Financial literacy challenges around the world

Marco Trombetta. Vice Dean for Research. IE Business School

7 January 2016

Many countries around the world still have a long way to go where financial literacy is concerned. A recent survey has revealed that even in developed economies like that of Spain, half the population does not have a basic understanding of financial matters.

“How much does the interest on your mortgage cost you?” Around half the mortgage holders in Italy and Japan don’t know. 

This is one of the findings of the S&P Global Financial Literacy Survey of financial education worldwide, the results of which were published recently. The report is the result of a joint effort by McGrawHill Financial, Gallup Inc., and the World Bank Development Research Group, under the academic supervision of the Global Financial Literacy Excellence Center of George Washington University, headed by Annamaria Lusardi. 

This global study was the first to use methodology developed by Annamaria Lusardi and Olivia Mitchell, of Wharton School, to gauge the level of financial knowledge among the general population. The authors of the report asked 4 questions about the diversification of risk, inflation, basic calculus and composite interest, to over 150,000 persons in 140 countries. The level of financial literacy of an adult was considered to be “adequate” if they answered at least 3 out of the 4 questions correctly.

The report states that two thirds of the world’s population do not have sufficient knowledge of financial matters to be able to handle themselves in the world of financial products. In terms of gender there is a significant difference of five percentage points between men and women in men’s favor. This difference could be due to the fact that women tend to be more “prudent” when it comes to answering and therefore have a greater number of “don’t knows/no answers” among their replies.

It was the first time that emerging and developing countries have been included in the report.  And we see that, as expected, the level of financial education in these countries is lower than in developed nations. Surprisingly, in countries with low levels of income per capita, there is no direct relation between income per-capita and financial literacy. In other words, in the early phases of economic development, levels of financial literacy do not automatically increase in lockstep with economic well-being. It is necessary to implement specific policies directly in order to solve the problem if the aim is to increase levels of financial inclusion among the population, along with all the associated benefits. 

According to the study, individuals that have a bank account know significantly more about finance than those who don’t. There can be two reasons for this. First, it tells us that it is very difficult to attain include peoply who do not have a basic knowledge of finance in mainstream (and regulated) finance systems. A lack of financial education feeds the fear of going to a bank and perpetuates the use of unofficial financial contracts with families or with traditional, non-regulated loan agencies. It also reveals that a formal relation with the financial system helps raise levels of financial literacy. 

The report serves to confirm the fact that the level of financial education is higher in the more developed countries. The percentage of people in the European Union that answered at least 3 questions right stood at 52%. The world “champions” in terms of financial literacy are Australia, Canada, Denmark, Finland, Germany, Israel, the Netherlands, Norway, Sweden, and the UK. In each of these countries, around 65% of the population has adequate knowledge of financial matters. 

Spain is below the average of the EU given that only 49% of those interviewed answered at least 3 questions correctly. These results are in line with those of a recent study on financial literacy and entrepreneurship in Spain undertaken by IE University in collaboration with FUNCAS. In Spain the level of basic financial education among the self-employed is similar to that of salaried workers. The report states that worldwide it is more common to find a basic knowledge of finance among salaried workers than the self-employed. The lack of financial education among entrepreneurs could have major consequences for the survival and success of their projects, which form a large part of Spain’s business fabric. Many plans have been drawn up in an effort to promote entrepreneurship. The medium and long-term efficacy of these policies depends on the implementation of financial literacy programs for entrepreneurs, focused on equipping them with at least a basic knowledge of the field. 

Generally speaking, the results of this worldwide survey and the results of the survey of Spain’s self-employed workers, and the results of the recent PISA report, demonstrate that the level of financial knowledge in Spain is insufficient, and that there is a need to foster training initiatives in order to attain the same levels as the world’s leading countries.

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