Financial Literacy Ranking by Country
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Based on S&P Global Survey, just 1-in-3 adults show an understanding of basic financial concepts. Without an understanding of basic financial concepts, people are not well equipped to make informed decisions related to financial management such as saving, investing, borrowing, and more.
Although financial literacy is higher among the wealthy, well educated, and those who use financial services, it is clear that billions of people are unprepared to deal with rapid changes in the financial landscape. In fact, financial literacy challenges confront developing economies and advanced economies alike.
Credit products, many of which carry high-interest rates and complex terms, are becoming more readily available. Governments are pushing to increase financial inclusion by boosting access to bank accounts and other financial services but, unless people have the necessary financial skills, these opportunities can easily lead to high debt, mortgage defaults, or insolvency. This is especially true for women, the poor, and the less educated—all of whom suffer from low financial literacy and are frequently the target of government programs to expand financial inclusion.
While financial products like credit cards are worldwide well established, even in the US where they are used by 60 per cent of adults, the understanding of related financial concepts is rather low: just 57 per cent of credit card owners correctly answer the interest question.
As many countries face ageing populations and smaller public pensions, they are calling on their citizens to take a bigger role in retirement planning. The data suggest they are not prepared. Just 47 per cent of those who do not save for old age show an understanding of basic financial concepts.
Given these risks, policymakers should build strong consumer protection regimes to safeguard citizens from financial abuse and provide a functional market environment. Researchers have found that financially savvy adults are, in general, less likely to default on loans and more likely to save for retirement.
Financial knowledge is especially important in times where increasingly complex financial products are easily available to a wide range of the population. For example, with governments in many countries pushing to boost access to financial services, the number of people with bank accounts and access to credit products is rising rapidly. Moreover, changes in the pension landscape transfer decision-making responsibility to participants who previously relied on their employers or governments for their financial security after retirement.
Financial ignorance carries significant costs. Consumers who fail to understand the concept of interest compounding spend more on transaction fees, run up bigger debts, and incur higher interest rates on loans. They also end up borrowing more and saving less money. Meanwhile, the potential benefits of financial literacy are manifold. People with strong financial skills do a better job planning and saving for retirement. Financially savvy investors are more likely to diversify risk by spreading funds across several ventures.
Standard & Poor’s Ratings Services Global Financial Literacy Survey
The Standard & Poor’s Ratings Services Global Financial Literacy Survey (S&P Global FinLit Survey) provides information across a wide array of countries. It is based on more than 150,000 interviews in over 140 countries. It can be used by academics, regulators, policymakers, and funders to gauge financial literacy across the globe. By showing where financial skills are strong and where they are lacking, these new data can help stakeholders design policies and programs to improve the financial well-being of individuals around the world.
Financial literacy was measured using questions assessing basic knowledge of four fundamental concepts in financial decision-making:
1) knowledge of interest rates (numeracy). Question: Suppose you need to borrow 100 US dollars. Which is the lower amount to pay back: 105 US dollars or 100 US dollars plus three per cent? [105 US dollars; 100 US dollars plus three per cent; don’t know; refused to answer]
2) interest compounding. Questions: Suppose you put money in the bank for two years and the bank agrees to add 15 per cent per year to your account. Will the bank add more money to your account the second year than it did the first year, or will it add the same amount of money both years? [more; the same; don’t know; refused to answer]. Suppose you had 100 US dollars in a savings account and the bank adds 10 per cent per year to the account. How much money would you have in the account after five years if you did not remove any money from the account? [more than 150 dollars; exactly 150 dollars; less than 150 dollars; don’t know; refused to answer]
3) inflation. Question: Suppose over the next 10 years the prices of the things you buy double. If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy today? [less; the same; more; don’t know; refused to answer]
4) risk diversification. Question: Suppose you have some money. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments? [one business or investment; multiple businesses or investments; don’t know; refused to answer].
The S&P Global FinLit Survey findings are sobering. Worldwide, only 1-in-3 adults are financially literate. 33 per cent of adults worldwide are financially literate. This means that around 3.5 billion adults globally, most of them in developing economies, lack an understanding of basic financial concepts. These global figures conceal deep disparities around the world.
Not only is financial illiteracy widespread, but there are big variations among countries and groups. For example, women, the poor, and lower educated respondents are more likely to suffer from gaps in financial knowledge. This is true not only in developing economies but also in countries with well-developed financial markets. People with relatively high financial literacy also tend to have a few things in common, regardless of where they live. Adults who use formal financial services like bank accounts and credit cards generally have higher financial knowledge, regardless of their income. Even poor people who have a bank account are more likely to be financially literate than poor people who do not have a bank account, and rich adults who use credit also generally have better financial skills than rich adults who do not. This suggests the relationship between financial knowledge and financial services may work in two directions: While higher financial literacy might lead to broader financial inclusion, operating an account or using credit may also deepen consumers’ financial skills.
