In preparation for the 2015 Global Forum on Development, which will focus on how access to financing can contribute to inclusive social and economic development, the OECD Development Centre and the United Nations Capital Development Fund (UNCDF) have developed a series of articles exploring the key issues and dimensions of financial inclusion. Today’s post from Sarah Bel of the UNCDF Better Than Cash Alliance and James Eberlein of the OECD Development Centre highlights some of the overarching themes related to financial literacy.
“Most of our problems are based on finances. Money is always an issue. I have to still provide for both my parents who are not working and make sure they are fed; I must pay their insurance policies because they no longer have the ability to pay them. I don’t earn enough money to afford all of that.” – A 35-year-old man from Lesotho, interviewed as part of the UNCDF Making Access Possible initiative
Have you ever tested your financial literacy? Read what follows and you’ll get a better sense of why this matters more than you may have thought.
Low-income consumers must make complex financial decisions even more frequently than middle or high-income consumers, given their smaller operating margins and their limited and irregular incomes. A forthcoming report by UNCDF on Lesotho and Swaziland shows that many workers forfeit up to 40% of their income because of burdensome loan repayments. Indebtedness in the informal consumer market is often an indicator not only of poverty, but also limited financial literacy.
Yet these problems are not limited to poor consumers or low-income countries. While households in advanced and emerging economies have gained increased access to a wide range of financial products, they seldom have the capacity to fully understand and master them. In response to the growing concerns about over-indebtedness, policymakers across the world are focusing on “predatory” lending, which takes advantage of financial illiteracy to push inappropriate loans to consumers who cannot repay them. Some common-sense reforms, like those implemented in France, now require lenders to include a disclaimer (“You are responsible for paying back a loan. Verify your ability to repay the loan before borrowing.”) Additionally, all marketing material must include plain-language explanations of the long-term cost of loans (interest rate, total amount due and the final cost of the credit). South Africa’s Broad-Based Black Economic Empowerment (BBBEE) legislation has specific regulations around financial education and consumer empowerment as stipulated under the Financial Sector Codes. The purpose of these types of regulations is to improve financial capability and increase financial inclusion. But while such reforms have helped improve the protection of financial consumers, they only address part of the problem.
Many people, in developed and developing countries alike, know little about basic financial concepts and do not engage in savvy financial behaviours. An OECD paper shows that in almost all of the 14 countries across 4 continents taking part in the study, at least half of the adult population failed to identify the impact of interest compounding on their savings, and revealed that fewer than one in five people would shop around when buying financial products.
Unfortunately, the picture isn’t any brighter when it comes to young consumers. The recently published OECD PISA financial literacy assessment revealed that around one in seven students in the 13 OECD countries and economies taking part in the assessment are unable to make simple decisions about everyday spending, and only one in ten can solve complex financial tasks. This result is astonishing and requires prompt action to ensure that tomorrow’s adults understand bank statements, the long-term costs of consumer credit and how insurance works, among other basic financial services and products. Indeed, improving the financial literacy of young people will help ensure that they can benefit from savings, retirement and healthcare coverage — much-needed safety nets in the absence of parents and/or social systems. And in case you wonder if you’re any better off than a 15-year-old when it comes to financial literacy, have a look at these sample questions.
To help governments design and implement policies to increase financial skills, including among young people, the OECD and its International Network on Financial Education (INFE) developed High-level Principles on National Strategies for Financial Education, which were endorsed by G20 leaders in 2012. They encourage countries to develop nationally co-ordinated frameworks for financial education policies and provide general guidance on the main elements of an efficient national financial education strategy, such as an effective mechanism to co-ordinate with civil society and the private sector.
Governments may involve financial service providers and other key stakeholders to build the financial capabilities of young people and adults through a variety of delivery channels. Rwanda’s national strategy, for instance, underlines the importance of using not only schools to deliver financial education, but also other innovative channels to reach vulnerable, out-of-school youth. Umutanguha Finance, one of the ten institutions supported by the UNCDF initiative YouthStart, empowers teenagers to deliver financial education on issues like savings to younger children. This peer-to-peer approach is particularly useful because young people tend to listen to their peers more than adults, and the participative approach helps foster youth as agents of change in their own communities.
