The Fad of Financial Literacy?


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Financial literacy has become an immensely popular component of financial reform across the world. As a response to the recent financial crisis, the United States government set up the President’s Advisory Council on Financial Literacy in January 2008, charged with promoting programs that improve financial education at all levels of the economy and helping increase access to financial services. In the developing world, the Indonesian government declared 2008 “the year of financial education,” with a stated goal of improving access to and use of financial services by increasing financial literacy. Similarly, in India, the Reserve Bank of India launched an initiative in 2007 to establish Financial Literacy and Credit Counseling Centers throughout the country which would offer free financial education and counseling to urban and rural populations. The World Bank also hasn’t been missing out on the trend – it recently approved a $15 million Trust Fund on Financial Literacy. 

But what do we know about financial literacy? Does it work, and if so, through what mechanisms? Despite the money being ploughed into financial literacy programs, we know very little to address these important questions. While it is true that there is a large and growing body of survey evidence from both developed and developing countries that demonstrate a strong association between financial literacy and household well-being, we are still in the process of learning whether this relationship is causal.

While survey analysis can control for all observable variables in the survey questionnaires such as income, gender, age, education, etc., there may be some unobserved variables, such as ability, that may be driving the positive correlation between financial literacy and use of financial services. In addition, people who choose to participate in surveys or literacy seminars may be quite different in terms of their interests in financial matters, for instance, than those who do not participate. The positive correlations may therefore be driven by endogenous selection. Further, survey evidence cannot distinguish the direction of causality: greater financial literacy may lead to greater use of financial services, or just as likely, individuals who use more financial services may score better on financial literacy assessments based on their experience in financial markets.

Experimental studies on financial literacy, similar to medical drug trials, allow for overcoming the problems of selection and endogeneity that are associated with survey analysis. There are only a handful of completed studies on financial literacy, though more are in the pipeline. 

In the developed world, research evidence that financial education can affect decision-making comes from a randomized evaluation conducted at a major university in the United States. Duflo and Saez (2003) implemented an “encouragement design,” in which they randomly offered some administrative employees a small financial incentive ($20) to attend a session which provided information on retirement products. Those receiving the incentive were significantly more likely to attend the training session, and this had a small, but significant impact on their savings decisions, as more individuals in the treatment group enrolled in tax-deferred retirement accounts.

In a paper I coauthored with Shawn Cole and Thomas Sampson, we provide the first study in this direction in the developing world, through a randomized evaluation of a financial literacy training program in Indonesia. Participants in this study consisted of unbanked households, half of whom received an invitation for a free financial literacy seminar 2-3 hours in length. Although take up of the training is high, we find no effect of the program on the likelihood of opening a bank account in the general population. We do, however, find that the training has a significant impact on unschooled and financially illiterate households, increasing the likelihood of opening a bank account by 12% and 5%, respectively. These results suggest that financial literacy training programs should be carefully targeted at these subgroups of individuals. Additionally, a more comprehensive financial literacy program that is delivered over several weekly sessions, rather than a single session of a few hours, may be required to change financial behavior among households in the general population.

The need for a more detailed and extensive financial education program is also reflected in research by Cole, Gine et. al (2009) on rainfall insurance for low-income farmers in Andhra Pradesh, India. Specifically, they randomize the provision of an education module about converting the measurement of rainfall in millimeters to soil moisture. Since farmers typically decide when to sow using soil moisture whereas insurance payouts are calculated using millimeters, the education module should improve farmers’ understanding of the insurance policy.

However, results indicate that the education module had no significant effect on insurance participation, possibly because the intervention was quite minimal. The education component only involved using a ruler to demonstrate a length of 10mm and 100mm, and subsequently showing a chart of how 100mm of rain translates into average soil moisture for a particular soil type. Moreover, the information was presented quite briefly, taking no more than 2 to 3 minutes. Thus, a modest amount of financial education appears to be insufficient in inducing households to participate in financial markets, and a more thorough financial literacy program may be necessary to do so.

