This is a guest post by Maliha Hasan.

Financial literacy is an active process, in which communicating information is only the beginning and empowering consumers to take action to improve their financial well-being is the ultimate goal. Financial literacy is critical for promoting access to finance by creating incentives and environments that promote desired financial behaviors such as saving, budgeting, or using credit wisely.

For the nearly 3 billion people living at the bottom of the pyramid, the ability to make good financial decisions is also important. The poor lack resources to cushion them from lost savings or investments or enable them to rebound from adversity. Having access to safe savings products or insurance can greatly affect their financial future. Fees and interest expenses related to financial products—formal or informal—are also likely to represent a higher share of income and thus have a significant impact on well-being.

Financial literacy is a popular topic in both developed and developing economies. As recent difficulties in advanced credit markets have shown, customers everywhere would benefit from having greater financial knowledge.

Financial literacy is especially important today for several reasons. The financial crisis will reduce access to credit and increase its cost in many developing-country markets, just as it already has in the United States and Europe. Financial literacy can help to prepare consumers for tough financial times, by promoting strategies that mitigate risk such as accumulating savings, diversifying assets, and purchasing insurance. Financial literacy also reinforces behaviors such as timely payment of bills and avoidance of over-indebtedness that help consumers to maintain their access to loans in tight credit markets.

The author holds a Masters degree in Finance, with over 10 years of experience with non-profit organizations in Pakistan. She has worked with women and children in the fields of primary education, literacy training, healthcare services as well as livelihood and enterprise development. Currently she is interested in how access to finance impacts development, especially in emerging markets.