Paving the road to better Financial Decision-Making in Mongolia

Transcription

1 Paving the road to better Financial Decision-Making in Mongolia August 2013 Financial Capability and Consumer Protection Survey Report Financial Inclusion and Consumer Protection Service Line

2 Contents Acknowledgments iv 1 Key Findings and Policy Recommendations Knowledge of Financial Concepts and Products Financial Attitudes and Behaviors Financial Inclusion Consumer Protection Background on Mongolian Survey 9 3 Financial Capability Awareness and Knowledge of Financial Concepts and Products Concepts Products Financial Attitudes and Behavior Dimensions of Financial Capability Financial Capability Dimension Controlled Budgeting Financial Capability Dimension Making Provisions for the Future Financial Capability Dimension Thinking about the Future Financial Capability Dimension Being Proactive Relationship between Financial Knowledge and Financial Attitudes and Behavior 29 4 Financial Inclusion Access and use of Financial Services Products Financial Institutions Relationship between Financial Inclusion and Financial Capability Relationship between Financial Inclusion and Financial Knowledge and Awareness Relationship between Financial Inclusion and Financial Attitudes and Behavior Consumer Protection 47 Appendix 50 A Background on Mongolian Survey 50 B Financial Capability 51 B.1 Knowledge of Financial Concepts and Products B.2 Knowledge of Financial Products B.3 Financial Attitudes and Behavior B.3.1 Dimensions B.3.2 Components C Financial Inclusion: Access and Usage of Financial Services 73 C.1 Products C.2 Financial Institutions ii -

3 D Distribution Channels 80 E Spatial Overview on Financial Products 83 F Spatial Overview on Financial Institutions 84 - iii -

4 Acknowledgments This Financial Capability and Consumer Protection (FCCP) Report was prepared by a team led by Siegfried Zottel (Economist) from the World Bank s Financial Inclusion and Infrastructure Global Practice, with contributions from Valeria Perotti (Social Protection Specialist) and Tillmann Heidelk (Research Consultant). Peer review comments were received from Leora Klapper (Lead Economist) and Nataliya Mylenko (Senior Financial Sector Specialist). Aurora Ferrari (Service Line Manager, Micro and SME Finance), Douglas Pearce (Manager, Financial Inclusion Practice), and Giuseppe Iarossi (Senior Economist, Finance and Private Sector Development, Africa Region) provided valuable overall guidance. Special thanks also goes to Coralie Gevers (Country Manager for Mongolia) and Klaus Rohland (Country Director for China, Korea, and Mongolia) for their guidance and support. The team expresses its appreciation to the Mongolian authorities, including the Bank of Mongolia, the Ministry of Finance, the Financial Regulatory Commission, and the National Statistical Office for their cooperation and collaboration during the preparation and implementation of the survey. The team would also like to thank the firm EEC Canada which was selected to undertake this survey work. Finally, the team owes particular appreciation to all Mongolian women and men who patiently responded to the survey. The Report was co-financed by the USAID Trust Fund on Consumer Protection and Financial Literacy. - iv -

5 c 2013 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC Telephone: Internet: This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: ; pubrights@worldbank.org. - v -

6 List of Figures 1 Financial Literacy Score, by Region Overview Financial Literacy I Overview Financial Literacy II Financial Literacy Score, by Gender Financial Literacy Scores, by Employment Status Household Income vs. Financial Literacy, Age Financial Literacy Scores, by Approximate Household Income Financial Literacy Scores, by Saving as a Child Financial Literacy Scores, by Media Usage Household Debt, by Financial Literacy Score Financial Products Known in Regions Overview Awareness Financial Institutions Service Offers I Overview Awareness Financial Institutions Service Offers II Knowledge Financial Institutions Service Offers, by Income Knowledge Financial Institutions Service Offers, by Employment Status Knowledge Financial Institutions Service Offers, by Media Usage Knowledge Financial Institutions Service Offers, by Erdenes Tavan Tolgoi - Program Knowledge Financial Institutions Service Offers, by Literacy Knowledge Financial Institutions Service Offers, by Urbanization Overview Financial Capability Scores Average Financial Capability Scores, by Employment Status Average Financial Capability Scores, by Literacy Average Financial Capability Scores, by Saving as a Child Average Financial Capability Scores, by Income Average Financial Capability Scores, by Urbanization Average Capability Score (Controlled Budgeting), by Region Components of Controlled Budgeting Score, by approximate Household Income Components of Controlled Budgeting Score, by Employment Status Components of Controlled Budgeting Score, by Literacy Components of Controlled Budgeting Score, by Saving as a Child Average Capability Score (Making Provisions), by Region Components of Making Provisions Score, by Employment Status Components of Making Provisions Score, by approximate Household Income Average Capability Score (Think Future), by Region Components of Thinking about Future Score, by Age Average Capability Score (Being Proactive), by Region Components of Being Proactive Score, by Gender Components of Being Proactive Score, by Saving as a Child Components of Being Proactive Score, by approximate Household Income Components of Being Proactive Score, by Urbanization Overview Financial Capability Scores, by Financial Literacy Score Sum of Financial Products, by Region Overview Financial Products I Overview Financial Products II Usage Financial Products, by Literacy Usage Financial Products, by Age vi -

