State of Financial Literacy in South Africa

The impact of the lack of financial education amongst consumers: a South African perspective

State of Financial Literacy in South Africa

The concept of financial literacy is the ability to make an informed judgment and make effective decisions regarding the utilization of and management of cash. It also involves understanding and gaining of the power of compounding, the difference between stocks and bonds and the involvement of a saving plan and superannuation fund involved. Studies show that financial literacy is irrelevant to many people since they do not have any money to save or invest, so they do not regard financial literacy as a priority in their day-to-day life. Financial literacy aims at molding confident managers of his or her affairs and critical thinkers about the impact of financial knowledge in a person’s life (lamdin, 2012, pg. 38). Lack of financial literacy in South Africa affects the lives of the people in all negative ways since people do not regard or consider financial knowledge as an important factor. Assessment of levels of financial literacy Based on US and European research, the professional view reveals that financial literacy is extremely low across their population, with a quite a number of both adults and young adults lacking the understanding and basic knowledge of crucial financial concepts. The research studies shows that a consumer`s knowledge of financial matters is directly proportional to his or her level of education, level of income, class, and ethnicity. People’s background, their level financial resources, and the challenges and opportunities in life also determine their financial knowledge (lamdin, 2012, pg. 49).

Employees, older people women, young people, and persons with a disability all require help when it comes to financial literacy according to research by the US treasury. The research also indicates that women are the excluded group when it comes to financial literacy education. Knowledge, attitude, and behaviors of South African consumers Information about the knowledge, attitude and behaviors of the South African consumers in relation to financial literacy are fragmentary. Data obtained from studies on consumer knowledge of investing, saving, loans and superannuation show that their knowledge regarding to financial matters is fragmentary. In addition, consumer attitudes to banking, share market investment, investment strategies, and women’s superannuation. There is also data on consumer behavior in savings, budgeting and personal insurance, community banking, and e banking. Professional view on the South African financial consumer knowledge indicates that there is limited and scanty information on people’s awareness when it comes to financial literacy. The research also indicates that people are quite knowledgeable when it comes to financial matters that affect their daily lives and their existing financial situations or possibilities. South Africans are aware of cash, fixed interest, property, the performance of banks, and the importance of investing in their own home, credit card loans, personal loans and their mortgage (Xiao, 2008, pg. 20). On the contrary, these people have less knowledge on investments, and superannuation. These areas according to the studies are complex, difficult to understand, and often lead to serious disagreements concerning the most effective investment strategies for people to follow. Who has the most valuable knowledge for consumers? There is a debate on who knows the best concerning the needs of the consumers. Groups involved in the debate involve financial professionals involved in the finance sector, regulatory and government agencies, ordinary people, and consumers and organizations, which represents their views (Rubin, 2007, pg. 199).

These organizations include non-government organizations, associations, and the society based organizations. One way of conceptualizing this is to consider what is required for a person to be an “educated” consumer and a provider to be a “socially responsible” provider. On the contrary, it maybe a consumer who has acquired all the knowledge and skills transferred from “experts” in the field, which in this context would be drawn from among financial services providers, financial planners and advisers. Another view would recognize lay knowledge -the knowledge a person has acquired from their own life experiences – and accept that a person can effectively negotiate and develop their own understanding, knowledge and skills from what is conveyable to them by experts. Social scientist and technology experts argue that social studies in science and technology can contribute to further understanding on the ways expert and lay knowledge ought to be negotiated to speed up the both educated and socially responsible financial services providers. This literature collection is useful since it aids in the clear understanding of the following areas, importance of recognizing fundamental knowledge and learning. The other area is cultures of the institution and experts, and perceptions of these by the lay public shape their trust of and dependence on expert knowledge (Serah, 2008, pg. 400).

