The importance of giving the poor access to financial services is now accepted wisdom. What isn’t appreciated, however, is how this important need is undermined by a lingering lack of trust in banks among the people most in need of these services. Many poor customers feel alienated because financial solutions are usually not tailored to their needs, and when they are, they’re often not clearly explained. Knowledge and trust are significant hurdles in any financial transaction.
Access to mobile phones is nearly universal, for example, yet the robust use of mobile financial services is still rare, mainly because of a lack of knowledge and trust. One of the prime causes of financial exclusion is lower levels of financial literacy. For making successful use of financial services, people need to be literate enough to understand the basics of managing money. Financial literacy is a set of skills that allow people to manage their money wisely along with an understanding of essential financial concepts and an appreciation of the trade-off between risk and return.
It is a combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions for a lifetime of financial well-being. At its most fundamental, financial literacy involves grasping the notion that money can be borrowed only at a cost. Three main features of financial capability can be summarised. First, the concept of financial capability seeks to capture the idea that individuals need skills and knowledge as well as the ability to put these into practice through their attitudes and self-efficacy.
Second, the dynamicity of the concept emphasising that financial decisions need to best fit different circumstances of life is crucial; thus, financial capability may mean different financial practices for different people and even for the same people at various stages of their life. Third, the concept brings the external environment into the picture, allowing for a consideration of those external features which may or may not regulate the exercise of financial capability by individuals. India has always been a fertile ground for swindles that have bilked mostly low-income households of millions of rupees.
The financially illiterate are usually easy pickings. The investors have been periodically lulled into dubious schemes by nefarious characters. The poor have now become wary of investing money even in credible organisations. Finance has entered the lives of every family in a much more significant way than in the past. The consequences of financial illiteracy have become more severe, because people now have to take so much responsibility for their financial lives.
We no longer live in a world of, nanny states paternalistic employers and friendly bank managers. Everyone needs to know the ABCs of finance. Financial literacy can impart the necessary confidence to transform ordinary individuals into informed and questioning users of financial services. The costs of financial illiteracy are high. The financial world is becoming steadily weirder. Those with lower levels of debt literacy are more likely to be vulnerable to predatory lending, and fraud, which can lead to crippling debt.
Financial institutions often target such unsophisticated consumers with their less-thanstraightforward ~ and often very expensive ~ products. Although there are consumers who behave foolishly, often the irresponsibility is more with banks that lend than with the customers who borrow. People buy financial products and insurance policies without adequate planning and give up midway because they don’t have money to pay the instalment or premium. Aggressive pushing of products by financial service providers without adequately assessing the financial profiles of buyers can mean more harm to the poor.
In contrast, being financially savvy has clear payoffs. Those with higher levels of financial literacy are more likely to make better investment decisions, refinance mortgages at the optimal time, and manage credit-card debt better. They are also more likely to sidestep common pitfalls of modern finance. The key concepts in financial literacy are numeracy and understanding the implications of having a bank account and borrowing from a bank. Numeracy relates to the capacity to do interest rate calculations, understand interest compounding, inflation, budgeting, and manage risk diversification.
While inadequate income is obviously the genesis of poverty, the gaps in basic financial knowledge compound the issue considerably. Sadly, most poor people still believe loans are for big businessmen, and traders. As a result, informal-often costlycredit sources thrive among the poor, even when affordable finance is available from formal channels. Much of the costs paid out on credit cards and other debts are largely due to ignorance of charging structures and the impact of compound interest.
Despite being better-educated, millennials confront greater difficulties ~ including economic uncertainty and student debts. They need to be more informed to better navigate a proliferating, complex, and fast-changing economy. Everyday money maths skills are more useful than the abstruse mathematical concepts usually taught in the classroom. Young students need to understand the building blocks of credit cards, mortgages, insurance, and pensions.
