Young people from the poorest neighborhoods are often abandoned by banks. Here’s what needs to change

Entrepreneurs need more support. Credit: Shutterstock/Kehinde Olufemi Akinbo

As the world’s population increases, it is estimated that by 2030 the world will need more than 600 million new jobs. Many of them will be needed in developing countries, where young people already struggle to find work, wages are low and working conditions are often poor.

With few decent work opportunities, many of the world’s poorest young people are self-employed or start their own businesses. Indeed, the World Bank considers small and medium-sized enterprises (SMEs) to be a key element of new employment opportunities in low-income economies.

But starting a business anywhere is fraught with pitfalls. Failure rates reach 75% in Ethiopia and Rwanda, 74% in Ghana and 67% in Zimbabwe.

Failure is more likely when interest rates are high and when potential entrepreneurs lack collateral, blocking adequate financial support, an essential element for the survival of new businesses and the new jobs they can create.

Unfortunately, secure financial support is not as widely available as it could be. In developing countries, only 15% of young people have saved money with a formal financial institution. Our survey sheds light on the varied experiences of young people (under 35) from low-income communities using financial services.

And it’s not just start-up support that’s lacking in our survey, we also found a more fundamental failure of the financial sector for individuals, and women in particular.

Many respondents (from 21 countries including Sri Lanka, Sierra Leone and Malaysia) preferred to take a more informal route to obtaining money. About 83% said they turned to family for financial support, 16% to community savings schemes and 9% to informal lenders.

For some, the financial services (both informal and through traditional banks) they receive have a positive impact, but for others they can be ruinous. Failure to repay loans can lead some young people to flee their homes.

And while formal finance may seem like the safest option, we have seen a general lack of trust in formal financial services. Most (62%) did not want to get involved in the formal banking sector, while almost a third (30%) had little money to spend and nothing to save, making financial services unnecessary. Almost half (45%) had never considered traditional financial products and services relevant.

Other major obstacles to the formal banking system include the lack of documentation or collateral. There may also be prohibitive interest rates to contend with.

Young people from the poorest neighborhoods are often abandoned by banks - here's what needs to change

What our respondents told us about where they seek financial help. Author provided

Overall, our survey indicates that young people appreciate the security and predictability that banks can offer, but often find these benefits beyond their reach.

Compared to older adults, young people are 33% less likely to save in general and 44% less likely to have a formal savings account. Nonetheless, research indicates that prioritizing even small savings over loans enables young people to create digital savings records and develop good financial habits.

Making small savings on a regular basis contributes significantly to the financial empowerment of young people, and especially women. Research from sub-Saharan Africa and South Asia shows that financial and digital literacy is key to building economic resilience.

Financial health

The situation is also a problem for banks. For them, and for businesses in general, the growing population of young people in emerging economies represents a relatively untapped market of millions of potential customers, customers and employees.

When it comes to lending, high interest rates are often justified because of lending risk, but it’s time to rethink that approach.

For example, should banks treat young entrepreneurs as very high risk? Can the evaluation criteria be more flexible for young prospects? And could new forms of credit assessment, based on building a financial and savings history rather than access to collateral, be accepted by those who were previously excluded?

Credit can support a young person’s growth or ruin him by depleting his financial health. For example, research on new digital borrowing systems found high levels of late payment, with 31% of borrowers in default in Tanzania and 12% in Kenya.

Other research shows that the type of credit matters. Long-term business loans improve financial health, while immediate credit to meet day-to-day needs tends to be detrimental.

Making financial health the new goal would mean helping people achieve financial stability – to get to a point where they can withstand financial shocks and feel secure.

Young people will grow up in the ongoing climate crisis, which our research shows is already disrupting lives and livelihoods. They need banks to seriously rethink what they offer. Wider use of formal financial services could offer young people in developing economies a safer way to start and grow the businesses that will create some of those 600 million new jobs.

How might Big Tech affect financial inclusion and stability?

Provided by The Conversation

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