Attributes of consumers and financial providers

The US research findings points out the following considerations for conceptualization of the educated consumer of financial services and their counterparts, the socially responsible financial providers. These two groups have linkage, and awareness on the consumer part and the social responsibility of the provider goes hand in hand. These include understanding the modes of structural modifications and their effects on distribution of risks and political education about the dynamics of the risks production in the financial market. The educated financial services consumer posses the following attribute while the illiterate posses the direct opposite of these attributes.

An awareness that financial decisions are about risk taking,

An awareness of their “normal” risk behavior and what are tolerable risks for them,

Confidence to seek advice from trusted financial advisers and to question the value of their advice in relation to their own knowledge,

Appreciation of the range of choices those are available to them and the level of control they have over them.

Ability and strategies to advocate their rights to be involved in making decisions about issues affecting their own lives or their community,

Awareness of groups and organizations that can advocate on their behalf and mediate conflicts between them and the financial institutions and/or the government bodies concerned with financial matters.

The socially responsible financial providers according to the US research would have the following attributes and the social irresponsible have the direct opposite of these attributes:

Appreciation of the value of taking community or client concerns and their normal practices into account when proposing solutions,

Skills in eliciting community or client requirements before formulating advice or solutions to their financial problems,

Effectively consulting the range of stakeholders involved in their provision of financial services and involving them in ongoing consultations,

Monitoring and reporting on the effectiveness of proposals that are implemented, and

Transparency and openness in decision-making in all financial transactions they make.

Evidence of financial literacy in South Africa

Despite the overwhelming economic levels, South Africa has recorded the low levels of financial literacy. Research studies by the US based agency, the National Council of Economic Education (NCEE) on survey among high school students and adults indicated that adults in South Africa have deeper financial knowledge as compared to the high school students. The United States of America recorded similar results in a different research study. Lack of consumer financial literacy in South America is also evident from the study by Bernhein, who in his research confirmed that South Africans lack the basic consumer knowledge. The survey involved true/false questions administered to 1000 persons between the ages of 19 years to 97 years. These questions examined financial and economic knowledge. The survey consisted of the 20-item questionnaire on financial and economic questions such as money, interest rates, and inflation, and personal finance. It also involved personal consumer evaluation questions on his or her understanding of finance issues at a personal level. That the study found that respondents answer only two-thirds of the questions correctly hence confirming low literacy levels. Smaller samples among specific groups of the population recorded similar results.

Research findings by Jump$tart coalition for Personal Financial Literacy and consumer Sensitization shows that most American and south African youths have low consumer financial knowledge. These students performance on credit and is poor. Both the students and adults do not have a good understanding of the terms and conditions of consumer loans and mortgages. This leads to poor and uninformed choices when it comes to financial decisions. Most employees interviewed showed that were not able to identify key factors of their company retirement programs, which included early/normal retirement ages and the level of their benefits would rise if they retired at later stage of employment. Lack of consumer knowledge leads to poor financial decisions among many people hence financial sensitizing is a vital factor in everyone’s life. This calls for free financial programs by the government and other concerned organizations since financial factors affect the economy of the country. Proper financial knowledge and decisions add up to stable economic standards and growth of not only the country but also to the individuals. The questions used to measure financial literacy include the following:

•Given your savings accounts has $50 and the interest rate is 1% annually. After ten years, what is the total sum the person will have in the account? Will it be below or above $100?

•Assume that the interests rate on the savings account is 2% annually and 1% inflation occurred per Annum. After two, years would be able to buy with more, less, or the same with the cash a person own currently?

•What is your take on the following statement is it correct or false? `Buying a particular company stock normally gives a secure return as compared to a stock mutual fund.

Table 1: Financial literacy among early parents

Type of QuestionCorrect %Incorrect % Unknown %

Calculation80.5 15 4.5

Lottery division60 34 7

Compound interest17 79 4

The above table shows how old parents answered the administered questions. The tabled results are in percentage form. The answers are self-explanatory and are easy to interpret.