7 47 Financial Inclusion, by Employment Status Financial Inclusion, by Approximate Household Income Saving Behavior, by Urbanization Saving Behavior, by Education Saving Behavior, by Age Saving Behavior, by Employment Status Saving Behavior, by Access to Credit Saving Behavior, by Household Income Access to Credit, by Urbanization Access to Credit, by Education Access to Credit, by Employment Status Access to Credit, by Household Income Access to Credit, by Saving Behavior Using Services offered by Financial Institutions, by Region Utilization Financial Service, Base Population Utilization Financial Service, by approximate Household Income Utilization Financial Service, by Employment Status Utilization Financial Service, by Saving as a Child Utilization Financial Service, by Urbanization Utilization Financial Service, by Education Utilization Financial Service, by Erdenes Tavan Tolgoi -Program Financial Inclusion vs. Financial Literacy Financial Inclusion vs. Financial Literacy, by Age Financial Inclusion vs. Financial Literacy, by Education Financial Product Usage vs. Financial Literacy Current Use of Financial Products, by Knowledge of Commercial Bank Utilization Financial Service, of those who know the Services Financial Inclusion, by Making Provisions Score Financial Inclusion, by Being Proactive Score Financial Inclusion, by Controlled Budgeting Score Financial Inclusion, by Think For Future Score Saving Behavior, by Being Proactive Score Saving Behavior, by Making Provisions Score Usage of Credit, by Think For Future Score Usage of Credit, by Making Provisions Score Usage Financial Services, by Making Provisions Score Usage Financial Services, by Being Proactive Score Usage Financial Services, by Think For Future Score Overview Conflicts with Financial Institutions Overview of Satisfaction with Services offered by Financial Institutions Satisfaction with Services Financial by Financial Institutions, by Urbanization Satisfaction with Services Financial by Financial Institutions, by Age Satisfaction with Services Financial by Financial Institutions, by Education Satisfaction with Services Financial by Financial Institutions, by Gender Map Survey Coverage Average Financial Capability Scores, by Age Average Financial Capability Scores, by Gender Average Financial Capability Scores, by Education Watching TV, by Region vii -

8 96 Using Internet, by Region Reading Newspaper, by Region Using Internet, by Region Reading National Newspaper, by Region Reading Local Newspaper, by Region Regular Media Consumption, by Region Information Distribution Channels, by Approximate Household Income Information Distribution Channels, by Employment Status Information Distribution Channels, by Age Information Distribution Channels, by Education Information Distribution Channels, by Urbanization Information Distribution Channels, by Being a Herdsman Information Distribution Channels, by Financial Literacy Formal Credit, by Region Informal Credit, by Region Formal Savings, by Region Informal Savings, by Region Investments, by Region Insurance Policies, by Region Usage of Services of Commercial Banks, by Region Usage of Services of Insurance Companies, by Region Usage of Services of Brokerage Houses, by Region Usage of Services of Microfinance Organizations, by Region Usage of Services of Other Non-Banking Financial Institutions, by Region Usage of Services of Money Exchange Offices, by Region Usage of Services of the Mongolian Stock Exchange, by Region viii -

