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Promoting Inclusive Markets and Financial Systems

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How can Children and Youth Become Financially Capable Adults?

This blog post originally appeared on Microlinks.

We are pleased to share it here with the SEEP community.


 

Improving individuals’ financial capability and encouraging them to save are key elements in many strategies to strengthen the economic stability of households. Much attention is being paid to building financial capability among children and youth, as this could be a promising way to improve their economic security throughout their lifetimes. It may be even more important to encourage saving and healthy financial decision-making among children and youth who are most vulnerable, including those whose households have been affected by HIV/AIDS and are at risk of getting stuck in the cycle of poverty. Research on the most effective ways to build financial capability and savings habits among young people is just beginning, but the evidence so far shows that well-designed programs can not only improve savings rates but can also trigger positive effects on test scores and income in the short term.

In Uganda, many households struggle to keep children enrolled in primary school. Though the country abolished most primary school fees in 1997, a recent UNICEF report found that 81 percent of parents cited financial constraints as the reason why their children dropped out of school. In a recent op-ed in Uganda’s Daily Monitor, Oliver Schmidt points out, “Many Ugandans say education takes the number one spot in their expenses…Our qualitative fieldwork revealed that a large proportion of microfinance loans are used to pay for education, even if those loans are by name for business or agriculture.”

Schmidt then summarizes the promising impacts of a pilot program through which primary school children were offered school-based savings accounts for education-related expenditures. A rigorous evaluation conducted by Innovations for Poverty Action (IPA) in Uganda found that a savings account that nudged children to set money aside for school supplies successfully encouraged students to save more. When the account was offered in combination with a parent outreach program, students were more likely to invest their savings in school supplies, uniforms, and education services such as tutoring, and had higher test scores.

Practitioners and specialists who work with orphans and vulnerable children should take note of these results: the promising impacts of this school-based savings program show that access to a simple savings account combined with a gentle nudge toward saving and responsible spending can be effective in improving the financial capability, and ultimately the welfare, of poor families in developing countries. Accordingly, access to savings for youth has long been on the agenda of organizations from Aflatoun and Save the Children to UNCDF and Women’s World Banking. The importance of providing savings vehicles for young people – and building a business case for such vehicles – echoed throughout the agenda at this year’s Global Youth Economic Opportunities Summit, where these organizations and a multitude of others championed the idea of providing well-designed savings programs to promote youth financial capability.

In a parallel (and possibly complementary) effort, governments and NGOs worldwide are focusing on programs that aim to develop youth financial capability through financial education. The theory behind such programs is simple: by learning financial concepts from an early age, children will become financially capable adults who take optimal, welfare-enhancing financial decisions. An evaluation of a large-scale financial education program for Brazilian secondary-school students demonstrated that a well-designed curriculum can, in fact, significantly improve the financial knowledge and savings behavior of youth.

So what is the best way to design such programs? Should they combine education and savings tools, or is it enough to just offer savings? How can these lessons apply to orphans and vulnerable children affected by HIV/AIDS?


Another IPA study in Uganda is testing this question among groups of 16 to 28-year-olds by comparing the impacts of a group savings product, a financial education program, and a combination of the two on the participants’ savings behavior. After one year, participants reported similar increases in total savings and earned income regardless of whether they received a savings account, financial education, or both, suggesting that there may be no added benefit to offering education and savings tools in combination, at least in the short run.

Unfortunately, this singular study cannot provide a definitive answer on how best to promote positive financial behavior, or whether youth have better health, are more safeguarded against shocks, or earn more as adults as a result of these programs. We need longer-term results. This is why IPA, with support from the Citi Foundation, plans to conduct long-term, follow-up research with the participants of the original study next year. Gathering evidence on the impact of financial education and savings accounts on savings behavior nearly 5 years after the initial program was offered will give us important clues as to whether impacts of financial capability programs can persist in the long term and help us understand whether these strategies are best offered individually or in combination. The findings will be critical in helping to define the direction of youth financial capability policy and practice, and hopefully provide insights for those working specifically with youth who are at-risk or affected by HIV/AIDS.

You can learn more about IPA’s work evaluating financial capability-enhancing interventions for children and youth here.

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Elana Safran is Programs Manager for East Africa and Health, and Beniamino Savonitto and Pooja Wagh are Initiative Director and Initiative Coordinator, respectively, for the Financial Capability Research Fund in IPA’s Global Financial Inclusion Initiative.

This blog was produced under United States Agency for International Development (USAID) Cooperative Agreement No. AID-OAA-LA-13-00001. The contents are the responsibility of FHI 360 and its partner, the International Rescue Committee, and do not necessarily reflect the views of USAID or the United States Government.

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