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Financial education is a key pillar of financial inclusion

Dr Sanderson Abel
According to the Finscope studies a large section of population lack access to basic financial services from the formal financial sector. Building knowledge of financial products and moving towards universal financial inclusion should be both a national commitment and a policy priority. Financial education is hence an important component for promoting financial inclusion, consumer protection and ultimately financial stability.

Financial education is the process of building knowledge, skills and attitudes to become financially literate. It is meant to educate people on good money management practices with respect to earning, spending, saving, borrowing, and investing. Financial education is meant to enable people to shift from reactive to proactive decision-making and work towards fulfilling their financial goals. By broadening people’s understanding of financial options and principles, financial education builds skills to use financial products and services, and promotes attitudes and behaviours that support more effective use of scarce financial resources.

Financial education is a key pillar of financial inclusion. Financial education should be able to assist the ordinary man to understand the need and benefits of the products and services offered by formal financial institutions. These include; ability to access affordable credit, reduced amount of financially risk, ability to budget and manage money or plan for the unexpected and ability to make the most out of their money among others.

How is financial education related to financial inclusion?

Financial education is an important tool to help consumers both accept and use the financial products to which they increasingly have access. Because it can facilitate effective product use, financial education is critical to financial inclusion.

• It can help clients both to develop the skills to compare and select the best products for their needs and empower them to exercise their rights and responsibilities in the consumer protection equation.
• Properly designed, financial education is tailored to the client’s specific context, helping them to understand how financial instruments, formal or informal, can address their daily financial concerns, from the vagaries of daily cash flow to risk management.
• Its power lies in its potential to be relevant to anyone and everyone, from the person who contemplates moving savings from under the mattress to a community savings group, to the saver who tries to compare account choices offered by competing banks.
• It spans the informal and formal financial sectors, supporting clients’ access to, and more importantly, use of, diverse financial services.

What should be the objectives of the broader financial education programmes?

Financial inclusion implies an alignment of supply and demand, where financially literate consumers have opportunities to apply their knowledge in a marketplace of appropriate product options.

Given the criticality of financial inclusion especially in our economy there is need for concerted effort towards encouraging financial education programs.

These programs should have three broad objectives that correspond to overlapping, inter-related interests of these three stakeholders.

• Personal financial empowerment and improved welfare: This should target the consumer, the potential client who needs to know when and how to use appropriate financial services to save, borrow, invest and mitigate risk. Financial literacy varies significantly among the poor, especially in relation to a financial landscape that is rapidly changing. With increased access to more service providers and more products, people confront options they don’t always understand. When their existing knowledge and competencies are not applicable to an ever changing financial landscape, people are limited in their ability to act.
• Product uptake or improved/increased use: New accounts and increased account activity are obvious motivations for financial institutions to sponsor financial education. Taken in isolation, these goals admittedly blur the line between education and marketing. Yet, financial institutions have other reasons to support financial education such as meeting their social responsibilities and building client loyalty with popular services. Institutional efforts range from incorporating educational content into marketing materials to adding financial education delivery to the responsibilities of front-line staff.
• Consumer protection and awareness: Consumer protection is a cornerstone of financial inclusion, levelling the playing field between suppliers and consumers of financial services. While both have their respective roles and responsibilities, government is the ultimate third party protector, especially in the absence of effective consumer advocacy organisations. Governments can embrace financial education in the form of public campaigns to broadcast key messages about consumer rights.

Financial inclusion and financial education are closely linked concepts. Financial education is meat to motivate the learner to understand the advantages of transactions with mainstream financial institutions and adopt available formal financial services. Financial inclusion is thus the process of bringing people from the margin to the mainstream, linking them to mainstream financial institutions so that they become customers of Banks and are able to access the full range of services — savings, deposits, loans which the banks offer.

Financial education is key to promoting financial inclusion which is a step towards customer protection as it ensures linkage with mainstream financial institutions so that the hapless borrower is not at the mercy of the informal service providers who charge notoriously high rates of interest.

• Dr Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on [email protected] or on numbers 04-744686 and 0772463008.