Every economy thrives on the effectiveness of its financial system. Stated in different terms, the economic success of each nation is nucleated around the existence of efficient and well-functioning financial system. The need for adaptation and implementation of well-rehearsed financial system has become an important desideratum for countries at all levels of global economic development, including advanced, emerging and developing economic levels.
The foregoing affirms the indispensable role of financial system in effective management of the Ghanaian economy towards the attainment of desired development and growth levels. A financial system characterised by efficiency and effectiveness facilitates exchange of funds among participants such as lenders, borrowers and investors in the national and global financial markets.
The financial sector remains a sub-sector in the services sector within the Ghanaian economy. The Bank of Ghana (2022) defined the financial sector to include activities pertaining to the insurance, pensions, securities and banking industries. The banking industry dominates activities within the financial sector. As at March 2020, there were twenty-three (23) licensed universal banks; and four international banks with representative offices in Ghana. The latter include the Bank of Beirut, Citibank, N.A. Ghana; Exim Bank of Korea and Ghana International Bank Plc (Hakeem, 2021).
Individuals are consistently confronted with the challenge of making choices that are integral to their everyday lives; and saddled with making choices that could have profound impact on their families as they attempt to create a balance in their budget; finance their children’s and personal education for professional advancement and growth; save towards retirement; and purchase a house, among others. However, making these cogent choices is contingent on strong financial knowledge.
Zucchi (2022) defined financial literacy to include the combination of knowledge that is required in the areas of finance, credit and debt management to make financially responsible decisions. Fernando, Khartit and Schmitt (2023) referred to financial literacy as an individual’s ability to comprehend and ensure effective application of diverse financial skills such as budgeting, investing and personal financial management skills. Thus, financial literacy relates to the knowledge and application of diverse financial skills, including savings for retirement; creation of budget and investment plan; and understanding how credit is applied and debt payment is effected. Further, financial literacy helps individuals and corporates to develop strong understanding of the differences among various financial instruments such as short-term borrowing instruments; and long-term borrowing instruments within the broader financial market.
Short-term borrowing instruments relate to commercial paper, trade credit, overdraft facility, acceptance credit and short-term bank credit, among others; while long-term borrowing instruments refer to stocks, bonds; exchange traded funds (ETFs), health savings accounts (HSAs); bank loan and documentation, debentures and lease financing, among others. Although financial literacy remains a life-long journey, financially literates tend to have good (and in some cases strong) relationship with money. Further, the level of efficiency and effectiveness of individuals who are financially literate in money management tends to be encouragingly high.
Genesis of Financial Literacy in Ghana
During 2015 a nationwide financial literacy and awareness campaign was launched by the Ministry of Finance and Economic Planning. The overarching idea was to increase the sensitisation efforts of government towards successful implementation of Ghana’s comprehensive financial inclusion strategy. As part of measures to ensure consolidation of existing financial policy priorities and improvements on outreach of financial services to various parts of the country, the financial literacy campaign was extended over a period of six (6) months.
Two projects were developed to form the nucleus of the campaign. The themes for these projects were financial literacy sensitisation; and financial literacy trainer of trainers (TOT). Key factors such as demand and supply of financial institutions’ products and services across the country were considered during the projects’ development phase. The financial literacy awareness was targeted at financial service providers; and the general public including smallholder farmers and farmer-based organisations (FBOs).
To ensure practical illustration of themes for the projects, manuals were printed and slides were prepared. These campaign materials were disseminated to key stakeholders including financial service providers, academic institutions and farmer-based organisations. Rural Microfinance Institutions (RMFIs) and other microfinance service providers formed the basis of reaching to the general public under the financial literacy trainer of trainers’ strategy. This strategy initially involved assessment of depth of knowledge of selected staff on financial literacy; and training the selected staff further; so they could sensitise their colleagues; and train consumers to facilitate their understanding and choice of financial products and services that are tailored to suit their investment and day-to-day financial needs.
The financial literacy sensitisation strategy was developed along the lines of value chain actors in the agricultural value chain. Emphasis was placed on major actors, such as agricultural extension officers; and executives of farmer-based organisations. These executives were expected to reach farmer-based organisations across the country. Essential messages on financial literacy were aired on radio and television stations, using different languages such as English, Ga-Dangme, Twi, Ewe, Dagbaani and Dagaari.
