As a diaspora, I have firsthand information and practical knowledge on how financial literacy and numeracy can serve as vital skills for the diaspora to quickly adapt to their respective host countries’ financial systems, services, and related regulations. In the same vein, financially literate and numerate households and individuals back home who receive remittances from families in the diaspora can quickly channel such resources to productive sectors and long-term savings. Generally, remittances received by families or friends back in Ethiopia are used to supplement monthly income, pay for household consumption, children’s education, healthcare services and other household expenditure. However it is estimated, that on average about 25-30% of the remittance is saved and often used for consumption of non-essential items. Studies by the World Bank (WB) and International Fund for Agricultural Development (IFAD) show that the expenditure on non-essential consumption is largely due to lack of financial literacy of remittance recipients and lack of appropriate saving schemes such as pension plans, life insurance schemes, portfolio investment, etc. Unfortunately, these options are not available in Ethiopia and hence saved remittances remain outside the formal financial sector. By now, we are also aware of situations where money remitted to the elderly family members end up squandered by younger siblings at home or stolen by strangers because it was kept at home with little supervision and safety measures.
What I found distressing was to see fellow diasporas who have taken bad loans and financial decisions on several occasions, without fully understanding legal and financial consequences. For instance, it is common for highly educated diaspora households to take heavy financial commitments such as housing loans and credits without even trying to understand some of the basic requirements of the commitments they are entering. They do not assess their liquidity-asset ratios and ability to sustainably repay debts in uncertain times such as loss of jobs and incomes. Nor do they choose the right time for their purchases or the right financial institutions when concluding loan or credit agreements. One does not need to be a financial specialist or expert to acquire information or basic understanding of the financial commitments one is making. But, when ignored, these situations can lead to bankruptcy, loss of income and break-up of families, particularly during times of socioeconomic crises or job losses such as those caused by Covid19.
In some circumstances, several compatriots have been lured by savvy financial experts to investment in risky “money markets” with significant losses of hard-won family savings in a matter of a few days and hours if not minutes or seconds. In some other cases, they acquire expensive properties (land, house, machinery, vehicles, etc.) without proper insurance coverage including life and accident insurances for unforeseen risks of invalidity or death. As a result, they leave behind huge amounts of debts (capital and unpaid interest rates) resulting from sadden loss of jobs, incomes, or lives. In some specific cases, even with the right kind of advice, the Ethiopian diaspora is known for taking costly and risky decisions. This is because that speaking out about or seeking professional advice on financial decisions, family finances, inheritance and retirement plans are unnecessarily secretive among the Ethiopian community. These are partly cultural but, to a large extent, causes and consequences of lack of financial literacy and numeracy in our education systems. These problems are further compounded by differences in value systems even though the Ethiopian diaspora is, generally, regarded as the most enlightened and highly educated ethnic communities in Europe and North America. In a broader sense, this means that financial literacy and numeracy can assist households, individuals, societies, and economies to manage risks arising from unforeseen crisis, help better harness opportunities and contribute to efforts to build productive assets for inclusive economic growth and development.
In short, the unprecedented increases in demand for financial services in parallel with complex financial tools and instruments and varied financial products and services, underscore the urgency for financial literacy and numeracy programs. These trends are further accentuated by highly advanced market systems and technological progress as well as associated risks and uncertainties, which collectively drive the demand for financial literacy and numeracy in developing countries such as Ethiopia. In practice, financial literacy and numeracy need to be promoted side-by-side with facilitating access to banking services to ensure financial inclusion, especially of the low-income segment of the population.
