An increasing number of countries are developing national strategies for financial education and implementing programs to enhance people’s financial capability. At least 36 countries have already established or are in the process of designing a national strategy for financial education according to the OECD. Boosting people’s ability to take sound financial decisions has emerged as a new policy objective, both in developed and developing countries. The recent financial crisis has reinforced the view that being financially capable is important. However, let’s take a step back. What do we know about how capable people are in different countries across the world in managing their finances? Which knowledge and skills gaps exist that could be filled with financial capability enhancing programs? Which populations are the least financially knowledgeable and capable and would benefit the most from any interventions?
Imagine you need a car to commute long distances to your workplace or the closest supermarket, to visit your parents and to bring your child to school. Therefore, you want to spend the money you have been able to put aside on a large purchase: a new and reliable car. However, you do not know how to drive, nor how do you have even a basic understanding of any technical aspects of a car, not to mention any knowledge about how to maintain a car.
Also, imagine that everything you have heard so far about car dealers from your family, friends and neighbors is that they have a very bad attitude, do not act in your best interest and try to sell you overpriced vehicles with hidden fees and features you do not need. Given your lack of knowledge of how to choose and use a car and your lack of trust, would you still feel confident about approaching a car dealer? Most probably not.
This analogy also applies to one’s participation in financial markets. Especially in developing economies, where most globally unbanked people live. If you do not have knowledge of features and risks associated with financial products, do not know how to choose and use these products, lack any basic understanding of inflation, interest rates and compound interest, it is unlikely that you will participate in financial markets, or that you will benefit from them if you do. A lack of trust in financial service providers will do the same.