Citi Foundation: Financial Education is a Moral Imperative and Business Smart Practice for Microfinance

Even though each region of the world is invariably different when comparing factors such as politics, culture, and language, there are still similarities among the billions of people around the world. One commonality is access to microfinance. Many governments and development institutions working in every region strive to expand access to "microfinancial services" in an effort to reduce global poverty.

When I worked in Kenya with microfinance borrowers over the last eleven months, I was often asked about how microfinance operates in the United States. When asked if American borrowers were facing similar challenges as Kenyan men and women borrowers, I answered knew the answer was yes.

Kenyan borrowers are not alone in their financial problems.

The stories of individual borrowers around the world (from Morocco to Nicaragua to India) not being able to pay their debt have been documented creating the global trend commonly referred to as the "repayment crisis." Microfinance markets across the world had to cope with losing clients and massive loan write offs.

Americans themselves are not immune to personal financial challenges. Not too long ago attorney generals across the United States came together to bring assistance to families affected by the mortgage crisis. Other families were also financially affected by events the Great Recession. With microfinance expanding in the United States, access to financial education is essential to ensure that borrowers are aware of the risk, investment and responsibility of borrowing. 

According to a recent report entitled Bridging the Gap: The Business Case for Financial Capability funded by the Citi Foundation, it is a moral imperative, but also smart business practice for lenders to think seriously on how to expand the financial capabilities (financial literacy gap) of microfinance clients. The report concludes that only one-fourth of current microfinance borrowers world-wide have or had access to minimal financial education. 

So, could education have prevented the global "repayment crisis"? Definitely not in its entirety, but education initiatives would have provided a greater platform of information for clients. 

Why is the microfinance industry reluctant to pick up this issue? According to the Citi Foundation, it's the price ticket. There is no sufficient research that suggests financial education provides higher returns compared to the cost of providing it.

Access to information and education is a vital consumer right, especially for financial consumers. Unfortunately, this is not the only solution to ensure consumer protection for borrowers. 

Another solution...regulation. Unfortunately, regulation seems to be a "four letter word" for financial markets. 

There needs to be a transformation of the current expectations of education that allows regulation to take a complimentary role in ensuring consumer protection for clients. Change needs to come at the policy level through an increase in legislation and regulation of the microfinance industry to compliment education efforts of civil society organizations and consumers.

 

Until this is implemented, I am the cheerleader for the industry to seriously consider long term education to allow clients to explore and question the usefulness of his or her participation in microfinance.

**To read more about financial literacy, please clink on the report title Bridging the Gap: The Business Case for Financial Capability  written by Anamitra Deb and Mike Kubzansky and funded by the Citi Foundation.

**Also, read a review of the report entitled A Call for Caution in Judging the Merits of Financial Education: A Review of ‘Bridging the Gap’ written by Chris Dunford, Senior Research Fellow at Freedom from Hunger.