Financial Literacy: The Global State

The financial literacy of each and every adult has a broader impact on the national and global economy. Understanding how to save, budget, invest or borrow, and being aware of larger financial considerations is an important skill to have for one's personal financial health as well as a country's economic growth.

As access to financial services expands thanks to mobile money, wider network coverage and digital banking in some parts of the world where financial literacy reaches less than 30% of the population, a lack of financial understanding is one of the main barriers to economic development.

The Situation Around the World

The 2014 S&P Global FinLit Survey found that 1 in 3 adults worldwide are financially literate, a metric defined as being able to understand concepts like risk diversification, inflation, basic numeracy and interest compounding. Looking more closely at different regions of the world, different income levels and along gender lines allows us to see the disparity in financial literacy and financial education.

Denmark and Norway boast a percentage of financially literate adults (71%) that is significantly higher than the global average, while emerging and developing economies all around Eastern Europe, the Middle East, North Africa, sub-Saharan Africa, South Asia and Southeast Asia fall below an already concerningly low global average. 

Afghanistan, Albania and Angola have as little as between 14% and 15% of financially literate adults according to the survey.

Within high-income and low-income countries, there is also a disparity in financial literacy rates between the richest 60% of the country and the poorest 40%. In major emerging economies, 31% of the wealthiest adults are financially literate, while only 23% of the poorest have achieved this level of understanding. The inequality is even greater in major advanced economies.

Education and access to banking are also positively correlated with financial literacy, while older people tend to be less financially literate, both in developed and developing countries.

Another important gap in financial literacy that is urgent to address is that which exists between men and women. Even when accounting for income level, education and age, 35% of men worldwide are financially literate compared to about 30% of women.

Impacts of Financial Illiteracy

Financial Impacts

Financial illiteracy imparts important costs both on people’s wallets and on the country’s economy. A survey conducted in the United States has found the average American lost 1,506 USD to financial illiteracy in 2023, which in total amounts to more than 388 billion dollars for the country's population as a whole, 43% of which are financially illiterate.

This lack of knowledge also affects the health of financial institutions across the world. Although access to banking is positively associated with financial literacy, only 38% of bank account owners are financially literate globally. 

In emerging economies, the rate of financial literacy among account owners is as low as 30%. As financial accessibility grows, in great part thanks to financial technology, more people are given the opportunity to make financial decisions. Without financial education, this can lead to potentially risky behaviour.

Risky financial behaviour correlated to financial illiteracy such as mass defaulting on loans and credit card payments hurts banks’ revenues and profitability. It also destabilizes financial institutions and potentially leads to important financial crises. Lower levels of investments contribute to lower national economic growth.

Social Impacts

Financial illiteracy affects the well-being and the quality of life of an individual and their family in different ways. In the short term, the financially illiterate are at risk of accumulating debts and in turn losing more money than they should on interest payments. They are also more likely to fall prey to predatory financial actors.

In the long term, financial illiteracy inhibits important skills like the ability to invest wisely, to save money, to keep up with loan payments, which can lead to housing foreclosure or financial crises, and generally to plan ahead for one’s future. This affects the next generation not only because it shapes their immediate living conditions, but also because it teaches them by example how to manage their finances as well as their attitude towards money as they grow.

Looking at the larger picture, financial illiteracy keeps the poor living in poverty and widens the wealth gap between the poorest and the richest, who are statistically more financially fluent, and therefore, also more likely to have the knowledge necessary to grow their finances wisely. 

Transition to Financial Literacy

On the other hand, a financially literate population is able to contribute to the economic growth of their country and to the reduction of poverty. When financial literacy and financial inclusion are made a priority, entrepreneurship and innovation, essential elements of a healthy economy, are stimulated, and business endeavors from people of different socioeconomic backgrounds have the opportunity to thrive.

Financial education empowers individuals by giving them the tools necessary to plan for their future and to make sound financial decisions. They are able to move upwards in the economy and to participate in improving their living conditions in a sustainable manner, as financial literacy is a tool which can always be relied on. Financial education is the key to interrupting the cycle of poverty.

A 2022 study conducted in Kenya, Tanzania and Uganda found an increase in financial literacy is strongly associated with a decrease in poverty in developing countries. An increase in financial fluency is also associated with an increase in consumption of food and other goods in impoverished households.

Current Barriers to Financial Literacy

The gap in financial fluency exists because of larger socioeconomic barriers affecting the underprivileged and women’s access to financial education. It is not only a question of affordability, but also one of accessibility: poor people, who have to live paycheck to paycheck, and women who carry the domestic burden of housework often in addition to working a job, may have less mental energy to find educational resources or even the time to learn. This is especially true when financial services use perplexingly complex language and require costly subscriptions.

Women worldwide also tend to have less experience with finance because of cultural reasons and historical circumstances. According to the International Labour Organization (ILO), there is a 25% gap globally between women and men in the workforce.

A Language Barrier

Around the world, over 7,000 languages are spoken across and within international borders. India alone has over 120 languages and dialects. A 2022 study has found that the language barrier limits financial inclusion in India for financial education and financial services.

Another study conducted in Mexico, Lebanon, Uruguay, Colombia and Turkey found individuals illiterate in their country’s official language obtain lower financial literacy scores. This finding is especially relevant for FinTech companies reaching out into the developing world, which has significantly lower basic literacy rates in adults than the global average. Illiteracy itself has significant negative impacts on an individual’s and a country’s financial health.

Implementation and Promotion of Financial Literacy

Financial education is a public good that must be as accessible, affordable, straightforward, and simple as possible. It needs to be designed to reach those who have been underserved by education systems and financial institutions. It must attempt as such to break through barriers like poverty, gender and age gaps, language divides and international borders in order to fulfill the project of financial inclusion.

Mobile technology

The increased use of smartphones around the globe is a wonderful thing for financial inclusion, yet this cannot be done without putting financial education at the forefront of this effort. Smartphone technology can be used to reach people of all walks of life, giving them access to the information they deserve at a low cost and from the comfort of their own home. This is especially important for those who live far from formal financial services, in a rural setting or in countries underserved by financial institutions.

Mobile technology also allows for different learning methods. Online or mobile app financial education programs should take advantage of the versatility of their interface to put out interactive learning material that would allow learners to practice their knowledge in a safe and controlled environment. This makes for a more substantial learning experience.

Language and Culture

As for language, financial education resources must be made available in different languages to reach as many people as possible, including those who struggle with illiteracy as they are more likely to be facing poverty and other hardships than literate individuals. Voice recognition technology can be used to that effect, as well as videos.

Research has shown learning and thinking about finances in a foreign language, because of the emotional distance it implies, can reduce language biases and reduce the framing effect according to a 2012 study.

Conversely, the same study also witnessed the reduction of loss aversion in students using English rather than their native language. They were more willing to gamble because they were less affected by the framing effect of loss aversion, which can lead to risky behaviour without the financial understanding necessary to make informed decisions.

Learning about finances in a foreign language like English as opposed to one’s native language can indeed have positive effects on one’s attitude and behaviour towards finances as a study conducted with Hong Kong students determined. The authors argue learning about finances in English also opens a world of resources available online to the student, whereas the availability of resources in other languages tends to be more conservative.

EZO

EZO aims to bridge the financial inclusion gap across the world. Financial fluency being the key to responsible financial inclusion and development, EZO will work with local actors to promote financial literacy and create accessible resources for easy access from anywhere in the world. Learning about investments, stocks, portfolios and more will never have been easier.

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