M E R 82398 U T BE N NO 10 OCTOBER 2013 FINDEX The Global Findex Database NOTES Financial Inclusion of Youth Younger adults make up a disproportionately large share of unbanked adults worldwide. Data from the Global Financial Inclusion (Global Findex) database show that 44 percent of youth (ages 18–25) have an account at a formal Asli Demirguc-Kunt financial institution, compared with 55 percent of older adults (ages 26–64). Leora Klapper Just 18 percent of youth report having saved formally in the past year, and 6 percent having borrowed formally. The age gap in account penetration Atisha Kumar persists across regions and across income, gender, and education groups Douglas Randall within economies. The Global Findex database can be used to track the effects of youth-specific financial inclusion policies worldwide and develop a deeper and more nuanced understanding of how younger adults save, borrow, make payments, and manage risk. WWW.WORLDBANK.ORG/GLOBALFINDEX Harnessing the productive capabilities of youth—who make up about 20 percent of all adults around the world—will prove critical in advancing economic growth, particularly in devel- oping economies. Yet in the developing world about 62 percent of youth remain outside the formal financial system, which limits their ability to invest in education, start a business, or manage day-to-day risk. Across both high-income and developing economies youth (ages 18–25) are significantly less likely than older adults (ages 26–64) to have a formal account, even when other personal characteristics—such as income, gender, and education—are controlled for.1 Increasing young people’s access to financial services can increase their human capital investment, as evidenced by recent research in the United States exploring the effect of credit offered to youth under government programs.2 Lack of systematic data on the unique financial needs of youth and their use of financial services has hindered the provision of youth-specific financial services in many econo- mies. The Global Findex database provides such indicators, measuring how people in 148 economies around the world save, borrow, make payments, and manage risk. These new indicators are constructed with survey data from interviews with more than 150,000 nation- ally representative and randomly selected adults age 15 and above. The survey was carried out over the 2011 calendar year by Gallup, Inc. as part of its Gallup World Poll. This note features Global Findex data based on interviews with adults worldwide. Using these data, it explores differences in the use of financial services between younger and older adults, focusing mainly on youth in developing economies. Is There an Age Gap in Account Penetration? Globally, 44 percent of youth have an account at a formal financial institution—a bank, microfinance institution, credit union, cooperative, or post office—compared with 55 per- cent of older adults. As in other age segments, account penetration among youth is strongly related to country income level: while 83 percent of youth in high-income economies have a formal account, only 38 percent in the developing world do. There is also enormous varia- tion within the developing world: In low-income economies 21 percent of youth have a formal account; in upper-middle-income economies 61 percent do. And just as among older FINDEX NOTES 1 E G 1 R U Account penetration by age group adults, account penetration among youth is FI Share of age group with an account at a formal financial institution (%) relatively high in East Asia and the Pacific 93 and significantly lower in the Middle East YOUTH (ages 18–25) and North Africa ( figure 1). 83 OLDER ADULTS Perhaps more relevant is the age gap, the dif- (ages 26–64) 61 ference in financial behavior between youth 58 and older adults within a region or economy. 51 44 44 Among regions, the largest age gaps in ac- 37 35 count penetration are in the Middle East and 29 29 North Africa and South Asia, where youth 23 20 are at least 30 percent less likely than older 14 adults to have a formal account. But the largest ones in individual economies can be MIDDLE EAST & SUB-SAHARAN SOUTH LATIN AMERICA EUROPE & EAST ASIA HIGH-INCOME found outside those two regions—in Benin, NORTH AFRICA AFRICA ASIA & CARIBBEAN CENTRAL ASIA & PACIFIC ECONOMIES Haiti, and Senegal, where the age gap exceeds Source: Demirguc-Kunt and Klapper, forthcoming. 60 percent. Among developing regions, the largest absolute gap is in Latin America and the Caribbean, where account penetration is almost 9 percentage points lower among E G 2 R U Account penetration in developing youth than among their older counterparts. FI economies by age group and within- economy income quintile Within developing economies the age gap in Share of age group with an account account penetration persists across income at a formal financial institution (%) quintiles. But it is larger at the extremes, in 80 both lower and higher quintiles ( figure 2). YOUTH (ages 18–25) Which Youth Are Most Likely to 60 OLDER ADULTS Have an Account? (ages 26–64) 40 In general, women, poor adults, and rural residents in developing economies are sig- nificantly less likely than their counterparts 20 to have a formal account. With income held constant, however, the gap in account pen- 0 POOREST RICHEST etration between women and men is smaller INCOME QUINTILE among youth. The data show that while women Source: Demirguc-Kunt and Klapper, forthcoming. ages 26–64 are 18 percent less likely than their male counterparts to have a formal account, the gender gap shrinks to 14 percent among those ages 18–25. Account penetration might increase more rapidly with age among men than among women because men are more likely to enter the workforce or take on the role of head of household. Generational factors may also be relevant, as gender equality tends to increase among younger generations in most economies. What are the barriers? Why do more than 700 million youth in the developing world remain unbanked? As with older adults, the most frequently cited reason for not having an account is lack of enough money to use one: 67 percent of youth in developing economies give this response, with 29 percent citing it as the only reason for not owning an account ( figure 3). The second most common reason—cited by 27 percent of youth without a formal account in developing 2 FINDEX NOTES E 3 R U Self-reported barriers to use of formal accounts in developing econo- G economies (and 25 percent of their older FI mies by age group counterparts)—is that the cost of having an Non-account-holders reporting barrier as a reason for not having an account (%) account is too high. Another common reason for