Financial inclusion for the poor: A critical analysis of the Brazilian case
Please cite the paper as:
“Fernando Pereira, Anderson Cavalcante, Marco Crocco, (2014), Financial inclusion for the poor: A critical analysis of the Brazilian case, World Economics Association (WEA) Conferences, No. 1 2014, Is a more inclusive and sustainable development possible in Brazil?, 5th May to 12th August 2014”
Abstract
In the last decade, following the international trend, the Brazilian government has been promoting a group of initiatives that composes a financial inclusion policy. The main focus of such a policy is the low income population (poor and extremely poor) who is contemplated by the national program of conditional cash transfer.
Basically, the financial inclusion policy aims at promoting access and use of financial services by means of two main strategies: financial regulation and education. Financial regulation acts upon the industry by controlling the expansion of the physical network and the type of services and products being offered to specific targeted groups such as the poorest, which has been historically marginalised by the formal financial markets. Regulation is increasingly aimed at stimulating and supervising the creation of financial services specially tailored to the low income population.
Once the supply of financial services to the low income population is warranted, financial education can play a role. The main hypothesis is that the targeted population has low financial literacy levels that, together with a historically limited or inexistent use of financial markets, can be amended by financial education initiatives. In an ideal world, with the implementation of the two strategies, a financial inclusion policy would be successfully developed.
This paper objective is to critically analyse the limitations of such financial inclusion policy, especially in what regards the above hypothesis. Our main point is basically that such kind of policy not only has very limited results but it is also completely inadequate, since it promotes very negative outcomes such as over-indebtedness and predatory actions by the financial system. The main argument is that financial education is not capable of increasing financial literacy or to act positively over the decisional process of the financial services’ consumer. Therefore, in order to guarantee that operational risks will not be completely transferred to low income consumers, it is necessary a sort of financial regulation that can rule the financial market structure and curb predatory practices.
The paper is structured as follows. The first section introduces the conventional arguments over financial inclusion. The second section critically appreciates, from a theoretical standpoint, the main points of what are described as financial inclusion policies. Following this initial appreciation, the third section gives a brief description of the financial inclusion policies in Brazil, showing the problems arising from taking a conventional view on the matter for granted.
The title of of this paper is captivating but am a little confused about what the authors’ definition of ‘financial inclusion’ in this case is. It would seem to be a combination of financial education (mainly by the public sector) and the supply of financial services (which I suppose is by the private sector). If this is the operational definition adopted by the authors, then the paper provides little proof to support the conclusions made of: i)inadequacy and ii) negative results like over-indebtedness and predation by the financial sector. There are several reasons for the negative results of access to financial services, lack of financial literacy being one of them. Hence if the public sector is pursuing financial education, it might be in response to a gap that has become evident through the over-indebtedness or the predatory behaviour the author mentions. But to say that financial education as part of a financial inclusion package, has negative results, is misleading. The authors admit to lack of data, so what informed their conclusion? If the conclusions are based on anecdotal information, then in the same spirit it is safe to say that many countries have pursued financial inclusion policies/increased access to financial services to the poor minus educating then on how to use them. Yet this same group of individuals lacks the basic education that would enable them manouvre the complex formal financial system. In a reactive manner, governments have now embarked on financial education to at least curb the extent of financial mistakes made by consumers. Thus, it would be recommendable for governments to start off with financial education that provides full information on product availability and usage. That way, consumers make informed choices of what to use. I believe a critical analysis would entail more than what the authors have presented in this paper, a few comparisons would also throw more light and minimise the potential confusion due to mix-up of concepts.
Dear Elizabeth,
many thanks for your comments, they will be very important to strenghten the arguments in the paper.
The financial inclusion definition we have used in the paper has to do with individuals being capable, through better knowledge, of using financial services (financial capability) in a way that improve their lives and avoid social exclusion. Note that, since the globalisation of finance accelerated in the last decades, financial exclusion has now become more important in the general discussion over social exclusion. In the end, financial inclusion does have to do with financial education, financial capability, and the use of financial services, as you mentioned.
