CDC Consults' Blog

Literacy

Literacy in itself is key for a lot of functional areas in life. The dictionary, defines literacy as “the ability to read and write”. We could therefore have literacy in different areas. One area of literacy that came to my attention in 2007 is “genetic literacy” which I was told focuses on issues such as understanding why it may not be too advisable for two people carrying the AS genotype to get married because there is the risk of having a child with sickle cell anaemia . This article is however, in another area of literacy: Financial Literacy.

I have had the privilege to lead two separate surveys commissioned by Trade and Investment Program for a Competitive Export Economy (TIPCEE) a USAID funded Program and the Ministry of Finance and Economic Planning (MoFEP). The first survey, “Baseline Survey on Urban Adult Financial Literacy” was undertaken in 2007 and the second “Baseline Survey on Rural Adult Financial Literacy” was undertaken between May and July 2009. Some aspects of the survey results was given coverage by both the print and electronic media. This article does not seek to reproduce findings from the surveys but to present some thoughts on the importance of personal financial literacy and highlight the role of the individual, financial institutions and the government in promoting financial literacy.

Financial literacy

Each and every one of us is required to make decisions that have financial implications for us in our day to day life, whether asking a friend or relative to give us money or buying an item on cash or credit basis. We make daily decisions on whether we should save or spend; how much to save and where to save.

An individual’s ability to understand, analyse and use information to make financial decisions today and plan for the future could be said to be a reflection of that individual’s level of financial literacy.

Schagen and Lines (1996) in a report to the National Foundation for Educational Research in the United Kingdom defined financial literacy as “the ability to make informed judgments and to take effective decisions regarding the use and management of money.”

Other researchers such as Beal and Delpachtra (2003) argue that the financially-literate should not only have the ability to understand key concepts in money management, a working knowledge of financial institutions, systems and services and a range of analytical skills, but also possess a facilitating attitude to the effective and responsible management of financial affairs.

Roy Morgan Research (2003) held the view that, financial literacy was about people being informed and confident decision makers in all aspects of their budgeting, spending and saving. Roy Morgan Research made it clear that measures of financial literacy should reflect individual circumstances and financial knowledge is “. . . only to be tested against an individual’s needs and circumstances rather than against the entire array of financial products and services, some of which they will neither use nor need” (Roy Morgan Research 2003, p. 2).

The two surveys undertaken for TIPCEE and MoFEP referred to earlier adopted an operational definition of “the ability of the adult Ghanaian to hear, read and understand basic financial issues and translate the knowledge into planning for daily financial choices, plan for the future and respond to predictable and unpredictable life events”.

Why is it important?

Financial literacy has been an issue for a lot of countries and people over the past decade. Governments and development partners have identified financial literacy as an area that can help strengthen individuals, households and nations. Ghana’s Financial Sector Strategic Plan (FINSSP) has given recognition to the need to improve the financial literacy of Ghanaians in order accelerate financial deepening in the economy.
Financial literacy baseline surveys are carried out among other things, to establish levels of financial literacy, identify specific need areas and also serve as yardstick to measure progress made in promoting financial literacy. The Urban Adult Baseline Survey of 2007 established that the urban adult recorded a mean score of 0.57 out of a maximum 1. This implies that the average urban adult answered 57% of the knowledge questions correctly. The 2009 Survey which focused on rural adults established that the rural adult recorded a mean score of 0.44 out of a maximum of 1. This also implies that the average rural adult answered 44% of the knowledge questions correctly. Whichever way these scores are interpreted there is a clear statement that financial literacy is low among Ghanaians. This should not be seen as a shame but a concern to be addressed just as the developed countries are doing.
The importance of financial literacy cannot be overemphasized. Many reasons can be given to support the importance of financial literacy in Ghana. In my view however, issues of financial literacy are assuming great importance in Ghana for a number of reasons:
1. The individual Ghanaian is getting exposed to multiplicity of financial service providers (different types at different locations) and there is the urgent need for the individual to be well equipped in order to make independent and well informed decisions in relating to these institutions and ultimately improve the individual’s financial well being;

2. The institutions aside, the individual Ghanaian is introduced to a number of financial products and services that do not actually meet the unique needs of the individual;

3. Emergence of fraudsters disguised as financial service providers some of which promise unrealistic interest payments and end up defrauding unsuspecting individual clients;

4. The rising cost of higher education, risk of loss of income due to retrenchment, unemployment, collapse and shrinking small businesses are but some of the reasons for improved personal financial planning which is a pillar of personal financial literacy;

5. Personal indebtedness is growing in Ghana: our compatriots are owing financial institutions and are defaulting while we are encouraged at the same time to take on long term loans to buy houses, brand new vehicles, home appliances, pay fees among others - take any newspaper or shuffle through the various FM Stations and you are likely to find or hear advertisements from one of the numerous financial institutions. Individuals need to possess the ability to analyse the effect of debt on them prior to contracting them;

6. The continuous decline in government resources and availability of “free services” is another key reason underlining the importance of financial literacy as citizens are expected to take more responsibility for themselves and families, all of which have financial implications.

