The link between financial literacy and economic empowerment

The truth is that financial literacy can affect financial development, for at least three reasons:

• First, higher literacy leads to more efficient allocation of savings and higher per rand returns, attracting more investment and growth in the country.
• Second, higher literacy might induce greater stock market participation and financial market depth.
•  Third, financial literacy might build confidence in the market economy, discipline financial intermediaries, and create a better policy environment for growth.

The importance of financial literacy

When we talk about financial literacy, we refer to more than simply the ability to do mathematics. Financial literacy is the more complex ability to process economic information and make informed decisions about financial planning, wealth accumulation, debt, and retirement savings.

American economist, Frederic Mishkin, speaking at the Third National Summit on Economic and Financial Literacy in Washington, pointed out that the individual citizens of a country make a number of pocketbook decisions every day that have an impact on the health of the economy. These include regular choices such as whether to take on a particular mortgage, how much to save and invest, whether to lease or buy a car, and how to manage credit cards. "This brings us back to the importance of financial literacy. The choices we make as individuals, as consumers and investors, are linked to the broader economy in ways that we don't always appreciate. However, one thing is certain. We make better decisions if we are better informed, and the whole economy benefits. That's the promise of economic education… that it not only improves the lives of individual consumers, but that it also makes for more effective policy and a better economy," he said.

South African financial literacy moderate to low

According to a comprehensive study by the Human Sciences Research Council in 2015 on behalf of the Financial Services Board, the level of financial literacy among adult South Africans tends to be in the low to moderate range on average, with a score of 55 out of 100. The South African financial literacy rate of 51% is on a par with a number of developed countries and higher than many contemporary developing nations.

Three questions in the quiz were designed to find out about the ability of the respondents to weigh up risk and return on investments. According to the study results, South Africans are quite sceptical about potential investments that offer the prospect of getting rich quick, with 70% believing that if someone offers them the chance to make a lot of money it is likely that there is also a chance that they will lose a lot. Regarding risk and savings, it is clear that the adult population is somewhat divided on the matter of risk and savings. In 2015, more than half (56%) thought it was true that only saving in one place was a risk while a third (33%) thought that statement was false.

Risk-aversion and financial literacy

Respondents were asked if they agreed or disagreed with the statement, “I am prepared to risk some of my own money when saving or making an investment.”

About half (46%) of the adult public agreed with the statement, roughly one third (35%) disagreed and the (16%) remainder said that they neither agreed nor disagreed or did not know. Benjamin Roberts, senior research manager at the HSRC says it is important to consider risk-aversion amongst important socio-demographic subgroups. He explains that to accomplish this, the HSRC constructed a risk-aversion scale. “Responses to our risk-aversion questions were coded onto a single 0-100 scale with 0 indicating the lowest level of reported level of risk aversion and 100 the highest. It was notable that South Africans in the 65 and over age cohort tended to be more risk-averse than their younger counterparts. The more educated an individual, the less likely that individual will be to be risk-averse. This may reflect the greater economic resources available to the educated and therefore the lower costs to risk-taking,” Roberts said.

Sources:

• The Economic Importance of Financial Literacy: Theory and Evidence by Annamaria Lusardi and Olivia S. Mitchell : https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5450829/
• Governor Frederic Mishkin, The Importance of Economic Education and Financial Literacy – speech made at the Third National Summit on Economic and Financial Literacy, Washington, D.C https://www.bis.org/review/r080305f.pdf
• Financial Literacy An International Comparison, discussion paper by Tullio Jappelli http://arno.uvt.nl/show.cgi?fid=112910
• Financial Literacy in South Africa; 2015 South African Social Attitudes Surveyhttps://www.mylifemymoney.co.za/Resources/Research%20Documents/FSB%20Financial%20Literacy%20Report%202015.pdf

 ^Disclaimer

^{This article is meant for information purposes only and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser.}

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