Financial education is of utmost importance for today’s young adults who are faced with a world of economic uncertainty and have few resources to navigate it with. Finance can be the first thing you lose when you feel you have no control over your life ~ but it can also be the lifebelt that protects you from the choppy seas. Changes in behavior can be achieved through a process that starts from early habituation. Therefore, early familiarisation with finance is essential because financial habits will continue to be carried and built by children to their adulthood.
There is need for bringing about behavioral changes by imparting an understanding on the difference between a need and a want. The key learning point is that in life we usually cannot afford to have everything we want, so we must prioritise by putting what we really need first. Early experiences with financial decisionmaking act as foundational skills and go a long way in shaping an individual’s attitude, preference and behavior. If we do not introduce key money concepts to children, it becomes challenging for them to handle finances efficiently as adults.
A college student can spend three years studying the intricacies of atomic science, earning a first-class honours degree, yet remain dangerously clueless about the merits of balancing a household budget. Thanks to financial literacy, young people now understand the importance of savings over credit cards and EMI loans. Earlier the refrain was “young people don’t save enough.” It represented the conventional wisdom about our millennials. This is now changing.
This cohort of young people is putting away more funds, though for short-term goals. Millennials now have a savings discipline that the preceding generations lacked. There is a lot of illiteracy about loan defaults and the implication of official policies. A deferment of repayment of loan installment doesn’t give any real benefit to the borrower. A loan holiday or deferment is just a postponement of liability and the borrower continues to incur the accruing interest, thus increasing his financial burden.
Savvy institutions that promote financial capability also build appropriate follow-on products for customers. Institutions that ignore this strategy may see their first-time customers move on to other providers as they become more comfortable with formal finance. Financial institutions that invest in building up financial capability are more likely to ensure they will have customers who are active users of a variety of their products.
Financial literacy programmes should avoid the one-size-fits-all approach and must target different segments differently. Programmes focused on just imparting knowledge will never yield the desired results unless backed by a suitable product and its usage support. Cognitive constraints rather than lack of attention are a key barrier to improving financial knowledge. Areas in which a service provider was involved in the programmes observed a better understanding and product usage.
It gave consumers a better handle on financial intricacies and enhanced their prospects for a stronger financial foundation. These hands-on interventions significantly improve basic awareness of financial choices and attitudes toward financial decisions. Using a model that involves experiential learning and product usage has a greater chance of being successful. This can evidently be seen in one model, where a bank undertook a project to deliver financial education training to young women in rural communities.
This was accomplished by a cascade training model where core trainers trained peer educators, who in turn trained community members. Financial education is not a silver bullet. But it can be an effective tool when delivered at the right time, to the right audience, through the right channels, and in combination with other interventions. The spread of mobile phones has opened a vast new world of possibilities for digital delivery of content that can enhance households’ financial capability.
Financial literacy has now acquired a new nuance with the onset of digital financial services (DFS), considered the most powerful tool for financial inclusion. Offering basic financial services through mobile phones, point-ofsale devices, and networks of small-scale agents, DFS has the potential to reach more people at a lower cost, with greater convenience than traditional “brick and mortar” banking services. However, millions of people cannot read, write, or understand the long number strings necessary to transact on mobile phones.
We need to aggressively train end-users on the nuances of digital finance that will empower them to adopt technology with ease. Women are eager to learn how to use digital payments because it gives them greater privacy and financial control ~ something they value a great deal. Moreover, the exponential growth in financial technology (fintech) is revolutionizing the way people make payments, decide about their financial investments, and seek financial advice.
The financial marketplace has become a dizzying emporium of choice and easy credit. Can financial education even out the playing field and enable people to better navigate a complex and fast changing economy? Some things are better addressed through regulation. If there are things that are clearly negative for consumers, then they don’t need to exist. But changing the financial framework is also not enough. Financial literacy is an essential skill for thriving in today’s economy.
(The writer is the author of Village Diary of a Heretic Banker. He can be reached at moinqazi123@gmail.com)