Financial Education For Managing Risks

Financial Education For Managing Risks Lucia Spaggiari Zak Syengo Yousra Hamed

Outline Microfinance Financial Literacy: A Cross-Country Study : Lucia Spagiarri - MicroFinanza Rating Financial Education for Managing Risk : Zak Syengo - Rafiki What impact of financial education interventions in Cambodia?: Yousra Hamed - ILO

Financial capability, Financial literacy, Financial education Financial education is a way to increase financial literacy. It provides basic skills related to earning, spending, budgeting, borrowing, saving and using other financial services such as insurance, money transfers Financial literacy is the ability to understand finance. It refers to the set of skills and knowledge that allows an individual to make informed and effective financial decisions, and understand the financial services that are available.

What is financial capability? Financial capability is defined as the combination of 1. Knowledge (I know what a savings account is) 2. Skills (I know how to open a bank account) 3. Attitudes (I find it useful to have a bank account) 4. Behaviour (I m going to the bank to open a savings account) that a person needs to make sound financial decisions that support well being (center for financial inclusion)

Access to credit and financial awareness Microfinance Financial Literacy: A Cross-Country Study

Methodology Financial literacy: set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources (Giesler, Markus; Veresiu, Ela). One of the skills is interest rate awareness. Interest rate awareness: clients who know their nominal interest rate within 25% margin of error. Analysis (logit model) by the University of Reading, UK. Limitations: only one measure of financial literacy; no causality, only association. Data: 9,053 clients, 52 FSPs, 28 Countries Social Rating field surveys by MicroFinanza Rating Financial awareness of interest rate = α + β_1 x Sociodemograhic Status + β_2 x Financial Access + ε Research question 1: Where do we stand in financial literacy? Research question 2: What borrower profiles are more financially literate? Research question 3: Are borrowers with previous access to finance more financially literate?

% Clients aware of the interest rate of their loan Total 34% LAC ECA SEA Africa 26% 30% 48% 63% Urban-rural Rural Urban 28% 35% 45% Bank NBFI Credit Union NGO 14% 33% 32% 44% Large scale Medium scale Small scale 31% 33% 41% Indiv. Group Village B. Mixed 34% 32% 40% 40% High fin. intermed. Low fin. intermed. No Saving 24% 33% 42% Low client awareness of the nominal interest rate of their loan, indicating low financial literacy.

Dependent variable Controls Client awareness of interest rate Country, survey year Association: positive; negative; none Socio-demographic explanatory variables Financial explanatory variables Age*** Education*** Client household head*** Living in rural area*** Female Annual interest rate on current loan*** Multiple borrowing from other NBFI, NGOs, Credit Unions (now)*** Have a saving account (previously)*** Have a loan from moneylender, family or friends (now)*** Have a loan from NBFI, NGO or Credit Unions (previously) Have a loan from bank (previously) ***/** Statistical significance 1%/5% level. NBFI: Non Bank Financial Institution. = literature literature Communication transparency Over-indebtedness Remuneration not the focus Past stress experience Awareness of interest % does not come automatically with access

Policy implication Hypothesis 1 Hypothesis 2 Sociodemographic factors such as gender, age and education level are associated to the financial literacy levels of clients in the cross-country microfinance environment. Clients with previous access to credit and additional source of credit have higher financial literacy of interest rate. Age, education X Gender, rural Previous access to moneylenders, family and friends X Previous access to banks, NBFI, NGO or Credit Unions; multiple borrowing Financial literacy is not automatically achieved with access to finance; deliberate financial education measures are needed to improve it. Given the cost of education programs, it may be cost-effective to take financial education measures with target segments with especially low financial literacy. Transparency culture and supervision could help improving client financial literacy. Client financial literacy may be a necessary line of defence against over-indebtedness.

Thanks Guan Huang PhD Student in Finance, ICMA Centre, Henley Business School, Reading Lucia Spaggiari Business Development director, MicroFinanza Rating See Financial Literacy insight

Financial Education for Managing Risk Zak Syengo, Head of Marketing & Corporate Affairs Rafiki Bank

Institutional Background A subsidiary of Chase Bank (K) Ltd and regulated by the Central Bank of Kenya. Rafiki opened it doors on 7th July 2011. Currently we are the 3rd largest Microfinance Bank in Kenya.