Financial literacy programmes can play an important role in reducing economic inequalities as well as empowering citizens and decreasing information asymmetries between financial intermediaries and their customers. Public authorities have a responsibility to develop financial education policies and set up robust financial consumer protection frameworks to ensure that consumers are informed and understand the financial products available to them. Innovations such as electronic payments are tipping the economic scales in favour of those who have, for too long, been excluded from the system. But unless consumers are equipped to make sound decisions about use of financial services, no amount of innovation will bridge the gap.
On April 3rd, the OECD Financial Roundtable (FRT) dealt with SME financing beyond traditional bank loans, emphasising the role of securitisation, private placements and bonds. In today’s post, Marcus Schuller of Panthera Solutions gives us his personal view on the meeting in this article we’re co-publishing with Panthera.
The crisis saw traditional channels of credit for SMEs drying up or becoming restricted. Deleveraging became the order of the day for governments, consumers and banks. And yet, although many SME managers think that banks won’t lend to them, a recent ECB/EC SME survey suggests that nearly two-thirds of SMEs in the EU who applied for external finance got everything they applied for. The actual bottleneck comes from increasing interest rates and even more so increasing non-interest related costs (fees, charges, commissions) which make bank loans increasingly unattractive for SMEs.
Non-bank financing alternatives need to be strengthened
So what alternative financing sources are available?
In Europe, short-term options are limited due to the missing culture of direct market financing. Bank loans account for around 50% of firms’ external financing, whereas in the US, around 80% of firms’ financing comes from capital markets (equity and debt securities). Therefore SME financing in Europe via private placements or corporate bond issuances is unknown territory for many. The German Mittelstand tries to change this by placing an increasing amount of corporate bonds (Mittelstandsanleihen) especially in the retail segment. Since 2010 about 150 issuances worth EUR 7.26 billion were offered, of which EUR 5.77 billion were placed. At a first glance, it looks like a success story. However, as this market segment lacks transparency, standardisation and creditor protection, we have seen retail investors being burnt. Almost every tenth issuer has defaulted by now, although for most of the bonds, repayment will only kick in in 2015. In short, the worst is yet to come.
Which leads to a first insight into SME financing: it lacks of standardisation. SMEs are difficult to analyse due to their heterogeneous character. Small companies have different needs than medium-sized ones. Financing differs strongly between sectors and countries.
False promises of securitisation?
No wonder the large banking institutions were lobbying strongly at the FRT for an instrument they know very well how to make money with, namely securitisation. Securitisation is the practice of pooling various types of contractual debt and selling it in various forms to investors. In theory, this sounds like an elegant solution for all parties involved. But if the term “securitisation” is now known outside specialist circles, it’s because of the disreputable reputation it acquired during the Great Recession.
The representative of a large banking institution at the Roundtable didn’t see it like this, arguing that the bad reputation was due to a conspiracy of governments and regulators, driven by a “hostile sentiment”, and that securitisation did not contribute to the severity of the Great Recession.
Others may be more persuaded by what happened to subprime mortgage securitisation, or the numerous SEC mortgage fraud settlements with large banking institutions. Thanks to the settlement culture, especially in the United States, no institution had to admit any intentional wrongdoing, which makes their claim to have changed for the better not necessarily trustworthy. To be clear, securitisation is not harmful per se. It has been misused.
If we should ever again consider securitisation as part of the solution and not the problem, investors need better tools to distinguish good products from bad. In recent years, regulators and the more reasonable industry representatives have worked on those tools. Several financial regulations and other initiatives have already been implemented in the EU. Only days after the OECD FRT, the Bank of England and the ECB published their joint paper on securitisation. The paper supports strongly the value of high quality securitisation.