9 List of Tables 1 Correlation Coefficients between Capability Scores Formal Saving by Informal Saving Formal Credit by Informal Credit Financial Knowledge and Inclusion (Specification: Urban) Financial Knowledge and Inclusion (Specification: Regional Dummies) Knowledge of Specific Financial Products (Specification: Urban) Knowledge of Specific Financial Products (Specification: Regional Dummies) Component-weights of Financial Capability Score Dimensions Financial Capability Scores (Specification: Urban) Financial Capability Scores (Specification: Regional Dummies) Elements of Financial Capability Scores (Specification: Urban 1) Elements of Financial Capability Scores (Specification: Urban 2) Elements of Financial Capability Scores (Specification: Regional Dummies 1) Elements of Financial Capability Scores (Specification: Regional Dummies 2) Financial Inclusion (Specification: Urban) Financial Inclusion (Specification: Regional Dummies) Usage of Specific Financial Products (Specification: Urban) Usage of Specific Financial Products (Specification: Regional Dummies) Glossary BoM ETT FCCP FI FRC MFO MNT MoF MSE NBFI PSU Bank of Mongolia Erdenes Tavan Tolgoi Financial Capability and Consumer Protection Financial Institution Financial Regulatory Commission Microfinance Organization Mongolian Tögrög Ministry of Finance Mongolian Stock Exchange Non-Bank Financial Institution Primary Sampling Unit - ix -

10 1. Key Findings and Policy Recommendations 1. Financial capability has become a priority for policy makers seeking to promote beneficial financial inclusion and to ensure financial stability and functioning financial markets. Today people are required to take increasing responsibility for managing a variety of risks over the life cycle. People who make sound financial decisions and who effectively interact with financial service providers are more likely to achieve their financial goals, improve their household s welfare, hedge against financial and economic risks, and support economic growth. Boosting financial capability has therefore emerged as a policy objective that complements governments financial inclusion and consumer protection agendas. To this end, policy makers are increasingly using surveys as diagnostic tools to identify financial capability areas that need improvement and vulnerable segments of the population which could be targeted with specific interventions. 2. At the request of the Ministry of Finance (MoF) the World Bank has implemented a nationally representative financial capability survey in Mongolia in This survey has been tailored to measuring financial capability in low- and middle income countries. To get a better understanding of the importance of external factors on financial capability the survey instrument also measured and assessed issues in related areas of financial inclusion and financial consumer protection. 3. It is suggested that a comprehensive financial education strategy be developed based on the results of the financial capability survey. 1 The survey identified numerous financial capability issues across various segments of the population and a number of initiatives are suggested in this report, which could be undertaken to improve the knowledge of financial concepts and products, as well as attitudes and financial behaviors. In order to ensure that available resources are used in the most efficient way, it is important to prioritize those financial capability enhancing programs, which are considered to be most feasible and cost-effective. The process of developing a national financial education strategy could serve to identify key priorities. Such priorities could be set based on a number of criteria, including the need, costs, outreach, desired impacts, and replicability of programs and could also present opportunities to leverage on existing programs. Both the development of a strategy and the setting of priorities would require a wide consultation process including various stake-holders from public, private, and non-profit sectors, which would facilitate a wider consensus building about the importance of financial education. 4. Further, the survey results and recommendations outlined in this report could provide guidance on the development and implementation of financial education programs. They could not only offer useful inputs for the design and monitoring of priority programs, but they could also align priorities and coordinate them with other initiatives and reforms such as those in the area of financial consumer protection. One of the key recommendations in the strategy development process would be to ensure that all proposed measures and programs be tested initially on a small scale and only be rolled out upon evaluation of their positive impacts. For more information about the process of strategy development, see OECD/INFE High Level Principles on National Strategies for Financial Education. 2 1 All results in this survey are indicative at the best and cannot be interpreted as causal. 2 Online available at: Principles_National_Strategies_Financial_Education_APEC.pdf

