Sanderson Abel —
Financial literacy is important for consumers in helping them budget and manage their income, save and invest efficiently, and avoid becoming victims of fraud.
As financial markets become increasingly sophisticated and as households assume more of the responsibility and risk for financial decisions, financial education is increasingly necessary for individuals, not only to ensure their own financial well-being but also to ensure the smooth functioning of financial markets and the economy.
Financial education should be targeted at providing citizens with knowledge and tools around money management.
This will help us break the cycle of generational poverty, get out of a debt trap and show people how to use the limited financial resources they have to realise their goals and dreams. If governments are to win consumers over to financial education, more needs to be learnt about what their financial education needs are at various stages in their lives. How to deliver this education is also important.
The OECD recommendations
The Organisation of Economic Cooperation and Development (OECD) developed a set of recommendation on Principles and Good Practices for Financial Education and Awareness. The recommendations include the following.
Governments and all concerned stakeholders should promote unbiased, fair and coordinated financial education.
Financial education should start at school, for people to be educated as early as possible.
Financial education should be part of the good governance of financial institutions, whose accountability and responsibility should be encouraged.
Financial education should be clearly distinguished from commercial advice; codes of conduct for the staff of financial institutions should be developed.
Financial institutions should be encouraged to check that clients read and understand information, especially when related to long-term commitments or financial services with potentially significant financial consequences: small print and abstruse documentation should be discouraged.
Financial education programmes should focus particularly on important life-planning aspects, such as basic savings, debt, insurance or pensions.
Programmes should be oriented towards financial capacity building, where appropriate targeted on specific groups and made as personalized as possible.
Future retirees should be made aware of the need to assess the financial adequacy of their current public and private pension’s schemes.
National campaigns, specific Web sites, free information services and warning systems on high-risk issues for financial consumers (such as fraud) should be promoted.
Way forward in adopting the recommendations
These principles are a good starting point for a country like ours and then we customize them to suit our situation. In this regard the Government should be the leader through its various departments responsible for the financial sector.
While the Government takes the lead, financial sector players should complement these efforts.
It is through combined effort that financial literacy can start to bear fruit through increased savings and consumption of various financial products.
An all stakeholders approach to financial literacy is important. Efforts to improve financial literacy are soundly based in economic terms.
Markets work best if participants are fully informed and able to correctly interpret available information to their advantage.
More clearly, consumers benefit from improved financial literacy directly by being in a position to make better informed decisions; and indirectly by adding to competitive pressures faced by product and service providers. It is everyone’s duty to ensure that this objective is realised.
For the success of financial literacy, there is need to identify the various players in the matrix and understand the roles that they play.
The major players in the financial literacy game are the Government, the financial services providers and the customers themselves.
The role of financial institutions in providing financial education, not only to clients but also to their own staff, needs to be better defined and further promoted.
More information is needed at both international and national levels on good programmes and practices and on ways to promote access to financial services.
Sharing information on successful experiences can be helpful to all. Financial institutions as both beneficiaries of a financial literate society and custodians of various financial products have a role to play in the whole matrix of financial literacy.
With a financially literate society, banks and other financial institutions also stand to benefit in the form of lower transaction costs from having competent, well-informed and confident consumers.
Over time they can expect to achieve deeper market penetration and possibly some roll-back in regulation that may outlive its usefulness in a better informed marketplace.
Governments are clearly aware of the need to improve financial literacy. One key element for the future is persuading consumers that they need financial education and enabling them to access it. Also important is better financial education in schools. Today’s school-leavers need to be a lot more financially literate than their parents were if they are to manage their personal finances successfully through life.
Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on firstname.lastname@example.org or on numbers 04-744686 and 0772463008