With the global population growing, it’s estimated that by 2030, the world will need more than 600 million new jobs. And unfortunately, many of these will be in developing countries, where young people already struggle to find decent work.
For these young people, self-employment or starting their own businesses may be their only realistic option. That’s why the World Bank considers small and medium-sized enterprises (SMEs) to be a key element of new employment opportunities in lower-income economies.
Starting any business is risky, but it’s especially challenging in developing countries, where interest rates are high, and many prospective entrepreneurs don’t have access to collateral.
Unfortunately, that means that many of the world’s poorest young people don’t have access to secure financial support. In fact, only 15% of young people in developing countries have saved money with a formal financial institution.
And when a recent study surveyed young people under 35 years old from low-income communities about their experience with financial services, we found even more worrying trends.
For example, 83% said they turn to their family for financial support, 16% to community savings schemes, and 9% to informal money lenders. And while some of these informal methods of getting money can have a positive impact, for others, it can lead to trouble. Failing to pay back loans can even lead to young people fleeing their homes.
And it’s not just the lack of support for start-ups that’s an issue—we found that many young people just don’t trust formal financial services. Around 62% don’t want to get involved with formal banking, and 45% have never considered traditional financial products and services to be relevant.
Other significant barriers to formal banking include a lack of documentation or collateral and prohibitively high-interest rates. All of this means that young people don’t feel secure and don’t think they can access the benefits of traditional banks.
But this lack of formal financial services is a problem for banks too. The growing youth population in emerging economies represents a vast potential customer base, and neglecting them means missing out on a huge market.
It’s time for banks to rethink their approach to providing loans and look at ways of making it easier for young people to access them. That could include more flexible assessment criteria for young prospective customers and introducing new forms of assessment that build up a financial and savings history rather than relying on collateral.
At the same time, it’s essential to focus on young people’s financial knowledge and support them toward financial stability. Research shows that both financial and digital literacy are vital to boosting economic resilience, and making small, consistent savings can significantly contribute to young people’s—especially women’s—financial empowerment.
Overall, it’s time for banks to seriously rethink what they’re offering young people in developing countries. With the proper support, these youth could create some of those 600 million new jobs, and a wider consumption of formal financial services could provide a safer way for them to do it.
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