Financial Literacy, Access to Finance and the Effect of Being Banked in IndonesiaPDF version
Particularly in low-income countries, the determinants of the demand for financial services are not well understood. One plausible theory suggests that limited financial literacy – knowledge or understanding of financial services and products – is an important barrier to demand for financial services in emerging markets: if individuals are not familiar or comfortable with financial products, they are unlikely to try to use them.
A growing body of evidence, based on household surveys in developed countries, has demonstrated a strong association between financial literacy and household well-being. Households with low levels of financial literacy tend not to plan for retirement, to borrow at higher interest rates, to acquire fewer assets and to participate less in the formal financial system relative to their more financially-literate counterparts. However, little systematic evidence exists to indicate whether this relationship is indeed causal, and how specifically an understanding of financial products can improve people’s lives.
In Indonesia, financial literacy is believed to be a barrier to accessing credit. This may in part be explained by low educational expenditures: measured as a share of GDP, education expenditures in Indonesia are the lowest in the world. However, and in contrast to many developing countries where access to credit is sparse, the Indonesian banking system has a wide geographical reach. Moreover, Indonesian banks have traditionally offered savings accounts with low minimum deposits designed to serve the needs of low income customers. The minimum deposit to open a savings account at the nation’s largest bank, Bank Rakyat Indonesia (BRI), is only 53 U.S. cents and interest is paid on balances greater than US$1.06. This is significant, considering that the per-capita income in Indonesia is approximately US$1,918. Yet only 41 percent of the total population and 32 percent of rural Indonesia households have a formal savings account.
In collaboration with the World Bank, researchers conducted a household survey in India and Indonesia to measure household financial literacy and demand for financial services. The Access to Finance survey was followed by a financial literacy experiment, which was only undertaken in Java, Indonesia, designed to directly test the role and relative importance of financial literacy and prices in determining demand for banking services. All “unbanked” households identified in the survey were offered the opportunity to participate in the experiment.
Study participants were first randomly assigned to a cash incentive level, ranging from US$3-$14, for opening a savings account within the next two months. To receive the incentive, households were required to fill out a mail-in form, indicating the participant’s name and bank account number. Upon receipt of this card, the survey firm transferred the appropriate incentive amount to the respondent’s account.
Independent of the incentive level, households were also assigned to either treatment or comparison for the financial literacy training program. Treatment households were invited to attend a financial literacy training session held in the village. Training session content was developed by Microfinance Innovation Center for Resources and Alternatives (MICRA), an organization that provides consulting and training programs to banks and microfinance organizations in Indonesia, with a curriculum specifically designed for unbanked individuals. The study design thus permits for direct comparison between the effect of financial literacy education and price subsidies.
Survey results are consistent with findings from previous studies, indicating a strong relationship between financial literacy and banking behavior. Financial literacy is low, especially in India. The mean share of correct survey answers for the first three questions was 55 percent in Indonesia, and 38 percent in India. This compares to an average of 65 percent for the same questions in the United States.
However, study results indicate that financial literacy education has no effect on the probability of opening a bank savings account for the full population, although among those with low initial levels of education and financial literacy, the estimated impact of the program is a 5.1 percent in the probability of opening an account. Modest financial subsidies, in contrast, have large effects, significantly increasing the share of households that open a bank savings account within the subsequent two months. Specifically, an increase in the incentive from US$3 to $14 increases the share of households that open a formal savings account from 3.5 percent to 12.7 percent, an almost three-fold increase. Cash incentives or price reductions may therefore represent a significantly more cost-effective way of drawing households into the financial system; in this experiment, literacy training cost approximately US$17 per head to deliver. In contrast, financial literacy efforts targeted at the general population in an attempt to raise savings account enrollment may be relatively ineffective. These results suggest further evaluation may be warranted to justify an increasing global emphasis on financial literacy education.
