Financial Inclusion and the Role of Financial Literacy in the Philippines

Introduction

• Financial inclusion is viewed as a key enabler of development objectives and is recognized by the UNCDF in facilitating the 2030 Sustainable Development Goals (SDGs).
• The Bangko Sentral ng Pilipinas (BSP) considers financial inclusion a national development agenda requiring a conscious effort by various sectors.
• The BSP aims for:
  • Reduced disparities in financial inclusion.
  • Improved financial health and resilience.
  • More financially capable and empowered consumers.
  • Increased access to finance for micro, small, and medium enterprises.

Definitions and Dimensions of Financial Inclusion

• Grohmann and Menkhoff (2020) measure financial inclusion in three levels:
  • Account ownership at a formal financial institution.
  • Active use of a financial account.
  • Rational use of financial services.
• The World Bank defines financial inclusion as individuals and businesses having access to useful and affordable products and services that meet their needs and are delivered responsibly and sustainably.
• The United Nations defines financial inclusion as universal access, at a reasonable cost, to a wide range of financial services, provided by a variety of sound and sustainable institutions.
• The BSP interprets it as effective access to a wide range of financial services for all, especially the vulnerable sectors.
• The BSP's 2019 Financial Inclusion Survey (FIS) employs account ownership at a formal financial institution as a basic indicator of financial inclusion.
• Financial inclusion captures access, usage, and affordability.
• The Global Partnership for Financial Inclusion (GPFI) identifies three dimensions of financial inclusion: access to financial services, usage of financial services, and the quality of the products and the services delivery.
• The Organization for Economic Co-operation and Development International Network on Financial Education (OECD/INFE, 2011) defines financial literacy as a combination of awareness, knowledge, skill, attitude, and behavior necessary to make sound financial decisions and ultimately achieve individual financial well-being.
• Subbarao (2010) claims that financial inclusion acts from the supply side while financial literacy stimulates the demand side.
• Financial inclusion encapsulates financial literacy, and they complement each other (Agner & Desello, 2022).

Problem Statements

• Financial literacy is a backbone of financial inclusion (Khan, Siddiqui, & Imtiaz, 2022).
• Philippine-based studies on financial inclusion and financial literacy have either been few, done separately, or focused on a specific geographical location or group.
• This paper attempts to provide an empirical study on financial inclusion and financial literacy using data gathered from the 2019 Financial Inclusion Survey (FIS) conducted in the Philippines.
• The researchers seek to answer:
  • What is the effect of financial literacy on account ownership in the Philippines?
  • What are the factors that drive the ownership of a financial account and the use of financial services in the Philippines?

Significance of the Study

• Aims to examine the relationship between financial inclusion and financial literacy and identify the determinants of account ownership and usage of financial services of Filipinos using a nationally representative survey.
• Supports the goals laid out by the Philippine government in the FIS.
• Attempts to confirm the positive link between account ownership and use of financial services to financial literacy, the results of which may help develop effective approaches to bridge the financial inclusion gap and raise financial literacy levels in the Philippines.

Literature Review

Financial Literacy and Positive Behavioral Outcomes

• Research points toward the relationship between financial education programs and positive financial behavior.
• The OECD (2015) associates a higher level of financial knowledge and skills with increased long-term savings and improved investment behavior.
• Lusardi (2019) suggests that financial literacy all around the world is generally low, especially in developing countries.
• Higher financial knowledge can be linked to higher index scores on cash-flow management, credit management, savings, and investment.
• Financially literate adults are more likely to plan for their retirement.
• Financially savvy individuals are also more likely to succeed in their retirement planning (Lusardi & Mitchell, 2011).
• Financially literate people are found to rely more on formal avenues for gaining financial knowledge.

Financial Literacy and Financial Inclusion

• Financial literacy is a backbone of financial inclusion (Khan, Siddiqui, and Imtiaz, 2022).
• The basic indicator of financial inclusion is account ownership at a formal financial institution.
• Financial literacy is a positive driver of financial inclusion in Cambodia and Vietnam.
• Financial literacy is a strong factor of financial inclusion in Kenya and Tanzania.
• Financial literacy facilitates finer financial decisions and a more advanced level of financial inclusion.
• Financial literacy has a decisive role in identifying individuals who are financially included or excluded.
• Financial literacy aids in achieving financial inclusion through financial attitude, financial behavior, and financial knowledge.
• Financial literacy influences financial services demand and accessibility.
• Fischer (2011) claims that even though individuals have experience and practical knowledge about finance through utilization, they still lack basic financial literacy.

