The importance of giving the poor access to financial
services is now accepted wisdom. What is not appreciated, however, is how this
crucial need is undermined by a lingering lack of trust in banks among the
people who are most in need of these services.
Many disadvantaged customers feel alienated because
financial solutions are usually not tailored to their needs, and when they are,
they are 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 financial
illiteracy. To make successful use of financial services, people need to know
enough to at least understand the basics of how to manage money. In simple
terms, financial literacy refers to a set of skills that allow people to manage
their money wisely along with some 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 ideally for a lifetime of financial
Financial literacy entails knowing about financial products
and services and having the rights skills for healthy financial practices. It
is a key pillar for financial inclusion, and a critical success factor to
achieve at least nine of the 17 United Nations Sustainable Development Goals
(SDGs). For instance, eliminating poverty and achieving gender equality is
simply not possible when two-thirds of adults worldwide remain financially
illiterate and women continue to trail men in financial decision-making.
Finance has entered every family and every individual’s life
in a much more significant way than ever before. The consequences of financial
illiteracy have also become more severe because people now have to take much
more responsibility for their financial lives. Everyone needs to know the ABCs
Financial literacy and understanding the subtle nuances of
finance have become increasingly important for governments and citizens.
Failing to do understand finance can have broad implications for the economic health
and stability of countries. Financial literacy can impart the confidence
necessary to transform ordinary individuals into informed and questioning users
of financial services.
A few fundamental concepts are the primary foundation for
most financial decisions. These are universal concepts that apply to every
context and economic environment. It begins with numeracy, which relates to the
capacity to do interest-rate calculations, understand interest compounding,
inflation, and risk diversification.
Due to their lack of financial literacy, people buy
financial products and insurance policies without adequate planning and give up
midway because they do not have money left to pay the installment or premium.
Aggressive pushing of products by financial service providers without
adequately assessing the financial profile of buyers can mean more harm to
those who are from economically weaker sections.
Sadly, most poor people still believe that loans are meant
only for big businessmen and traders. As a result, informal—often costly—credit
sources thrive among the poor, even when financial institutions offer
affordable lending schemes.
Millennials are exceptional in many ways. They are better
educated than their predecessors and more economically active. Yet they confront
greater difficulties—including economic uncertainty and student debt—than the
earlier generations. As a generation carrying new personal financial
responsibilities that have more complex forms, it is critically important for
millennials to be on a path that leads to financial security.
Financial behaviour can be changed through a process that
starts from early habituation. Therefore, an understanding of financial
concepts needs to be given as early as possible because financial habits will
be carried and built by children into adulthood. Our school curriculum needs to
incorporate financial education. The idea is that school-going children should
gain the required modern financial knowledge and awareness of financial
instruments, which then they can bring home to their families, including to the
seniors, and the wider community.
It is said that at the age of three, a child starts
understanding the concept of saving and spending. Early experiences with
financial decision-making become foundational skills and go a long way in
shaping an individual’s attitude, preferences, and behaviour. By the time the
child reaches the age of seven, typically, money habits are already set. If we
do not introduce key money concepts to children in this phase, 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, and 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 millennials. This is changing. This cohort of young people is putting
away more funds, though for short-term goals. Millennials now have a savings
discipline that preceding generations lacked. It is heartening to see people
realise the wisdom of putting some cash aside.
Being financially savvy has clear payoffs. People with
robust financial skills and a strong grasp of financial principles can better
understand and negotiate the financial landscape and avoid possible traps.
Conversely, people with a lower degree of financial literacy struggle to
understand money matters and their potential impact on financial well-being.
Financial institutions often target unsophisticated consumers
with their less-than-straightforward—and often very expensive—financial
products. Consumers who cannot comprehend basic financial concepts, such as
interest compounding and financial risk diversification, often end up paying
higher transaction fees, pile up unmanageable debts and end up paying higher
interest on loans.
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. Investors have been periodically lulled
into dubious schemes by nefarious characters. The poor have become wary of investing
money even in credible organisations. Financial education and awareness are the
most powerful antidotes against risky investment traps. People need to
understand that the price of financial illiteracy is very high.
Financial products have proliferated and become much more
complex. Moreover, the exponential growth in financial technology (fintech) is
revolutionising the way people make payments, decide what financial investments
to make, and seek financial advice The financial marketplace has become a dizzying
emporium of choice and easy credit. We have a head-spinning array of credit
options (credit cards, mortgages, home-equity loans). So, financial decisions
have become more numerous and complex than ever before.
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-of-sale 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 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.
While individuals are increasingly being called upon to make
complex financial decisions, a large fraction of households has only a
rudimentary understanding of basic concepts. Moreover, participation in financial
markets is far from universal, and individuals with low levels of education and
financial literacy are the least likely to participate in these markets. These
correlations have motivated policymakers to devote substantial resources to
financial literacy and financial education.
There is still a lot of illiteracy on issues relating to
loan defaults and how they can be handled. A deferment of repayment of loan
instalments, which borrowers and their representatives usually clamour for in
times of crisis, does not give any real benefit to the borrower; it is not even
a palliative. A loan holiday or deferment is just a postponement of liability
and the borrower continues to incur a cost by way of the accruing interest,
thus actually increasing his financial burden.
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. Several
promising programmes have experimented with experiential learning and customised
content that meets individuals’ specific needs. A new wave of research has
identified many effective avenues for delivering financial education. The
spread of mobile phones has opened up a vast new world of possibilities for
digital delivery of content that can enhance households’ financial capability.
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 do not need to exist. But changing
the financial framework is also not enough. Financial literacy is an essential
skill for thriving in today’s economy.
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