This humble call is based on academic and professional experience as well as personal encounters and observations. As someone who was born and educated in Ethiopia, I am familiar with the lack of financial literacy and numeracy in our education system. As diaspora, I have firsthand experience, information, and exposure to financial literacy in my “adopted” country as well as practical lessons from sending remittances back home. The discussion in this article is, therefore, based on personal observations, experiences, reflections, and encounters as to how financial literacy and numeracy (or lack thereof) affect financial wellbeing of households and individuals with implications to broader socioeconomic wellbeing of the nation. From my own experience interacting with family members, both in Ethiopia and in the diaspora, and observations from contacts with other Ethiopians who live and work abroad, it has become clear to me that we are unprepared for life in finance-driven and fast-moving modern life in the 21st century where some basic knowledge of household financial management is critical for planning daily expenses and making prudent financial decisions for the future. Thus, the aim of this article is to highlight the importance of financial literacy and numeracy and rekindle policy deliberations on how to foster these in our education system. The article is also intended to encourage Ethiopian researchers and those in the academia to closely examine the merits and demerits and the development implications of these vital issues. Such efforts would provide inputs, policy advice and modality for designing sound and inclusive national financial literacy and numeracy programs.
Globally, despite the critical importance of financial literacy and financial numeracy and financial inclusion for socioeconomic transformation, little attention has been given to these issues, particularly in developing countries. In mainstream discourses on economic growth and development (at national, regional, and global levels), the focus has been on getting micro and macroeconomic fundamentals right. There is a lacuna in research and policy analysis on ways and means of improving financial literacy and numeracy as integral parts of human capital development. Sadly, and as confirmed in recent global studies, this void is more pronounced in African countries. Not only financial literacy and numeracy but also financial inclusions remain grossly underdeveloped in Africa. Consequently, the proportion of the adult population excluded from financial markets and services is significantly higher in Africa than any developing regions. The situation in Ethiopia is even more worrying when compared to other African countries. For example, in Kenya, the application of Fintech such as M-Pesa has increased significantly both the financial literacy and inclusion of the wider population, including cattle herders in rural Kenya. Clearly our financial system is underdeveloped and woefully inadequate to respond to the growing need of the country’s economy and citizens. Most authoritative studies, including by the World Bank, show that, in 2017, the percentage of the Ethiopian adult population with bank accounts is a mere 35% as opposed to 82% in Kenya, 50 % in Rwanda and against 43% African average. Ethiopia also has one of the lowest financial service penetration rates when compared to other countries in Africa. However, there are indications that this situation may have improved slightly in recent years, particularly since the issuance of new bank notes by the National Bank of Ethiopia (NBE). Due to legal requirements to own a bank account in order to change large amount of old notes with the newly issued ones, many people who previously didn’t have bank accounts were forced to open one. Although it is difficult to establish causal relationship, there is a body of literature that has established that using banking services and related information regularly can improve financial literacy and numeracy. It is evident; therefore, addressing low and inadequate financial inclusion and penetration rates in Ethiopia will require wide-ranging legal, regulatory, operational and institutional reforms. However, these issues are outside of the scope of this article.
Conceptually, financial literacy and numeracy are different from sophisticated financial knowledge and technical ability to perform complex mathematical or econometric models. Financial literacy refers to the ability of individuals to gather, process, and understand financial information and market mechanisms to make basic financial decisions. Financial numeracy, on the other hand, consists of abilities to perform basic financial computation such as interest rates, cash flows, or profit margins. Both notions embody specific skills and capabilities of individuals, which are necessary to make informed decisions about short and long-term financial planning involving wealth creation, capital accumulation, savings, investment, pensions, taxation systems, etc. While knowledge of finance, economics, accounting, and business management can help in decision making processes, these alone are not adequate to make sound financial decisions.
Financial decision-making involves capacities to synthesize available information and understand complex financial markets, associated risks and uncertainties, which require the right mix of specific skills to manipulate an array of financial tools and instruments. These skills, combined with knowledge, awareness, attitude, and behavior of an individual assist in taking informed financial decisions and planning. That is why we have financial experts who are trained to manage complex financial transactions and help ordinary people arrive at sound financial decisions. Naturally, there are individuals who are financially literate and competent through learning by doing and without necessarily going through formal education and specialization in finance. One only has to go to Markato or other small-scale businesses to find individuals who are astute in financial matters without formal education. Such acumen emanates from early exposure to business or financial transactions, mainly through family-owned or self-managed business activities. However, while research in this area is limited, it is clear that such individuals are rare or the exceptions and may not represent significant proportion of households or individuals in business or financial services.
Building on this conceptual understanding, the present article attempts to shed light on the need for financial literacy and numeracy in Ethiopia. It argues that there is an urgent need now more than ever to launch effective financial literacy and numeracy programs in Ethiopia and provides some policy conclusions. This should be done in tandem with efforts to enhance financial inclusion in the country. Otherwise, in the long run, the cost of inaction could be colossal for the country, frustrating all efforts for industrialization, private sector development, financial inclusion and overall socioeconomic transformation, societal wellbeing, and development.
Why are financial literacy and numeracy important for Ethiopia now?
For several years, Ethiopia has seen continued economic growth and expansion of education, banking operations, consumption and growing level of financial transactions. These are facilitated and accelerated by rising middle class, growing population, increased investments, and expanding demand for financial services. The country has also seen youth bulge, rising unemployment, deepening trade deficit, mounting external debt, devalued currency, inflation and increasing cost of living. The inability of the economy (both the public and private sector) to provide jobs for the youth, the necessity of fostering entrepreneurship for jobs creation and poverty reduction all these have further heightened the need for financial services, financial literacy, and numeracy in the country. Furthermore, household or family decisions regarding children’s education, whether to acquire properties (land, homes, machinery, vehicles, etc.), launch a new business (enterprises), increase savings, diversify household incomes, or plan for retirement, etc. require adequate capacity in financial literacy and numeracy.
