When demographics shift the way we think about youth finance

Originally posted on youthsave.org.

By Tanaya Kilara, CGAP

The Center for Financial Inclusion at Accion recently released fascinating demographic data through the ‘Mapping the Invisible Market’  project, as part of their Financial Inclusion 2020 Campaign. It sketches a picture of the world in 2020 building on existing economic and demographic data, and draws implications for financial inclusion.

I do a lot of work on youth. Some of the data really caught my eye and even challenged some of my assumptions about priorities for youth financial services.

Where countries are in their development cycle affects their demographic opportunities. The Least-Developed-Countries (accounting for 27% of population growth over the next decade) are entering the first window of opportunity for a demographic dividendas fertility rates fall and the labor force grows faster than dependent populations, freeing resources for development. A second window of opportunity occurs when this expanded workforce agesand people stay in the workforce longer, saving and investing for extended retirement, resulting in more assets which raises the national income and leads to economic growth. Most developing countries, accounting for 68% of population growth over the next decade, fall into this category.

(Developed countries, take note: the demographic window of opportunity is largely closed.)

What does this mean for financial inclusion? One conclusion to draw from this is that countries need different financial inclusion strategies to address the needs and priorities of the age segments that are dominant at a particular time. For example, most middle-income countries like South Africa and Mexico are entering the second window of opportunity for a demographic dividend. With their youth population entering into the workforce in the near future, both countries will need to focus on the financial needs of mature adults. For poorer countries, like Nigeria and Pakistan, where the youth bulge will remain prominent for the future, we can anticipate that financial services targeted specifically for the young will be in higher demand and have more impact.  

Institutions in the youth financial services space have been working to advocate for youth savings accounts both as a business proposition and as a policy instrument. The Mapping the Invisible Market data provides more nuance to the view that (1) youth financial services should be a priority in all markets, and (2) savings accounts are the priority financial service for youth.

Focusing on youth financial services is important, but in the poorest countries that are entering the first window of opportunity. In most of the worlds’ developing economies, the financial service needs of mature adults and the elderly are higher priorities.

·       The dependency ratio, measuring the working age adults available to care for dependents (both young and old) can form a key lens for analysis of financial service needs. Youth need different financial services based on where in the lifecycle they are and what dependency pressures they face at a point in time (see image below). For example, as highlighted in a recent CGAP report on youth savings,youth need to learn to save in their childhood , but as they move into young adulthood, they increasingly also need access to credit for starting a business or building a house, recognizing that young people will be net borrowers early in their adult life.

·       At the policy level, youth financial services will be relevant to different degrees based on the demographic characteristics of the country. For countries in that are just entering the first window of opportunity, financial inclusion policies are best focused on needs of younger families and first time users of financial services, while countries that are nearing the second window of opportunity are better off focusing on the needs of mature families. We will be exploring this theme more in a roundtable that CGAP is organizing with policymakers from a select group of countries (watch this space).

·       The demographic shifts also have implications for funders that promote youth financial services. Looking at the data from the “Mapping the Invisible Market,” it becomes clear that the geographic focus areas for funders should be in countries that are entering that demographic “window of opportunity,” in particular poorer countries in Africa. The MasterCard Foundation, one of the largest funders of youth financial services, clearly seems to be investing in line with this potential.

What strikes me most is that these demographic changes aren’t somewhere far away in the future. 2020 is less than seven years away and these shifts are happening fast. There are 1.2 billion youth between the ages of 15-24 worldwide. For many of the world’s poorest countries, how they deal with the burgeoning youth population will determine their economic trajectory. Providing financial services for youth that correspond to their needs and priorities during the particular lifecycle stage they are in will be an important step to deal with the implications of the youth bulge.

Image: Courtesy CFI at Accion