• How financial literacy can drive a country’s development

Some time ago, I read that financial literacy is like the ripple effect when one drops a small rock in a pond or a lake. The ripples that keep forming and growing are similar to the decisions made by the financially literate on behalf of themselves and their families and their financial knowledge helps those around them as well. 

The lack of financial literacy has always been a concern in Sri Lanka, particularly in the non-urban areas, despite Sri Lanka being able to boast that it is one of the countries with high literacy rates of over 90%. A good example for this is many Sri Lankans not realising that they are still paying heavy indirect taxes when buying goods and services. They only started to feel the heat when the Personal Income Tax (PIT) kicked in as it is a direct tax that manifests when deducted from the salary. 

According to the Organisation for Economic Cooperation and Development (OECD), personal financial education means different things to different people. For some it is quite broad, encompassing an understanding of economics and how household decisions are affected by economic conditions and circumstances. 

“For others, it focuses quite narrowly on basic money management – budgeting, saving, investing, and insuring. Still others include a set of consumer and buymanship skills within a financial education framework. In reality, financial education probably can and does include all of these topics,” OECD says.  

The difference between the literate figures and financially literate figures is mind-boggling, according to the recently released data by the Central Bank of Sri Lanka. Accordingly, 57.9% of adults were reported to be financially literate in Sri Lanka as of 2021, which shows a significant increase from the 35% reported in 2014. Moreover, the gender gap in the financial literacy rates of males and females was 5.9%. 

The survey conducted by the Central Bank measured the respondents’ attitudes toward digital payment methods, considering the timely importance of the concept. The survey result revealed that more than half of Sri Lankans had positive attitudes towards the safety and efficiency of digital payment methods. 

The people in the 18-29 age group appeared consistently to have higher financial literacy derived from higher financial knowledge, attitude, and behaviour scores than the other age groups in the sample. People aged 60 and above showed significantly lower financial behaviour scores, perhaps reflecting comparatively lower engagement in economic activities and financial management in real life. 

However, the study titled ‘Impact of Financial Literacy Levels Among Sri Lankan Investors on Investment Choices’ by S.T.M.S. Tennekoon and C. Liyanage (2021) published in the South Asian Journal of Finance states that the majority of investors in Sri Lanka have low objective and subjective financial literacy. Further, they have poor knowledge of the relationship between interest rates and bond prices. The second key finding of the study was that financial literacy has a statistically significant impact on the current and future choice of different investment products as the main source of investment. 

Do financial literacy and economic development go hand in hand?

The answer is yes. The OECD argues that financial education is only one part of an economic development strategy and financial education can serve to complement other policies that enable financial access, provide for substantive protection in the financial marketplace, and offer mechanisms for redress. 

“It is necessary to note that education may need to be accompanied by advising – although general education and financial education courses can be helpful, consumers need to apply what they learn to their families and their situations. In the end, personal finance is, after all, personal. Making the link between financial education and community economic development outcomes is a bit thornier. Logically, financially-educated consumers should make better decisions for their families, increasing their economic security and well-being,” OECD notes.

It states that secure families are better able to contribute to vital, thriving communities, further fostering community economic development. However, OECD highlights that identifying and documenting those links is difficult. Data from a community development credit union, provided as a case study, hints at the potential relationships between financial education and community involvement and gives some hope that financial education programmes really are making a difference in communities.

Meanwhile, a research paper published in March 2022 under the title ‘Financial Literacy and Economic Growth: How Eastern Europe is Doing?’ demonstrates that a minor increase in the level of financial literacy of individuals helps stimulate their financial well-being considerably. Therefore, in order to prepare individuals to deal with income instability from changes in their working conditions, national governments should consider investing in financial education.

In addition, this study shows that the level of GDP growth is positively influenced by the level of financial well-being and that financial well-being is positively influenced by financial literacy. The results of the research reinforce the importance that all components of financial literacy have on financial well-being. 

This study represents an important step in the research related to the impact of financial literacy on the economic growth of countries. Due to the limitation of GDP as an indicator of economic performance, the analysis considers that further studies could include more specific indicators to take into account inequality, such as the Gini index, or developmental indicators such as United Nations Human Development Index (HDI).

Financial literacy for the other half 

Tennekoon and Liyanage suggest that educational institutions can improve their syllabi for both management as well as science streams by including financial knowledge and mathematical skill components so that both basic and advanced financial literacy of the younger generation can be improved. 

They also note that the promotion of subjective financial knowledge is also important to ensure that individuals’ self-worth and feelings are not affected. 

“Further, education programmes can include the development of behavioural and psychological traits which can impact financial behaviour, so that it will assist individuals in making conscious financial decisions. Further, the financial intermediaries should note that the provision of excessive information to investors can have a negative impact on their subjective financial literacy level,” they note.