Can you educate people to do sensible things with their money? Or is good financial management, like common sense, probably something you are born with?
Prolific Biznews.com blogger Alexx Zarr reckons there’s more to equipping people with the skills to make smart personal financial decisions than putting together a financial education curriculum. Addressing basic literacy and numeracy levels should come first, is the message in this blog – one of the most popular on Biznews.com in 2013.
Not to be underestimated, reckons Alexx, is nurturing critical thinking skills. This entails critically analysing what we are doing with a view to changing and advancing the way we are doing things.
He notes that the quality of our lives depends on the quality of our thinking. “Inferior thinking is costly for our resources and our quality of life. Excellence in thought must be methodically cultivated,” says Alexx. He offers much food for thought here on how to fix serious flaws in the South African education system. – JC
South African financial education: how to fix it
By Alexx Zarr*
There is a generally held view that financial education leads firstly to improved levels of financial literacy, and this in turn results in smarter decisions regarding individuals’ personal finances and associated life-style choices.
There is also an inference that smarter personal decisions results in enhanced macro-economic conditions, such as improved financial stability, more effective resource use, higher savings rates, lower indebtedness levels, and better financial inclusion ratios to boot.
The problem of flawed financial decision-making is universal. The debates, policy formulations and practices of financial education programs are thus of global interest and concern. South Africa has been at the forefront of seeking to resolve the challenges of poor access to financial services, and the associated problem of low levels of financial literacy. Over the past few years, stakeholders ranging from financial services providers, community groups, government and its agencies, NGOs and researchers have all waded into these matters, offering a diversity of views and solutions.
However, it feels that progress has not been satisfying. I have purposefully used the terms ‘generally’ and ‘inference’ above, as there seems to be little empirical evidence that there is currently a causal relationship between financial education, financial literacy, and smarter personal financial behaviour.
I suggest that there is no apparent smoking gun. In fact, reality is that almost all of us tend to make terribly un-smart financial decisions, no matter our income or wealth profiles, formal education levels, or exposure to general financial education programs.
Hathway and Khatiwa (Hathaway, I. and Khatiwada, S. (2008) Do Financial Education Programs Work? Federal Reserve Bank of Cleveland. Working Paper 08-03. P 2) have conducted an extensive review of research in this field. They reckon that, “…the literature does not succeed in establishing the extent of the benefit provided by financial education programs, nor does it provide conclusive support that any benefit at all exists. The reason is not clear, but could only be one of three culprits: either (a) financial education simply does not work, (b) financial education does work but the programs are not effective at transferring knowledge (i.e. poorly designed programs), or (c) financial education does work and the programs are properly designed, but program evaluation techniques are not yet adequate in capturing these effects. We believe that option (a) is unlikely, and that some combination of (b) and (c) is more likely. Either way, it is clear that more extensive program evaluation and further research are much needed.”
So, with both a professional and lay interest in this field it was with great interest that I read Dave Woollam’s comments in this regard (former CFO of ABIL in an interview with Alec Hogg on 18 Nov 2013).
This is what Mr Woollam had to say.
Sadly, the economic and political history of our country is that mass literacy – firstly – is very low and with mass literacy being low, financial literacy is going to be even lower…There are two sides – and I’m not here to say the industry has to take all the responsibility. Consumers have to take a great deal more responsibility. .equip people with tools to take more responsibility, to be more careful when they’re considering the choices when using debt.
I believe Mr Woollam has a clear grasp of some of the difficulties, namely, that general literacy is a problem area, which exacerbates financial literacy levels, and that there is shared responsibility for resolving the impasse, amongst individuals, businesses and government.
My four take-outs, what I would like to leave with you, are the following:
£ The deficit in financial literacy and smart decision-making (as an outcome of financial education) is universal, but does seem to be worst in consumption-based societies). South Africa has its own peculiar history around education, but even the OECD countries struggle with the same issues;
£ Critical thinking should be the foundation of our general education system. The rationale for establishing critical thinking at the core of any learning is based on the nature of the ‘thinking-changed-behaviour’ problem. Yes, it is in our nature to think. However, much of our thinking, if left to itself tends to be biased, inaccurate, incomplete, and possibly prejudiced. Notwithstanding this, the quality of our life depends precisely on the quality of our thinking. Inferior thinking is costly for our resources and our quality of life. Excellence in thought must be methodically cultivated, it does not necessarily come naturally. It is not the volume or quality of information that is essential for smart decision-making, but the quality of thinking.
£ People need to be empowered to take care of their own lives – generally and specifically. This is responsiblisation. Individuals in their personal lives need to be accountable for making prudent decisions. Businesses supplying financial services have a responsibility to provide all relevant decision-making information in a digestible format. Government must ensure there are protective measures in place to redress legitimate complaints.
£ Financial education programs that can build on a base of critical thinking, and have clear measurable success factors, are likely to succeed.
Alexx lives in and works from Centurion. He has degrees in economics, politics and strategic studies. In the recent past he has been managing director of a mutual fund company, a pseudo banker managing wealth and transactional products and currently runs a specialist research and consulting entity. Before that he did a stint at National Treasury and at a Constitutional entity, managing its research division. He has travelled extensively, studied offshore and done a stint of work for the IMF. More than most things he loves to mountain bike, let his dogs walk him and write – just write.
