Uneven Landscape of Financial Education

The MasterCard Center for Inclusive Growth

Originally published by the MasterCard Center for Inclusive Growth

Lack of financial literacy remains a huge barrier to financial inclusion, especially for women and youth. As more evidence points to the correlation between financial literacy and financial inclusion, several initiatives are using media and technology to reach underserved communities

In recent years, great strides have been made in improving supply-side issues in financial system access. Specially tailored loans and savings accounts have enabled poorer populations to smooth their income, and technology has allowed banks to reach those rural communities that physical bank branches can’t. But a lack of financial literacy remains a huge demand-side barrier to financial inclusion. Simply put, if people don’t know about or aren’t comfortable with financial products, they will either not demand them, or will be unable to make informed judgments and take effective decisions about them.

The problem is bigger than policymakers had imagined, as demonstrated by the S&P Global Financial Literacy Survey, the results of which were released in November 2015. It attempted to get an idea of how financially literate the world is by polling 150,000 adults in 148 countries on four basic concepts: knowledge of interest rates, interest compounding, inflation and risk diversification. Just one in three adults polled passed the test.

An Uneven Landscape

The survey found that financial literacy rates vary among countries. Norway, Sweden and Denmark tied for top place at 71 percent while Yemen came last with just 13 percent. The United States, although the world’s richest economy, failed to make the top ten, ranking 14th with 57 percent. Of note was the finding that more than half of American credit card holders don’t understand interest. In Puerto Rico, just 32 percent of adults are financially literate – lower than Uganda, Tanzania and Taiwan. Even in the major emerging BRICS economies, just 28 percent of adults on average are financially literate.

All told, roughly 3.5 billion adults globally – most of them in developing economies – do not understand basic financial concepts.

Perhaps unsurprisingly, poorer populations tend to be less financially literate. Men outscore women overall in financial literacy, with a gap of up to 20 percentage points in some countries. Education levels also play a role – there’s a correlation between the ranking of a country on the survey and the performance of its young people on the OECD’s Program for International Student Assessment (PISA) math test. Young adults aged 35 or younger are less likely to be financially literate than those aged between 35 and 50, which shows age is also a factor, although this could be down to experience – for example, Argentina, which has suffered several episodes of hyperinflation, has an overall financial literacy rate of 28 percent, but the percentage of its adults who understand inflation is 65 percent, above the world average.

Financial Illiteracy Impacts on Global Economic Stability

“Just as it was not possible to live in an industrialized society without print literacy – the ability to read and write – so it is not possible to live in today’s world without being financially literate,” said economist Annamaria Lusardi, the academic director of the Global Financial Literacy Excellence Center, which worked with McGraw Hill Financial, Gallup and the World Bank Development Research Group on the survey. “Financial literacy is an essential tool for anyone who wants to be able to succeed in today’s society, make sound financial decisions, and – ultimately – be a good citizen.”

This is a global problem, and one that needs to be addressed urgently if financial inclusion goals are to be met. What’s more, a worldwide lack of financial literacy can impact upon the stability of the financial system as a whole, as former Federal Reserve chair Ben Bernanke pointed out in 2008. “In light of the problems that have arisen in the subprime mortgage market, we are reminded of how critically important it is for individuals to become financially literate at an early age so that they are better prepared to make decisions and navigate an increasingly complex financial marketplace.”

A comprehensive strategy around financial education is key. But thus far, the landscape of actors involved is vast and disjointed, from finance ministries to microfinance institutions – over half of which offer non-financial services, mostly involving financial literacy training – to central banks, regulatory authorities, banks and NGOs. One thing they all agree on, however, is that financial education is crucial for financial inclusion, as an international survey of 301 financial service providers, investors, and members of support organizations confirmed. That study, led by the Center for Financial Inclusion at ACCION International, found that “respondents view financial literacy as an enabling factor that unlocks other key dimensions of financial inclusion.”

New Ideas

Speaking at the April Symposium on Financial Literacy and Financial Inclusion in Tunis, Dr. Guy Stuart, executive director of Microfinance Opportunitiesposited that there is a funding gap of about $7 billion to provide financial education to the 500 million consumers he estimates require it. But, he continued, if, rather than via traditional methods this training is carried out via embedded education, that figure falls to just $500 million.

One such example is in Kenya, where cartoon strips in well-established comic books have been used as a delivery platform for financial literacy programs. Meanwhile, in both Mexico and the United States, telenovelas that included financial messages in several storylines led to changes in perceptions around budgeting, saving and investing.

These innovative uses of existing media both lower the costs of delivering financial education and allow initiatives to be scaled up to a national level. But financial illiteracy needs solutions on a global scale, and therefore stakeholders are searching for bigger ideas.

These solutions don’t have to be complex: behavioral science lab ideas42 has come up with a simplified financial management course that uses what it calls “effective rules of thumb”, or heuristics, to teach financial literacy. It has recently gained funding from USAID and CGAP to create a mobile phone-based program on this concept, which it hopes will reach a large number of informal entrepreneurs across the developing world. The lab is also working with technology firms to develop an interactive voice response (IVR) solution utilizing a scalable off-the-shelf technology platform.

Capitalizing on the success of massive open online courses (MOOCs) is also an option: online education websites like Khan Academy, which reaches millions of students from Bengaluru to Boston every day, and the newer, Washington D.C.-based startup EverFi are already adding financial literacy courses to their lists of subjects. Meanwhile, smartphone apps such as the interestingly named Green$treets: Unleash the Loot! enable children as young as five to learn essential money skills.

Proceed with Caution

But not everyone is convinced that a focus on financial literacy is the right way to overcome demand-side issues, particularly in developed markets. Lauren E. Willis, a legal scholar who previously worked at the Justice Department and the Federal Trade Commission, argues against financial education and for greater regulation to protect uninformed consumers against potential pitfalls. In a paper, she points out that “for some consumers, financial education appears to increase confidence without improving ability, leading to worse decisions…The search for effective financial literacy education should be replaced by a search for policies more conducive to good consumer financial outcomes.”

However, as Muhammad bin Ibrahim, deputy governor of the Central Bank of Malaysia, pointed out at the Malaysia-OECD High Level Global Symposium on Financial Well-Being in October 2015, “Financial education is a powerful tool to equip consumers with the financial competence to manage their finances more effectively and improve the overall well-being of individuals and households. The focus on strengthening the ability of consumers and businesses to use financial services confidently and effectively must therefore be an important part of any effort to promote financial inclusion.”

As more evidence points to the correlation between financial literacy and financial inclusion, governments around the world are becoming increasingly aware of the need to implement national initiatives to improve financial education. But if the two-thirds of the world’s adults who don’t understand basic financial concepts are to be reached, more needs to be done to link the different players in the game, from education ministries to central banks and tech firms, to create a joined-up, global strategy with effective financial education programs and policies.