How to Tell Good MFIs from Bad MFIs

Most of us working in microfinance want microloan clients to be paying interest rates that are as low as possible. While we have the same vision, there is disagreement about how to determine whether an interest rate is an appropriate one.

Some people, including Mohammed Yunus, are worried about the growing commercialization of microfinance, including the entry of profit-motivated owners and managers.  They are concerned, reasonably enough, about possible “mission drift,” especially in the form of interest rates rising to (or staying at) excessive levels. In his book and in many presentations, Professor Yunus offers a straightforward formula for judging MFIs and their objectives:

• If you’re a real microlender who cares about the poor, then your interest margin (the difference between the rate you charge when lending to your clients and the rate you have to pay when you borrow from your funding sources) should be no more than 10%. That’s the “green zone” where true microlenders operate.
• If your interest margin is 10-15%, a big warning sign is flashing because you’re in the yellow zone.
• Anything above 15% is the red zone, where you’ve left true microcredit behind and joined the loan sharks.

Unfortunately, when you look at the evidence, this appealingly direct formula turns out to be pretty far off the mark.

To begin with the conceptual problem, the formula doesn’t allow enough room for legitimate differences in administrative costs among MFIs. For an MFI that makes especially small loans or serves a sparse rural clientele, administrative costs will inevitably be a higher percentage of loan portfolio, and the lion’s share of the interest rate spread goes to cover those costs. Application of the proposed formula could actually discourage outreach by such MFIs to poorer clients.

But concepts aside, how does the formula match up against actual MFI experience? It turns out that this formula would place most of the world’s MFIs in the red zone—the average interest rate spread for MIX MFIs in 2008 was over 20%.  But to be fair to Prof. Yunus, that shouldn’t end the discussion.  After all, maybe plenty of the MFIs in the MIX are charging their borrowers rates that are way too high.

Now let’s test the green-yellow-red formula against a group of Grameen-approved MFIs. Christoph Kneiding and I analyzed MIX data on Grameen along with several dozen MFIs that received support from the Grameen Foundation and reported to MIX. In 2007, for instance, 33 MFIs (representing about two-thirds of the Grameen Foundation recipients) reported to the MIX.  The only one in the green zone that year (interest spread below 10%) was Grameen Bank itself. Seven were in the yellow warning zone (10-15%). All the other 25 were up in the red zone (above 15%) and most of them way up in the red zone (between 30 and 55%). The three preceding years looked pretty much the same.

The proportion of Grameen affiliates in the red zone was about the same as the worldwide proportion:for instance, 75% of all MIX MFIs were in the red zone in 2008, according to a new study by Adrian Gonzalez of MIX. NGOs were more likely to be in the red zone than for-profit MFIs, suggesting that interest spreads may be driven more by the higher costs of smaller loans than by profit maximization objectives. (Average loan size in NGOs is about a third of what it is in for-profit MFIs.)

Has the Grameen Foundation has been fooled into working with a bunch of red-zone partner MFIs that are wolves in sheep’s clothing? Far from it. The Grameen partner MFIs that look so terrible on the green-yellow-red test actually appear quite strong—in fact, well above average—on indicators normally thought to be associated with commitment to the poor, such as average loan size.  Nor do they appear to be inefficient: they average considerably lower on cost per borrower than the other MFIs in their countries.

It’s disappointing that simple formulas can’t help much when it comes to appraising things like mission drift or fairness of interest rates. It takes a more complex analysis (see, for example, the CGAP papers on microcredit interest rates and Banco Compartamos).  I hope we see a lot more MFI-by-MFI analysis, in which the reasonableness of interest rates is judged by the reasonableness of the costs and profits that produce those interest rates. We all want to see MFIs charging clients rates that are as low as possible, so we need analytic tools that can do a credible job of separating the sheep from the goats in that regard.

by Richard Rosenberg

Source:-CGAP

Financial Literacy for Financial Inclusion

The majority of the working poor in India, especially those working in the informal sector like small and petty vendors, home-based workers, artisans, labourers, maid servants, desperately need financial services from formal financial institutions. The reason is that they are involved in economic activities in which they need working capital. They also need credit or term loans to buy business equipment like sewing machines or cutting machines or livestock or handlooms.

