> Posted by Timothy Nourse, President, Making Cents International
The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. This blog series spotlights financial inclusion efforts around the globe, shares insights from the FI2020 consultative process, and highlights findings from “Mapping the Invisible Market.”
Last week, I participated in a Youth Financial Inclusion workshop for the Middle East/North Africa (MENA) region, organized by Silatech and CGAP. Financial institutions in the MENA region are unfortunately the least inclusive in the world. Global Findex Data indicates that only 18 percent of the population has accounts at formal financial institutions, compared to a developing economy average of 41 percent, and among youth ages 15-24, the rate is even lower, reaching only 13 percent when the developing country average is 31 percent. The youth statistics are particularly distressing, considering that the Middle East’s youth bulge is quickly becoming a liability, rather than a demographic dividend.*
During the conference, participants debated how to respond. To what degree should the focus be on credit or savings, the policy environment or product delivery, and financial or non-financial services? In particular though, they wondered whether they should even make specific (and perhaps expensive) efforts to expand youth access. After all, microfinance institutions were already serving youth at a higher level than banks, why not just continue to grow broadly, and to use an economics metaphor – let the tide lift all boats?
Back in the office, I thought about how the youth-inclusive financial services field has been discussing these issues over the past few years, and I wanted to share some of the emerging recommendations that respond to these questions:
- Start with savings. USAID and other research indicates that teens and young adults in developing countries are already economically active, have financial resources, and demand tools to manage their money. Although credit is one of these tools, and is appropriate for young adults with entrepreneurial aspirations, savings should be the entry point for the vast majority. Besides encouraging asset accumulation and serving as an appropriate entry point for a relatively vulnerable population, savings has been linked to the development of critical long-term planning and goal setting skills in youth.
- Remove legal impediments to access. Many youth are left out of the financial system by laws that prevent them from opening accounts on their own and identification requirements that are difficult to fulfill. Revising these laws to reduce the age of majority or working with central banks to provide flexibility for proof of identification would improve youth access to financial services. For example, in Zambia, Natsave Bank, working with Making Cents, received a waiver from the Bank of Zambia to allow co-signers to help establish the legal identity of account holders under the age of 19.
- Increase competition. Making Cents’ experience with microfinance institutions and banks demonstrates that serving youth for Corporate Social Responsibility (CSR) or general welfare reasons is generally insufficient to motivate the focus and changes necessary to serve youth effectively. Competitive pressure however, can provide the extra ingredient to push an institution to serve this population, as in the case of Kenya, where banks are now more actively targeting youth and in response to competition for adults. In response, and especially in the less dynamic MENA financial sector, regulators should make steps to increase competition in traditional markets through regulatory reform and allowing new deposit-taking institutions (formal or non) to enter and forward youth-inclusion goals.
- Build the business case. While directly targeting youth with financial services appears to be a marginal business on its own, due to high transaction costs associated with low savings balances and small credit demands, it can reap rewards as part of a more comprehensive household financing strategy, yielding greater customer loyalty, cross-selling, and larger volumes of services. Although anecdotal information supports this case, research and data collection efforts need to be accelerated to make the case more convincing and thus to encourage additional entrants into this sector.
- Provide financial institutions with the right approaches. Serving youth effectively requires adapted approaches: market research that explicitly includes youth and family perspectives, delivery models that provide more supportive spaces for younger clients unfamiliar with financial institutions, and links made, when possible, to financial literacy or enterprise development services. Sharing lessons learned and developing local youth-inclusive technical assistance capacity will provide financial institutions with the tools to understand the real constraints to serving youth, but also how to overcome them.
- Improve financial literacy. Younger populations are unfamiliar with financial products and need additional information to demand and use them effectively. Financial institutions can play a role in providing these services, but in the end, greater financial literacy will only be achieved by embedding training in educational institutions, supplemented by other community level activities. For example, in the West Bank, Making Cents developed a supplementary financial and enterprise development curriculum that improved the 11th grade management and business curriculum at no extra cost to the Ministry of Education, which now serves 55,000 students a year.
Once implemented, these recommendations promise to make a substantial impact on youth financial inclusion.
In regards to the larger question as to whether special efforts should be made to target youth or to serve them through general efforts, I believe that this is a false choice, since a focus on youth will improve both their access to financial services, but also accelerate general inclusion efforts, especially in the future as younger populations mature. For example, regulatory changes designed to improve access for youth will have similar effects for other excluded populations, and developing improved market research tools and specialized product delivery approaches will help financial institutions serve rural and other hard-to-serve populations. This result will be especially significant in MENA, where demographic windows will soon begin to close.
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* The demographic dividend is the accelerated economic growth that may result from a decline in a country’s birth and death rates and the subsequent change in the age structure of the population. With fewer births each year, a country’s young dependent population declines in relation to the working-age population. These potential benefits are conceptualized as “demographic windows” in the recent report from the Mapping the Invisible Market project of the Financial Inclusion 2020 campaign, Looking Through the Demographic Window: Implications for Financial Inclusion.
Making Cents International is working to develop best practices for youth inclusive financial services through its collaborative learning activities and putting them into action through technical assistance projects throughout the world. Timothy Nourse is President of Making Cents and leads their Inclusive Financial Services practice area. Learn more about youth inclusive financial services at Youth Economic Opportunities.
Image Credit: World Bank
Have you read?
When Demographics Shift the Way We Think about Youth Finance
Child and Youth Finance – Governments Step in
Youth and Financial Inclusion: How Can We Give Them a Head Start?