A Call for Caution in Judging the Merits of Financial Education: A Review of 'Bridging the Gap'

> Posted by Chris Dunford, Senior Research Fellow, Freedom From Hunger
Bridging the Gap is a most welcome and ambitious review of the state of financial education. Its authors, Anamitra Deb and Mike Kubzansky of the Monitor Group, were commissioned and funded by the Citi Foundation.
There is much real value to this work, and I will point out the important contributions the report makes. I will also point out serious concerns about some of the points made and how they may distort the experience to date and the promise of financial education. Please read it for yourself rather than depend on me to summarize it for you here. This review is meant to help you read the report carefully.
Bringing conceptual clarity to an often muddled narrative
A valuable distinction is made by Bridging the Gap: financial education is but one component of the huge effort required to build financial capability. Financial capability is defined as “the ability to make informed judgments and effective decisions about the use and management of one’s money.” This must accompany access to financial services in order to bring about true financial inclusion. By these assertions alone, the authors earn our gratitude for bringing conceptual clarity to an often muddled narrative.
Bridging the Gap reasonably limits its scope to financial education delivered by financial service providers. Recognizing that the huge gap between the need for and current supply of financial education can only be bridged at significant expense, the report focuses on the need for a “business case” for delivery by financial service providers. Given the poor performance of any kind of public-supported education or awareness campaigns in low-income countries, I am totally sympathetic to their focus on the private sector with its absolute need for a convincing business case.
Beware the tension between financial education and product marketing
However, the authors fail to warn sufficiently up front (not until p. 44) that, “Finally, this model raises the question of striking the right balance between financial capability and product marketing—something the field has long grappled with.” Coming from Freedom from Hunger, a pioneer in the development of financial education technique and content, I know this is an understatement of the tension between, on one hand, education for full financial capability (to know the choices and make decisions among the full range of product offerings), and on the other hand, promotion of the relatively narrow range of products provided by a particular financial service provider. The latter is not always aligned with the interests of clients seeking full financial capability.
When the report tilts toward “product-linked financial education,” solely because convincing business models can be conceived for this provider-based approach, it accepts a fundamental conflict of interest that undermines the use of financial education for achieving financial capability.
Accepting and managing this conflict of interest may be the necessary trade-off to achieve full financial inclusion for all humanity.
However, much can be done to minimize this conflict of interest. For example, product-linked promotion can be integrated with general financial education within the same financial education module, as Freedom from Hunger is doing with some of its MFI partners. I suggest you read the more detailed commentary by Freedom from Hunger on this particular issue as well as on the Bridging the Gap report in general.
Beware fascination with the new and shiny
To my mind, the report also suffers from a deep inconsistency in the way it treats recent and current financial education efforts in comparison with newer ideas and experiments. The report seems afflicted by what my late and politically incorrect father would have labeled the “prettiest girl in the room” problem (Give him a break; he was born in 1918). Translated – judgment gets distorted by fascination with new ideas and shiny technology.
Yes, the sparse impact research done to date (by Freedom from Hunger, Innovations for Poverty Action and others) has yielded little to comfort those who want to believe financial education is effective in producing financial capability. Part of the reason for this may be lack of clarity about what financial capability ought to actually look like in the lives and decisions of poorly educated and mostly poor individuals. If they don’t jump at the newly revealed chance to open and actively use a savings account, maybe the product on offer has not been properly designed.  Maybe the education is not addressing what is meaningful in their lives. Interpretation of the disappointing results is still controversial.
On the other hand, there is practically no impact research, much less results, to merit enthusiasm for the newer experiments. Let’s be careful of a rush to judge negatively the devil we know while lauding the potential of the devil we don’t yet know.
Beware unfair cost comparisons
The same caution applies to the report’s comparisons of the cost of delivery.  Strange as it may be to say, the report is outright unfair in its cost comparison of education delivery models. It lumps classroom education by specialized trainers together with education at regular microfinance client group meetings (what the report labels “induction training” or “supplemental education”). Classroom education by specialized trainers naturally is an expensive approach, conducted in parallel to normal financial service operations.  In sharp contrast, education at regular group meetings is often specifically designed to minimize marginal costs. Many microfinance providers do not bring clients together in groups as part of standard operations, but those who do can train and support their regular financial service agents to facilitate financial education at regular meetings of their microfinance groups – with documented cost-effectiveness (always subject to further improvement, of course).
Likewise, the report doesn’t distinguish the costs incurred by two very different approaches to funding financial education.  Two-thirds of providers relegate financial education to a separate “cost center,” because they would rather take grant subsidy or charge significant fees rather than cross-subsidize non-financial services from the margin on financial services.  The other third are willing to cross-subsidize financial education to avoid perpetual dependence on external grant subsidy or dramatic reduction of demand by charging separate fees.  The cross-subsidizers are highly motivated to minimize costs through creative design of education content and delivery. The other two-thirds, especially those who take grants, are not so highly motivated.  The costs associated with these two different business models should have been distinguished before comparison with the costs of other business models.
Finally, the report includes the research and development (R&D) costs of relatively small-scale “supplemental education” but not for very large-scale “induction training,” as though the latter never incurred R&D costs and never will again.  They erroneously conclude that supplemental education is prohibitively expensive by comparison to induction training.  In practice, the two types are nearly indistinguishable in staffing, setting and technique.
Read this work with a critical eye
Don’t let me put you off this excellent report.  It provides a very valuable inventory of promising experiments, some more developed than others.  As for the report’s attempt to weigh and compare the potential utility of these experiments in financial education to achieve global financial capability, I urge you to read this work with a discerning, critical eye.
Image Credit: Citi Foundation

Chris Dunford is Senior Research Fellow at Freedom from Hunger.  He is devoting his time to The Evidence Project at www.microfinanceandworldhunger.org
Have you read?
Financial Capability: Not Many Answers, but Lots of Great Questions
Financial Education: A Means to a Means
Who Needs Financial Education?