11 1.1. Knowledge of Financial Concepts and Products Key Findings 5. Financial knowledge and awareness levels are a challenge in Mongolia, as is the case for many countries at a similar income level. Many Mongolians have a limited understanding of the basic financial concepts required to make savings and investment decisions, although the vast majority of the population masters basic calculus. For instance, around one third of the survey participants struggle to understand what interest rates are and more than 60 percent do not possess knowledge of how inflation affects their savings. Compared to the rest of the population, illiterate Mongolians, low income groups, rural dwellers residing in Western regions of Mongolia, and those who did not learn savings practices as children appear to have less understanding of financial concepts, such as inflation, interest rates, and risk diversification. 6. Commercial banks are widely known as financial service providers, but awareness of broader financial services offered by insurance companies, microfinance organizations (MFOs) or other financial institutions (FIs) is limited. This finding is not surprising given the relatively new institutional model of MFOs. It is also not a striking finding with regard to brokerage houses and the Mongolian Stock Exchange (MSE). However, in light of the 2012 distribution program of shares from a large mining state-owned enterprise, Erdenes Tavan Tolgoi (ETT), it is critical to inform the public on how security markets operate. These findings suggests a focus area for financial knowledge and awareness efforts. 7. Moreover, vast parts of the population are not equipped with the required knowledge to benefit from the privatization of ETT. Mongolians eligible to receive shares under the partial privatization of ETT have the right to request cash instead of shares. When asked if they would prefer to receive shares or cash in the next round of the 2012 ETT shares distribution program, 39 percent indicated their preference to receive shares. Less than 20 percent of those opting for shares are familiar with services offered by brokerage houses and roughly one third of those know about the services provided by the MSE. Knowledge of these institutions is essential to be able to trade shares. Recommendations 8. In order to raise financial knowledge of potential users of savings and investment products, innovative and interactive measures, and edutainment in particular, should be considered to reach adult target audience. Research has shown that innovation on delivery matters because adults often have stubborn preferences that are difficult to change. Conveying financial knowledge messages through innovative ways such as popular TV soap operas, films, videos or radio programs can be quite effective in improving knowledge and also in altering behavior. In order to be successful, it is pivotal that these programs be delivered in an engaging and entertaining manner through appealing stories that stick to memories. They are also presumed to be more effective if messages are repeated and reinforced over time For instance, in Kenya, a popular television drama, Makutano Junction, incorporated financial education messages into some of its story lines and viewers were able to send text messages to obtain a leaflet related to these topics. These messages encouraged people to save regularly or to open bank accounts, rather than to keep money under a mattress. As with other soap - 2 -

12 operas, people watch Makutano Junction because they identify with the characters and enjoy the stories; but in the course of watching the show, they benefit from the financial education messages. 9. Publications can also be a useful means of transmitting financial education since each copy can be read by several people and can be retained for future reference. A diverse range of publications can be used, including leaflets, booklets, fliers and posters. Articles in newspapers and magazines are also important tools, especially if contained within general sections of the newspaper or magazine, rather than in specialist financial ones. Comic books have been found to be particularly effective in several countries, such as Kenya, India, and South Africa, where literacy levels are low. In such cases, comic books effectively facilitate discussion within the family on topics related to financial literacy. 10. Financial education should be delivered through trusted organizations and individuals with whom the target audience interacts on a regular (day-today) basis. Many organizations have an interest in helping people to become financially knowledgeable and capable. Community organizations and trusted intermediaries, such as local community leaders, social workers, could provide these organizations with vital support in terms of resources, training and funding and they could be especially important for reaching remote and marginalized communities in rural areas. 11. Particular areas of focus for financial education programs include: (i) the meaning of interest rates, (ii) the ability to understand the cost of loans, (iii) how interest earned on interest (compound interest) and inflation affect savings, and (iv) the key benefits, features, and risks of basic retail products such as savings accounts, consumer loans, remittances, and mortgage loans. 12. Financial education programs should take advantage of teachable moments. One of the key lessons learned from impact assessments of financial education programs is that financial education works best when delivered to adults during teachable moments. Teachable moments are times in people s lives when they are more likely to be receptive to new information as they can relate it directly to their own life events. In terms of financial education, key teachable moments when one is most likely to re-examine his personal finances include marriage, new employment, and the launch of a new business. 13. In addition, developing and implementing a tailored investor awareness and education program dealing with the distribution of ETT shares to the population should be considered. These programs should inform about available options in the privatization and the pros and cons of each option. ETT shareholders should be informed about the services offered by the MSE and brokerage houses, about how to buy and sell shares, and about the advantages of holding shares from more than one company. In order to ensure that the recipients of the shares benefit from the privatization, an extensive investor education program will be needed, including wide-reaching TV and radio programs and easy-to-understand news releases issued in national as well as local newspapers. Investor education programs should also include the development of a dedicated financial information website on ETT privatization and outreach programs delivered through workshops, road shows, exhibitions, TV, games, and mobile phones. The maps provided in appendix D (see figs. 95 throughout 100) show the extent to which different types of mass media are used in the regions covered by this survey. These may give useful insights into how best to effectively and efficiently deliver awareness and education programs

