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Finance-wise, how wise?

Ever wondered if the rural poor who took loans actually understood interest rates in the first place? Well, how often do most of us can say the same about ourselves in the first place? The term financial literacy has been a buzzword in social science research in recent times, however, the objective of this two-word mission as per many is to help enhance the financial well-being of people - especially those who hail from rural backgrounds or the poor in general ...

Financial literacy has been defined as the ability to process financial information and make informed decisions about personal finances. In the last few years, with increasing focus on access to finance as an important determinant of household-level economic development and its accompanying positive consequences for empowerment, financial literacy has become an important issue for practitioners and policymakers alike. A question that remains unanswered and perhaps will remain so is would the situation remain the same had the poor or the people from rural backgrounds were financially aware if not literate about the various financial services they were beneficiaries of? Would there have been lesser exploitation and thus more transparency? Expecting all this to have existed early on may sound Utopian, however, a lot of the crisis that some of us speak today about the lack of credit availability and thus people resorting to informal sources of credit could have been avoided.

Very often, when any of us head to an electronics store, we inquire about the desired product and even compare with its counterparts under other brands!! We ought to do the same when it comes to availing ourselves with financial services. Don't you think even the poor and illiterate deserve to know what they are getting into when a loan is disbursed to them or when a bank/savings account is opened for them? Isn't that what financial literacy must strive to achieve?

I recently compiled a factsheet on financial literacy based on past and current studies of CMF on the subject. The direct link to the factsheet is here. You will find the entire factsheet section here. Here's hoping that financial literacy programmes not only educate people but also make them aware about how they can use financial services to enhance and complement their livelihoods...
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  1. Hi Kenny,

    Thanks for your post. I think some of the evidence that we have would support the claim that financial education (under certain circumstances) boosts the takeup and usage of financial products. The question is whether providing financial education is more efficient than creating simpler, more effective products, another way of boosting takeup. I think paying lip service to the need for financial literacy often gives financial services providers like MFIs an excuse to shirk their responsibility to design better financial products and mechanisms. I think we should be skeptical about the rhetoric about financial literacy and focus on:

    a) making products more suitable to the needs of low-income households
    b) building basic financial infrastructure.

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  2. Agree with you Shardul. Its hard to fathom why companies with such potential do not realize that they have to try understanding their customers first before they launch a product onto them. Product design somehow seems to be lacking focus among practitioners at large but I think lack of take-up will force them to relook at their strategy and then work towards providing a hit product ... lets hope they realize they can do much more than they think are doing right now.

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