Financial literacy: the water in the ecosystem

Published September 26, 2019, 12:01 AM

by Charissa Luci-Atienza & Bernie Cahiles-Magkilat

OF SUBSTANCE AND SPIRIT
By DIWA C GUINIGUNDO

Diwa C. Guinigundo
Diwa C. Guinigundo

I was rather proud to cite some of the initial victories in financial inclusion in the Philippines during the panel discussion.

We have covered nearly all areas of the Philippines bringing with us various forms of economic and financial education in partnership with local governments, schools, and our own network of 19 branches and three regional offices. We succeeded in having financial program included in the basic school curriculum by coordinating with our Department of Education. We award annually those partners in financial literacy program and financial inclusion who contributed meaningfully to these causes. This is meant to highlight the importance of financial inclusion in the overall goal of attaining more inclusive economic growth.

In promoting a more inclusive financial system, some anecdotal evidence was quite interesting and dramatic. There’s one bank today that is now serving previously unreached rural areas by capitalizing on the central bank’s enabling
digital finance regulations. It has some presence in 349 local government units covering 100 percent of households in 80 of those LGU’s.

We have also authorized our neighborhood grocery stores and pawnshops as cash agents of the banks to expand the reach of finance. So far, 95 banks have started to offer a basic deposit account with maintaining balance of only a hundred pesos ($2), below P100 ($2) opening deposit, no dormancy charges and simplified documentary requirements.

Consistent with the National Strategy for Financial Inclusion, the central bank also implements the National Retail Payments System by authorizing the creation of private sector-led automatic clearing houses such as InstaPay and PESO net—the enabling infrastructures that would allow bank and e-money accounts for storing money and enabling day to day payment transactions that would also power up the gathering of credit profiles especially for farmers and SME’s.

We also mentioned the launching of credit surety funds (CSFs) all over the Philippines. This initiative strikes at the very heart of small business’ basic problem with accessing bank credit. Premised on collaboration among the local government units, Land Bank, DBP and the Industrial Guarantee Loan Fund and the cooperatives, loans under the CSFs are granted without the borrowers presenting hard collateral and credit history to participating banks. Billions of pesos in loans have been generated under this program with very low non- performing loan ratio. Success stories abound within the CSF family.

But in looking at the dashboard of financial inclusion in the Philippines, we were rather disturbed by some pieces of information and survey results. We clarified to the Conference that timing is a very critical consideration because these findings either came before or after some of the key initiatives of the central bank were implemented and these data were the only latest available data.

Between 2015 and 2017, while adult savings rose by nearly 5 percent, those who saved in the formal banking system actually declined by nearly 15 percent. Between 2009 and 2014, the percentage of households with deposit accounts dropped by 7.5 percent. Between the first quarter of 2018 and the first quarter of 2019, the percentage of OFW households who allot a portion of remittances to savings declined by more than 5 percent. I understand this metric was updated about a week ago with the release of the latest Consumer Expectations Survey for the third quarter 2019 and the numbers suggest some improvement of a few percentage points.

We explained that these were somewhat disturbing because these periods coincided with the 20-year experience of the Philippines with sustained, uninterrupted economic growth averaging 6.5 percent in the last 7 years. We explained these were somewhat disturbing because these periods were covered by the central bank’s aggressive drive towards financial inclusion in the areas of policy and regulation, financial education and consumer protection, advocacy programs and data and measurement.

Of course, in many other areas, great improvements have definitely been made.

We concluded our keynote with three key points.

One, some of the literature posits the idea that the positive correlation and perhaps causality between financial inclusion and growth and employment may not hold for those economies with underdeveloped institutions. The transmission mechanism is not fully articulated in lowering transactions costs and better distribution of capital and risks. But this observation is hardly descriptive of the Philippines where, in the last 25 years, key policy and structural reforms have been put in place. The counter factual evidence is also available: in many developed economies with very developed financial systems and capital markets, financial literacy could also be quite relatively low. This warrants further research.

Two, there is also the idea that in low-income countries, income inequality exists and actually deteriorates but ultimately, when they reach a more intermediate or more advanced stage of economic development, income inequality starts to improve. The Philippines is now a lower middle-income country aspiring to be an upper middle-income country in the next five years or so, with at least an A- credit rating. Can we expect some improvement in this metric when we finally take off? Is the deterioration in some financial inclusion metrics a natural result of where we are in the economic development journey?

Finally, is there some trade-off between pursuing financial education and encouraging various financial innovations of increasingly complex nature that only the more sophisticated and the more educated could take advantage of?

Is it sub-optimal to do both? Teaching and allowing the people to access credit and enjoy lower transactions on a digital, fintech platform of financial
transactions could be very beneficial especially to those whose eyes do not blink to digital forms of payments. By introducing in a dizzying pace various forms of financial instruments and services made more complicated by digitalization, are we contributing to the ever widening gap between those who have the sophistication and those who have not in leveraging on technology and advancing greater access to financial opportunities?

Clearly, financial literacy is what would make people decide better in their saving, consumption and investing behavior. A population that is financially literatewould best leverage on technology and digitalization. A population that is financially literatecan make financial scams difficult to flourish. A population that is financially literatewill have better understanding and higher confidence in the integrity of the financial system and market conduct.

Financial literacy if pursued with greater vigor and emphasis will make the economy more vibrant with more promising dynamics of consumption, saving and investment. Knowledge of personal finance will make any initiative on inclusive finance more beneficial and useful because people fully understand how it works and how it will benefit them.

A powerful hand phone in the hands of someone whose knowledge is limited to the functionalities of games, texts, and calls is close to a useless tool. As in the case of a young boy, the hand phone will be most useful for calling his Dad to pick him up at the playschool. The phone in the hands of someone not in the know is not useful in making peer-to-peer payment or monitoring the movement in his bank account because he has none even if the banks are willing to lower the minimum amount for opening an account or the maintaining balance.

By all means, we can pursue both financial literacy and the broader goal of a more inclusive finance. But it would not hurt if we give financial education more traction. We can make use of more water before we dry up.

Or we end up doing a Sisyphus.

(to be concluded next week)

 
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