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An Examination of the Relationship between Financial Exclusion and Financial Capability

An Examination of the Relationship between Financial Exclusion and Financial Capability. By Laura Lamb, Ph.D. Thompson Rivers University British Columbia Canada. Research Objectives. to better understand the financially excluded

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An Examination of the Relationship between Financial Exclusion and Financial Capability

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

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

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

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

  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. Why is industry growth a problem? • Finance charges are very high (effective interest rates 200 – 900%) • Transactions do not contribute toward building a credit score • No developmental services • Weak regulation leaves customers vulnerable

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

  11. Growth of FF industry in Kamloops, BC

  12. Descriptive statistics • 57% female • 78% ages 24-55 • 78% household income <$20,000

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

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

  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. 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. What types of services are used?

  18. Perceptions of fringe finance institutions

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

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

  21. Controlling for education

  22. Controlling for Income

  23. Financial Literacy scores among Fringe Finance Users

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

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

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