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Financial Literacy Education

Financial Literacy Education. Bilal Zia (World Bank) Shawn Cole (HBS). Financial Literacy Education. Impact Evaluation in Indonesia-Results Impact Evaluation in India - Ongoing Impact Evaluation in South Africa-Plans.

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Financial Literacy Education

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  1. Financial Literacy Education Bilal Zia (World Bank) Shawn Cole (HBS)

  2. Financial Literacy Education • Impact Evaluation in Indonesia-Results • Impact Evaluation in India - Ongoing • Impact Evaluation in South Africa-Plans

  3. Valuing Financial Literacy Training – A Randomized Evaluation in Indonesia Shawn Cole (Harvard University) Thomas Sampson (Harvard University) Bilal Zia (World Bank)

  4. Introduction • Financial literacy is now a prominent feature of financial reform across the globe: • US: President’s Advisory Council on Financial Literacy • Indonesia: 2008 was “Year of Financial Education” • India: RBC has established Financial Literacy and Credit Counseling Centers

  5. International and Private organizations are also pushing heavily for financial literacy programs: World Bank: $15 Million Russia Financial Literacy Program Citi Foundation: 4 years into a 10-year $200 Million global program on financial education, operating in 65 countries

  6. Why So Much Interest in Financial Literacy? Compelling survey evidence from developed countries shows strong positive correlation. HHs with low financial education: Tend not to plan for retirement (Lusardi and Mitchell, 2007a) Borrow at higher interest rates (Lusardi and Tufano, 2008; Stango and Zinman, 2006) Acquire fewer assets (Lusardi and Mitchell, 2007b) Participate less in the formal financial system (Alessie, Lusardi and van Rooij, 2007; Hogarth and O.Donnell, 1999).

  7. Research Question But is this relationshipcausal?

  8. Research Question But is this relationshipcausal? Our paper addresses this question with a randomized evaluation

  9. Research Design • Piggy-backed experiment on a nationally representative household survey in Indonesia. • Unbanked households are our starting sample • Provided financial literacy training in groups at village level • Also provided financial incentives (to open bank accounts) (range $3-$14).

  10. A Test of Two Competing Theories • Demand for financial services is low because: • Consumers rationally decide that value of financial services is less than cost Or • Services are not well understood

  11. Results Summary • We find effect of financial literacy training only in subsets of sample. • We find significant effects of financial literacy training on uneducated population and those who possess low ex-ante financial literacy. • We do find a very strong and significant effect of financial incentives in the full sample.

  12. Interpretation Financial literacy training has no effect on the likelihood of opening a bank account Financial incentives have a very large effect: Compared to the baseline of $3, a $14 incentive increase probability of opening a bank account from 3.5% to 12.7% -- an almost three-fold increase

  13. Interpretation These results suggest financial literacy programs should be carefully targeted However…

  14. Cost Effectiveness Our literacy training cost $17 per head Among below median financial literacy, effect was 5%, so cost per head of effectively delivering program = 17/0.05= $340 In contrast, increasing incentives from $3 to $14 raises probability of opening bank account by 7.6%, so cost per head = $11/0.076=$145 Hence, even if financial literacy programs are carefully targeted, providing incentives instead costs less than half to achieve same objective.

  15. Important Caveat Financial education may have extra benefits that households may reap in the future (such as better internal savings, saving more informally, etc.) We do not measure these benefits – to do in future follow-up survey This paper focuses on extensive margin

  16. Financial Literacy in India Shawn Cole (Harvard University, J-PAL, IPA) Jeremy Shapiro (Yale University, IPA) Bilal Zia(WB)

  17. Further Work in India Video-Based Financial Literacy: Detailed, engaging modules on savings, credit, insurance and budgeting Local actors and good production firm hired for these videos (though not Bollywood!) Lab setup for screenings Low-cost, scalable intervention Financial Counseling Unbiased consultation to discuss household budgeting, borrowing and savings options Outcomes Measured financial literacy Real-world type savings and investment questions with financial consequences Follow-up household survey Further Test Some Behavioral Theories: Do people respond (financially) to deadlines? Do people (investors) respond to de-biasing ?

  18. NakekelaImali! (Take Care Of Your Money!) Shawn Cole (Harvard University, J-PAL, IPA) Jeremy Shapiro (Yale University, IPA) Kartini Shastry (Wellsley College, IPA)

  19. Basic Problem • Workers in mining houses in South African exhibit low levels of financial literacy • May make poor savings and expenditure decisions • Financial stresses may hinder work performance • Financial habits may contribute to absenteeism • Avoid coming to work on payday, to avoid moneylender • May “celebrate” the evening after payday, and miss work in subsequent days

  20. The (potential?) solution • Provide customized, two-day, experiential financial education module emphasizing: • Financial planning • Savings choices • Lending choices • Insurance • Hire Purchase • Legal rights • Remittances

  21. The Partners • Financial Education Foundation • Funding and technical support • Goldfields and AngloGold Ashanti • Two of world’s largest mining firms • TEBA Bank • Cooperative bank serving mine workers • Innovations for Poverty Action • Technical support and research direction • Ikhumiseng Consulting • Provide financial literacy education

  22. Research Design • Treatment assigned at individual level • Sample size • 10,000 workers in treatment • 10,000 in control • Administrative Data • Financial data (Teba) • Productivity and absenteeism (Mining Houses) • Survey data • 1,500 household surveys • Baseline • Endline (one year later)

  23. Anticipated Impacts • Knowledge / awareness of financial tools • Numeracy and budgeting skills • More savings accounts, more savings • Decreased use of moneylenders • Reduced absenteeism • Improved debt management

  24. Approximate Timeline • Baseline surveying: • Starting January 2010 • 30 individuals / week for one year • Financial intervention • 200 individuals / week for one year • Administrative data collection: • Periodically throughout study, and beyond • Endline surveying: • Beginning January 2011 • Study completion: • December 2011

  25. Discussion • Non-profit/private partnership • Mining houses contributing 20,000 person-days of labor • FEF funding training costs of 10,000 workers • If success demonstrated, mining houses may scale up to all workers • Individual-level randomization and large sample size allow detection of ‘small’ effects

  26. Conclusion • Range of experiments designed to understand importance of financial literacy • India, Indonesia, South Africa • Videos, Classroom, Community-Based • Taken together, along with a dozen other experiments conducted by colleagues around the world, will soon learn: • What works, what doesn’t • How financial literacy education works? • What is most cost-effective • Lead to: educational reforms, regulatory reform, new private markets

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