Postcard from Bhutan – What Is Money For?
Part 1
We were in Bhutan for a month-long work on entrepreneurship and financial literacy. We met with a number of people and stakeholders involved in starting and running businesses. We had also exchanges with farmers, financial institutions, businesses and other initiatives (like non-formal education) to understand the level of financial literacy, which is the focus of this blog post. Part 2 of the blog will be on entrepreneurship – stay tuned.
Making financial products more accessible
Since 2009, Bhutan has been making an impressive progress in expanding access to financial products and services. The number of banks has increased and service delivery mechanisms, including ATM, agency banking and mobile banking (such as mPAY, mBOB,B-Wallet) are now common as point-of-sale both in cities and rural areas. It is fair to say that Bhutan is now a cash-based economy and access to financial products and services has improved a lot. Rural Bhutanese have moved away from bartering and are receiving payments in cash rather than in labour. Three non-bank financial institutions also provide insurance and pension services. Informal providers are still an important source of financial products, including moneylenders (businesses or individuals) and family members, relatives, friends, or neighbours.
The Bhutan Development Bank Limited (BDBL), mandated by the Royal Government of Bhutan, has so far been the main source of financial services for most rural areas. This is quickly changing; more banks like the Bank of Bhutan (BoB) and Bhutan National Bank (BNB) are reaching out more customers. Rural customers deposit, withdraw, and transfer funds, pay their bills, inquire about an account balance, or receive direct deposit from others through bank agents – retail shops or individuals contracted by banks or mobile network operators. Most households are getting financially active, even though quite a lot informally, by recycling money from different sources which tend to be risky, expensive and unpredictable. In practice this means they borrow from local moneylenders to pay back bank loans, and then they pay back to local moneylenders by borrowing from relatives.
Not all is rosy: problems in putting money to good use
Sound usage of money requires having basic financial literacy – skills, knowledge and attitudes regarding making informed decisions about money. The Governor of the Central Bank, Dasho Penjore, was very clear in his assessment of how Bhutanese manage their finances: “we consume more than what we produce”. 78% of Bhutanese have limited financial management skills with very low saving habits and lack of long-term financial goals. Most spend their income on food, electric appliances and cars.
The challenge is acute among women. More than 44% of women are illiterate, and there is a strong link between literacy rate and financial management skills and knowledge. This does not mean just inability to read and write; it also means difficulties to “think abstractly… as it is hard for them to translate a generic instruction into a different type of action.” Many have limited awareness of the benefits of savings in banks; they also do not understand how financial institutions work and they do not have the confidence to approach and ask providers. Women farmers told us that this affects how they manage their finances to meet day-to-day expenditures, often to support children’s nutrition, health and education. They therefore likely bear more financial risks than other members of society. This poses long-term challenges because women play a major role in the transmission of financial habits and skills to their children.
Causes of low ‘financial fitness’
As mentioned above, the high level of illiteracy is a serious issue but not a root cause for the poor financial fitness of Bhutanese. It is often forgotten that attitudes toward money management are as crucial as skills and knowledge. Long-held social norms and values seem to worsen the problem. For example, savings – not only in formal institutions (banks) but also at home either in cash or in kind – is an afterthought rather than the first step in financial management. Most spend large amounts of their income on consumer goods (e.g. cars, cell phones), entertainment (e.g. chewing doma – betel nut, archery) and community religious ceremonies. Consideration of prioritising needs and wants is largely ignored.
What is crucially missing is financial education initiatives focus mainly on skills and knowledge but very little effort has been made to engage, for example, religious institutions which are an important source of informal loans. Other strong players in setting and reinforcing norms and values of money usage are wealthy landowners, former government officials, retired public servants or corporate employees and community leaders. Financial literacy initiatives by the Royal Monetary Authority (RMA) of Bhutan and other banks pay less attention to such power players.
Risks of debt trap
A local branch manager of the Bhutan Development Bank Limited was honest stating his concerns – the bank is shouldering on more than 60% of non-performing loans (sum of borrowed money upon which the debtor has not made scheduled payments for at least 90 days). He cited fund diversion (e.g. borrowing for rice plantation but buying archery) and weak monitoring system of the bank as causes for the problem.
The King of Bhutan had also expressed his concerns about the impact of private money lending over a year ago. The average debt-to-income ratio (the sum of a farmer’s monthly debt payments ÷ gross income per month) seems to be high in the country, leading to high debt load. Borrowers accumulate debts showing high debt-to-income ratio with decreasing ability to pay back which then creates debt trap.
Key takeaway
Financial inclusion is not just about enabling users to have access to quality and affordable financial products and services. It is also ensuring basic skills, knowledge and attitudes for informed use of financial resources. Poor and disadvantaged users (like women) use informal financial sources not by choice but by necessity. However, the experience in Bhutan shows that social norms established and followed by the majority in different communities persist despite carrying a cost, further creating the belief that money is to be spent without consideration for future expected and unexpected events!
Financial inclusion (access, usage and quality) efforts, therefore, need to pay careful attention to attitudes toward valuing and managing financial resources. What customers see and hear shape their attitudes more often than economic truths and calculations. They are more likely, unknowingly to commit financial mistakes, less likely to engage in recommended financial practices, and less likely to be able to cope with sudden economic shocks.
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