There is also a need for credit for improving their huts or houses, for adding water and drainage services in their living place, or for getting electric connections.

These are all their needs for running economic activities, mainly because they are self-employed or working on their own. Because of their nature of work (mostly manual labour), poor living and working conditions, and low income level, they are very vulnerable and susceptible to many types of risks, i.e., personal risks like sickness, accident death, or natural disasters like floods, cyclone and fire. They need to be protected under these risks. They also want to build little savings for their future needs. Women want to "save for rainy days". Vulnerability during their entire working life does not allow them to build or plan for their old age.

What we need is a two-step financial literacy programme — developing personal financial management skills and developing financial operation skills — to make financial inclusion successful

The poor need credit, insurance, savings and pension services. But because of lack of access to these financial services from formal sector, they have to depend on informal financial sources, i.e., private money lenders. Not only are these informal sources exploitative, they provide only credit services and do not provide other financial services like savings, insurance, pensions and remittances. As a result, the poor are caught in a debt trap; they borrow at very high interest rates for all types of life-cycle needs, whether it is a business need or a personal need like sickness or accident, or a social need like marriage. If our objective is to bring these economically active poor out of the vicious cycle of poverty and help them build their own capital assets and business, we need to ensure that they get access to integrated financial services, and that too from formal financial institutions at a reasonable price.

The current ‘financial inclusion’ policy has all the components that are required to ensure that poor get access to financial services. Most importantly, the policy does not talk about only credit service, but also about integrated financial services. It provides for "door-step" banking, which is needed by the poor. It talks about bank appointing business facilitators and banking correspondents. It seeks to allow the poor to open "no frills" accounts. Banks are given targets and they are strictly monitored. There is the necessary political will as well as positive response from the formal financial sector, especially banks.

Though targets are supposedly being achieved, it is yet to be seen that it is bringing a positive change in the life of the excluded population. Thus, while "no frills" accounts have been opened, few accounts are being meaningfully operated.

Probably the gap is at the demand side; may be the needy are not ready to avail of these services in a meaningful way; because this is the first generation of the population which we are trying to link with formal financial services. They are taking time to get used to such services. They are used to deal with informal financial service providers who provide 24-hour service at their doorstep with the simplest procedures. May be, they are reluctant because they are scared to follow procedures.

We need to ensure that the poor get access to integrated financial services, and that too from formal financial institutions at a reasonable price

For a few services like savings and insurance, there is a need which needs to be converted into demand. There is also a need to help them change their financial behaviour – they normally live on day-to-day basis and also think on a day-to-day basis. We need to build their awareness to help them think for long-term lifecycle needs. There is a need to help them to change their habit of making financial decisions like impulsive borrowing without thinking or understanding its terms and conditions, and their repaying capacity. There is need to teach them to differentiate between productive and consumptive use of money, specially borrowing.

What we need is a two-step "financial literacy" programme to make "financial inclusion" successful and meaningful. One is developing personal financial management skills and the other is developing financial operation skills for availing various financial services.

Personal financial management literacy includes the component of awareness building for financial planning and changing impulsive financial decisions, understanding importance of regular savings, borrowing only for productive purpose, minimising risks through availing insurance services and also understanding financial principles. These include the following:

· the principle of fungibility of money;

· principle of power of compounding;

· principle of productive versus unproductive use of money;

· principle of borrowed versus own capital; and,

· principle of insurance.

