Financial Education in Pakistan: Will it work to increase financial inclusion?

For all its popular support, financial education needs to be very carefully evaluated. As part of a nationwide program launched last month, the central bank of Pakistan (known as the State Bank) started a pilot financial education program targeting poor and marginalized populations. About 50,000 low-income households will receive training in six areas: (1) budgeting, (2) savings, (3) investments, (4) debt management, (5) financial products, including branchless banking, and (6) consumer rights and responsibilities. The training materials will be translated into the national language as well as the five main regional languages, Urdu, Sindhi, Punjabi, Pushto and Balochi. Following completion of an independent assessment, the program will be expanded to 500,000 beneficiaries.

The training programs will be complemented by consumer awareness campaign using such novel approaches as street theater, board games, comic strips and activity-based competitions. Website and media campaigns will also be used.

The issues are important for financial inclusion. The State Bank has found that only 12 percent of Pakistani households use formal financial services, with the balance relying on unreliable informal arrangements. Of those outside the formal financial system, 40 percent cite lack of understanding of financial products as the main reason for not using financial services.

Safe and Fair Finance Blog supports this initiative by the State Bank of Pakistan but recommends that its impact be carefully evaluated. Research by Shaun Cole, Thomas Sampson and Bilal Zia on effectiveness of financial education programs show that low-income households benefit from basic financial training. However financial education is generally an expensive process with unclear results. Cole et al found that a more cost-effective approach is to give low-income households a small amount of money – if they open a basic bank account. All this suggests that the evaluation by an independent third-party will be a critical part of making the nationwide program as effective as possible. That assessment should look at more than just the issue of whether the trainees better understand financial products. The evaluation should also try to determine if households receiving training in personal and household finance are more likely to use formal financial services that those not receiving such training.

However financial education cannot solve problems due to weak regulation. Safe and Fair Finance Blog recommends that a systemic review of the financial consumer protection laws and regulations compared to international practice also be conducted and published.

* Cole, Shawn, Thomas Sampson, and Bilal Zia. 2009. “Financial Literacy, FinancialDecisions, and the Demand for Financial Services: Evidence from India and Indonesia”. Harvard Business School Working Paper 09-117

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