An Examination of the Relationship between Financial Exclusion and Financial CapabilityBy Laura Lamb, Ph.D.Thompson Rivers UniversityBritish ColumbiaCanada

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Research Objectives1. to better understand the financially

excluded

2. determine if a low level of financial capability is associated with financial exclusion

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Financial exclusion Unbanked

3 – 13% of Canadian adult population

Underbanked 16% of Canadian adult population

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

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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.

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Why is industry growth a problem?1. Finance charges are very high (effective

interest rates 200 – 900%)

2. Transactions do not contribute toward building a credit score

3. No developmental services4. Weak regulation leaves customers

vulnerable

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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

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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

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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)

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Methodology Collect survey data in Kamloops, BC on fringe

finance users: Banking habits Attitudes Socio-demographic Financial capabilities quiz

Snowball sampling technique

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Growth of FF industry in Kamloops, BC

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Descriptive statistics

57% female

78% ages 24-55

78% household income <$20,000

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Descriptive statistics 35% < high school

29% high school

36% at least some post-secondary

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Who uses fringe financeo 42% are Aboriginal

o 71% are not employed

o 10% are students

o 36% have dependents

o 62% have sole financial responsibility

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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

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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

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What types of services are used?

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Perceptions of fringe finance institutions

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Evaluating Financial Literacy Financial capabilities quiz

Statistics Canada 14 questions

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Comparing financial literacy scores

Fringe finance users

49% (16.91)n=104

Non-fringe finance users

58% (24.05) n= 14,731

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Controlling for education

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Controlling for Income

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Financial Literacy scores among Fringe Finance Users

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Table 5: A Comparison of Mean Financial Capabilities of Fringe Finance Users with different banking and fringe finance habits Mean quiz score

(%) Difference

Bank account holder Non-bank account holder

52% (16.2) 40% (16.1)

8%*

Creditworthy Non-creditworthy

55% (19.4) 51% (15.4)

4%

Frequent cheque-cashing/payday loan use Non-frequent cheque-cashing/payday loan use

47% (16.2)

53% (17.6)

6%

Frequent pawnshop use Non-frequent pawnshop use

43% (18.7)

52% (15.5)

9%*

Note: standard deviation in brackets *t-test results reveal a statistically significant difference, p<0.05.

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

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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.

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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

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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

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Limitations Data collected in one small Canadian

city

Sample size is relatively small (n=104)

More research is needed!

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Future analysis Regression analysis: DV – frequency of

FF use

Assess quiz

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