Financial inclusion and literacy

Accessing financial services – being able to open a bank account, receive and transfer money, save and borrow, and access insurance services – is part of the daily lives of adults in most advanced countries, but much less so in many developing economies. This has only raised concerns among policymakers and economists in recent years, with the first data collections on the ease in accessing financial services and the actual use of financial services starting only 20 years ago. Now, however, a rich ecosystem of different data sources has been established, from the number of bank outlets and accounts to survey-based measures of the proportion of adults with a formal bank account and with access to other types of financial service providers. Survey data also allow barriers to access to financial services and use of them to be gauged, differentiating between geographical, social and other barriers. Finally, collecting data over time allows progress to be tracked. One driver of the increase in the percentage of adults with access to formal financial services has been technology, most notably mobile money services. One of the most striking cases is Kenya, where the mobile money provider M-Pesa has revolutionised money transfer services and helped pull a large part of the population into the formal financial sector.

Why is access to and use of financial services important? Being able to send and receive payments is a basic condition for participating in a modern market economy. Being able to save for durable consumption goods, education or old age is critical for lifetime consumption, as are the ability to access loans for emergencies and housing. Similarly, managing risks through access to insurance services is important. Given the greater volatility and incidence of shocks faced by households and individuals in developing economies, access to formal financial services is even more important, but typically less available. This is why policymakers and economists alike have focused on policies to increase financial inclusion in developing countries.

Goodhart’s Law states that when a measure becomes a policy target it ceases to be a good measure – this also applies to the proportion of the population with a bank account. Opening bank accounts for every adult in a country might seemingly resolve the financial inclusion challenge, but it is not ownership of an account or the possibility to use financial services that improves people’s welfare, but rather the use of such services. This is why the focus has recently shifted from the headline index of the percentage of adults with a bank account to the actual use of such services. The need for these services is certainly there, as is shown by the financial diaries project by Jonathan Morduch and co-authors, which documents the extensive use of informal financial services by the poor in developing countries in Sub-Saharan Africa and Asia. The question, however, arises of why even when people have access to formal financial services they do not use them or they use them inefficiently.

This brings me to the importance of financial literacy. A financial literacy survey by the OECD shows stark differences even among high-income countries. Both knowledge of basic financial concepts (including compound interest) and also behavioural traits and attitudes (risk appetites, long-term planning) are critical. The literacy agenda is not limited to school-age children, continual learning and using ‘teachable moments’ are critical! Financial literacy also has a critical position in the European Commission’s Strategy for a Savings and Investment Union and the Commission will adopt a financial literacy strategy by Q3 2025.

The Florence School of Banking and Finance will also be more active in this regard, so please stay tuned.