In a fast growing and modernizing economy, financial literacy and numeracy are important for wellbeing of families and social cohesion. While more research is needed to substantiate claims, there is evidence showing that financially literate and numerate households manage their income better, take advantage of opportunities and avoid debts or finance related distress. In short, they can better manage their financial resources and take sound financial decisions that maximize their family’s welfare and wellbeing. In contrast, households with little or no financial literacy and numeracy often face financial risks and uncertainties and, in some cases, leading to divorces and family breakups. This assertion is based on my own observation of Ethiopians in the diaspora who experience disputes within the family, including divorces and lengthy and costly litigation, due largely to finance related decisions and miscalculations. I have seen dear friends going through difficult family life and making wrong financial plans and decisions, which could easily have been avoided, should they have a limited knowledge or awareness of basic financial literacy and numeracy. As a result, I have seen couples opting for protracted legal processes, spending their lifetime savings on costly legal proceedings. There are several families of the Ethiopian diaspora who have fallen below poverty lines immediately after settling divorce or separation through legal processes. Sadly, they cannot recover their lost financial resources and opportunities, but their experiences provide useful lessons for others and reinforces the notion that, as our income increases and the rate of household level financial transactions rises, acquiring financial literacy and numeracy skills however basic are essential. As already noted above, it was these experiences and family feuds among colleagues I know that prompted me to write this article and appeal for rethinking about financial literacy and numeracy training from an early age.
Operationally, the provision of financial literacy and numeracy can begin from primary education, but it should be sustained and upgraded throughout the various phases of schooling, including technical and vocational training. In advanced economies, there are established cultures and mechanisms to educate children and adolescents about money and financial management early in their lives. For example, the tradition of monthly or weekly “pocket money” granted to school children by families help them to understand the value of money early in their development process. This quickly develops to managing small savings such as monetary birthday gifts through banking services and credit cards. These are vital processes that are cultured and captivated by families. Furthermore, in schools, children as young as eight years old, participate in “bake cells”- where they (with the help of parents) prepare pastry and biscuits for selling in their school compounds. The money mobilized through bake sales is meant to cover fees related to school sorties such as transport or snacks during visits to museums and historical places. When the children grow to adolescence, they mobilize funds to finance their school projects, study tours, exchange programs and travels. By the time they reach college level, they are aware of the value of money, savings, and investments such as in education. This phenomenon is in line with studies, which argue, that “teaching students how to earn, manage, and save money helps them to build aspirations and expectations for post-secondary education and training”. Conversely, low financial literacy is associated with “negative credit behaviors such as debt accumulation, high-cost borrowing, poor mortgage choice, mortgage delinquency, and home foreclosure”.
At the level of formal education, there is no standard or uniform cut-of age across countries to begin financial education. In some developed countries such as Denmark, Norway, the Netherlands and Sweden, financial literacy and numeracy begins with children at primary schools. In the United Kingdom formal education integrates financial literacy and numeracy in secondary school curricula. However, the OECD has developed Principles and Good Practices for Financial Education and Awareness and it recommend that financial education start as early as possible and be taught in schools. The OECD has also developed a standardized test on financial literacy and numeracy for 15-year-olds, which was administered for the first time in 2014 and since then annually. In the 2014 assessment, at aggregate levels, Norway, Denmark, and the Netherlands were considered as top performers with the national average score of 70% and above. What distinguishes all the three countries is the inclusion of financial literacy and numeracy at younger age through dedicated programs, which are financed and supported by their respective banks and financial institutions. Surprisingly, students from Shanghai region of China rated as the top performers in financial literacy than those who participated in the 2014 assessments of the OECD. However, Shanghai region cannot be a representative of the whole of China due to difference in socioeconomic development and level of education across the country.
It is equally important to emphasize that financial literacy and numeracy are necessary not only during times of economic booms, but also in situations of economic insolvency, bankruptcy, crises, inflationary pressures and during times of wider socioeconomic meltdown and political upheavals such as wars or natural disasters. During such periods illegal financial and underground economic activities increase with huge economic and opportunity costs to the economy. For instance, in times of wars and armed conflicts, hording of currencies, money laundering, illegal arms trade, human trafficking, illegal and informal (commodities) trade, illicit financial flows (including trade miss-invoicing), transfer pricing, withholding dividends and royalty fees as well as profit repatriation, etc. would become common phenomena.
These situations can further exacerbate the fragmentation and informalization of financial services, including parallel market for foreign exchanges. Financial literacy and numeracy alone may not be adequate to resolve or prevent these problems, but it is evident that financially literate and numerate citizens can easily adjust to the crisis and conditions of “war economy”. Similarly, the responsibility and accountability of financially literate and numerate citizens will make it easier for policymakers to introduce measures that address such economic risks or crisis.
Ethiopia also sends migrants (skilled, semi-skilled or unskilled) abroad and receives billions of dollars every year in the form of diaspora remittances.
Mussie Delelegn Arega (PhD) is a Senior Economic Affairs Officer and Chief of Landlocked Developing Countries’ Section, Division for Africa, LDCs and Special Programs, at the United Nations Conference on Trade and Development (UNCTAD). The opinions expressed in this article are the author’s own and do not represent the views of UNCTAD or the United Nations. The author can be reached at ([email protected]). The views expressed in the article do not necessarily reflect the views of The Reporter.
Contributed by Mussie Delelegn Arega (PhD)