Financial literacy, which is the ownership of “skills and knowledge that equip individuals to make prudent financial decisions”, is vital for the safe functioning of conventional finance as well as microfinance. This idea draws support from the recent sub-prime crisis, the lack of pricing transparency in microfinance and the increasingly complex nature of microfinance services (micro-insurance, microloans, mobile banking, etc.), which are just some of the reasons financial literacy is needed.
Consumers must make informed decisions after evaluating the risks, costs, pros and cons in order to derive maximum value from their financial transactions.
Global Initiatives
The OECD recommended a set of good practices for financial education and awareness for governments in 2005. A year later, Canada instituted a Credit Education Week (November 13th to 16th) and two years later, The President’s Advisory Council on Financial Literacy was created in America. Similarly, financial awareness campaigns have formally begun in countries such as Nigeria, India and Russia.
Principles for Financial Education/Literacy
Some of OECD’s recommendations for good practices for financial education and awareness (applicable to both conventional finance as well as microfinance), are as follows:
Definition: financial education can be defined as “the process by which financial consumers/investors improve their understanding of financial products, concepts and risks and, through information, instruction and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being”. Financial education thus goes beyond the provision of financial information and advice.
Implementation: This financial capacity building, based on proper financial information and instruction, should be promoted. Financial education should be provided in a fair and unbiased manner. Programs should be co-ordinated and developed with efficiency.
Focus of Financial Education: Financial education programs should focus on high priority issues, which, depending on national circumstances, may include important aspects of financial life planning such as basic savings, private debt management or insurance as well as pre-requisites for financial awareness such as elementary financial mathematics and economics.
Role of Regulations: Financial education should be taken into account in the regulatory and administrative framework and considered as a tool to promote economic growth, confidence and stability, together with regulation of financial institutions and consumer protection…(read about role of regulations in microfinance – not part of excerpt)
Policy Tools: Appropriate measures should be taken when financial capacity is essential but deficiencies are observed. Other policy tools to consider are consumer protection and financial institution regulation. Without limiting the freedom to contract, default mechanisms, which take into consideration inadequate financial education or passive/inert behaviour, should be considered.
Responsible Parties: The role of financial institutions in financial education should be promoted and become part of their good governance with respect to their financial clients.
Customization and Duration: Financial education programs should be designed to meet the needs and the financial literacy level of their target audience, as well as reflect how their target audience prefers to receive financial information. Financial education should be regarded as a life-time, on-going and continuous process, in particular in order to take account of the increased complexity of markets, varying needs at different life stages, and increasingly complex information.
(Excerpted from OECD’s Recommendation on Principles and Good Practices for Financial Education and Awareness - July 2005 )
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