With nagging questions about our ability to broadly raise the financial I.Q. of most people, the global financial education movement is pivoting to a large pocket where results are near certain and the impact may be greatest: the poor and unbanked.
Globally, half of adults totaling some 2.5 billion people do not have a formal bank account. This shuts them off from credit and savings opportunities that you may take for granted; it hinders their rise to a better life and squanders the potential to convert hundreds of millions of people from economic drains into economic contributors.
The vast majority of these unbanked are in underdeveloped nations like Kenya, India, Pakistan, and Columbia. More than 50 nations recently set targets for improving access to financial products—and the Alliance for Financial Inclusion, funded by the Bill and Melinda Gates Foundation, now has around 90 member nations supporting a set of common financial inclusion principles known as the Maya Declaration.
This is not just a less-developed world problem. Some 40 million unbanked are in the U.S., and the number of Americans more broadly defined as financially underserved is around 100 million. Activists like John Hope Bryant have been arguing for decades that financial inclusion is in many ways a civil rights issue on par with the right to vote in 1962. It disproportionately affects minorities, women, youth, poor people, and rural dwellers. In some ways, this issue has been with us since Lincoln established the Freedman’s Savings Bank in 1865 to teach freed slaves about money and how free enterprise works. As Bryant writes:
“Today, particularly in inner city and underserved America, issues around money and the economy are mixed up and interrelated with emotions, self-esteem, identity, and even core issues of human dignity.”
For this group, financial education clearly works. It’s not hard to convince someone borrowing from a payday lender at annual rates of 200% or more to instead borrow from a bank at 12% or even a credit card at 24%. The real challenge is getting them to a credit firm in the first place. According to a World Bank report, most of the unbanked cite barriers such as documentation, cost, distance, and trust. Access to insurance, tax-deferred retirement savings and credit is fundamental to our life today; such banking products should be broadly available to individuals. Meanwhile, unbanked small businesses fail to reach their potential. As Mahmoud Mohieldin, special envoy to the World Bank Group, writes:
“The estimated financing gap globally for micro, small, and medium enterprises is more than $3.1 trillion. Approximately 70% of micro, small, and medium enterprises in the developing world do not use external financing. Another 15% are underfinanced, despite some form of access to formal financial services. Micro, small, and medium enterprises have the potential to expand their activities, take on new workers, and generate income. Alleviating their credit constraints will be part of the solution.”
Of course, not all of the financially underserved want or need traditional banking services and, in fact, when given access history shows many become over indebted. So some level of protection and financial education must accompany broad access. Recent research out of Brazil shows that financial education works.
The country has pilot programs teaching high school students financial concepts and calls for some lessons to be completed at home with parents. This is how officials there are reaching an adult population that is 40% unbanked and highly skeptical of a system that three decades ago froze bank assets to fight hyperinflation. The program has produced big improvements in financial knowledge and behavior, and is now being scaled up to 5,000 high schools. Brazil has come a long way. Today, its largest city, Sao Paulo, is among the most economically powerful in the world—and Brazil’s financial literacy programs get some of the credit.