Financial Literacy and Availing of Financial Products and Services

• Financial literacy plays a role in the participation of Dutch households in the stock market.
• Higher financial literacy leads to a greater demand for life insurance in China.
• Awareness of insurance products was enhanced with higher financial literacy among university students (Dalkilic & Kirkbesoglu, 2009).
• There is a clear positive link between having more knowledge in financial matters and obtaining various financial services.

Financial Literacy and Inclusion in the Philippines

• Filipinos, on a national level, lack knowledge of basic financial concepts.
• Financial literacy, demonstrated through the practice of financial record-keeping, has been linked to lower impulse buying behavior among public school teachers (Jabar & Delayco, 2021).
• Financial literacy has a positive influence on financial well-being and development among young professionals in Metro Manila.
• Financial literacy has a positive correlation with entrepreneurial characteristics.
• Demographic factors such as age, educational attainment, marital status, and gender have a significant positive correlation with financial literacy.
• Literature focusing on the Philippines that links financial inclusion and financial literacy through nationally representative surveys have been very scarce.

Methodology

Data

• This study uses data from the BSP’s Financial Inclusion Survey (FIS) 2019.
• The FIS is a biennial survey that interviews 1,200 respondents.
• Part of the gathered information includes a three-item financial literacy quiz that covers the following topics: inflation, simple interest rate, and compound interest rate.

Econometric Model

• A linear probability model and a probit model are utilized.
• Ownership of one (1) or more of the following financial accounts was used as a proxy for financial inclusion: bank account, microfinance, e-money, cooperative, or non-stock savings and loan association.
• The equation that attempts to model this relationship is expressed as follows:

FAi = \beta0 + \beta1FLi + \beta2Xi + u_i

• The dependent variable FA is a binary variable that signifies whether the respondent possesses a financial account or not.
• The second objective aims to find out the determinants of financial inclusion expanded to include the use of financial services, which includes formal credit, investment, and insurance services.
• The equation that models this relationship is as follows:

FSi = \beta0 + \beta1FLi + \beta2Xi + u_i

• The dependent variable FS is a binary variable that signifies whether the respondent is subscribed to a financial service or not.
• $X_i$ represents a vector of variables that include demographic and social characteristics.
• The independent variable FL indicates the financial literacy score of each respondent with values that range from 0 to 3.
• All the models are presented with robust standard errors.

