Financial literacy programs are fast becoming a key ingredient in financial policy reform worldwide. Yet, what is financial literacy exactly and what do we know of its effectiveness? In a new paper, Lisa Xu and I summarize existing evidence on both measurement and impact of financial literacy and provide lessons for policymakers and guidance for researchers on future work in this area.
While the working paper provides a detailed and practitioner-oriented overview of the recent research, drawing on what we’ve learned from surveys, impact evaluations, and other empirical work, I want to use this blog space to focus on lessons for the way forward.
First, it is not clear at all how financial literacy ought to be measured, and in fact there is debate on what it should be called — you hear of financial literacy, financial capability, financial awareness, and many other similar terms. So a key starting point in moving forward with this concept is to spend some time figuring out how to measure it (and to a lesser extent what to call it). We can call it Swiss cheese for all I care, as long as there is a consistent way to measure the quality of Swiss cheese across different settings!
This is clearly a work in progress, but some new studies have at least demonstrated that financial literacy should be a much broader concept than simple numeracy. Although certainly correlated, numeracy is not the end all and be all of financial literacy. Indeed, a person living in rural Tanzania may not be able to do math well, but could still be aware of the financial product choices available to her or be able to discern between different insurance programs available through the local financial provider. Hence, in addition to numeracy, financial literacy is also about awareness and attitudes. Our paper discusses new research in this area with the takeaway message that the literature still needs to converge to a general definition of this currently loosely defined concept.
Second, let’s focus a bit on impact. Clearly, how we measure financial literacy will also affect impact since our outcome measures will be based on our definition. So to reinforce the previous point, pinning down measurement is key to effective evaluation.
But there are other lessons as well from and for impact studies. Perhaps one of the most important is that the way financial education is delivered matters. Although kids in school are primed to learn in classroom settings, adults unfortunately are not. Many of us are stubborn, have rigid preferences, and simply fall asleep in classrooms. So programs that involve one-way lecturing by even the best financial literacy expert are bound to fail. Why? Simply because such programs are unlikely to retain the attention of the participants. So a key lesson is to make the programs fun, interactive, and participatory. Maybe even use social media or television as a medium of delivery. There is more on this in the paper.
Motivation, perception of relevance, and other behavioral factors have also been shown to be an important factor in whether participants benefit from financial education or advice. More work is needed in these areas in order to make financial education programs more relevant and effective.
Who gets the training matters as well — surely we want to focus programs on people for whom they would be most effective. Most surveys indicate that women, youth, the elderly, and those with lower incomes and educational attainment are less likely to be financially literate. Many surveys also indicate disparities between urban areas and rural areas, and geographical regions, and differences by race, ethnicity, and employment status. Let’s use these insights to target specific needy groups.
Next, peer effects are important. Humans are social beings — we interact with neighbors, friends, family, business associates, and even random people on the street. Clearly, impact gets shared in one way or another. We currently do not have a good sense of how and to what extent this matters in spreading impact. But wouldn’t it be great for policymakers to know the answer to that question? Some research is underway in this area and we should have some insights soon.
What about supply side measures? Financial education and other consumer side interventions to increase take-up may be misguided in cases where the products are fundamentally flawed. In these cases, stronger regulation and consumer protection measures would be required.
To sum up, the survey evidence and evaluations discussed in our paper provide a useful starting point for policymakers in designing financial education programs that can be effective. Surveys have indicated certain areas of universal concern, such as lack of awareness of basic financial products, but also that people’s needs and desires for financial literacy vary widely. In light of this diversity, it becomes especially important to tailor both the content and the format of education programs to their target audience, to consider complementary interventions to reach the end goal, and finally to consider identifying and alleviating both demand and supply side constraints.