13 1.2. Financial Attitudes and Behaviors Key Findings 14. By applying statistical tools, four key areas of financial capability were assessed across the Mongolian population. These include (i) Controlled budgeting, (ii) Making provisions for the future, (iii) Thinking about the future, and (iv) Being Proactive. While the first two areas relate to financial behaviors, the latter two can mainly be associated with attitudes and motivations. All financial capability areas are measured on a scale ranging from 0 (lowest score) to 100 (highest score). Controlled budgeting comprises the ability to budget, to adhere to the budget, and to prioritize spending on essentials and affordable items. Making provisions for the future indicates how capable respondents are with respect to living within their means, covering for unexpected or old age expenses, and choosing appropriate financial products. Thinking about the future measures how far-sighted and impulsive people are. Finally, the Being proactive score measures the inclination to save whenever possible, to seek information and advice, as well as levels of achievement orientation. 15. Survey participants demonstrate high levels of financial capability in most areas, although they score higher with respect to controlled budgeting and making provisions for the future than they do in terms of thinking about the future and being proactive. The survey results suggest that on average Mongolians show strengths in areas related to controlled budgeting (68.7) and making provisions for the future (66), whereas the average scores for being proactive and thinking about the future are 62.7 and 59.7, respectively. Respondents who are out of labor force score significantly lower in the area of thinking about the future, compared to the informally employed, the self-employed, herdsmen, and retirees. Compared to herdsmen and the unemployed, they also tend to have more difficulties with controlling their budgets. 16. Rural and low income populations are mastering the management of their day-to-day finances, but struggle with being proactive and making provisions for the future. As compared to high income segments, Mongolians living on low incomes are significantly better at managing their day-today finances (controlled budgeting). Those with higher incomes, on the other hand, tend to be more proactive and more inclined to making provisions for the future. Consequently, daily hardship and the constant struggle with solving immediate problems can draw the attention of low income groups away from their long-term considerations and needs. While high income earners may be able to afford doing worse in managing their day-to-day finances, these low scores for low income segments are more worrisome, given their implications for their ability to smooth consumption, to cope with economic shocks, to generate lump sums for productive investments, and eventually for their long-term wellbeing. Likewise, while mastering the task of controlling their budgets, rural dwellers tend to be less proactive and struggle more with making provisions for the future than urban residents

14 Key Findings 17. Those who began savings habits as children outperform those who did not save in their childhood in almost all financial capability areas. Starting to build certain habits at an early age can have value, since those who already saved as children score on average significantly higher with respect to being proactive, thinking about the future, and making provisions for the future than their counterparts who did not save in their childhood. Recommendations 18. Provision of financial education from early age should be encouraged. Changing attitudes and long term behavior of adults can be a challenging task. Early financial education in schools can therefore have huge value for teaching basic principles of financial capability. Basic principles could include the following: (i) building savings cushions in order to cope with unexpected economic shocks, (ii) making provision for the future, (iii) living within means, and (iv) seeking information and advise when taking financial decisions. If people learn good habits on how to manage their money from a young age, they are more likely to stick to them throughout their lives. Although there is mixed international evidence on the effectiveness of school-based financial education programs on changing consumer behaviors, there are important lessons learned from other countries that have undertaken such programs. Success has been observed when education is interactive and is directly relevant to students lives either currently or in the near future. Therefore, high-quality materials/textbooks developed by experts are required and teachers need to be well-trained on the content and techniques. Moreover, as existing curricula are already saturated, it is practicable to integrate financial education into a variety of existing subjects, such as math, economics, and social studies, rather than adding a new course of study. 3 If resources to train teachers and to develop and provide teaching and learning materials are limited, it may be best to focus, at least initially, on incorporating financial education into one or two subjects. If possible, these should be compulsory subjects so that all students benefit and they should be taught over three or four consecutive academic semesters (preferably close to the time when students tend to leave school). 19. In addition to primary target groups, financial education programs should also focus on complementary target groups. Thinking broadly about complementary target groups is important. For instance, when not only students but also their parents are targeted with financial capability training, the expected outcomes are even greater. Similarly, targeting people who are out of labor force (but not retired), as well as their spouses, is expected to deliver more promising results since both desire to change behavior. The ability to apply new information is much greater if complementary groups are targeted. 4 3 Bruhn, Miriam, Arianna Legovinni, and Bilal Zia Financial Literacy for High School Students and their Parents: Evidence from Brazil. Mimeo, World Bank, Washington, D.C., Yoko Doi, David McKenzie and Bilal Zia Who You train Matters: Identifying Complementary Effects of Financial Education on Migrant Households, World Bank Policy Research Working Paper no. WPS

