Elisabeth Rhyne: "Money management strategies are important for financial health”
As managing director of the Center for Financial Inclusion at Accion and a member of the advisory board for BBVA's Center for Financial Education and Capability, Elisabeth Rhyne constantly faces the challenge of addressing financial inclusion worldwide, securing the protection of microfinance customers, and helping them achieve solid financial health.
The Center for Financial Inclusion (CFI) is a think tank that works to ensure that millions of people are not left out of the financial sector and that they receive the required training and services to improve their lives. Achieving good financial health is fundamental for these individuals and to do so requires various conditions to be met. “Specific indicators of financial health vary from one context to another, but the core concept comes down to three elements: balanced daily money management, resilience in the face of financial shocks, and the ability to pursue longer term goals.” explains Elisabeth Rhyne.
The strategy is what matters
It may be taken as a given that accomplishing these goals is more difficult if one is in a precarious financial position. However, this isn't always the case: “In every context, a person’s income has a big effect on financial health – it may be the single most important factor.” says Rhyne. “And yet, research by the Center for Financial Services Innovation in the U.S. shows that people can be financially healthy with surprisingly low incomes, and higher income people can be financially unhealthy. Money management strategies are also important factors.” This trend is also seen among individuals with incomes below the recommended levels: “People, even when very poor, have some ability to use financial strategies to improve their financial health.”
Informality and social networks
Another fundamental factor that influences the economic well-being of people in developing countries is informality – in other words, finding oneself on the margin of the formal financial system. “This does not mean that people who use informal methods are more or less financially healthy than others.” Rhyne clarifies. “But it does mean that it is more difficult to measure how financially healthy a person is, because there are few verifiable numbers – like a bank account balance.”
In a situation of informality, people develop close ties; they connect and collaborate among themselves. “People cultivate social networks because they know they may need to draw on someone else’s resources in a time of need.” The family plays an essential role in the economy: “Not everyone has autonomy over their financial lives. Thus, it is important to understand intra-household arrangements before drawing conclusions about financial health.”
The role of digitalization
The emergence of new technologies might be a bridge between the informal and formal economies and may facilitate a more direct relationship with financial service providers (FSPs). “Digitalization enables more people to receive financial services.” Rhyne explains. “But access to new services does not change habits or income, two of the biggest determinants of financial health.”
In this area, the role of providers is vital. “FSPs should make sure that they follow the Client Protection Principles to be sure that their products do not inadvertently harm customers, and they should integrate financial capability building elements into their customer interfaces and choice architecture.” explains Rhyne. This expert in financial inclusion is convinced that savings is the cornerstone of financial health, and she stresses the need to develop tools to facilitate it. “Products that facilitate or encourage savings are very important.” she states. “Insurance is also, of course, important for mitigating risks.”
The Center for Financial Inclusion is pursuing various avenues for the promotion of financial health. One of them is the development of an application, jointly undertaken with the Center of Microfinance in Warsaw: “This project is still in the early stages. We know that when people answer a few simple questions about their financial health, it sparks motivation to improve. The app will build on that motivation.”