Poor financial literacy is not only common in South Africa financial literacy report by the Organization for Economic and Co-operative and Development discovered poor financial literacy in many countries. Most of the countries in the final research documents were developing countries from Africa and South America. Similar research findings by the Survey of Health, Aging and Retirement in Europe (SHARE) indicated poor performance by the respondents in terms of financial literacy in specific areas. These areas include the following financial numeracy and literacy scales. The financial literacy levels among different social group/s.

Financial illiteracy is widespread and concentrated among certain demographic groups. Research shows that financial literacy declines with a decrease in the age of an individual. The more a person grows the less informed he, or she becomes financially. These findings result from the poor habit where consumers wait until late in their lifecycle to make financial decisions. Old women are the illiterate group when it comes to finance and financial decisions. The table below shows financial literacy between the male and the female gender. (Oecd, 2005, pg. 311).

The table summary shows that men are more financially literate as compared to women. Table 2

Financial Literacy among Early Parents in Terms of Gender

Question type Correct % Incorrect % Unknown %

Femalemalefemale male female male

Interest rate 61752518 11 7

Inflation 70831512 13 5

Risk diversification 47601215 39 25

Financial literacy among consumers also varies depending on the education level of the study groups. Consumers with higher education level are more enlightened when it comes to financial matters than those with low education level. Different ethnic groups also show different consumer knowledge when it comes to financial matters. Whites record greater level of financial literacy as compared to blacks and black-Americans. The whites are likely to give correct responses to the financial questions than the blacks. This leads to the assumption that the white consumers in South Africa are more financially enlightened as compared to the native South Africans. There is a positive correlation between financial literacy and gender, race, and education even among the younger generation. Economics and school exposure are also having a correlation to consumer financial literacy. Those who studied economics during their high school, college, or university are more likely to display a high level of consumer financial literacy in their later lives than those who never majored in the same. Those exposed to financial duties at work place also recorded a high number of consumer financial literacy than those in other departments. The research findings also reveal that people have a negative attitude towards financial trainings at work place since a few numbers of employees attend financial trainings at work (Porteous & Hazelhurst, 2004, PG. 435).

Financial Literacy and behavior

Research studies indicate that financial literacy has a positive relation to self-beneficial financial behavior. Research findings by Hogarth and Beverly in their 2003 financial report named behavioral patterns in terms of finance plans gave the results discussed below; they added financial and behavioral questions to the nationwide consumer financial survey and recorded certain results. These results depended on four variables, cash-flow management, credit-management, savings and investment behavioral patterns. Comparisons from the results of this research study indicated that those with more financial knowledge had higher scores as compared to those with low consumer financial knowledge. In South Africa, the approximate number of those with a high level of consumer financial knowledge is low. The level of consumer knowledge in South Africa is relatively low with approximately below 30% of the total population having a considerable financial literacy level (Mitchell & lusardi, 2011, pg. 299).

Importance of consumer financial literacy

The demonstrated low levels of financial are troubling since the success of an individual depends on his or her financial consumer decisions. Despite low consumer financial knowledge, South Africa still has one of the best economies in Africa. This shows that financial developments of a nation depend on the national budget of the country rather the consumer financial knowledge and decisions. Financial literacy questions assist in research aid, in the research surveys, since it helps in assessing the influences of financial literacy in the decision-making process. Financial literacy is not a simple process to the low educated, race, or sex. The result from the previous studies as shown in this research work shows that women, minors, and those with low education level are less literate when it comes to financial matters. Further research studies shows that financial literacy plays a vital role in accounting and is a fundamental determinant in planning. Retirement plans plan is crucial when it comes to wealth accumulation with those who embrace the plan recording the quantity of wealth than those who do not embrace the same. Not all people agree with the idea of financial literacy some might argue that reverse casualty is an issue hence suggesting that financial planning enhances consumer financial knowledge (Birkenmaier et al, 2013, pg. 501).