15 1.3. Financial Inclusion Key Findings 20. The rapid expansion of the financial sector is reflected in the high usage of formal savings and credit products. A large share of the Mongolians (78 percent) saves at a formal FI, whereas two out of five Mongolians (42 percent) have a loan from a formal FI. Apart from formal savings and loans, large parts of the population have some form of insurance. However, the high insurance penetration is most likely driven by compulsory insurance policies. Informal savings instruments such as savings clubs or keeping money under the mattress are used by a third of the respondents. Around a fifth of the sample uses some form of informal credit. Investment products such as private pension products are not widely used (15 percent). Illiterate Mongolians and herdsmen, as well as the informally employed and low income groups, hold fewer financial products than their counterpart groups. Compared to rural dwellers, urban residents appear to be more likely to use formal savings. 21. Commercial banks are by far the main FI whose products and services Mongolians use (88 percent). Products and services offered by any other FIs only play a minor role. Access to/use of services from commercial banks and other FIs is limited for low income segments, herdsmen, and those who did not save as children. 22. Despite many other barriers, access and usage of financial products can be constrained by lack of financial knowledge. Respondents, who answered more of the quiz-like financial literacy questions correctly, also hold more financial products and services. Moreover, being more familiar with basic financial concepts also correlates with increased access to/use of different types of financial products and services. 23. Likewise, access and usage of financial products and services can be constrained by financial attitudes and behavior. The survey provides strong evidence that specific aspects of financial attitudes and behavior relate directly with the level of participation that Mongolians have in the financial sector. Mongolians who perform better in making provisions for the future or being proactive tend to hold more financial products than those who do worse. This may be due to the fact that people who plan for unexpected events and for old age expenses are more likely to use savings and investment products. In addition, people who do better in terms of achievement orientation and getting information and advice may feel more confident about using financial products. Recommendations 24. To increase uptake of financial products, financial capability enhancing programs could be combined with available financial products. The survey results may indicate that enhanced financial knowledge is key for further financial sector widening and deepening. Financial education programs could be tied to those financial products and services most people can access and use, such as bank accounts, formal loans, or compulsory insurance products (including motor third party liability insurance). Given that especially low income and rural populations struggle with saving (being proactive) or making provisions for the future, insurance companies, banks, and other FIs should consider offering education programs to their customers. In these programs, customers should be informed about the importance of saving, even if only a little, and the need - 6 -

16 to plan for the future, as both of these financial behaviors have implications for their long-term well-being. Similarly, high income groups could be informed about how to budget and could potentially be provided with mobile phones or internet based personal finance tools, such as Juntos Finanzas. It should be ensured, however, that all educational materials be informative, clear, impartial, and free from marketing. 25. Generic financial education programs alone may be ineffective, but when combined with other interventions, they can be valuable. The limitation of traditional financial education in changing financial behavior is well documented by research. However, coupling the financial education intervention with reminders (e.g. to save) or specific financial capability messages (e.g. to shop around or to make larger remittance transfers) is more likely to induce behavioral change. Another advantage of such interventions is that they are also quite cost-effective and could be taken rapidly to national scale The Bank of Mongolia (BoM) may consider sharing the results of this survey with commercial banks and MFOs in particular to potentially develop savings products tailored to the needs of underserved parts of the population. Consumer choice is rather limited in Mongolia. It could make good business sense for FIs to develop products which fit the needs of underserved populations and help them to reach personal savings goals. These could comprise low cost no-frills or basic accounts with less burdensome opening requirements. In addition, they could also create savings products with design features that affect the extent of individuals use of financial services, such as commitment savings or labeled accounts. The former consist of accounts where a certain amount is deposited and access to cash is relinquished for a period of time or until a goal has been reached. The latter are accounts created with explicit savings goals in mind such as a car purchase, housing, or education. Credit products could include the design feature of small, initial tester loans that provide information to lenders useful for assessing risk on subsequent larger loans. 27. Removing impediments to financial inclusion other than a lack of financial knowledge is important. The higher access to/use of formal savings in urban areas most likely reflects geographical barriers. The large size of the country and the low population density make it unprofitable to serve remote areas using traditional banking operations. To stimulate demand for formal savings and credit products, especially in rural areas, further developing and expanding alternative banking delivery channels should be considered. Mobile or agent banking can dramatically reduce the cost of providing financial services in an environment of low population density prevailing in Mongolia. In a setting like this, mobile banking technologies can have the greatest benefits because they offer a commercially viable way of reaching locations and segments of the population that were previously excluded from formal financial services due to the prohibitively high costs of providing such services. 5 Karlan, Dean, et al. Getting to the top of mind: How reminders increase saving No. w National Bureau of Economic Research,

