At the invitation of Timothy Ogden and Sona Partners, I am covering the Microfinance Innovation and Impact Conference an event co-hosted by Innovations for Poverty Action, the Financial Access Initiative, Moody’s, Deutsche Bank and CGAP. These posts reflect my personal observations and thoughts. Given the semi-live nature of these blog posts, please forgive any typos, or unintentional errors or omissions. Also, many of these presentations are new and unpublished, so there will be little opportunity to provide links outside of what is described and shown at the conference. Please feel free to add comments if you have any questions/thoughts.
“There is growing evidence globally that large share of population unprepared to make financial decisions,” said Greg Fischer of the London School of Economics, IPA and J-PAL, in his first slide. With this understood, he wanted to test what types of financial trainings/education would work best. Fischer presented findings on financial literacy from a study conducted in the Dominican Republic. He developed three groups. The first was the control, second received accounting training and the third were taught basic rules of thumb.
The Accounting group were taught basic cash accounting, how to track inventories, profit, revenues, etc and were taught how to calculate them. Rule of thumb taught people that they needed to separate their business and personal accounts. They suggested that the business owners have separate drawers for the two accounts, were told to simply write down transactions (not taught or told what to do with them, simply write them down), and write self IOUs when borrowing money from the business for personal expenses.
Previous assumptions stated that borrowers already know everything they need to grow; they just need the capital in order to implement their business ideas. If this assumption is true, a study like Fischer’s should yield results that are similar across all groups as it is believe that there is an understanding which already exists. The trainings could be useful, but if they can already run a successful business, the money available will be more telling than training. Fischer’s findings do not agree with this. As it turns out, the group with the rule of thumb training saw significant improvement in business practices over the other groups. So, there were significant differences in business outcomes based on what training people received. This verifies that people were using training.
One measure they used was asking the business owners questions what would indicate the understanding of their own business. For example, they would be asked to assess current profits against previous trends. Those who were using some way to track their business would have shown a general understanding of the difference between times when profits were high, low and average. What was found was that the rule of thumb group had a reduction in mistakes 10% points lower than the other two groups. The rule of thumb group were, in fact, 60% more likely to track revenues than those who were formally taught to. Fischer hypothesized that by recording the information, people would begin to use what they were recording rather than just fill papers with records and never look at them. This indicated that they were most likely to have an understanding of their business and that the training helped them to achieve this.
Another interesting finding was that people with higher education benefited from the accounting training. What this all means is that there is a need for financial education, it will be implemented, and it can be applied to both the educated and uneducated.
Maybe Fischer can run a similar study in the U.S. to determine what kind of financial education is needed here as well.