Young people in poorer places are often failed by banks. Here’s what needs to change

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

As the world’s population grows, it is estimated that by 2030 the world will be more than 600 million new jobs. Many of these will be needed in developing countries, where young people already struggling until to find a job, wages are lowand working conditions are often poor.

With few options for decent work, many of the world’s poorest young people are self-employed or start their own businesses. Indeed, the World Bank regards small and medium-sized enterprises (SMEs) as a key element of job creation in lower-income economies.

But starting a business anywhere comes with risks. Failure rates are: as high as 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 have no collateral, which is blocking proper financial support— an essential part of the survival of new businesses and the new jobs they can create.

Unfortunately, secure financial aid is not as widely available as it could be. In developing countries, just 15% of young people have saved money with a formal financial institution. U.S questionnaire highlights the diverse experiences of young people (under 35) from low-income communities using financial services.

And our research not only shows support for start-ups, we also saw a more fundamental failure of the financial sector for individuals, especially women.

Many of the people we surveyed (from 21 countries, including Sri Lanka, Sierra Leone and Malaysia) preferred a more informal way to get money. About 83% said they turned to their families for financial support, 16% about community savings plansand 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 disastrous. Failure to repay loans can lead to some young people flee their homes.

And while formal financing may seem like the safer option, we found a widespread lack of trust in formal financial services. Most (62%) did not want to get involved in formal banking, while nearly a third (30%) had little money to spend and nothing to save, rendering financial services irrelevant. Nearly half (45%) had never considered traditional financial products and services to be relevant.

Other major barriers to formal banking include lack of documentation or security. There can also be priceless high interest rates have to deal with.

What our respondents told us about where to look for financial help. Author provided

Overall, our research indicates that young people appreciate the security and predictability that banks can provide, but often view these benefits as beyond their reach.

Compared to older adults, young people 33% less likely to save overall, and 44% less likely to have a formal savings account. However, research shows that prioritize savingshowever small, about loans enables young people to create digital savings accounts and build good financial habits.

Making small, consistent savings contributes significantly to the financial empowerment

. Research in Sub-Saharan Africa and South Asia shows that both financial and digital literacy are essential to increase economic resilience.

Financial health

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

When it comes to lending, high interest rates are often justified due to the risk of borrowing, but it’s time to rethink this approach.

For example, should banks treat young entrepreneurs as really risky? Can review criteria are more flexible for young potential customers? And could new forms of credit assessment, based on building a financial and savings history rather than access to collateral, be accepted from those previously excluded?

Credit can support a young person’s growth – or ruin him by affecting his financial health. For example, Research in new digital loan schemes saw a high rate of late payment, with 31% of borrowers defaulting in Tanzania and 12% in Kenya.

Other research shows that the type of credit matters. Long-term business loans improve financial health, while instant credit to meet daily needs is detrimental.

To make financial health the new goal would mean propelling people toward financial stability — to reach a point where they can withstand financial shocks and feel safe.

Young people will grow up in the unfolding climate crisiswhat our research shows is already disruptive life and livelihood. They need banks to seriously rethink what they are offering. A wider shot formal financial services could provide a safer way for young people in emerging economies to build and grow the businesses that will create some of those 600 million new jobs.


How can Big Tech affect financial inclusion and stability?


Provided by The Conversation

This article was republished from The conversation under a Creative Commons license. Read the original article

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Quote: Young people in poorer places are often abandoned by banks. Here’s What Needs Change (2022, October 13) Retrieved October 13, 2022 from https://phys.org/news/2022-10-young-people-poorer-banks.html

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Jacky

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