Members of the general public were educated on the need to save their incomes and other funds in safe and recognised financial institutions to ensure safety and security of their investments. For many financial service providers, regular radio and television advertisements on their products and services include some tip-bits on financial literacy. The reception and banking hall of some institutions serve as venues for telecasting videos on financial literacy to promote savings and investment habits throughout the country (Daisie, 2019).
Although banking practices have constituted an integral part of economic stewardship of the country since independence in 1957; and banks have evolved and developed products and services to suit contemporary needs of consumers, the level of patronage of banking services by the eligible population remains relatively low. The lop-sided ratio of eligible banking population to active banking population is low. Statistics released by Acuant during November 2020, revealed nearly 58% (actually 57.7%) of the Ghanaian adult’s population remained financially literate; and have access to financial services such as savings, investments and insurance, among others. This remains a significant improvement over the estimated 20% adult’s population with financial literacy during 2009 (Ghanaweb, 2009).
In the United States, an estimated 76% of the millennials’ population lack basic financial knowledge; while financial literacy rates over the years keep declining. Moreover, nearly half of all Americans do not have retirement savings account; whereas 40% of the population lack enough cash to adequately cover emergency expenses between US$400 and US$1,000 (FINRA as cited in RTSWS, 2019). The gloomy financial literacy situation in advanced economies such as the United States paints a vivid picture of current and related happenings in developing economies including Ghana; and the urgent need for financial literacy to be intensified by institutions in the banking industry to migrate the fairly large unbanked population to mainstream banking.
As of November 2020, the world’s unbanked population was estimated at 2 billion people; with significant portion of this population located in developing economies (Acuant, 2020). Lack of clear understanding of banking products and services; and extensive banking procedural measures shy a section of the eligible banking population away from active patronage and participation in banking activities in many global economies including Ghana. Further, limited financial knowledge leaves significant proportion of the working population unprepared for imminent financial crisis, such as poor retirement planning.
Relevance to Industry Growth
Fernando et al. (2023) noted increasingly widespread of financial products and services throughout society during the last two decades (2000 through 2022). In Ghana and many other African economies, many financial technology (Fintech) companies are springing up to provide complementary and in some cases, competing financial services. However, few people are found to be prepared; as decision-making related to their finances becomes more complex and requires technical understanding, analysis and explanations. Evidence suggests many contemporary consumers have limited understanding of how finance works. This underscores why significant number of people struggle with savings and investments related planning and decisions.
To this end, initiatives of the various banks towards intensifying financial literacy campaign could prove economically and financially useful to all key stakeholders, especially the banks and consumers. Effective implementation of financial literacy programmes would allow banks to assess financial capabilities of existing clients and prospects by measuring their knowledge in inflation, interest, bond prices, diversification and compounding, among other pertinent financial variables. This remains a strategic tool for effective penetration of banks in remote parts of the country; and penetration in the unbanked population to accelerate the drive towards financial inclusion.
A recent study by the Financial Industry Regulatory Authority (FINRA) in the United States (as cited in Zucchi, 2022) revealed widespread financial illiteracy; as only one-third of the sampled respondents were able to answer four or more questions out of five correctly. The FINRA findings (as cited in Zucchi, 2022) affirmed non-peculiarity of the financial illiteracy challenges to developing economies; and the need for intensified efforts to shore up the contribution of M2 to Ghana’s monetary aggregates. That is, ensure an increase in the amount of money (total liquidity) in circulation through the banking system.
Effective management of consumer finances in recent years has been a challenge due to changes in banking products and services; and changes in consumer habits. An example is the transition from use of cash for almost every transaction payment to a cashless system, including use of debit and credit cards for daily online purchases and payments; and at shopping malls, cinemas, health centres, among others. In the United States, credit card usage in day-to-day transactions surged from 24% during 2017 to 27% during 2019; while online shopping remained the top choice for many shoppers.
A survey conducted by the Federal Reserve Bank of San Francisco, California in the United States during 2021 revealed cash accounted for only 20% of all payments; while payments through credit card was nearly 28%. The findings affirmed the popularity of credit and debit cards; and shift in paradigm from cash towards electronic or digital payments. High concentration of the public on electronic payment options reduces the incidence of theft through physical attacks on financial consumers.
