One of the most overlooked aspects of the global financial crisis that has gripped the economies of the US, Europe and the world beyond is the level of financial literacy among the consumers of financial products and services. Although there are several causes to the crisis, the uninformed choices made by individuals regarding their finances left thousands of households homeless.
During the first half of the last decade, home prices in the US were booming. Banks and mortgage lenders started giving loans to virtually everyone who wanted to have a new house or refinance the existing one without properly assessing the creditworthiness of the borrower. They violated the basic norms of lending to earn higher service fees in fiercely competitive mortgage market. On the other hand, with the rising property prices, people began to feel rich and continued financing and refinancing against their mortgages. They were in fact lured by delusive schemes often with complex terms and conditions designed and marketed by banks and mortgage lenders. Some schemes offered loan at near-zero interest rate for the first couple of years subject to revision to higher rates afterwards. These terms were generally concealed from the borrower. As these schemes were sold to poor sub-prime class of people having no regular long-term income, they didn’t understand the product properly and eventually lost their homes as well as little savings in down payment.
While financial illiteracy is pervasive in otherwise highly literate countries like the US, it is not surprising that the problem is prevalent in poorer, less literate countries like Nepal. One example is the reckless usage of remittance money and the missed opportunities it entails for the country. As per latest macroeconomic data released by Nepal Rastra Bank (NRB), the country receives more than Rs. 320 billion annually in remittance, constituting over 21 percent of the country’s GDP. The hard-earned money sent by around two million Nepali workers abroad is not only helping the country pile-up foreign currency reserve and maintain a positive balance of payment, but also contributing to the well-being of the members of around 34 percent of the families now receiving the remittance. The overall quality of life of the recipients of remittance has increased significantly. However, it is worrisome that the money so received is being squandered in unproductive sectors and consumer durables.
An estimated remittance consumption expenditure figure easily goes up to 90 percent of the total remittance. People are building new houses, replacing their cell phones and television sets, buying gold and ornaments. Very few people are investing in business or other entrepreneurial ventures that have greater multiplier effect on the economy and on its growth. The reason, understandably, is the lack of awareness among people about their finances. They do not realize that the flow of money they are receiving is not permanent and that they need to spend their pecuniary resources wisely for their secured future. They are not aware about how much to spend and how much to save. They don’t know how to invest productively. For example, many people are investing in shares, and more recently in derivatives market instruments, without realizing and understanding the inherent risks.
In both the examples of the US and Nepal, we saw that not giving proper financial education to the citizenry is not only detrimental to their personal lives but may also result in disastrous consequences for the whole economy. And surprisingly no one is helping them. Before expatiating ‘how’ the level of financial awareness among the consumers can be raised, it’s worthwhile to see the significance of spreading financial education.
Financial education can broadly be defined as familiarity with and understanding of financial market products, especially rewards and risks in order to make informed choices (Chakrabarti, 2009). It is the basic knowledge required to manage financial matters or resources. It creates a win-win situation for consumers and financial service providers like banks. Consumers can better understand their financial needs and can choose the products and services that best match their needs. Similarly, banks can design and sell new products and not necessarily base their unique selling proposition on price only. It also brings financial and banking sector stability by dragging fraudulent players and unhealthy practitioner out of the market. The phenomenon basically nurtures innovation in financial sector with more sophisticated products and fosters financial inclusion which in turn helps inclusive growth in the real economy as well.
PROMOTING FINANCIAL LITERACY
In the short term, financial service providers should take charge to make their customers understand various aspects of their products and services. They should provide fair counseling about product suitability to customers’ need and consequences of consuming the product. They should also clearly display and explain immediate and semi-permanent pricing and other terms of the services. Financial institutions should encourage clients to read and understand information, especially when related to long-term commitments or financial services with potentially significant financial consequences. (OECD’s Financial Education Program)
However, a longer term solution to the financial illiteracy would be to embed the issue within the country’s educational framework. In other words, the financial education should be institutionalized by integrating it into school curricula. Today, in academia, we impart the knowledge about health and hygiene, behavioral and moral education, sports etc. They have become integral parts of regular academic endeavors. Likewise, we can teach children about what is a bank account. How interest rates are calculated. To plan income and expenditure, etc. The goal is to make them learn and start thinking about it from very early age. The children not only limit the knowledge about these things among themselves, but are likely to go back home and make the elderly learn about it too. So, schools are excellent starting points on making our citizen financially literate.
The author is with the Business Development Department of the Nepal SBI Bank Ltd
bishalkchalise@gmail.com
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