It is now widely accepted that a key component of financial inclusion, that is providing poor and low-income people with access to appropriate and affordable financial services, is financial literacy. This, of course, makes perfect sense. After all, what is the good in providing the tools if the recipients do not fully understand how to use them, or indeed understand what might be the risks of using them?
The Organisation for Economic Co-operation and Development (OECD) defines financial education as “the process by which financial consumers/investors improve their understanding of financial products and concepts and, through information, instruction and/or objective advice, develop the skills and confidence to become more aware of the financial risks and opportunities, to make informed choices, to know where to go for help, and to take effective actions to improve their financial well-being.” Based on this definition, financial education is something that would be beneficial to us all – the financially included as well as excluded. However, for those of us who believe access to the right type of financial services is central to addressing poverty, financial education becomes even more vital since we would like to equip poor and vulnerable people with the skills and knowledge to manage financial resources effectively and over a sustained period of time – hopefully a lifetime.
The quality and commitment to financial literacy training varies from organisation to organisation. However, after a recent trip to Zimbabwe, I was impressed to see that Lendwithcare partner, Thrive, has not only fully integrated financial literacy training into their operations but its benefits are genuinely championed by everyone at the organisation - from senior management in Head Office to loan officers in the field.
So how does financial literacy training work at Thrive?
1. Unlike most microfinance organisations, the vast bulk of Thrive’s financial literacy training actually takes place before the first loan is approved. For the organisation this unique structure is absolutely key in terms of organisational risk (that is ensuring successful clients manage their loan and debt to the organisation well) and social development. A worrying yet important criticism of some microfinance organisations is that they burden poor and vulnerable communities with debt they cannot afford, with terms and conditions they simply do not understand. For Thrive, all successful loan applicants must demonstrate (before they receive a loan) they have a viable, income-generating business and that they understand the true cost of accessing a loan (the loan itself and the interest payable).
2. Thrive’s training schedule takes place over four weeks and consists of eight sessions in total. The training sessions include preparing and writing business plans, how to keep simple income and expenditure records, and calculating the cost of borrowing compared with the anticipated benefit. This four week period also includes interactive sessions where potential borrowers meet with former borrowers (without the organisation) to share good and bad experiences of borrowing and provide mentorship on group leadership and formation
3. Once a loan has been approved, Group Relationship Officers keep in touch with the clients, visiting their businesses to ensure loans have been used productively and the newly learnt business management skills are being used. All repeat clients also take part in a refresher training session before being approved for a second or any subsequent loan.
What are the benefits?
The benefits seem obvious – equipping poor and low-income entrepreneurs with the knowledge and confidence to wisely invest in their businesses, providing borrowers with the skills to manage their small businesses and plan for their expansion, and ensuring understanding around the cost of borrowing and the potential risks. There are other, less tangible, benefits that also come from such an integrated and comprehensive training programme and these are linked to the feelings of empowerment that are created when a small business owner is properly equipped with these skills. Whilst in Zimbabwe, we were shown time and time again, with great pride, the income and expenditure records now kept by the female clients of Thrive and one woman told us how she was now teaching her husband (the main income earner of the household) how to manage his business affairs and working with him to implement the lessons she was learning as a client of Thrive. Group Relationship Officers (who perform the function of appraising loan applications and monitoring their use and repayment) also took enormous pride in delivering the financial literacy training programme, creating added benefits for the organisation in terms of staff retention and staff-client relationships.
What are the challenges?
But of course, a training programme such as Thrive’s, does come with its challenges. Namely:-
1. The organisation risks losing clients due to the time and financial (each training session costs $1) commitment required before a loan is actually approved. This risk increases in a more competitive market, where potential borrowers may just decide to use the organisation down the road that can approve a loan in less than a week.
2. A comprehensive training course requires additional resource and therefore comes at a fairly significant cost to the organisation.
3. This cost is likely to be reflected in the cost of borrowing (covered by increased interest rates or other service fees) and while this might be acceptable to first or second time borrowers who find the training invaluable, there is the possibility that repeat borrowers will start to look elsewhere as the training programme becomes repetitive and the added costs unjustifiable.
So while the benefits of financial literacy training are widely acknowledged today, the debate continues on how an organisation usefully and affordably implements it. Nonetheless, I was thoroughly impressed by the programme being used by Lendwithcare’s partner in Zimbabwe and look forward to seeing how the tools (i.e. small loans) Lendwithcare lenders provide combined with the confidence and knowledge to use them (the training), make a difference to the lives of Thrive’s clients.