A proper understanding of the principle of power of compounding will make the provision of "no frills" accounts meaningful because poor will understand the importance of regular savings for the long term. Similarly, the principle of productive versus unproductive use of money will reduce the use of borrowed money for productive purpose and the principle of fungibility of money may help them to save and plan for different purposes or different life-cycle needs. Personal financial management literacy should be accompanied with financial operational literacy, like account opening procedure, explaining a nomination facility, types of saving accounts or how to avail credit from a bank.

The financial inclusion programme can become meaningful if parallel work is done on both the demand and supply side. Excluded population should be prepared to avail of financial services from formal financial institutions and financial literacy can play a very important role in bringing in the desired results. Of course, it will be too much for banks to play this role of preparing people for availing financial services or converting need into demand. Thus, a parallel financial literacy movement should be encouraged, may be through the media, even as we build a cadre of financial counsellors at the grassroots level to educate people by building financial awareness.

Jayshree Vyas is Managing Director,
Sewa Bank

India: Microfinance and Its Emerging Challenges

The recent debate on the rise and regulation of Micro Finance Institutions (MFIs) has put the focus squarely on the neo-liberal model of microfinance, being followed by the government since the beginning of the economic reforms. The early 1990s saw the emergence of microfinance as a major strategy of poverty alleviation by the neo-liberal state, especially in the wake of the reduction of public spending on welfare programs. The formation of self-help groups (SHGs) and their links with banks and government schemes was seen as a way of offsetting the problems of the limited outreach and of mobilizing capital for self-employment and other income generation programs. Many of these schemes targeted poor women, who were largely dependent on the informal sector credit from moneylenders. Thus the self-help groups formed under the bank linkage program attracted many women and more than 70 per cent of the bank and government linked groups were formed by women.

Perspectives on the SHGs

It was for this reason that the democratic movement and its organizations were not only forced to take this development seriously, but also develop their own perspective on SHG formation, while recognizing the limitation of the neo-liberal model of microfinance. The main critique of the neo-liberal model was built around the fact that it was largely designed to mobilize the savings of the poor for providing liquidity to banks and also for mobilizing the savings for self-employment programs in which the government had started to invest less and less money. In this situation, the formation of the SHGs was becoming a way of absolving the state of its own responsibility towards poverty alleviation programs. At the same time, many communal organizations and profit seeking commercial enterprises had also started to use these SHGs for their own narrow ends.

In stark contrast to this, the alternative perspective of the Left led governments saw the SHGs as a way of increasing the outreach of the government as well as channelling the government funds to the people. For example, the Kutumbashree, neighborhood micro-credit program of the Kerala government, linked the panchayat development with the organization and livelihood security of women. In West Bengal too, SHGs were given loans at subsidized, low interest rates, and they also received adequate training and marketing support. This showed that the democratic movement’s model of SHGs was concentrated on the democratization of governance rather than on the withdrawal of government support. By the same measure, democratic organizations working for women’s rights saw the formation of SHGs (for instance, MALAR federation in Tamilnadu) as providing a window of opportunity to mobilize women on social, economic and political issues.

Roots of the Rise of MFIs

The recent rise and growth of micro finance institutions has only made such SHGs all the more vulnerable in the present scenario of economic distress. According to the State of the Microfinance Sector report of the ACCESS alliance, the MFI operations expanded by 13 times in four years to end the year 2009 at Rs 117.9 billion ($2.6 billion) in outstanding loans. Of its 26.6 million borrowers, poor women and disadvantaged sections form one of the largest sections of the clientele. Whereas there was only one for-profit MFI in the country in the middle of the 1990s, this number had spiraled to 149 registered micro finance institutions by 2009. Of these, about 11 per cent of the large micro finance companies had a disproportionally larger share in the credit market, having 82 percent of the clients and controlling about 88 per cent of the loan portfolio. This reveals the emergence of new corporate entities and private finance companies who have started to exploit the credit needs of the poor by charging high interest rates. An investigation by a report from the Down to Earth magazine in Andhra Pradesh revealed that whereas bank linked self-help groups were charging interest rates of about 15 percent from their borrowers, the interest rates charged by the MFIs were at about 60 per cent. This clearly showed that a space had been created for exploitative financial intermediaries for entering the rural and urban credit markets.

