FINANCIAL LITERACY DOES NOT SPREAD EASILY: Evidence from rural Rwanda
Training people in financial literacy can have a positive impact on their savings and borrowing behaviour as well as boosting new business start-ups – but unfortunately the financial knowledge does not seem to ''spillover'' to other members of the local community. That is the central finding of a field experiment with farmers in Rwanda by Aussi Sayinzoga, Erwin Bulte and Robert Lensink, the results of which are published in the August 2016 issue of the Economic Journal.
The researchers note that the last decade has seen an enormous increase in microfinance programmes in developing countries. The promise that microcredit can eradicate poverty rests on the assumption that poor people, especially women, are ''trapped'' in poverty because they lack access to capital. It is suggested that relaxing this binding constraint – via a small loan – can set in motion a process of development. But there is very little rigorous evidence to support this view; indeed, on the contrary, recent studies show that microcredit fails to raise households out of poverty.
Originally, microfinance regarded business training as unimportant on the assumption that poor people already have the necessary entrepreneurial skills and knowledge. But the situation in developing countries is not quite so simple. Most owners of small shops and businesses do not implement standard business practices: formal records are rarely kept; household and business finances are often mixed; and no proper marketing takes place. Therefore, in addition to microcredit, training in business and financial literacy seems to be needed to lift the poor out of poverty.
The new study involved a field experiment conducted in rural Rwanda to evaluate the impact of a programme of financial literacy training. The researchers partnered with an international non-governmental organisation (NGO) providing training for five consecutive days. They collected data from five agricultural savings and credit cooperatives located in the southern province of Rwanda.
The study used a ''randomised controlled trial'' design, in which the timing of the training was randomly allocated via a lottery, implying that the ''control'' group received the ''treatment'' later. The most innovative feature of the study is that the researchers did not train randomly selected members of village banks, but instead asked the banks to send volunteers or representatives. These representatives were explicitly asked by the NGO to share the knowledge they had obtained from the training with their fellow members.
This set-up made it possible to examine the hypothesis of the implementing NGO that the bank representatives would share what they had learned with their peers, leading to a spread of financial literacy across the country. The presence of such ''spillover effects'', which is an implicit assumption of many implementing organisations, would enormously improve the cost-effectiveness of training interventions.
But the results of the study are sobering. On the positive side, the researchers show that the financial literacy training caused significant changes in behaviour. The savings rate for farmers who received the training is 6% higher compared with farmers in the control group; trained farmers exhibit a 16% greater probability of starting up a new income-generating activity; and the share of the population that has taken a loan increased by 24% due to the training.
Unfortunately, these effects are confined to the trained individuals. Comparing the peers of trained individuals (that, is fellow farmers from the same local bank branch or lending group) to randomly selected farmers from the comparison group, there is no evidence of spillover effects for any outcome variable after 15 months.
Thus, the study clearly shows that the benefits of the training stay limited to those farmers who receive the training. This finding contradicts the assumption of many organisations responsible for training interventions that information about new behaviour and innovations spread almost costlessly from one individual to the next.
''Financial Literacy and Financial Behaviour: Experimental Evidence from Rural Rwanda'' by Aussi Sayinzoga, Erwin Bulte and Robert Lensink is published in the August 2016 issue of the Economic Journal. Aussi Sayinzoga is at the University of Rwanda. Erwin Bulte is at Wageningen University. Robert Lensink is at the University of Groningen and Wageningen University.