Indeed a more financial literate population could actually fuel accountability on the part of individuals and governments. Ghanaians will eventually be more aware for example of the need to fulfill personal tax obligations to the State and government will be held more accountable on the use of tax resources at all levels. All important aspects of our lives will improve when we improve financial literacy. We will plan in advance for predictable and unpredictable life events; we will plan in advance for the education of our children and other dependents; we will plan our families better and indeed live healthier and more prosperous lives in young and old age.
The interesting thing about financial literacy is that it affects all of us irrespective of our income level, education and gender. Every Ghanaian Living Everywhere therefore needs some level of financial literacy commensurate with the needs and services available to him or her. The lack of financial literacy, we need to admit however, has more severe implications for those in the lower income group and the poor.
No one is suggesting that financial literacy is the panacea to our financial challenges as individuals and households but it is clear that it helps minimize the adverse effect of poor financial planning and decision making on all of us.

What is your personal financial literacy level?

We should by now be asking ourselves of our own level of financial literacy. This can be a difficult assessment because the normal tendency is for most of us to believe that we know and we do not need financial literacy. I was surprised to find out as part of the surveys undertaken that accountants for example are not necessarily more financially literate than non accountants. Accountants may be good at collation and processing of corporate financial records; financial interpretation and reporting but not necessarily good at personal financial literacy.
Financial literacy is a combination of knowledge and behaviour. Though most of us will have some level of knowledge we may be caught by the “translation clause”. Have you ever heard of the statement that, “the one who will not read is not different from the one who cannot read”? In the same vein, an individual who has financial knowledge but does not translate that into expected behaviour is not any different from the one who lacks financial knowledge. I agree that behaviour is influenced by other factors such as the availability of appropriate financial institutions with relevant products and services. However the financial knowledge itself has to be acquired within the existing constraints in one’s environment. In this regard an individual who has no interaction with “bonds” for example may not necessarily have knowledge about bonds but could have knowledge of “basic savings product” which is what might be needed.
So are you financially literate? You might have answered yes. That is encouraging but let us ask some other thought provoking questions and see how we fare. What will you do today if you lose your job or your small business collapses - can you pay the children’s school fees, can you still send money home to the old folks, can you pay the next rent? Have you thought of the fact that your ward in Primary Class 6 will actually go to Junior High School and eventually Senior High School and that financial commitment at those levels will be higher and you need to start preparing today? Can you sincerely say that you do not engage in impulse buying? Do you prepare personal budgets or you wonder where all the money went by the middle of the month? If your nice house or car has a problem, are you able to repair it immediately…..? Have you really checked if your current bank is not overcharging you on fees and interest and have you compared these to what you can get from the other bank in the corner, since they are so many of them now?

Financial Literacy- Whose Responsibility?

