Financial education is vital for escaping the poverty trap

Microfinance changes people’s lives and its positive impact can be felt for generations. This is one of the key lessons that Claudio González-Vega has learned after years studying and working in the sector. “In Bolivia, I proved that children from households receiving loans from microfinance institutions stay in school more years than children from households that do not have this access. In Mexico, we were able to demonstrate that the impact on children’s education is greater when households are offered deposit facilities, even when they are offered just credit.”

Microfinances and other means

González-Vega has witnessed how the sector’s players have evolved to adapt to their customers’ needs. “In the early days, current microfinance institutions simply offered working-capital short-term loans to households-businesses of self-employed workers, i.e. microcredits. However, these institutions have been rolling out additional services and the leading ones are offering increasingly comprehensive service portfolios.” A good example of this is the BBVA Microfinance Foundation of whose Board of Trustees he became a member when it was first established.  “The institutions of the BBVA Microfinance Foundation have a more depositors than borrowers, and their insurance policy sales grow on a daily basis.” This is something that this veteran specialist is particularly proud about: “For the first time, after many generations suffering the feedback effect of poverty, our microfinance customers can dream about their kids having a brighter and better future than their ancestors.

Besides microfinances, González-Vega underscores other means of financial inclusion for the people who need them, or who, like employees, have their own needs for services such as: “banking accounts for beneficiaries from different government programs, as well as conditioned money transfers and other subsidies,” he explains. “Other important products are the savings accounts programs for children and teens, as well as different insurance programs covering against natural disasters, which are high in demand among farmers, and health insurance.”

Rural-world problems

González-Vega is a seasoned expert in the world of rural finance, an issue on which he’s drawn some interesting conclusions after years of thorough study. “In rural areas and, specifically, in the farming industry, there are many productive opportunities that offer a high-yield potential and the possibility of boosting the income of those households capable of tapping into them, especially low-income households.” Unfortunately, these resources go largely untapped because “rural households lack the savings or the borrowing capacity they need to make the investment they need by themselves. They also lack access to institutional credit, in the terms and conditions that farming cycles require. These hurdles that hinder the path towards progress are compounded by the lack of means to eliminate the feeling of insecurity: “farmers perceive the risks involved as too high, and the lack of insurance protecting them against events to which agricultural activity is especially sensitive, means that they cannot mitigate them accordingly.”

González-Vega is certain that the key to solving all these issues would be the development of a “set of innovations in the provision of financial services in rural areas.” Developing these services, according to this expert, would require understanding the agricultural value chains, establishing an adequate combination of financial services that goes beyond credit, establishing efficient technical assistance services, ensuring adequate market access, managing risks and developing tools to measure environmental impacts. But above all, the human factor is absolutely critical for González-Vega: “building long-term personal ties with customers.”

Technology to reach out to customers   

Technology is another essential factor in promoting financial inclusion among the most vulnerable strata of society: “Many highly-valuable tools are already being offered to cut costs, increase productivity and scale, and expand the reach." González-Vega firmly believes on the power of this technology and its positive impact on people’s lives: “those microfinance institutions that are capable of optimally leveraging these tools to retain and build robust relationships with customers, more than to replace them, will be the ones that succeed.”

And the emergence of these technologies has benefitted the BBVA Microfinance Foundation tremendously: “the deployment of cloud technologies has allowed us to improve our internal processes, boosting our organization’s agility and efficiency to curb costs; the group has developed a common core banking platform that all group units share, and which centralizes activities; document digitization and a data repository to increase our responsiveness to customer requests, as well as the setup of new channels and processes.” And the scale of these internal changes ripples across the Group’s external activity: “Technology has allowed the Group’s different franchises to improve their physical and digital proximity with customers, understand them and cater to their needs better. González-Vega enthusiastically went over the many applications that these tools enable: “helping structure agendas better, improving the quality of the information we gather, improving how we manage non-performing customers and expediting loan origination processes, allow us to improve our customer maintenance and prospection management.” On the other hand, agents equipped with tablets and smartphones can: “provide online services to customers and reduce transactional costs on both sides, enable georeferencing and the use of biometric information, widening the range of information that both parties have to make their decisions.

The responsibility of governments

But all these efforts will fail to prosper without collaboration of governmental institutions: “Governments play a critical role in promoting the use of new technologies in financial inclusion.” Their role encompasses all aspects of finance, from facilitating access to mobile telephony and the internet, to the role of regulations which “must solve the way in which competition contributes to bring the price of services down and how the protection of macroeconomic stability contributes to raise the people’s trust levels on these services.” Also, González-Vega advocates freedom in the economic field: “it is essential that authorities refrain from enacting repressive regulations, such as controls over interest rates and other service fees, which distort the market and harm, first and foremost, poorer customers.”

The contribution of the banking sector

As the expert explains, banks also play a key role by helping the most vulnerable invest in their projects: “lending is important, but deposit facilities and insurance policies are also pivotal.” But to get things started, authorities need to design and promote “financial inclusion programs, properly designed, that can play a key role in improving the available information and strengthen decision making processes.” Without a doubt, for González-Vega, financial education is essential to raise the level of financial inclusion amongst the most vulnerable segments of the population. “Sound decisions improve the chances of escaping the poverty trap.”