These are the words of 35-year-old man from Lesotho, interviewed as part of the UNCDF Making Access Possible initiative. Low-income consumers must make complex financial decisions even more frequently than middle- or high-income consumers, given their smaller operating margins and their limited and irregular incomes. In Lesotho and Swaziland, many workers forfeit up to 40% of their income because of burdensome loan repayments. Indebtedness in the informal consumer market is often an indicator not only of poverty, but also of limited financial literacy.
Yet these problems are not limited to poor consumers or low-income countries. In response to the growing concerns about over-indebtedness, policymakers across the world are focusing on “predatory” lending, which takes advantage of financial illiteracy to push inappropriate loans to consumers who cannot repay them. Some common-sense reforms, like one implemented in France, now require lenders to include a disclaimer, such as “you are responsible for paying back a loan” and “verify your ability to repay the loan before borrowing”. Additionally, all marketing material must include plainlanguage explanations of the long-term cost of loans (interest rate, total amount due and the final cost of the credit). South Africa’s Broad-Based Black Economic Empowerment legislation has specific regulations around financial education and consumer empowerment. The purpose of these types of regulations is to improve financial capability and increase financial inclusion. But while such reforms have helped improve the protection of financial consumers, they address only part of the problem.
Many people, in developed and developing countries alike, know little about basic financial concepts and do not engage in savvy financial behaviour. An OECD working paper by Adele Atkinson and Flore-Anne Messy shows that in almost all of the 14 countries across four continents taking part in the study, at least half of the adult population failed to identify the impact of interest compounding on their savings, and revealed that fewer than one in five people would shop around when buying financial products. Unfortunately, the picture isn’t any brighter when it comes to young consumers. The Students and Money report from the 2012 OECD PISA financial literacy assessment revealed that around one in seven students in the 13 OECD countries and economies taking part in the assessment are unable to make simple decisions about everyday spending, and only one in ten can solve complex financial tasks. This result is astonishing and requires prompt action to ensure that tomorrow’s adults understand bank statements, the long-term costs of consumer credit and how insurance works, among other basic financial services and products. Indeed, improving the financial literacy of young people will help ensure that they can benefit from savings, retirement and health care coverage– much-needed safety nets in the absence of parents or social systems.
To help governments design and implement policies to increase financial skills, including among young people, the OECD and its International Network on Financial Education (INFE) developed High-Level Principles on National Strategies for Financial Education, which were endorsed by G20 leaders in 2012. They encourage countries to develop nationally co-ordinated frameworks for financial education policies and provide general guidance on the main elements of an efficient national financial education strategy, such as an effective mechanism to co-ordinate with civil society and the private sector.
Governments may involve financial service providers and other key stakeholders to build the financial capabilities of young people and adults through a variety of delivery channels. Rwanda’s national strategy, for instance, underlines the importance of using not only schools to deliver financial education, but also other innovative channels to reach vulnerable, out-of-school youth. Umutanguha Finance, one of the ten institutions supported by the UNCDF initiative YouthStart, empowers teenagers to deliver financial education on issues such as savings to younger children. This peer-to-peer approach is particularly useful because young people tend to listen to their peers more than adults, and the participative approach helps foster youth as agents of change in their own communities.
Financial literacy programmes can play an important role in reducing economic inequalities as well as empowering citizens and decreasing information asymmetries between financial intermediaries and their customers. Public authorities have a responsibility to develop financial education policies and set up robust financial consumer protection frameworks to ensure that consumers are informed and understand the financial products available to them. Innovations such as electronic payments are tipping the economic scales in favour of those who have, for too long, been excluded from the system. But unless consumers are equipped to make sound decisions when using financial services, no amount of innovation will bridge the gap.
Atkinson, Adele and Flore-Anne Messy (2012), “Measuring financial literacy: Results of the OECD/International Network on Financial Education (INFE) pilot study”, OECD Working Papers on Finance, Insurance and Private Pensions, No 15, OECD Publishing, http://oe.cd/11y.
Government Gazette No 37271, South Africa, 27 January 2014
Legifrance, LOI n° 2010-737 du 1er juillet 2010 portant réforme du crédit à la consommation (Act No 2010-737 on reforming consumer credit, 1 July 2010), www.legifrance.gouv.fr.
OECD (2014), PISA 2012 Results: Students and Money: Financial Literacy Skills for the 21st Century (Volume VI), OECD Publishing, available at www.oecd.org/pisa/.
OECD Development Centre (2014), Good Practices in Development Communication, available at www.financial-education.org/home.html.
United Nations Capital Development Fund, visit www.uncdf.org
©OECD Observer Special offprint, July 2015