> Posted by Claudio Storm Quinteros, Director Ejecutivo, Fondo de Solidaridad e Inversion Social de Chile
The Financial Inclusion 2020 project at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”
Imagine your refrigerator breaking down. The mechanic says it can’t be fixed. You don’t have a bank account, you don’t have a high paying job, and while you have saved a bit of cash in your home, it’s certainly not enough to purchase a new appliance. You later wander into a department store on your way home from work, and see it: a brand new refrigerator, on sale today only. You ask what the price is, and it is well beyond your savings. “Do you want to purchase it on credit?” the clerk asks.
Of course you do.
In Chile, about 58 percent of adults are financially excluded, if a bank account is the metric of inclusion (according to the World Bank Global Findex). But many people get their start with financial services through a different route. Retailers have moved into the financial services space and offer the ability to purchase many household items on credit. The product is even available for – perhaps especially aimed at – people whose incomes are low.
This is the population that my agency serves—those who are low income and trying to make ends meet. When serving this population, we address the root causes of poverty through a range of social and economic development activities. When we consider our financial inclusion programs targeting this population, we have to think about how people living in poverty use the financial services available to them—especially the consumer credit to which they have easy access.
Falabella department stores pioneered the practice of consumer credit for retail goods, offering a card that gave middle and lower-middle class shoppers – including those without bank accounts – the opportunity to buy televisions and refrigerators on credit installments. Customers of the department stores make two out of every three purchases on these cards, according to the Financial Times. Loyalty is high, and Falabella has built its brand on the cards. So have a number of other Chilean department stores.
In fact, when American retailer JCPenney tried to enter the Chilean market in the mid 1990s, it could not compete. When Walmart bought food retailer D&S, it kept the D&S brand name, forgoing the opportunity to extend its own name into Chile.
When we think about financial inclusion in Chile, therefore, we have to think about consumer credit.
While readily available credit can be a very good thing, there is the concern that without much competition, department stores can charge high interest rates to customers. A few years ago, it was found that retailer La Polar had extended loan terms without customer knowledge, extending a vicious cycle of debt for users.
In Chile, the household debt-to-income level rose by about 254 percent between 2001 and 2008, prior to the global economic crisis. In 2010 debt-to-income was reported to have been above 70 percent, according to the Banco Central de Chile (or $70 in debt for every $100 in income). For a country whose statistics may be interpreted as showing less than 50 percent financial inclusion, therefore, Chile already has regulatory challenges in financial inclusion.
What is to be done?
My agency relies on partnerships with other agencies to address the issue of over-indebtedness and to protect consumers. Since over-borrowing is a multi-dimensional problem, it requires a multi-dimensional solution. It is critical for consumers to be able to interpret interest rates, understand terms and conditions, and manage their repayment process.
Consumer protection regulation is one essential response to the challenge, as Sernac is well aware. So is the need for greater financial capability among consumers. To this end, Sernac hears complaints from consumers and works directly with institutions and organizations to resolve disputes. It has also worked to mandate the clarification of loan terms in contracts and communication with customers.
Financial capability among consumers is an issue that we are tackling in my agency, FOSIS. We address this problem of over-indebtedness among the most vulnerable by holding targeted workshops on how to understand loan terms, creating games to address financial education in the most vulnerable schools, and distributing informative materials (including comics, shown above) at critical times in the year—when debt is easiest to accumulate.
Finally, there are a number of underlying systemic factors, especially prevalent among low- and middle-income consumers, that are strongly linked to over-indebtedness. For example, we see people come out of poverty only to fall back into it because of debt. For these people, we try to teach underlying principles of saving, earning, and investing.
Consumer credit for retail goods has the potential to be a good thing—to provide people with the financing they need for major purchases and to help people to develop a credit history. But to ensure it indeed is used in a positive way, these client protection measures have become important to our national financial inclusion strategy.
For more information on Financial Inclusion 2020, sign up for project updates.
Image credit: FOSIS
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