not having an account is that another YOUTH (ages 18–25) Religious reasons family member already has one—24 percent OLDER ADULTS (ages 26–64) of unbanked youth in developing economies Lack of trust cite this as a reason. While indirect use of an Lack of necessary documentation account may provide access to financial ser- Too far away vices, it may also limit financial independence and delay the establishment of a relationship Family member already has account with a formal financial institution. Too expensive Lack of necessary documentation, also Not enough money 10 20 30 frequently cited as a reason for not having an account, is significantly more common Note: Respondents could choose more than one reason. The data for “not enough money” refer to the percentage of adults who reported only this reason. among younger than older adults. This reason Source: Demirguc-Kunt and Klapper, forthcoming. is cited by 20 percent of unbanked youth in developing economies but 16 percent of older adults without an account. Youth may find it harder than older adults to obtain the documents needed to use financial services because of such factors as low financial literacy and limited mobility. Indeed, studies have found that the young are less likely than the middle-aged to be financially literate, which may affect the level of trust in and awareness of formal financial services.3 Saving and Borrowing Less Prevalent among Youth Globally, younger adults are less likely than older adults to save and borrow. While 18 per- cent of youth report having saved formally in the past year—using a bank, credit union, or microfinance institution—25 percent of older adults report having done so. This is consistent with expected patterns in the use of financial services over the life cycle—as people start careers and families, they have both higher income and higher potential savings as well as greater expenses and greater demand for credit (such as a home mortgage). Beyond differences in their tendency to save, younger and older adults also exhibit differ- ences in their savings goals. Although 69 percent of both age groups report saving for future expenses such as education, a wedding, or a big purchase, older adults are more likely than their younger counterparts to report saving for a future emergency. While 70 percent of youth cite providing for emergencies as a savings goal (multiple responses were permitted), almost 78 percent of older adults do so. There is also a significant age gap in formal borrowing behavior—6 percent of youth report having borrowed from a bank, credit union, or microfinance institution in the past year, compared with 11 percent of older adults. Interestingly, there is no significant difference in informal borrowing behavior between younger and older adults. Worldwide, 28 percent of youth and 24 percent of older adults report having borrowed money from family or friends in the past year. Among youth in high-income economies, school fees are the most commonly reported reason for borrowing money in the past year.4 Although only 6 percent report borrowing for this reason, the frequency of this reason relative to others is consistent with the notion that education-related expenses can be among the largest financial burdens for young adults. In the developing world emergency or health purposes are cited most frequently as a reason FINDEX NOTES 3 E G 4 R U Formal saving in developing economies for borrowing money in the past year both FI by age group and within-economy income among youth (with 10 percent reporting this quintile type of borrowing) and among older adults Share of age group saving at a formal financial institution in the past year (%) (12 percent). The differences in borrowing purposes between youth in high-income 40 economies and those in developing econo- YOUTH mies probably reflect differences in the at- (ages 18–25) 30 tainment of postsecondary education. OLDER ADULTS (ages 26–64) The age gap in saving and borrowing varies 20 across regions and country income groups, across income quintiles within economies 10 ( figure 4), and across modes of saving and borrowing. The age gap in formal saving, for 0 example, is greater in the developing world POOREST INCOME QUINTILE RICHEST than in high-income economies. In developing economies 14 percent of youth report saving Source: Demirguc-Kunt and Klapper, forthcoming. formally, compared with 20 percent of older adults—while in high-income economies 46 percent of youth, and 48 percent of older adults, report doing so. In addition, a larger share of youth in developing economies report borrowing (34 percent) than report saving (29 percent), whether formally or informally. Conclusion The Global Findex data highlight differences in account ownership and other financial behaviors between younger and older adults worldwide. As the first public database of indicators that consistently measure people’s use of financial products across economies and over time, the Global Findex database fills a big gap in the financial inclusion data landscape. The data set can be used to track the effects of financial inclusion policies globally and develop a deeper and more nuanced understanding of how youth around the world save, borrow, make payments, and manage risk. By enabling policy makers to identify segments of the population excluded from the formal financial sector, the data can help them prioritize reforms accordingly. WWW.WORLDBANK.ORG/GLOBALFINDEX 1. Allen and others 2012. References 2. Lochner and Monge-Naranjo 2011. Allen, F., A. Demirguc-Kunt, L. Klapper, and M. Soledad 3. Lusardi and Mitchell 2011. Martinez Peria. 2012. “The Foundations of Financial Inclusion: Understanding Owner- 4. Respondents choose from a list of borrowing pur- ship and Use of Formal Accounts.” Policy poses that include home purchase, home construc- Research Working Paper 6290, World Bank, tion, emergency or health purposes, and funerals or Washington, DC. weddings. Other borrowing purposes, such as the purchase of consumer goods, may be more common. Demirguc-Kunt, A., and L. Klapper. Forthcoming. “Measuring Financial Inclusion: The Global Findex Database.” Brookings Papers on The reference citation for the Global Findex data is Economic Activity. as follows: Lochner, L., and A. Monge-Naranjo. 2011. “The Nature Demirguc-Kunt, A., and L. Klapper. Forthcoming. of Credit Constraints and Human Capital.” “Measuring Financial Inclusion: The Global Findex American Economic Review 101 (October): Database.” Brookings Papers on Economic Activity. 2487–529. Lusardi, A., and O. S. Mitchell. 2011. “Financial Literacy around the World: An Overview.” Journal of Pension Economics and Finance 10: 497–508. 4 FINDEX NOTES