That this phenomenon was linked to the refusal of public sector banks and the state to extend the outreach of its formal credit infrastructure is evident from the fact that most of the MFIs are concentrated in the 256 districts where the poor have a demand for credit, but the formal banking system is not able to meet this demand. Of this Andhra Pradesh and Karnataka have the greatest density of micro finance institutions, and more than 50 percent of the outstanding loans are in the southern states.

This meteoric rise of the MFIs has its roots in the liberalization of the banking system and its failure to meet the demands of the rural poor, especially women. Initially the MFIs were started in response to the program of financial inclusion. The SHG-bank linkage program was started by the National Bank for Agriculture and Rural Development (NABARD) where non-government organizations (NGOs) and not-for-profit institutions played an intermediary role in promoting and facilitating the link between self-help groups and banks. Thus many MFIs started as not-for-profit NGOs and then began to expand their operations to make direct contact with the clients. Thus SKS Microfinance (which is the largest MFI in the country today) started as a not-for-profit institution and converted itself into a non-banking financial company in 2004. Similarly, Sampdana, another of the MFI giants, started with 500 clients and increased its clientele to about 3 lakh (300,000) in the period between 1998 and 2004 when it became another for-profit company. This conversion of not-for-profit institutions into MFIs was a result of a state policy that increasingly facilitated the penetration of big private capital in this sector. International institutions like the World Bank supported the funders of the MFIs like Basix and the NGOs like PRADAN and SEWA in order to facilitate the demise of public sector banking.

Weakness of the Neoliberal Model

Such policies only exposed the weakness and inability of the current government and bank driven programs to meet these challenges. Women participating in the bank linkage program faced difficulties in getting access to bank credit despite the fact that it is they who had formed the SHGs. Thus around one lakh SHGs under the bank linkage scheme are yet to be credit linked even though they have formed the group under the linkage scheme. Further, the bank linkage scheme itself operates in two ways: first where the SHGs are supported directly through the banks on the one hand and, second, where banks lend to the MFIs for onward lending to the SHGs. They believe that this will only increase their outreach. But it is precisely this strategy which has also created the space for a replacement of the banks with the MFIs in some regions. Thus NABARD’s own report on the Status of Microfinance, 2009-2010 shows that while the rate of growth of direct bank support to the MFIs went up by 8.1 percent during the last year, direct support to the SHGs only went up by around six percent. This shows that the banks found it easier to give bulk loans to the MFIs rather than strengthen their direct links with the SHGs. Further, the ACCESS alliance report shows that the operation of the MFIs expanded by 83 percent in the last two years whereas the expansion of banking operations was only half that rate. This shows that the roots of rise of the MFIs lie in the slow growth of public sector banking and their reluctant and tenuous links with the SHGs.

The second important factor that led to the rise of the MFIs was the failure of the poverty alleviation programs that relied on the SHGs as the main mobilization strategy. The Andhra example is well known in this regard. Here the withdrawal of low interest rate based self-employment programs has led to the increasing operation of the MFIs. Further, in governmental schemes like the SGSY or the Urban Self-Employment Schemes, subsidies were linked to the ability of the SHGs to get loans from banks. The design of many of these schemes was such that applicants had to get their loans sanctioned before they could avail of even the inadequate and reduced subsidy (which in most cases did not exceed 35 per cent of the entire project). This was accompanied by inadequate infrastructural, training and marketing support for such employment opportunities. Thus, even though many of these schemes were targeted at the poorest of the poor (those below the poverty line), the rural and urban poor were not able to avail of these schemes adequately. For example, the government of Delhi was able to make only about 500 SHGs and train 3,000 women in one decade of its Shahri Swarozgar Yojana. Thus, along with other macro economic factors, the failure to provide work to the rural and urban poor also made them more and more vulnerable to the MFIs as well as informal sources of credit to meet their daily needs.