As a replication, intensified financial literacy programmes by Ghanaian banks could increase consumers’ participation in online shopping; and surge in the use of debit and credit cards as immediate payment options. In essence, online shopping remains a strong conduit for use of debit and credit cards; and rapid extension of credit by financial institutions; while assuring convenience to shoppers.
Consumers’ appreciation and use of debit and credit cards could help banks identify consumers with strong transaction history; and invest their excess funds in these consumers in the form of extended credit. This strategy has the potential to increase loan repayment rates; while decreasing the amount and rate of non-performing loans (NPLs) among banks and other institutions within the financial sector.
Financial literacy has strong potential to increase competitiveness of banks. All else held constant, banks that accept the challenge to invest in and intensify their financial literacy campaign and efforts tend to have competitive edge over other rivals in the industry; through surge in patronage of their products and services. Some derived benefits within this context include increase in the value of deposit funds by existing customers and prospects; surge in the banking population; increased productivity and revenue; increased recognition and reputation through efficient and effective serves delivery; and increase in shareowners’ wealth, among others.
Further, consumers would have the opportunity to improve their knowledge in finance to facilitate management of their day-to-day financial lives; while taking proactive view of their financial planning. The foregoing implies consumers could ensure assessment of their financial needs transcends day-to-day; to include long-term focus of their financial needs. This initiative has the potential to assure improved living standards in the not-too; and distant future.
The foregoing suggests the likelihood of heightened financial literacy leading to improvements in financial responsibilities of individual and corporate consumers within the economy; especially when they are impelled to apply their financial skill and knowledge to effective management of trading accounts, debts (auto loan, mortgage payment, and so forth) and retirement accounts, among others. The inference is understanding remains crucial to effective management of budgeting and financial planning. Financial literacy helps to evaluate the trade-offs between different credit and investment products. This enhances the risk management capabilities of institutions within the banking industry; accelerates eventual growth of the industry and financial sector; while assuring sustainability and valuable contribution to national development and growth efforts.
Financial literacy has the tendency to vary in tandem with levels of education and income. However, extant research (as cited in Zucchi, 2022) has proven that in some cases, the level of ignorance in information literacy demonstrated by less educated and lower-income earners tends not to be worse than the level of ignorance among the highly educated. This notwithstanding, the prominence of finance and its attendant literacy (education and campaign) in contemporary society cannot be overemphasised.
The preceding statement renders financial literacy an important desideratum in the long-term financial success of individuals and corporate institutions. Strong knowledge in financial literacy ensures win-win situation for key stakeholders, including individual depositors, banks, investors, businesses, general public and regulatory bodies such as the central bank. To wit, carefully-crafted financial literacy programmes ensure sustainability of accumulated debt; and leads to improvements in bankruptcy, foreclosure and credit history, among other pertinent consequential financial management factors (Fernando et al.). Successful financial literacy programmes have significantly positive cyclical effect on the broader economy.
Some sampled respondents in a recent survey conducted by the Organisation for Economic Co-operation and Development (OECD) (as cited in Zucchi, 2022) were of the firm opinion that a visit to the dentist was less stressful than strategically opting for the right investment for a retirement savings plan. Fortunately, banks are strategically and professionally positioned to navigate financial consumers through this challenge. For instance, in many banking institutions, employees with expertise in financial literacy proffer cogent explanations on individuals’ personal finances to ensure significant reduction in the level of anxiety believed to be induced by financial planning among consumers.
Financial decision-making in recent periods is believed to be getting more onerous for consumers; as the challenges related to personal financial literacy keep compounding. The problem is exacerbated further by the wider gap between the “haves” and “haves-not;” and weak macroeconomic indicators such as steady increase in unemployment levels; rising inflation rates; and inconsistent surge in annual economic growth rates over extended fiscal periods.
During periods of economic despair, some groups of individuals or consumers are more likely than not to lag behind the financial literacy curve. This converging trend ably affirms the relevance of financial literacy; as bank staff with the requisite expertise take turns to demonstrate the significance of making thoughtful and informed decisions about financial planning to consumers.