17 1.4. Consumer Protection Key Findings 28. Consumers do not widely report complaints or other conflicts with financial service providers. Only 5 percent of the respondents reported that they experienced conflicts with financial service providers in the past 3 years. However, only half of those who encountered a financial service provider conflict tried to solve it. The main reason reported for not trying to solve an encountered conflict was that FIs are perceived as being too powerful. This may be an indication that the lack of appropriate internal procedures for customer complaints leads to inertia and resignation. 29. Compared to the strikingly high levels of customers satisfaction with financial services offered by commercial banks, insurance companies, and money exchange offices, other FIs satisfy their customers less. More than 90 percent of the survey participants are satisfied with the products and services used from commercial banks, insurance companies, and money changers. MFOs, the MSE, brokerage houses, and in particular other non-bank financial institutions (NBFIs), such as credit co-operations, seem to offer services which satisfy their customers much less. Recommendations 30. Delivering financial education is not enough, as measures to strengthen the consumer protection framework must also be taken to ensure that new and existing consumers benefit from the financial services they use. It needs to be ensured that consumers are provided with sufficient information to enable them to select financial products and services that are the most suitable and affordable. Therefore, Key Facts Statements for all basic consumer finance products should be required and regulator s websites should provide price comparison information. For those without internet access, complimentary dissemination mechanisms should be provided. 31. FIs should also be required to provide customers with key information on internal complaints handling focal points and standards. Legal or regulatory provisions should require all FIs to provide customers with contact information of the person or division within the institution that is authorized to receive and respond to complaints. This information should be included not only in advertising or marketing materials, but also in documents provided to consumers when applications are filed and contracts are concluded. Consumers should also be provided with information on the financial institution s complaints handling procedures Financial regulators should analyze the statistics on consumer complaints submitted by FIs and use this information as input to their supervisory and regulatory activities. All FIs should centralize data on complaints received and share that data with the BoM and the Financial Regulatory Commission (FRC). Based on the analysis of information regarding consumer complaints and inquiries, the BoM and the FRC could propose guidelines, instructions, or awareness campaigns that address the common problems identified in such analysis. 6 Diagnostic Review of Consumer Protection and Financial Literacy in Mongolia, The World Bank (2012)

