Financial literacy is a key pillar for financial inclusion, and a critical success factor to achieve at least nine of the 17 United Nations Sustainable Development Goals (SDGs). For instance, eliminating poverty and achieving gender equality is simply not possible when two thirds of adults worldwide remain financially illiterate and women continue to trail men in financial decision making.
It doesn’t help that the term, ‘financial literacy,’ means different things to different people. Investopedia defines it as an understanding of various financial areas including managing personal finances, money, and investing—which covers a range of applications that can vary from bringing marginalized communities into the mainstream in low-income countries to removing gender disparities in affluent countries, and everything in between.
The FinLit Report
In 2014, Standard & Poor’s in partnership with Gallup World Poll set out to get a handle on these issues. They surveyed 150,000 respondents across 140 countries on their understanding of basic concepts of risk diversification, inflation, numeracy, and compound interest. Those answering three of four questions correctly were deemed to be financially literate. What resulted was documented in the S&P FinLit Global Survey.
The survey revealed that although the problem of financial illiteracy is universal, women, low-income individuals, and the less-educated suffer from greater disparities in financial knowledge. Country-level financial literacy rates range from 71 percent (across Scandinavia) to 14 percent (Afghanistan, Albania) of the adult population. Worldwide, 35 percent of men are considered financially literate while 30 percent of women are considered financially literate.
Tackling Financial Illiteracy
The problem of financial illiteracy is solvable. When overcome, it can unlock solutions to an array of global social challenges by making access to finance more widely available. Strategies to raise financial literacy rates are simple and require relatively low and non-recurring investments. In recent years, concerted efforts and investments from institutions like the World Bank, the Organization for Economic Cooperation and Development (OECD), the International Network for Financial Education (INFE), the United Nations Development Program, the Mastercard Foundation, and Financial Literacy Around the World are advancing financial literacy and education.
The stakeholder system for imparting financial literacy on a global scale is vast and disparate, but there are adequate resources, broken into the following categories:
Technology: A number of start-ups, consulting firms, and quasi-governmental organizations have developed low-cost assets or solutions for financial literacy. For instance, the start-up awaaz.de, in partnership with the Bill and Melinda Gates Foundation, has created mobile podcast videos focused on teaching financial literacy. The CRISIL Foundation runs a successful program called mein-pragati—an android phone application—which literally translates to “I Progress.”
Funding: Financing for the effort is coming from both public and private sources. One of the earliest champions of financial literacy, U.K.’s Department for International Development (DFID), created the Financial Education Fund between 2008 and 2013 to promote financial literacy in several African countries. That same period also witnessed the success of private sector-driven mobile money in Africa, most notably mPesa in Kenya. The World Bank’s Universal Financial Access program has recently led efforts to enable universal financial access for all.
Networks and Research: Considerable knowledge and research assets are accessible through the World Bank, OECD, and INFE websites. The list includes white papers and standards setting. The Consultative Group to Assist the Poor and the Bill and Melinda Gates Foundation have devised criteria for impact evaluation of financial literacy and information exchange. In affluent countries like the United States, a variety of initiatives target financial literacy, key among these are the Women’s Institute for Financial Education and the Financial Literacy Organization for Women and Girls.
Regulation: Many central banks are working to strengthen financial literacy. In India, there has been a major regulatory push with all financial regulatory bodies cooperating to create a charter called the National Strategy for Financial Education. India’s central bank has directed banks to set up Financial Literacy Centers (FLCs) across the country. There is a growing counter view, however, that financial literacy measures have not been effective and the initiative needs to shift from a demand-side approach to a supply-side one. This is based on the recognition that a customer will typically never know enough and therefore informed consent and service provider liability should be introduced at the point of transaction.
Measuring Impact: Impact assessments for financial literacy interventions are rare, however outcome indicators are well established. The simplest of these are captured in the FinLit survey. They include the rate of literacy and gaps in literacy rates in terms of age, gender, nationality, or income group. One can rely on these and other indicators to demonstrate rising levels of financial literacy. For example, impact is measurable based on the level of activity in newly opened bank accounts or the off-take of financial products, as revealed in the Government of India’s Pradhan Mantri Jan Dhan Yojana scheme. Since it was established in 2014, over 330 million bank accounts have been created in the banking system, although a large number of these are inactive and hold zero balances.
Nevertheless, as financial literacy improves, we would expect to see account balances continue to rise along with banking activity. One measure of financial literacy is the increase in the average number of financial products in a household. Therefore, impact assessments should determine, for example, whether there is an increased off-take in credit or life, accident, and health insurance policies, or if there is an increase in the number of digital financial transactions. From an advanced economy perspective, the indicators could include reduced gaps in financial literacy rates in women or reduced gaps among adults differentiated based on education levels.
The Benefit of Tri-Sector Partnership
If the UN is to achieve the SDGs by 2030, it will be made possible with the support of increased financial literacy and improved education. For wholesale improvements in education, the public, private, and social sectors must continue to seek opportunities to collaborate. Without partnerships and a systems approach, this herculean task cannot be completed. Efforts from organizations like the World Bank and OECD, laudable as they are, have only scratched the surface of the challenge. Such initiatives require the support from a larger number of financial services players like JPMorgan, for example, that has worked in Detroit collaborating with key stakeholders to create an ecosystem of alliances that also include innovators, nonprofits, social enterprises, incubators, educators, and skills development agencies.
Forging true partnership toward this goal demands a different mindset, one that requires courage and compromise. Partners must accept that private players will drive business value through their involvement. It is logical that banks and financial institutions invest in inclusive finance and financial education as it will only contribute to enhancing the market pie for financial services. This is a win-win outcome, and a key to unlocking solutions to the Global Goals.