INCOME & FINANCIAL LITERACY
While in richer countries, proxied by GDP per capita, financial literacy rates tend to be higher, the relationship only holds when looking at the richest 50 per cent of economies. In these economies, around 38 per cent of the variation in financial literacy rates can be explained by differences in income across countries. For the poorer half of economies, with a GDP per capita of $12,000 or less, there is no evidence that income is associated with financial literacy. What this likely means is that national-level policies, such as those related to education and consumer protection, shape financial literacy in these economies more than any other factor.
THE FOUR CONCEPTS OF FINANCIAL LITERACY
Among the four topics that define financial literacy, inflation and numeracy (in the context of interest rate calculations) are the most understood. Worldwide, half the adult population understands these concepts. Knowledge of risk diversification is the lowest, with only 35 per cent of adults correctly answering that survey question. Risk diversification also figures into some of the largest disparities among countries.
LOWER FINANCIAL LITERACY AMONG WOMEN AND THE POOR
Financial literacy rates differ in important ways regarding characteristics such as gender, education level, income, and age. Worldwide, 35 per cent of men are financially literate, compared with 30 per cent of women. While women are less likely to provide correct answers to the financial literacy questions, they are also more likely to indicate that they “don’t know” the response, a finding consistently observed in other studies as well. This gender gap is found in both advanced economies and emerging economies (Figure 5). Women have weaker financial skills than men even considering variations in age, country, education, and income.
ACCESS TO FINANCIAL PRODUCTS AND SERVICES
Financial literacy skills are essential for people who use payment, savings, credit, and risk-management products. For many, having an account at a bank or other financial institution—or with a mobile money service provider—is an essential first step to participation in the financial system. Yet access to financial services is not an end in itself. Instead, it is a means to an end. For example, when people have financial accounts and use digital payments, they can provide for their families, save money for the future, and survive economic shocks. Digital payments can also reduce corruption by increasing transparency, and they help empower women by giving them greater control over their finances. But people who lack the knowledge to use such services effectively can face financial disasters, such as high debt or bankruptcy. It is, therefore, worth exploring the link between financial services and financial literacy.
Account owners tend to be more financially savvy, but they still lack financial skills. Globally, 38 per cent of account-owning adults are financially literate, as are 57 per cent of account owners in major advanced economies and 30 per cent in major emerging economies. Account owners who lack financial knowledge may not fully benefit from what their accounts offer. One example is savings. Globally, 57 per cent of adults save money, but just 27 per cent use a bank or other formal financial institution to do so. Others use less safe and less lucrative methods, such as informal savings groups or stuffing cash under a mattress. Only 42 per cent of account owners worldwide use their account to save, and 45 per cent of these adult savers are financially literate. Improving financial literacy might help these savers get a better deal.
It is difficult to say whether low financial knowledge makes these people less likely to use financial services. According to Global Findex, 59 per cent of “unbanked” adults say they do not have enough money to use an account. Most poor people make payments and other financial transactions every day, but they do so in informal and often more costly and less safe ways. If they were more aware of accounts and how they are used, unbanked adults might sign up for an account. Another possible reason the unbanked lack financial skills is that they do not have experience using financial products.
If they used financial concepts in their daily lives, their understanding could increase with time. The concept of interest, for example, would become more concrete as they watched the value of their savings increase. However, the most straightforward explanation for low financial skills among the unbanked is that they come from poorer and less educated households.
Credit is more common in rich countries than poor countries. Many borrowers in the emerging world are dependent on family and friends or on loans through informal lenders such as pawnshops and store credit. Access to formal credit is often confined to the rich and well educated, who tend to be more financially savvy. In the major advanced economies, 51 percent of adults use a credit card, compared with only 11 percent of adults in the major emerging economies. A smaller share of adults borrows from a formal financial institution. Fifty-three percent of adults in major emerging economies who use a credit card or borrow from a financial institution are financially literate, much higher than the average financial literacy rate in these economies. Credit cards are gaining popularity in many emerging countries, but knowledge of related financial concepts is not keeping up. Many short-term credit users do not fully understand the speed at which interest compounding can inflate total amounts owed.
ANNEX I : FINANCIAL LITERACY SCORE, by COUNTRY (Alphabetic Order)
ANNEX II: FINANCIAL LITERACY SCORE BY COUNTRY