Given the dearth of rigorous evidence on the impact of financial literacy training programs, there are currently several ongoing field experiments which will soon provide additional evidence on the efficacy of such programs. Several projects are already underway to measure the efficacy of business training programs for poor and small entrepreneurs:

  • Bruhn and Zia in Bosnia-Herzegovina, providing business training for youth entrepreneurs;
  • Pande, Field and Jayachandran in India, using a 2-day training course on business and financial skills for self-employed women;
  • Gine and Mansuri in rural Pakistan, evaluating a program that provides business training and loans up to 4 times the average loan size; and,
  • Bruhn, Karlan and Schoar in Mexico, who conduct a randomized evaluation of on-site business mentoring, where local entrepreneurs were paired with a mentor for a 1 year period.

Such programs typically incorporate some aspects of what is usually considered financial literacy (e.g. learning how to separate business and financial accounts, understanding financial statements) with other elements of better business practices (e.g. how to market products better, sales techniques).

There are even fewer ongoing studies attempting to look at other aspects of financial literacy behavior. Exceptions include Cole, Shapiro and Zia, who are conducting a randomized evaluation of a video-based financial literacy training program in India, which includes modules on loans, savings, budgeting and insurance. Elsewhere, Hastings and Mitchell are conducting an experiment among Chilean households, to determine whether or not financial literacy has an effect on an individual's ability to make optimal financial decisions; and Karlan, McMillan and Kutsoati are carrying out a randomized control trial in Ghana where rural bank customers receive six 15-minute financial literacy lessons.

The jury is still out on whether financial literacy is a useful and cost-effective tool for promoting financial access. The studies mentioned here and many more that are in development should enhance our understanding of what works, how it works, and for whom it works.


Bruhn, Miriam, Dean Karlan, and Antoinette Schoar. Returns to Entrepreneurship Mentoring for Small and Medium Enterprises in Mexico. Ongoing project.

Bruhn, Miriam, and Bilal Zia. Business Training for Youth Entrepreneurs in Bosnia. Ongoing project.

Cole, Shawn, Xavier Gine, Jeremy Tobacman, Petia Topalova, Robert Townsend, and James Vickery, 2009. Barriers to Household Risk Management: Evidence from India. Harvard Business School Working Paper 09-116.

Cole, Shawn, Thomas Sampson and Bilal Zia, 2009. Financial Literacy, Financial Decisions, and the Demand for Financial Services: Evidence from India and Indonesia. Revise and Resubmit, Journal of Finance. (Working paper version is available here.)

Cole, Shawn, Jeremy Shapiro and Bilal Zia. Does Financial Education Improve Financial Access for Women? Experimental Evidence from India. Ongoing project.

Gine, Xavier, and Ghazala Mansuri. Business Training and Increased Access to Microcredit for poor households in Pakistan. Ongoing project.

Hastings, Justine, and Olivia Mitchell. Financial Literacy, Short-run Impatience, and the Determinants of Savings and Financial Management. Ongoing project.

Karlan, Dean, Margaret McMillan and Edward Kutsoati. Savings Account Labeling and Financial Literacy Training for Susu Customers in Ghana. Ongoing project.

Pande, Rohini, Erica Field and Seema Jayachandran. Business Training for Women in Ahmedabad, India. Ongoing project.


Bilal Zia

Senior Economist, DECRG

Join the Conversation

Helen Abadzi
August 12, 2010

In order to make informed decisions about alternatives people first and foremost must be able to calculate fluently and automatically. Research shows that students often don't learn the required skills, so the unbanked household residents may lack this skill.

Whatever your research design, please give a simple math test. The results may turn out to be your most important mediating variable.

August 12, 2010

We actually do administer several math questions of varying degrees of difficulty, and we aggregate the scores in a "Cognitive Ability" measure.

Nachiket Mor
August 27, 2010

The view we take in our work, following Merton, Bodie, Ibbotson and Shiller, is that given the increasing complexity of financial solutions on offer and the ability to actually approximate Arrow-Debreu Complete (Financial) Markets for a household financial literacy may actually not be the way to go but much more customised wealth management services combined with ex-post liability on the provider of this advice and the notion of "informed consent".

Our concern is that while providers are keen to educate customers, when asked even simple questions such as: "How much life insurance should a person ideally buy?" they themselves are unable to come up with accurate answers. And in our view this is not surprising since these are not easy questions to answer. We have tried in our work to figure out the best answers to these questions and figure out ways in which well-trained high school graduates ( using protocols and technology aided tools can actually offer this advice to remote rural households ( and now have a draft of a text book: "Financial Engineering for Low Income Households" and a website ( that actually operationalises these tools.

