Prices or Knowledge? What Drives Demand for Financial Services in Emerging Markets?
This study tests two theories of low demand for financial services in emerging markets. The first theory attributes low demand for formal financial services to high costs associated with their provision. The second proposes that limited financial literacy is a barrier to demand for services.
The study conducts surveys in India and Indonesia to measure household financial literacy and demand for financial services. It supplements survey data with a randomized field experiment among unbanked households in Indonesia, to test the role and relative importance of financial literacy and prices in determining demand for banking services. Findings indicate that:
- Financial literacy and behaviour are correlated;
- Financial education program has modest effects, increasing demand for bank accounts only for those with low levels of financial literacy;
- Small subsidies greatly increase demand for financial services;
- Financial literacy alone does not lead to greater demand for financial services in the general population.
A follow-up survey conducted two years after the initial intervention confirms these findings, demonstrating that those who were originally offered incentives are significantly more likely to have used bank accounts in the past year to deposit, withdraw, send or receive funds.
