Financial literacy plays a significant role in reducing poverty and improving financial well-being. The low financial literacy rate in developing countries means cycles of poverty continue, often intergenerationally. However, improving financial literacy rates in developing countries through education can help create pathways out of poverty, improving the financial standing and economic stability of low-income individuals.
What is Financial Literacy?
The Asian Development Bank Institute defines financial literacy as “people’s understanding of financial concepts as well as their skills and ability to manage money and make informed financial decisions.” The financial literacy level of an individual typically influences their financial judgment and resulting actions. Thus, the stability of one’s finances is often dependent upon one’s financial literacy level.
Why Financial Literacy Matters
Financial literacy offers many benefits to a consumer regardless of their level of income. For example, if an individual is financially well-informed, the individual is less likely to make decisions that will harm their finances rather than improve them.
Furthermore, financial literacy encourages people to pay bills on time, increases preparedness for economic difficulties and allows people to avert significant debt. Those who are well-educated on financial concepts are also very likely to set aside savings and pass on financial knowledge to their children.
Poverty-stricken individuals may benefit the most from financial literacy as their economic standing makes them less likely to successfully recover from an economic setback without adequate financial knowledge. This makes smart financial decisions especially important for this population in order to proactively combat any avoidable financial crises. However, despite financial knowledge holding more significance for those with a lower economic status, individuals within this group are less likely to be financially literate.
Financial Literacy in Developing Countries
Financial illiteracy disproportionately affects impoverished developing nations, likely due to a lack of adequate education systems in many of these countries. Data indicates that just 54% of people residing in developing nations have the capability or knowledge to open a bank account and also lack access to banking institutions.
Indonesia provides an example of this concern as a developing nation where financial literacy is a scarcity, and therefore, stands as one of the main barriers to financial inclusion. Data from an Organization for Economic Cooperation and Development (OECD) study indicates that most Indonesians with a low socioeconomic status only have enough financial savings to last seven days in the case of an emergency.
Another example of a country with inadequate financial literacy is Zambia, where approximately half of the population does not utilize any financial services. A survey conducted in South Africa suggests that approximately 60% of respondents lack comprehension of important financial terms such as “interest.” From these statistics, it is apparent that financial literacy is insufficient in several developing countries.
As developing nations strive for economic growth and financial products become increasingly complicated, it is imperative to equip people with the knowledge to make economic decisions that are in their best interests. Ultimately, a financially literate population will help stabilize economies in developing countries and contribute to reducing poverty.
The improvement of financial literacy in developing countries will require participation from policymakers, stakeholders, organizations and other important figures. Several of these actors are taking action to support financial literacy in developing nations.
For example, in Indonesia, the Indonesian tech company Tokopedia created the “Rabu Nabung” campaign in 2020, which translates to “Savings Wednesdays.” Purchasing mutual funds through Tokopedia on Wednesdays allows people to amass gift cards and even access cashback rewards for investing in gold. This campaign acts as an incentive for Indonesians to save their money and make investments, thus increasing both financial standing and financial literacy. A study by the University of Indonesia (UI) indicates that roughly “78% of all Tokopedia users surveyed said the program helped them understand the importance of investment.”
Other nations are taking action by implementing financial education programs that target groups with high rates of financial illiteracy. The Bank of Uganda created the second Strategy for Financial Literacy in Uganda 2019-2024, focusing on five major groups: women, the working class, youth, those that reside in rural areas and special interest groups. This program will give individuals a better understanding of savings, investments, managing their money and other important financial components.
A person’s ability to understand and apply financial concepts plays a key role in their economic decisions. Financial literacy benefits the individual while contributing to long-term economic stability. Thus, improving financial literacy in developing nations is crucial to achieving growth in the financial sector. By enacting various programs and campaigns to empower individuals to make financially sound choices, developing nations should see economic advancement in the future.
– River Simpson