This shows that financial literacy is indigenous hence; individuals who plan to invest in a retirement plan have to seek further financial knowledge. Financial plans requires more than the basic knowledge one may poses since financial plans such as retirement plans requires a deeper understanding of financial planning knowledge. Further studies show that the positive association between financial knowledge and household financial decisions making. For examples, individuals who cannot correctly calculate the rate of interests in a given payment channel ended up with more borrowings and less wealth accumulation than who had knowledge on how to make the calculations. Those with low financial knowledge are unlikely to invest in the stock market and investment plans. This means that only consumers with deeper knowledge in financial matters invest in the stock market and investment plan packages. Those who undermine the strength of compound interests accumulation have a problem with debt matters since they are unlikely to agree with the interest rates and the calculation matters. The research findings also indicated that the young and the aged are likely to commit financial errors and mistakes as compared to the middle-aged persons (Lucy et al, 2012, pg. 89).

These two subgroups also recorded the lowest levels of financial behavior and informed ability. Financial knowledge and financial behavior show linkage in a number of ways. A number of investors always ignore paying their mortgages during falling interest rate periods. This results from poor financial literacy since those who boycotted the payments were individuals with less financial knowledge. The same investors have less knowledge on the terms and conditions of their mortgages and investment plan. Borrowers who took high cost mortgages also displayed limited knowledge on financial matters. From the literature review, lack of consumer knowledge affects the consumers more than it affects the economy of the country. South Africa has relatively low level of consumer knowledge, but its economy level is still one of the best in Africa. Lack of consumer financial knowledge affects how a person makes vital financial decisions in negative ways. From the studies, it is evident that this low level of financial knowledge recorded poor decisions in terms of financial plans and investment. This affects their lives more than it affects the economy of their respective countries (Durkin et al, 2002, pg. 402).

Those who possess a greater knowledge on financial matters recorded wise decisions when it came to making financial decisions. Financial knowledge also relied on other factors such as age, race, gender, and educational level. Men recorded a significant level of financial knowledge as compared to women. Older women recorded the poorest level of consumer financial knowledge. Youths and older people also had minimal financial knowledge as compared to the middle-aged who recorded a significant level of consumer financial knowledge. Financial knowledge comparisons between the whites and the black- Americans revealed that the white race is more enlightened when it comes to consumer financial matters than their black counterparts. Education level was another significant tool when it came to financial matters. Individuals who pursued financial studies in high school, college, and the university had greater financial knowledge in comparison to the ones who did not undertake the same courses. Exposure to financial duties at work also determines a person’s financial knowledge and decisions, since he or she has the required knowledge for making financial decisions.

References

LAMDIN, D. J. (2012). Consumer knowledge and financial decisions lifespan perspectives. New York, NY, Springer Science+Business Media, LLC. http://dx.doi.org/10.1007/978-1-4614-0475-0.

XIAO, J. J. (2008). Handbook of consumer finance research. New York, Springer.

RUBIN, J. S. (2007). Financing low-income communities: models, obstacles, and future directions. New York, Russell Sage Foundation.

SERAH J.E (2008). Improving financial education and awareness on insurance and private pensions. Paris, OECD.

OECD. (2005). Improving financial literacy analysis of issues and policies. Paris, OECD

MITCHELL, O. S., & LUSARDI, A. (2011). Financial literacy: implications for retirement security and the financial marketplace. Oxford, Oxford University Press.

BIRKENMAIER, J., CURLEY, J., & SHERRADEN, M. S. (2013). Financial capability and asset development: research, education, policy, and practice. New York, Oxford University Press.

LUCEY, T. A., & LANEY, J. D. (2012). Reframing financial literacy: exploring the value of social currency. Charlotte, N.C., Information Age Pub.

DURKIN, T. A., & STATEN, M. E. (2002). The impact of public policy on consumer credit. Boston [u.a.], Kluwer Acad. Publ.

PORTEOUS, D., & HAZELHURST, E. (2004). Banking on change: democratising finance in South Africa 1994-2004. Cape Town, Double Storey.

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