Financial literacy

ONLY ONE in four adult Filipinos is considered financially literate, or understands basic concepts such as interest rate, inflation, savings and debt. This fact highlights the difficult task of both the government and the private sector in expanding public access to financial services.

According to a survey done by international credit watchdog Standard & Poor’s Ratings Services, two-thirds of adults globally are financially illiterate, with only one in three, or 31 percent, showing an understanding of basic financial concepts. The survey findings are said to represent the world’s most comprehensive global measurement of financial literacy to date.

The S&P Global Financial Literacy Survey conducted last year found country financial literacy rates ranging from 13 percent to 71 percent among 143 economies, with Yemen, Albania and Afghanistan at the bottom and Denmark, Sweden and Norway sharing the top spot. The Philippines is ranked with, among others, Vietnam, Cambodia, Nepal, Bolivia, Turkey, India, Jordan, Honduras, Romania, Macedonia, Uzbekistan, El Salvador, Sierra Leone, Sudan, Iran, Kosovo, Nicaragua, Bangladesh, Haiti, Angola, Somalia, Afghanistan and Yemen in the bottom 30 in the survey. Among the Southeast Asian countries included in the survey, Singapore has the highest financial literacy rate at 59 percent, and Cambodia the lowest at 18 percent. Vietnam is the only other economy to score lower than the Philippines at 24 percent.

Younger Asians are more likely to be financially proficient than older ones, according to the survey. Globally, there is also a five-percentage-point gender gap: 35 percent of men and 30 percent of women are financially literate. Gender gaps are present in most countries, even in highly developed ones.

A respondent is judged financially literate if he or she can correctly answer three of four multiple-choice questions on financial concepts:

1) On risk diversification. “Suppose you have some money. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments?”

2) On inflation: “Suppose over the next 10 years the prices of the things you buy double. If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy today?”

3) On numeracy: “Suppose you need to borrow P100. Which is the lower amount to pay back: P105 or P100 plus 3 percent?”

4) On compound interest: “Suppose you put your money in the bank for 2 years and the bank agrees to add 15 percent per year to your account. Will the bank add more money to your account the second year than it did in the first year, or will it add the same amount of money both years?”

The correct answers are: 1) multiple businesses or investments; 2) the same as you can buy today; 3) P100 plus 3 percent; and 4) more money in the second year.

S&P observed that while the lineup of financial products available in Asia continued to grow rapidly, the survey results suggested that most consumers lacked a general understanding of credit, compound interest and other key concepts. An example is China, where credit card ownership is believed to have nearly doubled since 2011 yet less than half of the respondents could not correctly answer the survey question on interest.

Matthew Bosrock, executive managing director and head of Asia-Pacific for S&P’s Ratings Services, pointed out that understanding concepts like interest, inflation and the importance of savings is at the core of economic development: “A lack of basic financial understanding is one of the factors obstructing faster growth in Asia. This survey gives policymakers the tools to identify the gaps in education and also a chance to improve access to financial products.”

While the government should see to the financial wellbeing of the marginalized sectors, private employers should take responsibility for ensuring that their workers are saving enough for the future. They should put up programs to help ensure their employees’ financial wellness, including those that will help workers be more careful with money, build emergency funds, and cope with financial stress.

In the end, education is key—and not just in high school where many of the financial concepts are taught but not quite absorbed or learned, but in a continuing program until a person’s retirement. Otherwise, financial illiteracy could lead to high debt, loan defaults or, worse, bankruptcy.