This article seeks to answer the question- Why it is important for the banking public to be financially literate?
Financial literacy is one of the pillars of the National Financial Inclusive strategy, and it was found out that Zimbabwe has low levels of financial literacy, albeit high general literacy levels (92%) as per the World Bank Consumer Protection and Financial Literacy Review that was conducted in 2014. Of late monetary authorities have been working hard to try and enhance financial inclusion, and it has been found that financial inclusion efforts are being hampered by the fact that there are sections of the populace that are financially illiterate. It is of the realization that once a greater proportion of the economy is financially literate, this will enhance financial inclusion, since the populace will be able to make well informed decisions with regards to uptake of financial services which is step in the right direction towards poverty alleviation as well as economic growth and development.
Financial literacy is the possession of a set of skills and knowledge that allows an individual to make informed and effective decisions with all their financial resources. The benefits of financial literacy enables financial service consumers with the ability to acquire knowledge (ulwazi/ ruzivo), skills and mold behaviors to be able to identify and make informed decisions on financial opportunities so as to improve their wellbeing. The Zimbabwe National Financial Inclusion Journey Report 2016-2020 spells out that the Reserve Bank of Zimbabwe (RBZ) recognizes that financial literacy is a core life skill for participating in modern society. In a monetary policy statement in July 2015, all banking institutions were urged to implement tailored consumer education programs aimed at empowering customers of financial services, which we as banks are currently doing, although there may be need to upscale education programmes.
It is common practice that complex terminology or jargon is used in the different areas of specialization, and at times we often take things for granted and think that everybody understands what ever will be communicated. This section of the article seeks to unbundle what we think is common knowledge. Financial literacy comprises of several financial components and skills that are vital for the financial consumer to be able to effectively manage money and debt and these are:
1. Budgeting- Basically, there exist four main uses of money that determine a budget namely: - spending; saving; investing and giving away. Being able to create the right balance throughout the use of money results in individuals being able to better allocate their income, resulting in financial security and prosperity.
2. Investing- For one to be considered financially literate and able to make favorable investments, one must be able to learn the key components of investing which are interest rates, price levels, risk mitigation and diversification. Learning these investment components results in individuals being able to make smarter financial decisions that will result in an increase in the flow of income.
3. Taxation - Several forms of taxation exist and gaining knowledge of how they impact the net income of an individual is crucial for financial literacy. Each source of income is taxed differently, and that is whether it is investment income, salary, or enterprise profit.
4. Saving– Saving is one of the most crucial aspects of maintaining a healthy financial position. A few of the common goals in life that include but are not limited to travelling, having a family, and buying a property (house) requires one to save. However, one is only able to save provided one has the knowledge on what is offered in the financial market.
Understanding basic financial concepts allows people to know how to navigate in the financial system. People with appropriate financial literacy training make better financial decisions and manage money better than those without such training. An improvement in financial literacy will have a significant positive impact on consumers and their ability to provide for their future.
In modern times, achieving financial literacy is of paramount importance due to everyday facets of life such as loans, mortgages, investments as well as health insurance. Being financially literate is a skill that comes with an assortment of benefits that can enhance the standard of living for individuals through an increase in financial stability.
Author: Tillas Gopoza is an Economist. He writes in his capacity as the Chief Economist for the Bankers Association of Zimbabwe. He can be contacted at tillas@baz.org.zw