Financial literacy around the world

Why is financial literacy so important?

On average, financial literacy can be defined as a set of knowledge and skills in the financial industry, which implies effective use of money in personal life. In moments of economic turbulence, financial literacy allows citizens not to lose personal money, and to take advantage from any economic situation.

Financial literacy of the population improves the efficiency of financial market instruments, which are becoming more complex every year. With a developed ability to compare and evaluate the risks and returns of various financial products, financially literate consumers promote competition. Thus, the possibility of establishing a monopoly on financial products is reduced.

At the microeconomic level, low financial literacy leads to: 

• an increase in the number of financial fraudulent activities;
• an increase in excess overdue debt on bank loans and microloans among the population;
• uncontrolled growth in spending and consumption;
• inefficient distribution of personal funds available to the population.

At the macro level, poor financial literacy contributes to:

• economic stagnation;
• distrust in all financial institutions and in the related state policy for their regulation;
• excessive burdens on the budgets of all levels;
• slowdown in the growth of the economy as a whole.

The level of financial literacy in different countries of the world

Let's look at the situation with financial literacy in the countries of the world, based on the research of the OECD and the World Bank.

Financial literacy score is calculated by the OECD based on three indicators: financial knowledge, financial relationships and financial behavior. Most notably, it correlates well with important indicators of financial inclusion tracked by the World Bank, as well as the level of national GDP.

National differences in understanding and emphasis

Realizing the importance of financial literacy, all countries strive to promote its idea among the population. Now it is really a global trend. Various webinars, competitions, lessons in schools, seminars in universities are held, scientific articles, books are published, government documents and other thematic materials appear. At the same time, there are some significant national differences in approaches to the understanding and methodology for introducing financial literacy to the masses. 

Let’s take a look at the examples of some countries from the OECD group.

Hong Kong. Financial literacy in Hong Kong is considered one of the highest in the world. The IFEC (Investor and Financial Education Council) is responsible for introducing financial literacy into the population. One of the main financial literacy-boosting procedures is the Hong Kong Monetary Month (HKMM), which helps raise public awareness of the benefits of financial education. There are also various championships and financial literacy seminars among the youth.

According to IFEC, Financial literacy here refers to financial education as “a process aimed at increasing the level of financial literacy of the population. By improving their financial literacy, people can better manage their money, and thus financial education helps improve their financial well-being.” Thanks to the active support of the state, Hong Kong can rightfully be considered one of the most financially literate countries in the world.

Germany. In Germany, financial literacy is often referred to as general financial education or competence. The government pays much attention to the school curriculum, which should contain financial literacy lessons.

Examples include Sparkassen SchulService from the German Savings Bank and the Jugend und Finanzen platform from Volksbanken/Raiffeisenbanken. For a more out-of-the-box approach, teachers can rely on independent education providers such as Wertvoll macht Schule or Finanztip Schule, which launched pilot projects in 2018 and 2019 to promote financial literacy in 170 classrooms across Germany.

Financial literacy here refers to “the skills and knowledge necessary to make informed decisions about financial resources and processes, including investment, lending/borrowing, and saving”.

Malaysia. Most Asians have been brought up in a “money taboo” culture, which means that matters relating to money and finances are never discussed. Now this is a rather sensitive topic for most Malaysians, being the reason for the low level of financial literacy.

To address these challenges, in 2019 the Bank of Malaysia developed a dedicated national strategy to increase the financial literacy, which identifies five priority areas: instilling values ​​in young people (under 18); expanding access to financial management information, tools and resources; instilling positive behavior among target groups; stimulation of long-term financial and pension planning; and the creation and preservation of wealth.

Financial literacy here refers to “a measure of how well a person can understand and use information related to personal finance.”

The general trend towards increasing financial literacy among the population is confirmed in all countries. The importance of this direction is underlined by the fact that more and more often, financial literacy is not just incorporated into government strategies and programs, but implies development from a very young age.