PRODUCT OFFERING Savings Facilities Savings Account Current Accounts FDRs Credit Facilities Working Capital Asset Finance Mortgages & Development Over Drafts Trade Finance Bid Bonds Guarantees Forex Money Transfer services Micro - Insurance

Education Products Education Finance These comprise of loan products that enable individuals pursue education at different levels Institution Finance These loan products are offered to educational institutions to purchase necessities such as school vans, etc. Training We also facilitate training programs to individuals and educational institutions so as to promote education in Kenya through committed champions

Training Initiatives Chama breakfasts Classroom trainings Customer advisory Customer visits Open day

Partnership: Edulink International College Edulink International College offers global technical and graduate courses. Has partnered with several universities in the US, UK Partnership with the bank to have credit facilities availed to the students and guardians Diversification of partnership to reach out to many more youth. The bank extends financial training module to students through regular sessions facilitated by the staff trainers

OneUni MOBI DEGREE OneUni is a Silicon Valley mobile-first startup revolutionizing global higher education Offering a mobile learning platform that lets students access programs anywhere The monthly program fees even include the data plan so students can get to work wherever they are. In Kenya, OneUni is rolling out the first programs in partnership with Daystar University OneUni also chose to partner with Rafiki Microfinance Bank to offer school fees loans to students enrolling in their programs. Challenges: Reaching out to individual students for personal finance training

Educational Institution Finance Number of schools financed 25 Primary schools 14 Secondary schools 11 Total amount financed Balance of these loans outstanding Ksh.70,122,563 Ksh.56,772,171 PAR 0.63%

CASE STUDY 1:Tenacity Locks Ltd The proprietor, Ken Ndwiga is BCOM graduate He began specializing in locks in May, 2011 to take care of padlock security needs Enrolled in Rafiki Financial Education class in 2011(part of bank s initiatives for training entrepreneurs in personal and business finance through four sessions in a month) Uses social media as a key tool for advertising and marketing Currently planning to set up the largest show room in the Central Business District for locks Current borrowing over Kshs 4,500,000

CASE STUDY 2: St. Francis of Assisi Academy, Nakuru St. Francis of Assisi Academy was 30 th May 2006 by two directors Offers 8-4-4 system ranging from baby class to class 8 Currently accommodates a total number of 707 students. Employed 28 members of teaching staff and 12 non-teaching staff Current borrowing over Ksh. 9,000,000 School directors and management have benefited from Financial Education training organized by the bank to enhance best practices in personal and business finance

CASE STUDY :CHAMAS Number of groups trained 2102 Loan Book 469,354,000 Deposits 527,000,000 PAR 1.20%

Education Vs Risk in Microfinance Access to information helps clients make informed decisions Bank monitoring makes clients prioritize-avoid diversion Financial access bridges expansion gaps Ultimate risk management-for clients and microfinance Challenge: How sustainable are FE initiatives by the microfinance bank?

Zak Syengo Head of Marketing & Corporate Affairs Rafiki Microfinance Bank zsyengo@rafiki.co.ke (+254) 706 757 140 www.rafiki.co.ke Rafiki House, Biashara Street, P.O. Box 12755 00400 Nairobi, Kenya

Microfinance and risk management: An impact assessment of a client training on financial education AMK and VisionFund - Cambodia

Action Research Programme Timeframe: 2008-12 16 partner-mfis worldwide GOAL: to measure the impact of decent work innovations on the welfare of microfinance clients

Microfinance for Decent Work Innovations Formalization Occupational Safety and Health Job Creation/ Women Empowerment Risk Management Child Labour Awareness raising and client sensitisation to benefits Introduction of business development services Client training on good working conditions and agreement on improvement plan Specific loan product for work improvements Organisational restructuring: new SME lending window Client training on women s empowerment Financial education - Entrepreneurship training for clients Introduction of insurance products: multi-risk for business loan clients, health, credit life Introduction of individual emergency fund Introduction of leasing product Awareness campaign Modification of existing health-insurance product Modification of existing health-insurance product