18 2. Background on Mongolian Survey 33. This survey instrument has been extensively tested in the context of low and middle income countries. The survey instrument used is based on an instrument developed with support by the Russian Trust Fund for Financial Literacy and Education to measure financial capability in the context of low and middle income countries. Extensive qualitative research was conducted to develop this survey instrument, including about 70 focus groups and more than 200 cognitive interviews in eight countries to identify the concepts that are relevant in low- and middle-income settings, and to test and adapt the questions to ensure that they are well understood and meaningful across income and education levels. The instrument is currently used or will be used in 14 countries in Latin America, Africa, Middle East and Asia Pacific. 34. The survey instrument allows financial capability, financial inclusion and consumer protection issues to be assessed and measured. Financial capability is measured by knowledge of financial concepts and products, attitudes, skills and behavior related to day-to-day money management, planning for the future, choosing financial products and staying informed. In order to jointly analyze financial capability and inclusion, the survey instrument captures information on access to different kinds of financial products and service providers. The consumer protection section gathers information on incidence of conflicts with financial service providers and levels of satisfaction with financial products offered by different FIs. The survey instrument has been further customized to the policy priorities of all relevant stakeholders including the MoF, the BoM, and the FRC. This was done by adding Mongolia-specific questions, such as those related to the 2012 distribution program of shares from the large mining state-owned enterprise, ETT. The survey instrument was translated into Mongolian, the major language spoken in country and, for validation purposes, it was also back-translated into English. 35. The Mongolian survey is designed to be nationally representative of the adult population aged 18 and older and it comprises a total sample of 2,500 individuals. The sample was designed to allow reliable estimation of main variables of interest on the national level. The most recent 2010 population census data, provided by the National Statistical Office, was used as a sampling frame. The population was divided into two strata: urban and rural. To fulfill the requirement of a scientifically sound survey, a probabilistic sample selection mode was applied. The sample was selected through a two stage cluster sampling with census enumeration areas as primary sampling units (PSUs) and households as secondary sampling units. The effective sample size was established with 2,500 interviews. However, in order to account for non-contact and non-response, a gross sample of 2,875 households was selected. In total, 125 PSUs were drawn with probability proportional to the number of households in each stratum. Within each PSU, 20 households (+3 reserve households) were selected by random walk method. Finally, within each selected household one respondent was randomly drawn by means of the Kish grid out of the pool of eligible household members. Household members eligible for being interviewed, needed to be 18 years or older and to have some role in managing either personal or household finances. To appropriately balance between scope of coverage and budget, sparsely populated areas with average checking accounts/adults numbers similar to areas with higher population density (equal of higher than 1) were not covered (see appendix A, fig. 91). 36. The fieldwork took place between August and October To implement the survey, the World Bank contracted the Canadian company Étude Économique Conseil - 9 -

19 (EEC Canada). After 4 days of intense training and a pilot survey, the data was collected by a team of 39 enumerators and 3 supervisors. 37. All graphs and regression analysis in this report are based on weighted data. To adjust for varying probabilities of selection and non-response proper weights were calculated for each respondent, and then applied to the data set. 38. The survey respondents are distributed as follows: 55.4 percent of the respondents are urban dwellers and 44.6 percent live in rural areas. More than half of the selected sample are females (57.51 percent), whereas males represent 42.5 percent of the sample. Concerning age, 29.4 percent of the respondents are younger than 35, 47.2 percent are between 35 and 55 years old, and 23.4 percent are older than 55. Regarding income, 17.3 percent of the respondents live in households with a monthly incomes below 210,000 Mongolian Tügriks (MNT). Around a quarter of the respondents (25.9 percent) belong to a household which earns a monthly income of at least MNT 210,000, but less than MNT 285,000. Another quarter (26.7 percent) lives on a monthly household income which falls into the range of MNT 285,000 and less than MNT 645,000. Approximately a third of the sample (29.9 percent) lives in households with monthly incomes of MNT 645,000 or more

20 3. Financial Capability 3.1. Awareness and Knowledge of Financial Concepts and Products Concepts 39. A certain level of knowledge of fundamental financial concepts and products and basic numeracy skills are needed in order to effectively participate in financial markets. To test people s awareness of financial concepts and their basic numeracy skills all respondents were asked to answer 7 quiz-like questions (multiple choice and direct answers). These include questions where respondents were required to do simple calculations and to show their understanding of inflation, interest rates, compound interest, risk diversification, or the main purpose of insurance products. Some questions test knowledge of inflation, interest rates and compound interest which are crucial for informed savings and borrowing decisions. The last two questions, on the other hand, are vital for being able to take informed investment decisions and to protect against risks No data Figure 1: Average financial literacy score in regions. Lowest possible score: 0, highest possible score: 7, see fig. 3. Simple Devision Compare Bargain Purpose of Insurance Simple Interest Risk Diversification Compound Interest Inflation Figure 2: Percentage of respondents who correctly answered financial literacy questions. Percent Figure 3: Discrete frequency distribution of financial literacy scores. 40. On average, respondents were able to correctly answer 4.9 out of 7 questions on financial literacy. Around nine in ten survey participants were able to provide at least four correct answers. Slightly more than two thirds answered at least five out of seven financial literacy questions correctly, whereas at least six correct responses were given by almost two fifths of the sample. Nevertheless, giving correct responses to all 7 financial literacy questions seemed to be a challenging task, which was only solved by 7 percent of all respondents