Need to Resist the Current Trend

The pressure being applied by the MFIs to resist the regulation should be seen in this context. Their political influence is reflected in the fact that the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act (passed in December 2010) has no caps on interest rates. This once again shows that the government is willing to let the micro finance institutions do business as usual and manipulate the urban and rural poor for maximizing their profits. Needless to say, this trend needs to be countered and linked to the larger fight against neo-liberal policies and the increased social security for the urban and rural poor.

The democratic movement has been raising demands based on their experience with women’s SHGs and the government programs of the Left ruled states. It recognizes that the MFIs can only be countered if the government supports the SHGs through increased subsidies and low interest credits. The direct links of public sector banks with rural and urban poor and their SHGs need to be strengthened by expansion of the banking infrastructure and provisioning of low interest rate credit at a repayment rate of four percent. In such cases, the government may require to provide interest subsidies to these groups. But along with this, political mobilization for the regulation of the MFIs needs to be strengthened. For-profit NGOs and MFIs need to be stopped from expanding their operations in this sector on an urgent basis. It is no surprise that the finance minister has already stated that the government does not want to ‘strangulate’ the micro finance sector. The intention of the government is thus clear and large scale political mobilization is urgently required to stop its devious and anti-people design.

Source:-People's Democracy

Do the poor need financial literacy?

Olga Morawczynski is Project Manager for Grameen Foundation’s financial literacy project in Uganda.

When I started the financial literacy project at the Grameen Foundation in Uganda, I was faced with some very fundamental questions—what exactly is financial literacy? And do the poor really need it, or even want it? Aside from my own questions, I also faced some reservations from colleagues in the field. Many were very frank in their opinions. There is no need for financial literacy, they told me. What the industry needs is appropriate financial products. The learning bit will take care of itself.

I have spent the last months travelling around Uganda and speaking with individuals who depend on a wide variety of livelihoods, from fishing to trading and farming. And I have made some extremely interesting discoveries. Amongst the people I spoke to, there was a clear demand for financial information. Many of my informants did not have a lot of money, and their inflows of cash were extremely irregular. But they had many questions on how to manage it better. A significant portion wanted advice on savings and budgeting. As one farmer explained, “when you have so little, you have to become an expert at managing it. If not, it will disappear from your hands before you even had the time to count it”.

But what makes one an expert at managing their cash? “When times are good, you put cash away”, the farmer explained. “So when the cash is not flowing, you have something saved”. I asked what happens if you don’t have something little saved. The farmer pointed to a small herd of his cows. “You sell one of them”, he said. So maybe that brings us a little bit closer in our understanding of what financial literacy is and what it should do. That is, helping people to plan accordingly so they are prepared for the periods of cash deficits. And when you are an expert, you get to keep your cows.

Source:-Grameen Foundation

Remittance: a step towards financial inclusion

Financial Inclusion is the buzzword doing the rounds in the social sector these days. Financial inclusion is an umbrella term used to represent access to various financial services by the poor (bottom of the pyramid!). One of these services is the transfer of money i.e. remittance; a field which is seeing a lot of developments lately.

Remittance in common parlance refers to the transfer of money by a person abroad to his family/friends in his/her home country. Various reports by World Bank, United Nations University show that remittances form the second largest source of international finance to many developing countries of the world, often surpassing the official development flows. International Fund for Agricultural Development (IFAD) 2006 estimates put the total flow of remittances to developing countries at $301 billion (including informal channels) while the World Bank estimates are $250 billion (excluding informal channels), which mirrors the huge market potential.

And we are not just talking about the rich or middle-class but the poor too. We have known through personal experience or news stories about the sheer no. of unskilled labour who have migrated to areas for e.g. Gulf (from Kerala) in search of livelihoods. And it is this section of migrants that the development sector needs to concentrate on by ‘introducing’ formal channels to them which can be better leveraged to promote economic development.