However, it was not our intention to relate financial education with the public sector and financial services with the private sector. First of all, because financial education experiences in Brazil come from both the public and the private sector (though the best practices are being suggested by the governemnt) and financial services are also mixed between the two (two out of five biggest banks – total assets – in Brazil are owned by the government). Therefore, we did not intend to make the link you suggested (“public” financial education – “private” services). We acknowledge this very important point and we will make the argument clearer in a new version of the paper.
Second, you have raised a very interesting point when mentioning that “if the public sector is pursuing financial education, it might be in response to a gap that has become evident through the over-indebtedness or the predatory behaviour the author mentions”. We may not have explored that fuly in the paper, but our point is that financial education policies have been all captured by this exact idea, which is completely inadequate if we do need to reduce financial exclusion. Assuming that people are already over-indebted and, also, assuming that financial education will correct that is, in our view, a naive way to resolve the issue. First, because it does not curb the predatory behaviour of the financial system (only strong regulation does that); Second, because it does not guarantee people will be able to use their newly acquired knowledge to avoid financial predation and improve their relation to the financial system (the financial system and its services are too complex, even for highly educated people). And third, because homogeneous financial education tools are simply not able to reach a very diversified group of people. Therefore, a multidimensional approach (education, capability, regulation) is needed in order to promote a more adequate financial inclusion policy.
Again, many thanks for your comments. We will make the best to include your comments in the paper.
The action of the Brazilian government to offer a financial inclusion policy for the poorest sections of the population is valid for contributing to improve quality of life and to recover citizenship.
Thus, citizens of the poorest sections of the population have the opportunity to initiate financial inclusion, whom otherwise would be completely excluded.
As a pioneering initiative in a country with large social needs, this policy certainly has some faults; however it is producing some important results for the population.
Thank you very much for your comment, Mr. Hofstatter.
We know that we are in a difficult position. Nowadays, nobody can deny the relevance of financial inclusion for any citizen and, consequently, nobody can be against financial education.
Actually, the problem is the way that “National Strategy for Financial Education” has been shaped in Brazil and some other countries.
The main point is “Financial Education” has been presented as a panacea that will empower consumers and low-income people, preparing them to deal with financial market.
Unfortunately, “Financial Education” has been shaped only as a way to transfer responsibilities to financial consumers in a market in which products are not strictly regulated.
In our view, the “National Strategy for Financial Education” is not neutral but a risky (and expensive) politics that can produce unexpected consequences to new financial included people.
Thank you very much again, your comment will help us to improve our argument.
This topic is very interesting and quite extensive, but I would position myself starting a social phenomenon that implies financial education, the consumerism.
Can’t observe big results in “financial education” living in a society where the consumerism becomes the main form of social integration.
Brazil is going through major social changes throughout the years and one of them is based on consumption, i.e., buy more than you need.
Regarding this, the poorest or low-income population has assumed a very important role, because it has been the greatest lever to rampant consumerism, where the important thing is to have and to show what you have, at last how much more you expose, more your social “acceptance”.
In most cases, people do not have financial conditions to support such high standards and nevertheless continue buying and sporting a fictional way of life and therefore generating a high rate of economic delinquency.
In general, the society believes that the social inclusion happens through what you have and not by that what you are, even less by contribution that each person offers to society.
I believe we have here a muddle of values between the financial insertion and consumerism. In my point of view, the ideal scenario would be as follow:
Educate yourself financially;
Assume a safe and reliable roll to the society;
Consume only as much as you need.
These aligned and clear aspects can provide better education, culture, welfare, quality of life, social insertion and economic financial responsibility.
In regards to the governmental actions, I believe they are valid however their focus should be more towards children and adolescence education.
I personally think its contradictory to preach financial education whilst valuing and encouraging consumption whereas in reality this is what happens. Let us fight consumption and therefore reclaim our financial health.