If personal financial literacy is so important, whose responsibility is it to provide it? The issue as to who has responsibility for financial literacy is a shared one. The key players are the individual at the centre of decision making; financial institutions and service providers; industry based associations (apex bodies) and government.
Individuals have the ultimate responsibility to equip themselves with the requisite knowledge and translate that knowledge into behaviour to ensure that financial decisions are in the ultimate interest of the individual and households. Indeed the quality of individual decisions could have significant effect on households, families, communities and indeed the wider economy. Individuals should seek to understand issues surrounding their financial knowledge and exhibit high sense of responsibility for financial issues. There are too many of us who are too willing to spend beyond our means because we fail to exhibit the basics of planning and thus plunge ourselves in debt that we should not have incurred in the first place. We are not making any efforts to save anything because we are consumption oriented, resulting in poor and in some cases non-existent savings and investment culture. We all know people (may be we ourselves) who are unemployed and or complain of financial difficulties and yet use two or three mobile phones. We have not bothered as a people to attend programmes that will orient us financially but we are ready to attend other programmes to entertain ourselves.
Financial institutions and service providers owe it as a responsibility to their clients to develop products and services that actually meet the needs of the individual. This could be blurred especially where institutions and service providers who are profit oriented focus on the need to make more money. The truth, however, is that every financial institution worth its salt recognizes that it is in their ultimate interest to have products that have features meeting the interest and need of their clients, profit notwithstanding. The increasing bad portfolio of a number of financial institutions could be traced to the unmet needs of clients. What happens in most of our financial institutions is change of name for loan and savings products as if to suggest that the features of a product are secondary to product name! Innovation remains only on paper. Based on observations, we cannot expect that financial institutions will always tell the client what is in the client’s interest - one that baffles me is where financial institutions advise individuals to keep their fixed deposits locked in at say interest rate of 14% per annum and use it as a collateral for an overdraft or loan of an amount which understandably is always lower than the fixed deposit at interest rate of say 28% - in effect you borrow your own money and pay the financial institutions for keeping it for you. Financial institutions are in business and will have to remain in business with their existing business models - thanks to clients who remain financially illiterate and cannot negotiate financial terms.
Financial institutions have a key role to play in the promotion of financial literacy. In my view a personal financial literate client cannot be exploited by the financial institution, but that client will keep the financial institution in business because financial literacy largely promotes responsible client behaviour.
So what is government’s responsibility? Government has responsibility to ensure that the regulatory environment is sound to enhance confidence, quickly enforce rules and ensure that financial institutions “behave”. The Bank of Ghana for example through its Banking Supervision Division ensures that some basic best practice principles are adhered to by the institutions it supervises. Government plays its role with significant support from development partners because as you know, Mr. Government does not have enough resources. Over the past two years, government through the Ministry of Finance and Economic Planning, as part of the Financial Sector Strategic Plan has taken steps to enhance awareness on financial literacy. TIPCEE (USAID sponsored) has actually supported the MOFEP to undertake baseline surveys on financial literacy and mark financial literacy week. USAID, GTZ and SPEED Ghana (funded by GTZ and DANIDA) have worked so hard to provide educational materials on financial literacy. SPEED Ghana is implementing efforts in several communities through dance and drama on consumer education which are all efforts towards the promotion of financial literacy.
The responsibility of APEX bodies may be seen from the angle of ensuring some acceptable level of conduct from its wider membership in relation to financial literacy. Associations and networks such as Association of Bankers, Association of Rural Banks (ARBs), Credit Union Association, GHAMFIN and their likes could actually provide educational programmes targeted at general financial literacy and hold their members accountable for basic education instead of always business promotion. A fraction of the sponsorship of some social events by the financial institutions channeled into financial literacy promotion will be helpful.

What next?

It is never too late. Recognizing that we have a problem is the first step. Willing to address the problem is the next and believing in ourselves that we can bring about significant changes in our knowledge and behaviour in relation to personal financial literacy is the next.
Every individual should make personal financial literacy a personal responsibility. We all need to be more responsible and take responsibility for our actions. Let us learn as a people to cut our coat according to our cloth size. Make a conscious decision to seek knowledge. For those who can read, buy basic books on savings, investments and such related topics and read. Let us prepare basic personal financial plans and stick to the plans as much as possible. Seek help from knowledgeable people in making financial decision though the final decision must be yours. Ask questions and do not accept financial products only because you are desperate - there is nothing as “free lunch”. I believe personal responsibility and accountability will be a good foundation. You do not need to meet all your needs before you think of savings- and that is known by many people. Let us spend time to think through some of the predictable and unpredictable events of our lives and start preparing towards them.
Financial institutions need to do more to help us in promoting personal financial literacy. What they give us now is more of promotional materials that have nothing to do with financial education. Going a step further for example to explain what they mean by “conditions apply” which is normally in small print will help all of us. Continuous education to ensure that clients understand the implications of their financial decisions, even where the client did not ask, will in the long term serve the interest of the financial institutions. When clients for example are clearer on the implications for interest rate changes for a three year personal loan for example at the onset, it will help them make a more informed decision instead of the shock one gets down the line when he/she is confronted with additional interest. This is what the accountant calls “full disclosure”. Secondly, financial institutions need to invest more in consumer research to facilitate product refinement even if not new developments to meet the needs of clients. Many respondents have complained that financial products do not meet their needs- payment schedule, interest rates and time of disbursement(one jacket for everybody philosophy) - but they are forced to take the products because they do not have alternatives: the result is default and late payments on the part of the clients and bad portfolio as the inheritance of the financial institutions.
As for government, it can only be required to continue with the facilitation roles at all levels. It has to resource and encourage supervisors of the financial institutions: banks, insurance companies, capital market and credit unions among others to maintain acceptable levels of best practice. We should be careful not to do anything that erodes the already low level of confidence in our financial institutions. Further work should be done with development partners and their sponsored projects to promote personal financial literacy. Efforts of SPEED Ghana for example to work with the Ghana Education Service are laudable. Indeed we should mainstream all our development efforts with financial literacy. Major interventions in agriculture for example should continually consider the inclusion of financial literacy. Women (though not at the expense of men) should be provided with financial literacy programmes that are relevant to their peculiar needs for us to have stable households.
It should not be too much in asking that serious consideration should be given by government to setting up an independent commission to oversee issues relating to the promotion of financial literacy.
We will be long in reaching our destination, but we can make significant progress when we keep focus. Indeed developed Countries such as the United States of America, Canada and Australia are still working on financial literacy and we cannot afford to do otherwise. We will be a better off economy and people when we become more financially literate because it contributes largely to personal security and social cohesion.