Remittances make a real difference to people, a difference that’s measured not in money but in its ultimate utilization for better food, medicines, education and healthcare. But what’s the connection between remittance flows and financial inclusion?

In countries like Ghana, remittances can account for up to half the household income. In Bangladesh, they can represent most of the household income. It is estimated that about 10% of the world’s households receive remittances (DFID). And while this money is used to support basic necessities like roti, kapada, makaan, it can have a multiplier effect. It is known that most often the excess money is further invested for genetrating profits for the family. The cumulative effect on the economy could be increased employments, increased money flow for investments, thereby stimulating growth. And it is this aspect that if encouraged, can help communities to come out of poverty.

Money is sent through formal channels like banking institutions or money transfer agencies or more frequently, as in case of poor migrants, through informal channels like friends, acquaintances or illegal Hawala channels. There a number of impediments faced in the informal fund transfer – higher charges, delivery issues, possibility of theft etc., which may not just mean reduced money to the beneficiary but may even further tax the family. On the other hand, the formal channels ensure easy transference of the entire amount in return for set charges. And as money transfers through formal channels often require the use of a bank account, remittances promote access to formal financial services for the sender as well as recipient.

However the problem lies in the fact that the penetration of the formal channels is much limited, due to the same demand and supply problems which are plaguing the banking sector - problems of availability and accessibility, identification, information gap, illiteracy, higher operational costs.

This situation if utilized efficiently can prove to be a win-win situation for all stakeholders. As Dilip Ratha(World Bank) points out, encouraging remittances through the banking channels (formal channel) can increase the development impact of remittances by encouraging more savings and furthering investment opportunities. Banks and other financial institutions can introduce their other products to its remittance customers thereby reducing their costs per customer. MFIs can make use of the history of the remittance receipts to map out the credit history of the potential customers.

Access to remittance services in rural and remote areas can be improved by encouraging the participation of the microfinance institutions, credit unions, and saving banks (including postal saving schemes) in the remittance market thereby effectively increasing the probability of usage of formal channels by the poor.

The opportunities are limitless; and if combined with initiatives by the financial institutions and policy and regulatory support by Governments have the potential to make a difference!

By Ms. Swati Vempati.

Need for sustainability in the quest for financial inclusion

A focus on “financial inclusion” has been there in India for quite some time now. If we look back we can see examples of policies aimed at financial inclusion at various instances in the past; most prominent amongst them being the policies that were enforced in the immediate aftermath of bank nationalization and in many subsequent policies even later. So if there existed policies for financial inclusion why it is that a vast segment of our population continue to remain outside the coverage of formal financial institutions and their products and services and continue to rely on informal sources of finances like moneylenders who charge exorbitant rates of interest.

Why it is that poverty characterizes vast tracts of rural India and people there aren’t able to use the ladder of access to alternative sources of finance to escape the clutches of poverty and the social and economic shackles that a poorly performing agricultural sector has imposed up on them. Why is it that large numbers of landless agricultural laborers AND farmers continue to be dependent on agriculture despite falling wages and incomes?

The answer to this is that though the architects of India’s poverty alleviation programs had their intentions right and realized that providing financial inclusion in the form of access to formal financial institutions and their services to the most impoverished segment of the population would help them to break away from their dependency on incomes from agriculture and also liberate them from the clutches of the moneylender (principally responsible for a large part of rural indebtedness); in implementation the “financial inclusion” did not go further than increasing the number of bank branches in rural India and emphasizing on credit requirements of the rural population; most of which again went to the land owning segments of the agricultural class who were able to muster sufficient collateral.

There was hardly any focus on providing the landless laborer with credit let alone other financial products and services including savings, insurance, etc. Thus the rural financial infrastructure that came about was quantitatively impressive but qualitatively poor.

