What is financial literacy?
The Organisation for Economic Co-operation and Development defines financial literacy as a “combination of financial awareness, knowledge, skills, attitudes and behaviours necessary to make sound financial decisions and ultimately achieve individual financial well-being”.
Many adults lack an understanding of financial concepts and how to apply basic financial skills, making it difficult for them to make good financial decisions. Underdeveloped financial literacy directly affects people’s ability to manage their money and understand how to spend, save, borrow and invest.
Although research findings differ – 2022 research conducted by the Financial Services Conduct Authority (FSCA) estimated that 51% of South African adults are financially illiterate, while a 2019 National Income Dynamics Study (NIDS) discussion paper put this figure at just over 40%, similar to the S&P FinLit Survey’s figure of 42% – the numbers are not encouraging.
More needs to be done to help ordinary South Africans understand money and make better financial decisions.
Why is financial literacy important?
Financial literacy is essential as it empowers people to make informed decisions about managing their money, which leads to greater financial security. It helps them avoid making costly mistakes, becoming victims of fraud, or accumulating unsustainable debt, for example.
Being financially literate is a precondition to achieving your goals and being meaningfully included in an economy. In particular, it provides underserved populations – low-income households, women, and rural communities – with access to formal financial systems and allows them to secure credit, protect their assets, and build wealth.
Financial literacy is essential for the development of a strong middle class, which is the cornerstone of financial stability and upward mobility in any country. It also helps to boost entrepreneurship and contribute to economic growth.
The global picture
The OECD International Network on Financial Education (OECD/INFE) 2023 International Survey of Adult Financial Literary assessed financial literacy in 39 countries and economies around the world. On average, only 34% of adults reached the minimum target score on financial literacy, which is at least 70 points out of 100. South Africa was not one of the countries assessed. However, in the 2016 survey, South Africa achieved the lowest minimum target score for financial knowledge of the 32 countries surveyed, achieving 31%.
In 2014, Standard & Poor’s Ratings Services Global Financial Literacy Survey revealed that only one in three adults worldwide could understand basic financial concepts, with low-income households, women and lower educated respondents more likely to suffer from gaps in financial knowledge.
On average, around 55% of adults in major advances economies, such as the United Kingdom, the United States, Canada, France, Germany, Italy and Japan, were financially literate (rates vary widely, from 37% in Italy to 68% in Canada). By contrast, in the so-called BRICS countries (Brazil, Russia, India, China and South Africa), 28% of adults were considered financially literate, on average (rates ranged from 24% in India to 42% in South Africa).
Financial literacy at home
The South African Social Attitudes Survey (SASAS) has been conducted by the Financial Sector Conduct Authority (FSCA) in partnership with the Human Sciences Research Council (HSRC) in 2012, 2013, 2015, 2017 and 2020. In 2020, the survey examined patterns of financial literacy over the past decade. The 2020 survey showed that South Africans scored an average of 51 out of 100 in the ‘financial knowledge domain’ – a decline from what was seen in 2015. However, about half the adult population want to learn more about financial products and services. This is encouraging as it suggests South Africans are not satisfied with the status quo.
The vast majority know that improving their financial literacy will lead to both personal and professional opportunities. In 2016, the Gordon Institute of Business Science (GIBS) investigated the use of financial literacy concepts by entrepreneurs in the small and medium enterprise sector in Mpumalanga. The research set out to understand the extent to which entrepreneurs in the SME sector pursued financial literacy concepts – budgeting, investing and borrowing – in managing their business finances. The study also aimed to establish the relationship between the use of financial literacy concepts and the performance of the SMEs. The results showed, among other things, that there is a positive relationship between the use of financial literacy concepts and the economic success of SMEs.
