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FINANCIAL LITERACY AND POVERTY REDUCTION

Accelerating Poverty Reduction in Africa:

Poverty Reduction

Poverty reduction programs that have been implemented in many countries exhibited some changes, but poverty still remains a challenge to many developing countries. There is evidence showing that a lack of financial literacy in the population affected the realization of poverty 

reduction and welfare improvement programs, which suggested the need for integrating personal financial education into poverty reduction programs, such as microfinance and financial inclusion, entrepreneurship, income, and employment creation, and other similar programs aimed at welfare enhancement.  Building financial literacy and the capability of citizens to improve personal financial management, which in turn, will be manifested through better financial behavior and financial outcomes.

Personal financial management capability enables people to save for income and consumption smoothing in developing countries where people face various risks, including but not limited to price volatility of agricultural products, illness, death of breadwinners, loss of jobs, and retirement, posing significant income shocks for many. 

Financial Management Capability

Poverty and Education in East Africa

Poverty and Education in East Africa

Financial literacy and its outcome on personal saving behavior also contribute to the availability of investment funds at household and national levels. The effect of financial literacy on enhanced saving and investment is significant. 

In line with this, credit markets in developing countries force many to rely heavily on accumulating personal savings to finance investments. However, behavioral phenomena, such as self-control problems or limited aspirations may lead to suboptimal savings and underinvestment relative to desired levels. 

Empirical studies on behavioral finance, economics, and psychology are suggesting that well-designed financial education programs do not only impart financial literacy, but also contribute to improving financial behavior, such as enhancing self-control, preventing impulse purchasing and over-borrowing on one hand, and improving financial planning and budgeting capability and saving habits.

Poverty Reduction Programs

Financial literacy is key to poverty reduction

Financial literacy is key to poverty reduction

Financial literacy improves understanding of investment options which could reduce risk and optimize earnings from the meager financial resources of the poor in developing countries. Enhanced money and finance management capability also contribute to wealth accumulation and a decrease in over-indebtedness resulting from the informed use of selected beneficial financial services, and consumer finance schemes emerging in most developing countries. 

Financial literacy education incorporated in poverty reduction programs ―seeks to strengthen and change behaviors that lead to increased incomes, better management and protection of scarce assets, and effective use of financial services. 

Financial literacy does not only help to achieve a financial goal but also helps to improve programs in health, education, and other social developments. Thus, building basic and applied financial literacy of citizens can leverage poverty reduction programs and ensure sustainable socio-economic growth. 

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