Possible consequences of neglecting financial literacy and numeracy
Neglecting the importance of early education in financial literacy and numeracy or failure to seize new opportunities, may lead to the informalization of financial markets and services. If left unattended, this can gradually undermine the efficiency and effectiveness of monetary and fiscal policies of nations and erode public confidence in such policies. For example, recent restrictions of credit, changing collateral requirements for bank-lending, repeated directives on currency circulation (or exchanges), anti-tax evasion laws or inflation control measures issued by the National Bank of Ethiopia (NBE) may not be able to sustainably resolve systemic challenges facing the Ethiopian economy. Such decisions or directives can only entrench further marginalization and exclusion (especially of poor households) from financial services and amplify socioeconomic challenges, risks, and vulnerability. Monetary and fiscal policy instruments, reforms of the financial sector and related directives, rules, and regulations can have quick and lasting impact only if accompanied by enhanced financial literacy and numeracy of the educated Ethiopian citizen. Lack of financial literacy and numeracy can undermine financial inclusion and increase economy wide risks and vulnerability as well as wastage of meager financial resources. Therefore, financial literacy and numeracy have become absolute necessities not only for making informed financial decisions but also to enhance financial inclusion of societies in mainstream financial market and enhance consumer protection.
Low level of financial literacy and numeracy can also lead to irresponsible use or misuse of public resources and taxpayers’ money. Financially unaware or illiterate citizens usually think that caring for public infrastructure and investment projects of governments is the sole responsibility of government institutions only. For example, the Ethiopian Electric Power Authority loses enormous financial resources (every year) because people cut electric poles and wires for making household utensils or for selling iron-bars or wire-coils at local markets for a very small amount of money. They are unaware of the colossal damages they cause to the national electricity infrastructure and, more importantly, for electricity distribution and consumption by households and the industry. They do not relate public investments in infrastructure and social services with taxes paid by citizens, which makes them directly responsible with the right to demand accountability of the government officials entrusted with expenditure of public revenues.
Unfortunately, the adverse impact of low or lack of financial literacy and numeracy is not limited to individuals, business, or households. Rather, it also affects the bureaucracy and political decision-making processes, which often lead to misallocation, misappropriation, or wastage of public resources. For example, it is not unusual to read or hear in the Ethiopian media (mainstream or social media) that the country’s business owners donate funds for political parties. There are also occasions when political elites donate financial backing to charities or socially beneficial projects such as education, health, orphanage, or rehabilitation centers. There was also massive reporting of huge sums of financial donations by regional or federal government officials to other fellow regions or federal institutions. These are not bad or negative by themselves, but the resources are from every tax-paying citizen or from consumption of government services. Therefore, public, and political officials will have primary responsibilities to ensure that public donations are effectively used for intended purposes. This requires developing and enforcing sound legal provisions and institutional frameworks that enforce accountability, responsibility, and enhance mechanisms of supervision on the use of such donations for intended purposes. Although donations are largely driven by political decisions than economic cost-benefit analysis, there should be a clear demarcation between philanthropic or charity functions on the one hand, and government responsibilities and political portfolios on the other. This is simply because public funds are not for charities but for publicly financed development projects and programs.
Several studies show that, while publicly funded development programs have long-term and durable impacts on economies and societies, charities or philanthropic programs or projects are time-bound and short-term in their nature. In other words, short-term efficiency (social welfare) of charities and philanthropies are much larger that long-term efficiency (development gains). As such, charities are not supposed to address development challenges and problems due particularly to a relatively small size of funds charities raise for development causes. In short, under situations where accountability and responsibility is low and financial literacy and numeracy inadequate and where legal and institutional capacity (supervisory) is weak, such misuse (misallocation) of resources can lead to economy wide loss of productivity, undermine judicious use of scarce resources and widen the scope for embezzlement of public funds. Furthermore, it is not uncommon to read or hear about systemic tax evasion, money laundering, hording of local or hard currencies, informal and underground (illegal) trade, corruption, or embezzlement of public funds, debt defaults and bankruptcy as well as the rising cost of living in the country. Stemming or reducing the negative impacts of all these problems and challenges, requires effective policy, legal and institutional mechanism. It also needs clear understanding of the merits and demerits of public finance, which can be improved through targeted financial literacy and numeracy programs.
