The challenges of financial literacy in Southeast Asia
The rise of the (Southeast) Asian consumer will be a dominant economic theme for the next several decades. It is forecast that by 2030, two-thirds of the global middle class will be living in Asia. Juxtaposing the traditionally dominant developed economies, North America and Europe will together account for only a fifth of the world’s middle-class population, down from more than half in 2010.
Asia’s population is expected to grow to almost 5.3 billion by 2050. Millions of households will enter the middle class, becoming major consumers with rapidly growing disposable incomes. The American consumerism dream of the 20th century will become the Asian dream of the 21st century: the demand for homes, cars, smartphones and financial services will increasingly come from the East. But without any education on the principles, how are they going manage all this new money?
The challenge is, most Asian countries haven’t been educated to take advantage of disposable income in a healthy fashion. This isn’t their fault, the education system has failed everyone here. But the Southeast Asian economies are well below the global average in their understanding of basic financial principles. A new report released by ratings agency Standard & Poor’s and the World Bank — the Standard and Poor’s Ratings Services Global Financial Literary Survey — a rather simple five-question list on financial matters such as risk diversification, inflation and compound interest — was posed to 150,000 adults in more than 140 countries last year. It turned out that a staggering two-thirds of people surveyed failed the short test of basic financial concepts.
South Asia is home to countries with some of the lowest financial literacy scores, where only a quarter of adults — or fewer — are financially literate. Southeast Asia ended somewhere in between, with the Philippines, Vietnam and Cambodia yielding the worst results, and Singapore scoring best (although dropping recently).
“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,” the report says, adding that “they also end up borrowing more and saving less money.”
The story above sounds surprising, until you read the stats to understand the cause:
· We spend a whopping two cents on financial literacy for every $100 spent on education.
· 40% of adults gave themselves a C, D or F on their knowledge of personal finance and almost 80% believe they could benefit from financial advice regarding everyday decisions
· 60% of adults admit to having no budget
· Over one-third of adults pay only the minimum credit card balance
· Average family credit card debt is $15,000
· A depressing 60% of households have no savings and parental role modelling is the single biggest influence on youth financial habits, creating a virtuous cycle of insecurity
· Even more acute, the results of studies demonstrate that women have been stagnant in the financial literacy since the 1980’s and 1990’s
A major consequence to the lack of financial literacy in developing Southeast Asia, is the rise in thriving loan sharks businesses. In Thailand, millions of the poorest and most illiterate become prey of unscrupulous and organized black market lenders who cash in up to 20% interest on a small loan — per month. Illegal moneylenders marketing to individuals with no systematic access to loans, who also have no judgement about the extent of usury they are exposed to, regularly get duped. It’s no wonder they prefer to keep their money safe under their mattresses!
Here are some interesting facts from selected ASEAN countries to highlight the criticality of this issue:
Singapore, while evidently the highest scoring in the Southeast Asian region when it comes to financial literacy, still suffers from the raw fact that a third of working Singapore adults are not planning for their retirement, with 40 per cent of them acknowledge they lack an understanding of financial optimization, and another 25 per cent not knowing when or how to start planning.
Women are even worse off. Although 67 per cent of men surveyed in Singapore were financially literate, only 52 per cent of women hit the threshold for financial literacy among the largest gaps among the 140 countries in the survey.
The “financial literacy level of the average Filipino remains alarmingly low — a problem that begins with poor childhood education that persists until their adult years”, according to the country’s financial regulator. The Bangko Sentral ng Pilipinas (BSP) said Filipino adults could correctly answer only three out of seven financial literacy-related questions covering basic numeracy, computing compounding interest, fundamentals of inflation and investment diversification. Citing the results of a study by the World Bank, the BSP said only 2 percent of Filipino adults answered all questions about financial literacy correctly.
Malaysians still lack understanding on risk and return and are not able to make rational financial decisions. NM’s Financial Capability and Inclusion (FCI) Survey that was conducted in 2015, which found more than 75 per cent of Malaysians said it was a challenge to raise any amount of immediate cash in the event of an emergency. Only 32 per cent of Malaysians have enough money to cover a week’s expenses, at most, should they lose their source of income. If there’s an emergency, Malaysians usually resort to cutting down on spending, or borrowing from friends and family members, or depending on credit lines, such as credit cards and instalment plans.
Household debt has piled up over the past five years, reaching 82 per cent of gross domestic product. Borrowings are also ridden with delinquent payments, reflecting deteriorating credit quality, and a credit-card delinquency rate currently at 7 per cent, compared with Singapore and the United States at 5 per cent and 3 per cent respectively.
The combination of low saving, high debt and bad credit has been partly spurred by recent government packages such as the first-car scheme and bank’s underwriting standards. It is irrefutable that individuals contribute to a fair share of the problem due to a lack of financial knowledge and discipline.
So we know there’s a problem, now what do we do?
It’s important to recognize that the potential benefits of financial literacy are manifold. People with strong financial skills do better job planning and saving for retirement. Financially savvy investors are more likely to diversify risk by spreading funds across several ventures.
So the question is: As Southeast Asia continues to develop economically and household incomes are on the rise, the question becomes — how do we improve personal financial literacy education to set our people up for success?
With the aim to improve financial literacy, many countries in Southeast Asia have already implemented financial literacy programs aimed at various segments of the population (urban, uneducated, female, unemployed, etc.). But there is a large disparity between awareness and action, resulting from a lack of financial education (Indonesia, Philippines, and Malaysia), a lack of trust in financial institutions (Malaysia) and a perceived lack of funds (Indonesia).
“A practical understanding of how to manage money, including saving and borrowing, should be provided by parents and taught at school. The goal is to eventually develop financial know-how so that people can effectively manage money matters such as household cash-flows and loans,” said Deborah Heng, group head and general manager of MasterCard Singapore.
That´s why programs need to focus on education of financial literacy through the programs that can best help regional groups to make good financial decisions. The programs should be designed to target specific subgroups and regions to tackle distinctive needs of each population segment. Possible actions include introducing practical financial education into all primary school curriculums. Through this approach, rural populations can have access to the basic financial knowledge, and we will set the next generation of spenders up for real success in the future.