What does 'financial literacy' mean? It is defined as:the ability to understand finance such as the basic money principles of interest rates, risk and return, credit management, banking, insurance, and time value of money and taxes. It is about being able to make informed financial decisions.
Financial Literacy in South Africa
A pilot study commissioned by the Financial Services Board (FSB) into the financial literacy of South Africans produced some interesting, yet frightening, statistics around financial planning. Although 64% of the respondents who participated in the study directly play some part in the managing of a household budget, 49% said they were unable to live within their means while 30% have encountered financial difficulty. Unsurprisingly, only 32% use some kind of saving system and only 2% invest in trusts, stocks, shares, livestock or property as a form of saving. Alarmingly, many were found wanting when it came to knowledge of financial matters.
"The debate about the financial literacy of South Africans or the lack of it, has always been interesting and one of the major contributing factors as to why we do not save efficiently for retirement, nor ask the right questions when it comes to retirement funds," says Nerine Brink, Executive Practice Head - Employee Benefits at PSGK Corporate.
The primary overall objective of the FSB study, the first of its kind in South Africa, was to gather baseline information around financial literacy in South Africa. This in order to assist the FSB to fulfill its vision of 'helping all South Africans achieve sound financial management and to provide the relevant financial information to facilitate this for consumers.'
The broader objectives were to determine levels of financial literacy in order to benchmark these against those of other countries. This in turn will help form public policy relating to low financial segments and assist in developing strategies to improve financial literacy.
"Financial knowledge, attitudes, behaviour and skills have never been researched with great success in South Africa which means accurate information is limited," explains Brink. "In order to advise and empower the South African consumer, it is essential to understand behaviour and educate people. The outcomes of the FSB report focus on financial capability, money management as well as choosing the relevant products and proper financial planning."
Who was surveyed
3112 South Africans participated in the survey. These were individuals aged 16 and over and specifically comprised those living in households, hostels and other structures - a sample representation of the country's population.
Making ends meet
- Respondents were asked whether, in the year prior to being interviewed, they had personally experienced a situation whereby their income did not quite cover their living costs. More than two-fifths (44%) responded affirmatively, with slightly over half (53%) indicating that this had not happened to them.
- Financial difficulty was more prevalent for women (47%) relative to men (41%), the 30 - 60 age groups rather than 16 -19 year-olds, and for black and coloured respondents more than white and Indian. Those with little education suffered the greatest income shortfalls.
- A follow-up question on coping strategies to help get through these times of financial duress indicated that the most common response was to borrow from family or friends. This implies that informal and familial networks matter most for South Africans during hard times.
- A common behaviour in South Africa is for employees to borrow from employers or try to access Retirement Funds. This inevitably leads to problems at retirement and a vicious cycle begins.
Understanding of investment risk and return
Two questions included in the survey were designed to test the respondent's ability to weigh up risk and return on investments. The responses indicate that South Africans are quite sceptical about potential investments that offer the prospect of getting rich quick, with nearly three-quarters (73%) acknowledging that such schemes also pose the risk of quick losses too. A fifth of respondents (20%) disputed the likelihood of loss in relation to investments promising sizable returns, while 7% were unsure.
When choosing a financial product, consumer decisions are mostly informed by product-specific information from a branch of a bank (28%), family and friends who are not in the financial services industry (22%), television and radio programmes (17%) and television advertisements (16%). These four information sources account for 57%, rising to 63% if one also includes the 6% reporting the importance of advice from family and friends working in the financial sector. These figures are applicable to bank accounts and credit cards.
In terms of private pension funds, equivalent importance is attached to television adverts and bank-based information (both 26%), followed closely by television or radio programmes (21%). Also notable is the higher than average percentages of consumers being influenced by financial advisors or brokers (14% - the highest of any product), the sales staff of product providers (11%), internet websites (9%), as well as newspaper adverts.
The choice of post office savings accounts is determined more by advice from family and friends (30%) and newspaper articles (16%). Junk mail (11%) received more mentions than average. For investment accounts, media coverage emerges as marginally more important than information from a branch of a bank. The advice of employers (11%) is the highest of all the products examined.
"This information reinforces the important educational role required by the financial industry and employers," says Brink.
Keeping consumers informed
In light of this FSB Report, it has become more evident and urgent that South Africans become financially literate. Members of retirement funds should be given access to information that is easy to understand and should be helped to come to grips with all aspects of financial planning.
"PSGK Corporate is one of the financial services providers in the industry which goes the extra mile in providing relevant and understandable information when it comes to retirement fund education," says Brink. "Communication to members, at their place of employment, is offered on different levels and the impact of delivering this information in the employees home language is never underestimated. We believe that we all need to be more active in ensuring personal interaction with members to help them plan for their future."
Note: The statistics in the above article are from the 'Financial Literacy in South Africa: Result of an OECD/INFE pilot study' prepared for The Financial Services Board by the Human Sciences Research Council. For the full survey please go to FSB survey www.fsb.co.za/index.htm