An Examination of the Relationship between Financial Exclusion and Financial Capability

Transcription

1 1 An Examination of the Relationship between Financial Exclusion and Financial Capability By Laura Lamb, Ph.D. Thompson Rivers University British Columbia Canada

2 2 Research Objectives 1. to better understand the financially excluded 2. determine if a low level of financial capability is associated with financial exclusion

3 3 Financial exclusion Unbanked 3 13% of Canadian adult population Underbanked 16% of Canadian adult population

4 4 Fringe Finance Institutions cheque cashing services payday loan companies pawnshops rent to own retailers

5 5 Massive growth in fringe finance industry Pawnshops have a long history Firms offering payday loan services emerged in 1990s Rapid growth to approx. 1,400 retail outlets across Canada serving close to 2 million people.

6 6 Why is industry growth a problem? 1. Finance charges are very high (effective interest rates %) 2. Transactions do not contribute toward building a credit score 3. No developmental services 4. Weak regulation leaves customers vulnerable

7 7 Economic theories of financial exclusion Neoclassical economics Franco Modigiani s life cycle theory & Friedman s permanent income theory New Keynesian (Stiglitz & Weiss, 1981) Behavioural Economics New Institutional Economics

8 8 Literature Review Factors influencing financial exclusion(gross et al, 2012 ; Bowles et al., 2011; Simpson and Buckland, 2009; Buckland and Dong, 2008) Low income less wealth younger age group high debt low education larger families no home ownership

9 9 Literature Review Inferences made about the role of financial literacy in financial exclusion (Buckland, 2012; Simpson & Buckland, 2009; Buckland & Dong, 2008; Atkinson et al., 2007; SEDI, 2004)

10 10 Methodology Collect survey data in Kamloops, BC on fringe finance users: Banking habits Attitudes Socio-demographic Financial capabilities quiz Snowball sampling technique

11 11 Growth of FF industry in Kamloops, BC

12 12 Descriptive statistics 57% female 78% ages % household income <$20,000

13 13 Descriptive statistics 35% < high school 29% high school 36% at least some post-secondary

14 14 Who uses fringe finance o 42% are Aboriginal o 71% are not employed o 10% are students o 36% have dependents o 62% have sole financial responsibility

15 15 Banking Habits 76% have a main stream bank account 10% have a traditional credit card 13% use pre-paid credit cards 8% have a bank loan

16 16 What types of fringe finance are used? In the past 5 years: 98% have used a payday loan/cheque cashing company 69% have used a pawn shop 10% have used a rent-to-own company

17 17 What types of services are used?

18 18 Perceptions of fringe finance institutions

19 19 Evaluating Financial Literacy Financial capabilities quiz Statistics Canada 14 questions

20 20 Comparing financial literacy scores Fringe finance users 49% (16.91) n=104 Non-fringe finance users 58% (24.05) n= 14,731

21 Controlling for education 21

22 Controlling for Income 22

23 23 Financial Literacy scores among Fringe Finance Users Table 5: A Comparison of Mean Financial Capabilities of Fringe Finance Users with different banking and fringe finance habits Mean quiz score Difference (%) Bank account holder 52% (16.2) 8%* Non-bank account holder 40% (16.1) Creditworthy 55% (19.4) 4% Non-creditworthy 51% (15.4) Frequent cheque-cashing/payday loan use 47% (16.2) 6% Non-frequent cheque-cashing/payday loan use 53% (17.6) Frequent pawnshop use Non-frequent pawnshop use 43% (18.7) 52% (15.5) 9%* Note: standard deviation in brackets *t-test results reveal a statistically significant difference, p<0.05.

24 24 Conclusions The results imply that those who use fringe finance institutions do not choose to do so due to low levels of financial capabilities. Appears financial exclusion is likely a result of low income & poverty rather than a lack of financial knowledge

25 25 Conclusions The proposed connection between low levels of financial capability and fringe finance use in the literature is grounded in the behavioural economics concept of bounded rationality. Linked to lack of brain power or access to information. Hypothesis testing indicated this is not likely true.

26 26 Conclusion The behavourial economics concept of bounded willpower may be applicable. overuse of credit and lack of regular savings is a common behaviour among all socio-economic groups, but for those with low incomes and few assets the consequences are much more serious often resulting in financial exclusion

27 27 Policy recommendations Objective: increase financial inclusion Encourage mainstream financial institutions to Make services more accessible Provide appropriate services for low income Encourage government to Provide greater levels of consumer protection Ensure competition in financial markets

28 28 Limitations Data collected in one small Canadian city Sample size is relatively small (n=104) More research is needed!

29 29 Future analysis Regression analysis: DV frequency of FF use Assess quiz