Besides the above-mentioned country-specific challenges, opportunities and the need for financial literacy and numeracy, there are some who argue financial literacy and numeracy are not priorities for African countries. Such skepticism is largely due to Africa’s generalized poverty, low income, low spending power, agrarian and informal nature of production, limited saving capacities, etc. Interestingly, even poor people and informal sector operators save and need to manage their income more diligently with extra care. Indeed, one can even argue that poor people and poor economies with low and unreliable income need to acquire financial literacy and numeracy more than individuals or economies with high income and large resource base. The need to be financially astute is more urgent when income is low than when income is high. Therefore, the argument that financial literacy and numeracy should not be a priority in poor economies misses the point and could act as hindrances to economic growth and development in Africa. Moreover, such baseless arguments should not be used as excuses not to kick-start programs to enhance financial literacy and numeracy in the continent.
Unfortunately, the same skepticisms or narratives appear to have precluded African countries from major global research, surveys, and studies to assess the viability and relevance of financial literacy and numeracy. Consequently, there is little or no substantial research on financial literacy and numeracy in Africa and policy tools to address gaps and limitations. Nor is there robust or rigorous study on the role and significance of financial literacy in the economies of Africa. This notwithstanding, African economies are integral parts of the global economy often with weak degree of integration. As a result, they have not escaped from the bouts of exogenous shocks resulting from financial or economic crises, either. Hence, irrespective of the existing narratives and justifications, several recent studies including by the United Nations Conference on Trade and Development (UNCTAD), the WB and The Organisation for Economic Co-operation and Development
(OECD) have clearly established the need for financial literacy and numeracy in Africa as key for financial inclusion and for the beneficial integration of Africa in the global financial services and systems.
Conclusions with policy implications
Generally financial literacy has remained one of the most useful but often overlooked aspects of formal education not only in Africa but also in middle- to high-income developing countries and developed economies. However, the impact of low financial literacy and numeracy in developed economies is not as serious and damaging as it is in developing economies. In developed economies, financial services, monetary systems as well as mechanisms of supervision and consumer protection are highly developed to match the needs of their economies and societies. Furthermore, as discussed earlier, unlike developing countries, these economies have established cultures and traditions that expose children to understand the value of money and manage effectively in earlier phases of their schooling. Although personal financial decision-making can still be a challenge even in developed economies, it is not as acute as it is in developing economies. This notwithstanding, recent technology and housing bubbles (subprime mortgages), collapse of banking and insurance services and repeated global financial crises underline the inadequacy of economy wide financial skills and knowledge as well as the importance of wide scale financial literacy and numeracy even in developed economies. Consequently, many developed economies of Europe, North America and Asia are increasingly revising their education systems and curricula to include mandatory financial literacy and numeracy. This is because of the growing recognition of the fact that enhancing financial literacy and numeracy is key for personal financial decision-making and financial inclusion of citizens. These, in turn, increase the use of financial services, asset building, management, marketing, and valuation as well as financial planning and decision-making.
Therefore, it is time for Ethiopia and other African countries to inculcate financial literacy and numeracy in their respective national education systems sooner than later. The long-term cost of delays and inaction on socioeconomic development of these economies could be too ghastly and too large to precisely estimate. In this context, government institutions (relevant ministries, banking, and financial institutions), private sector, academia, research and development centers, civil society entities, development and trade partners should join hands to kick-start financial literacy and numeracy programs. More importantly, the Ministry of education must pay extra attention and incorporate the relevant curricula to ensure that school children start to learn the basics of financial literacy and numeracy. Similarly, the role of parents is vital in appraising their children about the value of money, how it is earned, used, and managed. It is critically important to introduce children on the importance of financial independence and how this influences their capacities to make financial decision and planning in their lives in the future. These should go hand in hand with inclusive financial and banking services by allowing adolescent population to have bank accounts and exposing them to banking and other financial services. This should not be confined to urban areas only but should also spread to rural communities with equal opportunity for men and women. Otherwise, it will be too late and too little to stave off weaker and vulnerable economies and societies such as those in Africa from perpetual financial crises and shocks.
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)