The Relationship between Financial Literacy and Financial Inclusion

25 Pages Posted: 23 Nov 2020

See all articles by Antonia Grohmann

Antonia Grohmann

Aarhus University

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin - Faculty of Economics

Date Written: November 2020

Abstract

About two billion people in the world do not own a financial account and there are many more who use financial services only occasionally. In the past, initiatives which address these problems of financial exclusion focused on the supply side of financial markets, in particular by increasing the branch network of banks and by offering cheap bank products. While this had the desired effect, recent evidence shows that improving the demand side of financial markets is also helpful. There are numerous initiatives and public policies to enhance financial education and to improve financial literacy. Microeconometric studies, often randomized controlled trials, show that financial literacy has a causal effect on financial inclusion; educated individuals understand the advantages of financial services better but also feel more confident about contacting providers. Cross-country evidence indicates that in poorer countries improved financial supply and demand are substitutes, i.e., they work independently of each other. In higher-income economies, however, these instruments are complements, i.e., it is useful to improve financial literacy in order to make better use of available financial services.

Keywords: Financial inclusion, financial literacy, financial development

JEL Classification: G53,O16

Suggested Citation

Grohmann, Antonia and Menkhoff, Lukas, The Relationship between Financial Literacy and Financial Inclusion (November 2020). DIW Berlin Discussion Paper No. 1914, Available at SSRN: https://ssrn.com/abstract=3735809 or http://dx.doi.org/10.2139/ssrn.3735809

Antonia Grohmann

Aarhus University ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

Lukas Menkhoff (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

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