Could the securitisation market in Europe be large enough to solve SME financing issues? The outstanding amount of asset-backed securities (ABS) in the EU is currently about EUR 1500 billion, or around one quarter of the size of the US ABS market. Since its peak in 2009, the outstanding amount has decreased by half, to EUR 750 billion. Apart from investor-placed issuances remaining far below pre-crisis levels, secondary market activity is thin in many segments.
Residential Mortgage Backed Securities (RMBS) form by far the largest securitisation segment, accounting for 58%; SME ABS are second, but account only for 8 % of the market. The SME ABS market volume stands at EUR 120 billion. In comparison, for the EU as a whole, the aggregate volume of credit supplied to non-financial corporations was close to EUR 6 trillion in 2011. Even with the exact amount lent to SMEs remaining unknown, it is obvious that SME ABS will not be strong enough to substitute for impaired lending channels all alone.
Information is power
Instead of elaborating on available alternatives like private placements, corporate bonds or shadow banking options (crowd-investing, SME financing via hedge funds, etc.), I sensed the necessity during the FRT to highlight a prerequisite before alternative sources can be considered. In my experience SME managers and owners are experts in their field, but not in corporate finance. They don’t know the technical vocabulary and lack knowledge about available alternatives.
And although banks like to talk about servicing clients in advising them on financing, information asymmetry between the bank and an SME representative puts the latter at a disadvantage. By not asking the right questions and not knowing the limits in negotiations, the agreement automatically favours the bank. SME managers and owners need to be supported by independent advice, no matter if it is coming from the regulator or an independent market participant.
In short, educate and empower the SME entrepreneur and manager. If this succeeds, financing options will become significantly more diverse. The single offering, be it a bank loan or something more sophisticated, will have to compete with viable alternatives. Like that, market forces on relatively level playing fields would take over again. A solution that is as desirable as it is sustainable.
SMEs and the credit crunch: Current financing difficulties, policy measures and a review of literature Gert Wehinger Financial Market Trends (OECD journal), March 2014
Today’s post is by Julia Kukiewicz, Editor and Lyndsey Burton, Founder of Choose, a consumer information site that’s been covering personal finance in the UK since 2003.
As world leaders traded notes on the financial services that will shape consumers’ lives at the G20 in September, OECD head Angel Gurría had a few thoughts for the consumers themselves. “Individuals are increasingly responsible for taking key financial decisions in a complex and volatile environment,” he told reporters. In most developed countries, public welfare is shrinking and the products growing up to replace it are complicated, Gurría added.
The speech underlined the OECD’s continuing support for financial education, even as critics of government and private consumer education projects grow louder. Such criticisms threaten to derail the project of widespread financial education before it even gets off the ground in countries like the UK. But OECD support can and should help. In this post, we’ll look at the challenges the UK project is facing and how policymakers could overcome them.
First, some background: the UK will bring financial education into the school curriculum for all children between the ages of 11 and 16 from September 2014. As in other developed countries, the UK always had a financial education movement but it has grown in response to the financial crisis. Financial education’s inclusion in the national curriculum (the guide for all lessons in the state schools that are the majority in the UK school system) has been seen as a grassroots victory. Consumer groups pushed for the measure with considerable public support.
As the UK prepares to roll out financial education, however, it faces a number of problems:
- High expectations among those that supported the measure and who expect to see results.
- Increasing concern that financial education will be co-opted by banks pursuing their own interests and, in particular, choosing to push financial education as a replacement for greater regulation.
Managing high expectations
High expectations might not seem like such a big problem and, in some ways, they aren’t: it’s great that people are excited about financial education. If those expectations are going to be fulfilled in a way that we can see, however, it’s going to mean a real commitment to big ideas in the classroom and to measuring the real effects of those classes on consumer behaviour.
For example, at a recent Treasury hearing into financial education, consumer group representatives said they believed that financial education in schools will be ”crucial” to avoid mis-selling scandals and other problems, like high levels of debt, in the future. They also argued that children’s education could flow back to their parents. “Prevention is better than cure, being both cheaper, effective and potentially less damaging,” the UK’s leading financial education charity – PFEG – summed up. That’s quite a claim however, and one that needs to be measured.
