Knowledge is power

The Colombo Stock Exchange recently joined in a global effort to improve financial literacy, which remains a struggle for Sri Lanka. Financial inclusion, which is giving people access to the financial system of a country, can only be effective if individuals are aware of the risks they are taking and have the ability to be strategic in the way they make use of the financial system. In Sri Lanka, many issues – Including high levels of indebtedness – are caused by low financial literacy.  

As per Standard & Poor’s 2014 global financial literacy survey, Sri Lanka has a higher financial literacy rate than its South Asian peers. This is not a surprising factor since Sri Lanka has one of the highest adult print literacy rates in the region, and as a country with an aging population, there is greater need for competent use of the financial system to find solutions to social needs.

However, what it is noteworthy is the gap between print literacy and financial literacy. Sri Lanka has the highest gap between print literacy and financial literacy in the region. As per the survey, on average 65% of adults in the major advanced economies are financially literate. South Asia records the lowest percentage of financial literacy, with Sri Lanka coming in at about 35%. Bhutan has the highest parity between its print literacy and financial literacy, recording 65% and 55%, respectively. 

This indicates that there is more scope to promote financial literacy among Sri Lankans, and this may well be one of the main reasons behind the relatively high level of indebtedness, where despite the country’s well-developed financial system, many pockets still struggle to use it effectively. 

Financial literacy is massively important because even though about 83% of Sri Lankan adults have bank accounts, their usage of banking services is severely limited. The number of individuals who reported no deposit and no withdrawal in the past year was 31%, and only 17% of women have been successful in borrowing from the formal sector, whereas over 80% of borrowers in the informal microfinance sector are women. This shows that there is a strong gender bias towards financial inclusion and literacy as well.

Every few years Sri Lankans read about or hear of pyramid scams or informal lending schemes that provide loans at high interest rates and have landed their clients in trouble. Most of these operate outside legal purview because governments cannot police lending organisations that do not take deposits. Deposit-taking entities are generally licensed and have to perform according to regulations, but lending-only businesses, especially those that proliferate online, are very hard to control.

These organisations generally thrive on the financially illiterate, who, because of their lack of knowledge, only focus on short-term gain and have limited understanding of the long-term impact of their decisions. Perhaps the best example of this was the post-war influx of hire-purchase schemes that flooded into the North, and have now come to be synonymous with errant microfinance companies. When lenders do not understand the concept of compound interest, the results can be dangerous.

Beyond wide-ranging awareness programs, financial literacy needs to be built into Sri Lanka’s education system, with personal finance management a mandatory part of the school syllabus. Short modules can be built into vocational training, local language media and all entrepreneurship efforts. Without financial inclusion and financial literacy, everyone cannot be truly empowered.