Results and Discussion

• Financial literacy is significantly and positively correlated with owning at least one type of account.
• A one-standard-deviation increase in financial literacy scores increases the likelihood of holding at least one account by 3.7 to 4.2 percentage points.
• Age is positively correlated, while being unemployed is negative.
• A negative sign in the variable age squared indicates that as individuals reach a certain advanced age, their chances of owning at least one account decreases.
• Being female is found to positively correlate with owning at least one account.
• Those individuals who attended only elementary school, and possess certain incomes are less likely to avail of at least one account.
• Individuals with more than 40,000 PHP in monthly income have a higher probability of owning one account.
• Those who are considered as a main financial decision-maker in the household avail of at least one account.
• The respondents’ awareness of BSP’s financial programs has a positive and significant effect on account ownership.
• Financial literacy is positively associated with the likelihood of owning a bank account only.
• A one-standard-deviation increase in financial literacy increases the likelihood of holding a bank account by 2.1 percentage points.
• Age and age squared are positively and significantly correlated with microfinance.
• Females are more likely to own accounts with cooperatives and microfinance.
• Being unemployed shows the expected and significant negative correlations with owning bank, cooperative and microfinance accounts.
• Factors such as being a recipient of international remittance and awareness of the BSP’s financial programs have positive and significant effects on bank account ownership.
• Individuals who attended only elementary and high school are less likely to avail of a microfinance account.
• Individuals with a college education is more likely to own a bank account.
• Individuals with certain incomes are less likely to own bank and e-money accounts.
• Bank account ownership appears positive and significant across all Philippine regions.
• Residents from Metro Manila and North and Central Luzon are less likely to avail of an account with microfinance, while individuals from Mindanao are less likely to own an e-money account.
• Those who are considered as main decision-makers and co-decision-makers avail of bank and cooperative accounts, while those who are minor decision-makers tend to avail of cooperative accounts only.
• A one-standard-deviation increase in financial literacy score improves the likelihood of availing of a financial service by 4.9 to 6.0 percentage points.
• Older respondents are more likely to avail of a financial service.
• Women are also more likely to obtain any of these services.
• Lack of employment, and presumably a stable source of income, greatly hinders having any financial service.
• Respondents’ awareness of the BSP’s financial programs has a highly significant positive effect.
• Remittance has a positive correlation with receiving remittance and obtaining a financial service.
• Having a college education registers a likelihood of availing of financial services.
• Higher-income individuals are more likely to avail of one of these services.
• Respondents live largely does not have a significant effect, except for those living in certain rural areas.
• The extent of one’s role as a financial decision-maker in the household has a positive effect on availing of financial services.
• Financial literacy is positively associated with the likelihood of availing of a financial account, a formal credit, an investment, or insurance.
• These relationships, however, vary in their statistical significance.
• The positive impact of financial literacy is seen to be statistically significant at with respondents who avail of a financial account, or avail of an investment.
• A one-standard-deviation increase in financial literacy scores raised the likelihood of having either of these services by 3.7 to 4.2 percentage points.
• Age has a consistent positive correlation with all specifications, implying that the older a respondent is, the more likely he or she is to avail of these financial services.
• Being a woman, on the other hand, shows a positive impact on availing of a financial account, formal credit, and insurance; but a negative association with having investments.
• Being unemployed has a negative association with individual financial services.
• Awareness of the central bank’s financial programs shows a statistically significant impact on availing of a financial account, and on having investments only.
• We also found a positive correlation between respondents receiving international remittance and owning any of the individual financial services.
• More educated individuals are likely to avail of a financial service.
• One’s income level generally follows this same trend, where a higher income increases the likelihood of availing of a financial service.
• Those whose incomes are below have a negative likelihood of availing of a financial account or an investment.
• Respondents’ area of residence, there is largely no set pattern that consistently indicates a strong correlation with owning any of the individual financial services.
• The degree of a respondent’s financial decision-making responsibility in the household largely corresponds to the likelihood of availing of specific financial services.
• Those who are considered to be the main decision-makers are more likely to have financial accounts, investments, and insurance.

Conclusion and Recommendations

• Financial literacy has a positive and significant effect on financial inclusion in the Philippines.
• A one-standard-deviation increase in financial literacy increased the likelihood of holding at least one account by 3.7 to 4.2 percentage points.
• The other drivers of owning at least one formal account are age, being female, awareness of the BSP programs, income above 40,000 PHP, Visayas as residence, and being the main financial decision-maker.
• Financial literacy is positively associated with the likelihood of owning a bank account.
• A one-standard-deviation increase in financial literacy increased the likelihood of holding a bank account by 2.1 percentage points.
• Individuals who know the BSP programs, receive international remittances, are educated beyond the high-school level, and have income above 40,000 PHP are most likely to own a bank account.
• Bank account ownership appeared positive and significant across all Philippine regions.
• This strong positive correlation in opening a bank account held true for both main and co-decision-makers.
• A one-point increase in financial literacy scores improved the likelihood of availing of a financial service by 4.9 to 6.0 percentage points.
• Age, gender, employment status, awareness of BSP’s programs, and the respondent’s role in household finances greatly contributed as well.
• Financial literacy scores had a significant impact only on owning investments and any formal financial account.
• Improving the knowledge and understanding of financial concepts and tools lead to greater participation in the formal financial industry.

Further Research

• Further studies can concentrate on analyzing the impact of additional financial literacy items covered in the succeeding financial inclusion survey.
• It is also worth investigating for future researchers the rationale for the determinants; namely, being female, household decision-maker, and aware of the BSP programs for showing positive significance and larger coefficients to financial inclusion.
• Researchers can also study the link between financial literacy and financial technology, and explore other drivers and factors.