Financial literacy, financial decisions, and the demand for financial services
Subtitle: evidence from India and Indonesia
By: Shawn Cole, Thomas Sampson, Bilal Zia
Contributors: Sampson, Thomas Andrew; Zia, Bilal Husnain, 1977-; Harvard Business School
Edition: Rev. ed.
Series: Working paper / Harvard Business School -- 09-117; Working paper (Harvard Business School) -- 09-117.
Publisher: Harvard Business School
Published: 2009
Place of publication: [Boston]
Language: eng
Number of pages: 41
Description: Why is demand for formal financial services low in emerging markets? One view argues that limited cognitive ability and financial literacy stifle demand. A second view argues that demand is rationally low, because formal financial services are expensive and of relatively low value to the poor. This paper uses original surveys and a field experiment to distinguish between two competing answers to this question. Using original survey data from India and Indonesia, we first show that financial literacy is a powerful predictor of demand for financial services. To test the relative importance of literacy and price, we implement a field experiment, offering randomly selected unbanked households financial literacy education, crossed with small financial incentives (ranging from US $3 to $14) to open bank savings accounts. We find that the financial literacy program has no effect on the likelihood of opening a bank savings account in the full sample, but do find modest effects for uneducated and financially illiterate households. In contrast, small subsidy payments have a large effect on the likelihood of opening a savings account. These payments are more than two times more cost-effective than the financial literacy training.
Notes: "April 2009, revised October 2009"--Publisher's website.

Includes bibliographical references.