Risk Management cluster s innovations PRIDE Microfinance Uganda Introduction of new leasing product (Mortgage Asset Financing Loan) Negros Women For Tomorrow Foundation (NWTF) Philippines Introduction of new entrepreneurship training to clients: using ILO training modules Generate and Start Your Business Modifications to Individual Emergency Fund (= savings account for emergency situations) VisionFund Cambodia Introduction of financial education to clients (direct client training) AMK Cambodia Introduction of financial education to clients (indirect approach through educating client officers) TYM Vietnam Introduction of client training on risk management and microinsurance Finanziera Confianza Peru Introduction of insurance Multiriesgo de Confianza and client training to establish a insurance culture among clients Banco Popular Honduras Introduction of health insurance Salud popular

Findings from the diagnostic phase and choice «over indebtedness and vulnerability» - AMK Almost 20% of respondents stated they had difficulties repaying their loan; 66% of respondents confirmed using financial services from other sources; among those clients, 8.8% stated that they took a loan to pay back their loan to AMK; 55% of respondents stated that they had been confronted with a large, unforeseen expense in the last year (mostly due to health issues); 65% of respondents explained that they covered large, unforeseen expenses by withdrawing savings; 60% took an additional loan, while almost 30% sold their assets; Only 11.6 % of all self-employed respondents indicated that their business income covered their business expenses; 8.3% of respondents reported being unable to cover household expenditures.

FE theory of change ACTIVITIES Development of training/new product Training of Trainers at different organisational levels (HQ, branch) Pre-selection of clients Client training/ briefing OUTPUTS MFI staff trained (training department, loan officers, branch managers) FE manuals provided (partially in local language) MFI clients trained/briefed MFI clients served by capacitated staff OUTCOMES Clients changed financial attitude Clients took better informed financial decisions and improved risk management strategies -Increased savings -Improved planning -Less withdrawals for non-emergencies -Increased use of insurance Clients built and maintained assets (physical, financial, social) Clients improved entrepreneurial skills Clients increased business revenue/profit IMPACT Client levels of overindebtedness reduced -Multiple borrowing reduced -Late payments reduced -Use of loans to payback loans reduced Client vulnerability levels reduced -Planned and unforeseen expenses fully covered by income MFI loan portfolio improved Implementation Results Baseline survey and up to 5 follow-up surveys to track the impact

Control and target group. Quantitative impact Evaluation: Basic facts on evaluation for MF4DW Action Research. Panel data: Baseline with one to four follow-up surveys (depending on the innovation). Data sources: Questionnaires (clients) and Management Information Systems (MFIs). Assignment of innovation at branch level (Number of branches in samples: 2 to 29). Typical evaluation methodology: Difference-in-differences (sometimes supported by Propensity Score Matching).

Risk Management Groups of outcome variables: Financial attitude - Debt-related attitudes - Precaution-related attitudes Financial behaviour/risk management - Planning horizon - Setting money aside etc. Asset building - Insurance - Savings Over-indebtedness/multiple borrowing - Borrowing from other informal/formal source - Took loan to repay another - Repayment difficulties Vulnerability - Expenses covered by income

AMK - Cambodia AMK applied an indirect training approach focusing on increasing financial education and training capacity of staff and delivering key message in group meetings throughout the loan cycle. Results Strongest positive impact on the repayment behaviour of clients: Reduction of 3.4% in late payments Significant and positive impacts on: Asset building through 10% increase of insurance uptake, Financial attitude through 8% reduction in clients believe that it is impossible to save, 1% increase in clients association of savings and security, through improved handling of debt, as well as attitude towards borrowing

Vision Fund-Cambodia VFC applied a direct training approach and implemented training sessions with clients (2 days course). Results Some impact on financial attitude and risk management 10% decrease of negative perception towards insurance Partially improved attitude towards savings 9% increase of setting money aside for future emergencies 22% increase in ability to put money aside for emergency expenses; Little evidence with respect to asset building (except for 8-10% increase of savings incidence); Many mixed and counter-intuitive results for multiple borrowing/overindebtedness and vulnerability.

Thank you! Yousra HAMED Social Finance Programme www.ilo.org/socialfinance International Labour Organisation See also ILO s financial education page More results on the MF4DW report

Q&A

Thank you Lucia Spaggiari - lucia.spaggiari@microfinanzarating.com Zak Syengo - zsyengo@rafiki.co.ke Yousra Hamed hamed@ilo.org