What they forgot was that the approach towards making financial inclusion a reality needs to focus on perceiving the common man at the base of the pyramid not merely as a recipient of the financial services that institutions hand down but also as an important stake holder in the entire process; one for whom these products and services are a gateway to greater freedom from poverty and underdevelopment. The focus therefore needs to be not only on the quantitative but also on the qualitative. This poses interesting questions to us today. It forces us to ask ourselves are we providing the base of the pyramid with what they need or are we providing them with what we think they need? what difference is what we are doing making in terms of providing the base of the pyramid with a greater avenue of choices to escape the poverty and impoverishment that binds them?

It brings us to the realization that when we talk about financial inclusion we should not merely talk about the quantitative but also about the qualitative. There needs to be a focus on sustainability; on providing the base of the pyramid with access to financial services and products that are designed to help bring about transformational changes within the structure of rural society and economy that will help it escape from the clutches of poverty and grow while at the same time providing adequate protection to those making use of these products and services. The task of financial inclusion will be incomplete if the common man at the base of the pyramid, who is in a vulnerable position due to poverty and marginalization is not protected and is left even more vulnerable at the end of it.

it requires us to adapt and adopt newer systems and processes to cater to the demands of different geographical, economical and social environments with the purpose of breaking restraining forces that are inhibiting their economic development and hence fulfill the objective of achieving sustainable growth that is all inclusive

Posted By Vivek John Varghese. http://knowaboutvivek.blogspot.com

The nature of Financial Literacy

Ever since i have become familiar with the word "financial literacy" and the manner of its usage and the contexts in which it is used i have had reason to wonder whether it is actually necessary to differentiate between financial literacy for the rich, poor (and to do justice to what is a large segment of the Indian population) the middle class. The origins of this question is founded in the fact that today we live in an economic context where macro economic realities and happenings impact the lives of people, Rich and Poor with the same intensity (albeit in manners more dependant to their different contexts).

A classic example of this is the economic phenomenon called as inflation (or in common parlance "price rise") and the kind of different impacts it has on all segments of society. While on one hand it is necessary to rein in inflation (and often this reigning in is done through stricter monetary policy like raising interest rates) as it can make the life of the common man hell by pushing up the prices of most essentials like vegetables and fuel etc, the same stricter monetary policy can also force loss of confidence in equity markets and by making credit expensive push down industrial growth rates. Whose concern should the government address in such a situation is a question of choice and i believe that the only way this dillema can be addressed is democratically.

This is where the question that i posed earlier becomes of paramount importance. If financial literacy is provided tailor made depending upon what we feel should people be made aware of it can leave some people better informed and others ignorant; thereby giving the better informed a better chance at shifting the decision making towards themselves and in disfavour of the ignorant (mostly the poor and the middle classes) who constitute the greater number and who should have been the recipients of redressal.At the same time it is also necessary to inform people that many at times macro economic happenings over which they are not responsbile can also have severe and sometimes shocking impacts on their economic and financial contexts. Many of you might say that it would be unfair to think that all people; whether rich or the poor or whether educated or uneducated; have the same level of understanding and hence can be dealt with in the same manner. I say i agree with you too. All people might not have the same level of understanding but the differentiation should not be in what constitutes the curriculum for financial literacy programmes but the methodology of carrying out the financial literacy initiatives; which should differ according to the socio-economic contexts of the audiences involved; so that all people have some idea about the financial and economic issues that to greater or lesser degrees affect them and their lives.

Savings and loans and explaining them to people are absolutely important in the case of a country like India where the greatest segment of people remain outside the purview of formal financial services, products and institutions.but at the same time it is also important to realize that as greater numbers of people are coming into the fold of formal financal institutions they are increasingly going to be exposed to newer dangers and threats - many of which remain outside their control and under the influence of macro economic factors. It is time the common man was made more aware of these threats and informed about information assymetries so that he can claim his protection and what is due to him in the new socio-economic and financial context.

Posted by Vivek John Varghese