Literacy

Financial inclusion to help reduce poverty

3 December Dec 2015 1740 03 December 2015

Worrying findings from the S&P Global FinLit Survey. The major survey on financial literacy shows that not only is financial illiteracy widespread, but there are big variations among countries and groups. Women, the poor, and lower educated respondents are more likely to suffer from gaps in financial knowledge. This is true not only in developing economies but also in countries with well-developed financial markets.

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Financial Markets
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Worrying findings from the S&P Global FinLit Survey. The major survey on financial literacy shows that not only is financial illiteracy widespread, but there are big variations among countries and groups. Women, the poor, and lower educated respondents are more likely to suffer from gaps in financial knowledge. This is true not only in developing economies but also in countries with well-developed financial markets.

The major survey on financial literacy has just been published, and the findings are sobering. In the S&P Global FinLit Survey, financial literacy was measured using questions assessing basic knowledge of four fundamental concepts in financial decision-making: knowledge of interest rates, interest compounding, inflation, and risk diversification. More than 150,000 nationally representative and randomly selected adults in more than 140 economies were surveyed during 2014.
The results highlight a lack of financial knowledge amongst a sizeable proportion of the population in each of the countries surveyed. In detail around 3.5 billion adults globally, most of them in developing economies, lack an understanding of basic financial concepts.

It is widely recognized that in the United States, the subprime mortgage crisis was not just the result of poor risk management and misleading selling practices by lenders and financial institutions, but was also due to the reckless financial behaviours of households, including the most vulnerable ones who contracted mortgages they should not have subscribed considering their financial situation.
Actually, individuals were often not aware of the risks they were exposed to and did not understand the terms and conditions of the mortgages they purchased, which often resulted in significant increases in their monthly payments over time. That’s why some governments have started developing strategies and policies to improve financial literacy. The increasing sophistication of the financial landscape and products while public and occupational welfare benefits are shrinking in most developed countries have shed light on the importance of consumers’ financial decisions.

The authors of the report say that financial ignorance carries significant costs: “Consumers who fail to understand the concept of interest compounding spend more on transaction fees, run up bigger debts, and incur higher interest rates on loans”. So consumers around the world and in particular vulnerable groups with limited knowledge and understanding of financial products and concepts, also have difficulty making long-term informed financial decisions and selecting financial products that match their needs. This may have negative consequences not only on individuals’ and households’ future financial well-being, but also on the long-term financial and economic stability of a country.
Not surprisingly, financial literacy rates differ enormously between the major advanced and emerging economies in the world. On average, 55 percent of adults in the major advanced economies –Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States–are financially literate. On the other end of the spectrum, South Asia is home to countries with some of the lowest financial literacy scores, where only a quarter of adults—or fewer—are financially literate. For example, just 16% of respondents in Yemen answered the question correctly,

Financialliteracyworld

Even once financial literacy is higher among the wealthy, well educated, and those who use financial services. A 2006 World Bank report shows a strong correlation between reductions in poverty and the development of the financial sector. “Around two billion people, or 38% of adults in the world, do not use formal financial services, and 73% of poor people do not use a bank because of costs, travel distances and the often-burdensome requirements involved in opening a financial account”.
Governments are pushing to increase financial inclusion by boosting access to bank accounts and other financial services. The access to financial services could help the poorest earn a living, grow their businesses and create new jobs.

The lack of knowledge can be costly for anyone, of course, but the consequences may be worse for women, because they tend to live longer than men. This is true not only in developing economies but also in countries with well-developed financial markets. With lower savings rates and less willingness to take risks, just 30% of women are financially literate, compared with 35% of men. The study didn’t focus on why women are less financially literate than men: it only reported that even women in favorable economic conditions are less financially knowledgeable than men.

In 2012, according the OECD Programme for International Student Assessment (PISA), the first large-scale international study to assess how far young students have acquired some of the knowledge and skills that are essential for full participation in society, Italy's performance in financial literacy was below the average of the 18 countries surveyed. The bad news is that after four years, the S&P survey shows a modest improvement. Only 37% of the people polled around Italy could answer three of four basic questions about inflation, risk, and interest.

Going beyond the data, the authors’ main point is that by showing where financial skills are strong and where they are lacking, can help stakeholders design policies and programs to improve the financial well-being of individuals around the world.

The report is available here:
http://gflec.org/wp-content/uploads/2015/11/Finlit_paper_16_F2_singles.pdf

Photo: Getty/KAZUHIRO NOGI

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