Financial literacy in an economy is defined as the citizens’ ability to make rational judgments and decisions with respect to the use and management of their financial assets, commonly money. It involves both the understanding of basic financial concepts and the ability and discipline to use that information to make informative personal decisions including; when to spend, when to save, budget preparation and implementation, choosing the right financial products, among others.
It goes an extra mile to determine one’s ability to exercise proper judgement when offered access to credit. Financial literacy has a great bearing on the level of financial inclusion in the economy. According to highlights of FinAccess Household Survey conducted by the Central Bank of Kenya, Kenya National Bureau of Statistics and Financial Sector Deepening in the Economic Survey 2016, Kenya has made significant progress in fostering financial inclusion over the past decade.
Kenya’s progress in formal financial inclusion has made her a leader in Africa behind South Africa way above her EAC counterparts. Most economies in the African continent are suffering from financial illiteracy, a situation that has significantly dimmed their growth potential, development agenda and poverty alleviation efforts. At independence, Kenya’s main challenges were; poverty, disease and ignorance. Of the three, ignorance has been regarded as an opponent of economic empowerment and a tool that disarms all efforts meant to outfox poverty. Financial literacy is linked to economic and social development agenda. It plays a key role in fighting poverty. The FinAccess survey for instance is done to measure and provide better understanding of the financial inclusion landscape in Kenya and monitor progress overtime. Financial literacy has a major role to play in fostering financial inclusion in our economy.
Financial literacy helps individuals within the economy to fulfill their personal, family, social and other responsibilities including those due to the government such as payment of taxes. Currently, the source of financial literacy is the financial education that we acquire from formal institutions of learning. Empirical studies on financial literacy show that consumers in most African countries do not have adequate financial knowledge, skills and understanding to make informed decisions.
It further establishes that there is a strong link between financial literacy of a nation and its economic growth and development. Nations with high financial literacy levels tend to record high growth rates and minimal poverty levels too. What this means is that financial illiteracy is a huge burden to a nation. The situation is prevalent in Least Developed Countries (LDCs) and developing countries in Africa. As a result, financial illiteracy remains a major drawback for economic growth, development and poverty alleviation efforts.
According to a policy brief by the Organization for Economic Co-operation and Development (OECD), it dissuades the initial overemphasis on financial education for investors and instead underscores the need for individuals and families to embrace financial literacy for prudent financial management. Financial literacy has become essential for the average family trying to decide how to balance its budget; buy a home, fund the children’s education and plan for their retirement. There is a strong case for financial literacy in developing countries even though this is a global problem; African economies have adversely been affected due to the extent of the damage caused by poverty’s vicious cycle.
World Bank in its study titled, “The Case for Financial Literacy in Developing Countries”, states that financial literacy helps to prepare consumers for tough financial times by promoting strategies that mitigate risks such as accumulating savings, diversifying assets and purchasing insurance. It further states that financial literacy plays an important role in promoting access to finance by creating incentives and environments that promote desired financial behaviours such as saving, budgeting and prudent utilization of credit facilities. It also provides security to the individuals and the nation, which is an integral part of a country’s economic progress.
To remedy on the adverse effects of financial illiteracy in the economy, there is need to incorporate financial education about money and how it works in our basic education system. This is the only way we will inculcate progressive financial values in the young generation who constitute over 70 percent of our population.
