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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EUROPEAN UNION: Better Consumer Credit Disclosure is Needed

While consumer finance practices are improving in Europe, they still have a long way to go. EUobserver.com notes that in a September 2011 survey of the 27 European Union countries plus Iceland and Norway, two-thirds of 242 banks (and another 320 intermediaries) failed to meet the EU requirements on consumer credit disclosure. Every country except four (Bulgaria, Greece, Iceland and Ireland) reported problems in banks failing to meet the minimum standards of EU consumer law.

In the UK, the Office of Fair Trading found that in a sample of 47 websites of credit providers targeting sub-prime or “non-status” consumers, 38 failed to comply with EU law. The failure rate was still higher in Spain where the National Institute for Consumer Protection discovered that 29 out of 29 credit websites failed the test.

The most common violations were failure to disclose the annual percentage rate (APR) on credit and indicate if interest rates were fixed or variable. Also inaccurate was information on requirements to obtain personal insurance as collateral for the consumer credit.

To date, the names of the offending banks have not been publicly released.

However the European Commission’s own website provides additional detail. It notes that of the 562 websites that were checked, the most common problems regarding consumer credit were three-fold:

1)       Missing information in advertising: Advertising on 46% of websites did not include some of the standard information required by the Consumer Credit Directive, specifically, the annual percentage rate of charge (APR), information on whether charges on obligatory ancillary services (such as insurance) were included in the total cost, and the length of time for which the credit agreement was valid.

2)      Missing key information on offers: 43% of websites failed to give full information about the total cost, in particular the type of interest rate (fixed, variable or a combination of both) and detail about extra costs related to the credit, such as an arrangement fee.

3)      Misleading presentation of the costs: 20% of websites gave misleading information about the way the price is calculated or the total cost for consumer credits where insurance is obligatory.

In the coming months, the national enforcement authorities have been asked to contact the financial institutions and request clarifications or corrections to the websites, under penalty of legal action leading to possible fines or closure of the institutions’ websites. The national authorities have also been requested to report back to the European Commission by the autumn of 2012 on the actions taken. The Commission will thereafter report publicly on the results.

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