FINANCIAL LITERACY IN DEVELOPING COUNTRIES
A multitude of policies and programs have been implemented with the hope of reducing daunting poverty in Africa. Financial literacy education plays a major role in poverty reduction and sustainable economic growth by enhancing outcomes of poverty re-education and welfare improvement programs.
Initiatives such as employment and income creation, entrepreneurship and small business development, and food security will succeed because financially literate individuals will better manage their personal finance.
Skills to Manage Financial Resources
This will result in improved money management and financial planning; improved saving and debt management, financial security, and sustainability.
The overall effect of enhanced individual financial literacy on the economy and society at large will also be realized.
Good financial literacy in the population will positively impact financial inclusion, which is a widely accepted poverty reduction strategy aimed at improving access to and usage of formal financial products: saving accounts, credit, money transfers, and insurance by those in a vicious circle of poverty partly because of low access to financial products.
Empirical evidence on financial inclusion has identified various factors affecting financial inclusion in developing and low-income countries. These include transaction costs, lack of trust and regulatory barriers, information and knowledge gaps, social constraints, and behavioral biases.
Well-designed and targeted financial education programs can help in overcoming these barriers to accessing formal financial services.
From the demand side, financial education improves clients’ financial knowledge, skill, and confidence in seeking and using financial information.
And this can address demand-side problems, such as lack of trust, information and knowledge gap, social constraints, and behavioral biases.
Similarly, financial literacy can help in overcoming supply-side problems. For instance, with respect to regulatory barriers, where clients with financial knowledge strengthen financial regulation by reducing information asymmetry between clients and service providers.
Moreover, financially literate clients are able to make a conscious choice of financial products to compel efficiency and effectiveness in financial service providers.
Optimal personal financial decisions on saving, borrowing, investment, and daily use of money also contribute to macroeconomic soundness by improving gross national saving cum investment. Financial literacy also reduces credit market imperfection, which is a typical challenge in most African countries.
Financial literacy becomes increasingly important for the economic well-being of the nation’s future. Financial literacy contributes to growth and inclusion where better-informed consumers make more effective choices and more appropriate decisions whereas financially illiterate individuals either voluntarily do financial exclusion or will get the financial information from unreliable sources, the result of which may result in the misallocation of wealth leading to social decline and increased public expenditure.
Developing Countries’ Economy
Building the financial literacy of citizens thus needs to be considered an important element of poverty reduction, welfare improvement, and financial sector-building strategies in developing countries.
Despite the fact that financial literacy has potential significance for the individual, financial sector development, and stability of the economy of developing countries, the reported level of literacy, so far, is low, but financial education policies and strategies implemented as well as the effect are not well known albeit a high demand to personal finance education exists in most countries.
The need for financial literacy improvement in developing countries in general and Africa, in particular, is to empower people to better use the meager financial resources at their disposal in order to enhance financial security both in the short and long term, on one hand, and contribute to the development of the stable and inclusive financial sector by demanding and wisely selecting welfare improving financial products and services.
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