By Moin Qazi
Financial services are analogous to safe water, basic healthcare and primary education— these are essential to enable people to participate in the benefits of modern market-based economy. Ideal financial societies are those which provide safe and convenient ways that enable people to navigate their daily financial lives. The poor need to set aside money in times of plenty and draw it in lean times. In addition, they should be able to borrow, make and receive payments, and manage risk.
Without a safe place to save money, it’s difficult to cope with the unexpected or to plan for the future such as the unprecedented pandemic. Without access to affordable credit, it is difficult to acquire an asset or set up a business. Without insurance, all your security can be wiped out by one misfortune.
When the Pradhan Mantri Jan Dhan Yojana (PMJDY) was announced in August 2014, it could not be anticipated how successful a scheme it could be in respect of financial inclusion of the masses. The Jan Dhan account-holders are to be brought under a social security cover, with the two schemes; an auto-debit of ¹ 330 and ¹ 12 annually gives separate life and accidental coverage of ¹ 2,00,000 for those in the age group of 18 to 50 years and 18 to 70 years, respectively.
While we are nearing universal financial access, we still have to go a long way in achieving greater usage of these accounts. That is the real challenge of financial inclusion. In order for people to be able to use financial services, account holders need to be literate enough to understand the basics of these monetary affairs. Merely opening physical accounts as flag posts of financial identity won’t help unless they are actively used by people for managing their money.
To make this possible people have to be imparted an ability to understand and execute matters of personal finance, including basic numeracy and literacy, budgeting, investing, and risk diversification. This skill is known as financial literacy. It is a combination of financial awareness, knowledge, skills, attitude and behaviours necessary to make sound financial decisions and ultimately achieve financial well-being.
In simple terms, it refers to a set of skills that allow people to manage their money wisely along with some understanding of essential financial concepts, not the least of which is an appreciation of the trade-off between risk and return. It is the single biggest skill that can ensure economic well-being and freedom.
People with robust financial skills and a strong grasp of financial principles are able to better understand and negotiate the financial landscape and avoid possible traps. Conversely, people with a lower degree of financial literacy struggle to understand money matters and their potential impact on financial well-being. Financial ignorance carries significant costs and results in people spending more on transaction fees, getting overextended with debts since they are ripe prospects for predatory practices. They usually fall prey to aggressive marketing and end up with troublesome financial products.
In the past few years financial literacy has gained great momentum because it is seen as an assured path to universal financial inclusion. However, the financial environment is now populated by a huge range of complex and nuanced products. In such a situation, literate and working populations tend to feel overwhelmed by the range of options and the arcane financial and digital vocabulary in which these options are couched. To keep abreast, even those who are financially literate need to brush up on the latest.
We need to develop a full suite of financial literacy interventions so that more youth and women develop the confidence and skills to manage their own finances. On account of financial illiteracy, they get saddled with risky levels of debt.
Financial inclusion and financial literacy are two sides of the equation. Financial inclusion works on the supply side by providing financial market/services that people demand whereas financial literacy stimulates the demand side by making people aware of what they need. Therefore, financial inclusion and financial education must move in concert; each trigger supportive reaction in the other.
People believe that the triad of financial inclusion, financial literacy and financial stability will be extremely relevant in the coming times because our financial lives are going to become complex. The depth and breadth of financial systems determine the financial stability of any society.
Everybody is happy while getting a loan. The problem begins when you have to repay the loan. It should be dinned into borrowers’ minds again and again that excessive borrowing (taking multiple loans) and sub-lending or ghost lending (allowing the use of your identity for a loan that someone else uses) can be extremely toxic for financial lives – for communities at all levels of income.
Financial literacy has now acquired nuance with the onset of digital financial services (DFS), considered the most powerful tools for financial inclusion. Offering basic financial services through mobile phones, point-of-sale devices, and networks of small-scale agents, DFS have the potential to reach more people, at a lower cost, with greater convenience than traditional “brick and mortar” banking services.
However, millions of people cannot read, write, or understand the long number strings necessary to transact on mobile phones. We need to aggressively train the end-users on the nuances of digital finance that will empower them to adopt technology with ease. Women are eager to learn how to use digital payments because it gives them greater privacy and financial control – something they value a great deal.
At a time when individuals are increasingly being called upon to make complex financial decisions, a large fraction of households have only a rudimentary understanding of basic concepts. Moreover, participation in financial markets is far from universal, and individuals with low levels of education and financial literacy are the least likely to participate in these markets. These correlations have motivated policy makers to devote substantial resources to financial literacy education. Functional proficiency in core money skills and their subtle nuances is crucial if they are to successfully manage their future money needs. The complex nature of our financial lives has given rise to a new concept – financial capability.
There is still lot of illiteracy on issues relating to loan defaults and how they can be handled. A deferment of repayment of loan instalment, which borrowers and their representatives usually clamour for in such events, doesn’t give any real benefit to the borrower; it is not even a palliative. A loan holiday or deferment is actually just a postponement of a liability on which the borrower will continue to incur cost by way of the accruing interest, thus actually increasing his financial burden.
Here is a strong need for collaboration and convergence between those working towards financial literacy. A particular weakness has been the absence of a strong conduit for transfer of knowledge and practice between institutions and geographies having successful experiences. This can lead to cross learning and cross-pollination and sharing of best practices unique experiences and breakthroughs, and both successes. Policy makers will do well to act in interest of the people. — INFA