Available evidence suggests companies in the securities industry; and those in the insurance, pensions and banking industries all vie for assets of existing and potential consumers through the sale of financial products and services. This heightens competitiveness of the financial sector; and further accentuates relevance of investment in carefully thought-through financial literacy programmes towards accelerated expansion and growth of the banking industry in particular; and the financial sector in general.
Applying Pragmatic Measures
The survey conducted by the Financial Industry Regulatory Authority (as cited in RTSWS, 2019) revealed vulnerabilities of women related to financial literacy. The study revealed although women live longer than men, they earn less income than men when they are working. Further, the financial illiteracy rate among women is higher than the rate observed among men.
In spite of the differences in geographic location of the FINRA (as cited in RTSWS, 2019) study, it may not be exaggerative to situate the findings within the Ghanaian context; and to state the findings fairly reflect demographics of financial consumers within the Ghanaian economy. The survey outcomes present banks with the opportunity to intensify financial literacy among the female population to increase their patronage to ensure gender balance; while increasing profitability of banks; and accelerating growth of the economy.
Improved healthcare is analogous with prolonged or extended lifespan. The latter increases the burden of financial decision borne by consumers; as they are compelled to be strategic in their choice of retirement plans, in addition to social security income; which has practically proven to be inadequate financial source of livelihood during retirement. Past generations relied extensively on Tier 1 pension scheme to fund bulk of their retirement.
Nonetheless, the current generation could enroll in Tier 2 and Tier 3 in addition to the mandatory Tier 1 pension scheme to shore up their retirement contribution during active service to guarantee higher superannuation income. Bank staff could prove useful to retirement planning of consumers; while increasing product sales directly by the banks; or indirectly through the banks’ subsidiaries licensed to sell insurance products and related services.
The savings and investment products offered by the banks in recent periods are believed to be more sophisticated than they were in prior periods. The complexities; and varying maturities and interests coupled with limited financial education make it quite challenging for some consumers, irrespective of their education level, to make strategic financial decisions. Again, employees of implied banks endowed with knowledge in financial literacy could educate consumers to make thoughtful, strategic and informed financial decisions with immediate-, medium- and long-term benefits.
Strong relationship exists between financial literacy and going concern of banks. To illustrate, financial literacy programme that is characteristically efficient and effective could aptly define sustainability of institutions within the banking industry; and mimic strength of the financial system. Recent data shared by the Monetary Policy Committee (MPC) of the Bank of Ghana (during March 2023) affirmed the sustainability of growth inherent in deposits and exchange rate variations on the balance sheets of various banks.
As at December 2022, the industry’s total assets were valued at GHȼ209.4 billion; this represented 16.4% growth. Underpinning the financial exploits of banks during the period in focus is efficient financial literacy campaign which ensured depositors and prospects’ interactions with banks were not negatively impacted by the current economic crisis, including the national debt restructuring programme.
Available statistics indicated nearly 4.66 billion people around the world use the Internet, representing approximately 60% of the global population; while 91% of the 4.66 billion people use mobile devices to go online at least some of the time. During the same period, mobile phone connections in Ghana were estimated at 130%; Internet users constituted 48% of the total population; while users of active social media constituted 20% of the population (Acuant, 2020).
The implication is increased financial literacy through the Internet and online by banks would not be an economic and financial exercise in futility. The above statistics unveil the potential of banks expanding their clientele base and inching the country very close to its financial inclusion drive through the Internet; while improving operational performance and profit maximisation through consistent increase in sales of online banking products and services.
Well-executed financial literacy programme creates the enabling environment for institutions in the banking industry to effectively assume their enviable role as catalysts for the efficiency and transformation needed in the financial lives of individuals, small-, medium- and large-sized firms in society. Further, financial literacy programme that is well-rehearsed and strategically tailored could serve as positive conduit for accelerating financial inclusion; improving well-being of the citizenry; assuring banking-industry growth and economic stimulation; enhancing effectiveness of the financial ecosystem; and sustaining rigidity and robustness of the economy against potential internal and external shocks.
The above write-up featured in Thursday, April 13, 2023’s Edition of the Business and Financial Times (B&FT). www.thebftonline.com
Ebenezer M. Ashley.