From 2015, the UK – alongside some other countries – will start to monitor pupil’s financial literacy through PISA testing, perhaps the world’s largest comparison of education levels between countries. This type of monitoring is vital if we’re going to foster effective policies that can help children grow up into informed consumers.
Where do banks fit in?
Similarly, many don’t see any problem with banks being involved in financial education: after all, they have a lot of money to spend on it. In the UK, groups like PFEG, who provide resources to schools that want to offer lessons in personal finance, include resources provided by the UK’s big six banks and also help bank employees to come into the classroom to deliver their messages. The charity says that teachers and pupils are happy with the results but, critics say, allowing banks to lead education will inevitably lead to lessons that could encourage very young consumers to take on debt for example, and will privilege learning about products over learning mathematics skills that may make them more financially capable in the future (pdf).
Currently UK MPs are debating what role the Money Advice Service, a general consumer interest and information group which primarily offers basic money advice face-to-face and online, should take in school based financial education. It has been suggested that it should be up to the Money Advice Service, as the Government’s primary consumer help service, to take a much more active role, and reduce the influence of the banks. The OECD has strongly supported levies on the financial industry to pay for consumer protection measures and, in the UK, a statutory levy is what pays for the Money Advice Service. As it stands however, the Money Advice Service wants to take just a supervisory role in school based financial education, setting up standards and codes of practice for the UK’s many charity and non-profit financial education groups to follow.
With respect to concerns about banks’ involvement in educational resources and delivery then, UK policymakers could do well to look overseas and see how other countries have dealt with these competing interests.
At a much higher level, the UK could also seek out the experiences of other countries as it attempts to balance education with regulation of the banking sector.
Many have argued for example, that the roots of the financial crisis can be found in policies that failed to protect consumers, not in a lack of consumer education; regulators allowed the subprime mortgage market to thrive in the US, for example, that consumers chose to take out those loans was just part of the problem. As in other countries, the UK Government was already inclined to implement measures that could increase consumer protection as a result of global pressures. However, measurement of the effectiveness of regulation, as well as financial education by bodies such as the OECD is needed to help ensure that Governments don’t sidestep their responsibilities to protect consumers by favoring just one approach.
How the OECD can help
The OECD International Network for Financial Education (INFE) has been attempting to monitor these financial education policies and identify best practices since 2010. As it sets up its classes, the UK desperately needs to see what types of financial education have been effective in actually changing behavior in other countries.
The work of INFE as well as the results of PISA research into financial education could be a useful resource as the UK Government looks for a realistic view of what education can do.
The independent judgment of the OECD, in the form of PISA testing, for example, will also be a key resource for the UK as it looks to monitor the results of the financial education it does choose to implement in schools.
Finally, the OECD can encourage governments, in the UK and elsewhere, to strengthen their commitment to protect consumers from harmful products and harmful practices at the point of sale. This commitment is not incompatible with the drive for greater financial education: the two should go hand in hand.
Public consultation: Guidelines for private and not-for-profit stakeholders in financial education. INFE is developing guidelines intended to address the involvement of private and not-for profit stakeholders in the development and implementation of national strategies for financial education. The draft text of the guidelines is now available for public comment. Comments received will be taken into account when preparing the final version of the guidelines. Submission deadline is 10 January 2014
What’s the most depressing book you’ve ever read? I sniggered at Jude the Obscure until I got bored, and I felt that the eponymous little twerp in The Sorrows of Young Werther was lucky his girlfriend didn’t blow his brains out for him. So imagine my surprise to find a book published by the OECD of all people that touched me deeply. Improving Financial Education and Awareness on Insurance and Private Pensions gave me a stark, uncompromising insight into the error of my ways.
