Research suggests that financial literacy, not income, is the stronger determinant of financial inclusion

What is responsible for financial exclusion?

There have been several studies to identify the drivers of finance access in different regions. In 2016, EFinA’s bi-annual financial access survey which documents the state of financial inclusion in Nigeria, highlighted several factors including poverty and financial literacy as deterrents to formal financial inclusion.

Some studies have discovered strong relationships between financial education and financial behaviour. For instance, Bernheim, Garrett, and Maki (2001) noticed that middle age individuals who took a personal financial management course in high school tended to save a higher proportion of their income than others who did not.

To verify just how much impact these two factors — income and financial literacy — have on financial access, two of our researchers — Dr Olayinka David-West and Dr Olubanjo Adetunji — dug deeper into the *EFinA data, in order to unearth some relevant insights.

Their hypothesis was simple — Having a source of income will positively affect a person’s saving habits (whether using formal services or informal), while higher levels of **financial literacy increase the frequency of demand for financial services. The effects of income and financial literacy on both formal, informal savings and other savings (at home or with family and friends) were thus investigated.

*The study employed secondary data from the 2016 Access to Finance (A2F) survey of EFInA which surveyed over 22 000 respondents across the six geopolitical regions in Nigeria.

**Respondent’s financial literacy was computed using their responses to questions evaluating their knowledge of financial services/terms.

RESULTS

There is a very high disparity in income levels among Nigerians while financial literacy is generally average.

1. About a third of Nigerian adults do not save, while about the same number use other saving services (save at home and with family and friends). The number of people saving digitally in mobile money wallets is negligible.
2. The relationship between income and frequency of informal saving is similar to that between income and formal saving suggesting that more people will be willing and able to save if their incomes increase.
3. Saving with other services (family/friends and at home) was common among low income earners. About 80 percent of the people who frequently used other saving services, were low income earners, earning a monthly income of less than 20 000 Naira (USD50).
4. Also, regarding financial literacy scores, over 80 per cent of those that save at home and with family and friends (other savings) have a financial literacy score of 6 (out of a possible 10) or less. This evidence further suggests that income and financial literacy are inhibitors to access to formal financial services.
5. The results also show that while financial literacy significantly determines how often individuals save formally and informally, income only has a significant positive effect on informal savings.
6. The middle-aged to older women both in the urban and rural areas save more frequently, than any other groups, with informal financial institutions.

The Impact of Income and Financial Literacy on Formal Savings

Income

The findings show that the frequency with which adult Nigerians save in banks and other deposit taking institutions does not depend on their income. This suggests that income alone does not drive formal savings as the frequency of formal savings does not change in response to income. Thus, we need to look elsewhere for (actual) triggers to encourage excluded adults to save formally for the first time and also for the included to increase their frequencies of saving.

Financial literacy

The results show that financial literacy has a significant positive effect on the demand for formal savings products. The higher the financial literacy scores of the respondents, the more often respondents save in banks and other formal financial institutions. This suggests that with improvements in financial literacy, more adult Nigerians are likely to open savings account.

The Impact of Income and Financial Literacy on Informal Savings

Income

Unlike the insignificant relationship between income levels and formal savings, there is a significant positive relationship between income and the frequency of informal savings. The results suggest that savers with informal financial institutions enjoy some benefits that are not offered by banks and other formal providers. Reasons provided by the respondents include ease or simplicity of use, ease of access to savings, trust and financial benefits.

Financial literacy

The relationship between financial literacy and the frequency of informal savings is the same as that between financial literacy and formal savings ie. it’s a significant positive relationship. The results show that the more financially literate a person is, the more frequently he/she saves either in formal institutions such as banks and other formal providers or with informal saving groups and cooperative societies.

The Impact of Income and Financial Literacy on Other Forms of Informal Savings

Income

Income has a significant negative impact on the frequency of saving at home and with family and friends. The findings show poor households are more likely to save at home and with family and friends. However, as household income improves, the results suggest that household members will switch to informal saving with saving groups and cooperative societies.

Financial literacy

Unlike income, there is little or no evidence to show that financial literacy has any impact on how often an adult Nigerian saves at home and/or with family/friends. If earnings are not enough, it makes no difference how many financial services the individual is aware of.

CONCLUSION

This study investigates the extent to which income levels and financial literacy act as key drivers of demand for financial services. It explored the possibility that income and financial literacy of an individual (when controlled for age, gender and urban–rural classification) determines how often the individual uses financial services.

From the findings, we can deduce that programs aimed at improving income and financial literacy of the financially excluded are more likely to result in informal financial inclusion. However, in situations where the individual is already informally included, the financial literacy component is bound to encourage them moving into the formal financial services ecosystem.

Income also plays an important role in financial inclusion. The various Social Investment Programmes currently being run by government have made a difference in the lives of beneficiaries. Furthermore, combining financial literacy and awareness campaigns with poverty alleviation programmes is likely to improve access to financial services. Financial services providers can also target young adults and the underserved rural women with savings products that include financial literacy training programmes.