Would be very keen to get feedback and guidance on this approach.

Ana from Accounting Course
August 29, 2010

I could amend that financial literacy and its spread also depends on the past experience of the country. For example in post Soviet union countries there are no so deep traditions in finance, since economy was so regulated. Therefore huge amount of time needed to spread and teach financial literacy among older people.

For young people information accessibility is better, since they use internet extensively and know foreign languages, however education system needs improvement again due to lack of practice. Just pure theory is hardly applicable in practice.

Fehmeen | Microfinance Hub
September 23, 2010

Even if the causal relationship between financial literacy and use of microfinance services isn't proved scientifically, in theory it makes perfect sense. Plus, even if experience is the precursor to better financial experience, it isn't necessarily a deal breaker, because experiences can be molded into case studies and shared with inexperienced mobile banking users as part of trainings that 'intersect' the causal relationship, i.e. offer the benefits that experience yields without having to experience something first-hand.

Additionally, I wonder if studies are underway to determine the causal relationship between financial literacy and price transparency.

Danish Imam
December 16, 2010

Basic Financial education should be the compulsory part in academic text book. To develop clear mindset, Financial education seed should be sown. To popularize Financial Products and education, banks and media should play their role.

May 04, 2011

It seems to me that the objectives of the training would be what gets the impact - if it is well designed and if the environment is somewhat conducive.
Maybe I am stating the obvious, but a few thoughts:

- if it is difficult to open a bank account, then it would be hard to expect that people will open one as a result of the training only (unless it was very practical and offered tips)

- if the goal is to prevent over-indebtedness, for example, I think that the training would need to cover that objective explicitly and then measure the impact

It makes intuitive sense to me that a bit more of longer-term training is needed to chenge knowledge, skills, attitudes (depending on what is being targeted through through the training, again) I think that it is different to change an attitude (encourage people to save) then to introduce a skill (how to correctly calculate an interest rate.)

Steven Bulmer
May 26, 2011

The challenge is that those who are trying to address financial literacy are ignoring several psychological impairments to the achievement of financial literacy. The one that is most glaring is that they ignore the simple message of IQ measurement. That message is that half the population has an IQ under 100. Bluntly stated...Half the population just does not have the capacity to understand complex financial transactions dreamed up by the brighter 20% of the IQ bell curve. There are a multitude of other psychological impairments. The topper is that our Human Psychology is armed with 106 Cognitive Biases (behaviors to cover our incompetence ) (lies if you will) to save face when in these sorts of social situations.

The scary thing is that governments and scholars cannot even acknowledge this problem. They are too full of their own agendas and biases.

At thinkyourmoney ( we are independent of these biases and can call a spade a spade. We are in the process of identifying and explaining the Psychologies that affect human interaction in financial situations.

June 01, 2011

Thank you for your comment, Steven, but I believe your criticism is unfair. Certainly, we are paying a lot of attention on studying cognitive biases and on how financial literacy is measured. For example, research currently underway is exploring alternate masures of financial literacy that do not rely on computational skills, but rather focus on basic financial awareness and financial attitudes. Similarly, we are borrowing tools from psychology to identify behavioral biases people may exhibit (such as overestimating small-scale probabilities, which leads them to overestimate their chances of winning a lottery). Further, we are studying whether people can be effectively de-biased using financial literacy and other engagement tools (such as experiencial games).

Cary Clark
July 09, 2011

Could you provide any information about the following?

"Gine and Mansuri in rural Pakistan, evaluating a program that provides business training and loans up to 4 times the average loan size;"

Thank you,
C. Clark

Avik Kedia
September 27, 2011

Hi there,

I happened to come across your article. It was thought provoking. I would just like to share with the other readers here that Financial Literacy is a generic thing, and has different significance to different groups of people. Financial Literacy for disadvantaged youth is entirely different than financial literacy for privileged youth, both of the same age groups. While privileged youth have access to credit cards at one extreme, disadvantaged youth have difficulty in even saving little money.

Financial Literacy for middle income adults is different than financial literacy for poor adults having low income. Privileged adults have access to more financial products and services than they need, while disadvantaged adults do not.

Financial Literacy is indeed interesting.