Page after page describes all the stupid things people do when buying insurance or planning for retirement. Like all great literature, you can hear the author’s voice as you read. In this case, I’m sure they were two, and you could hear one saying “We’ve got to be thorough, cover all the possible cases” and the other replying “Come on, nobody’s that stupid!” He was wrong. I kept thinking: “That’s me! So is that! Oh no, that’s me too”. By the time I’d finished, I was in shock, but like the hand bursting from the grave at the end of a horror film, there was worse to come.
Once they’d finished listing all the daft things you shouldn’t do, the next stage of the descent into hell described all the clever things you should do. Not once did I cry out in relief “Yes, I did that”. No, I found myself muttering: “What’s that? Never heard of it. What are they talking about?”
So, apart from me, who else has a problem? Most of us, according to a joint report by the G20 Russian Presidency and the OECD that’s just been released following last week’s summit in St Petersburg. This time, it’s the report’s authors who are worried, because of: “… the long-term implications [in a growing number of countries] of low levels of financial literacy among the majority of the population.”
Women are particularly affected, and even though they appear to be better than men at keeping track of their finances, this short brochure produced by the OECD Directorate for Financial Affairs shows why there’s reason to be worried. For example, almost 60% of women in Poland don’t know that high investment returns are accompanied by high risk (45% of men don’t know either).
Women earn 16% less than men on average in OECD countries and spend more time outside formal employment and the social protection schemes linked to having a job. That helps explain why they tend to save less than men, especially for retirement, have more trouble making ends meet, and face a higher risk of poverty in old age. When choosing financial products, women are less likely than men to shop around, or to use independent advisors.
The G20 report identifies youth as another priority, and there’s also a brochure about financial education in schools. Again, there are some worrying statistics, for instance three-quarters of young Danes have little or no knowledge about interest rates. (I’m not sure what to make of the 96% of teenagers in the UK “who say they worry about money on a daily basis”. Maybe they could be financially educated to understand they can’t get everything they want.) The OECD recommends starting young and building financial literacy into school curricula from an early age. This is all the more important given that in many cases their parents or carers may not know much about finance themselves, and in some cases may even be worse than useless because of the bad example they give.
Last week’s G20 also heard from the G20/OECD task force about implementing the G20 “High-level Principles on financial consumer protection” endorsed in 2011. High-level here refers to the fact that the principles are not all that detailed, such as this one: “Strong and effective legal and judicial or supervisory mechanisms should exist to protect consumers from and sanction against financial frauds, abuses and errors.” As you can imagine, actually translating that into effective practice in different national contexts takes time, and the latest report is the ninth draft.
We’ll bring you up to date on progress as it happens. In the meantime, I should point out that the book I mentioned at the start wasn’t totally depressing. In fact, just when all hope had gone, I realised I wasn’t alone in my despair. Here’s what restored my faith in human nature: “A survey by the Royal Bank of Canada finds that respondents consider choosing the right investments for a retirement savings plan to be more stressful than going to the dentist.” I love Canadians.
Today’s post is from Kate Lancaster, editor in charge of publications on social and financial issues and employment at the OECD.
Babylonians, Romans, Puritans did it,
Teens and queens and epicenes do it,
Let’s do it, let’s be resolved…
(apologies to Cole Porter)
For millennia, people have rung in the New Year with resolutions for self-improvement. Ancient Babylonians made promises to their gods, in particular that they would return borrowed objects and repay loans; Romans made vows to Janus, the deity whose two faces simultaneously looked back to the past and forward to the future. Puritans fasted, prayed and resolved to be free of sin in the year to come.
In the 21st century, the habit of making New Year’s resolutions is still going strong. The perennial favorites are saving money and losing weight, though the US government also includes drinking less, eating more healthily getting a better education or better job, improving fitness, managing stress, quitting smoking, recycling, taking a trip and volunteering on its list of popular resolutions.
If these are the areas in which we feel we need to improve, does this mean we are all overweight, in debt, under-educated, poorly employed, unfit, stressed-out smokers, without the time to take a vacation, do our part for the environment, or help others? What’s the real picture in OECD countries?
Health data reveal that we’re smoking less, with rates dropping about 20% during the last 10 years, in most countries. When it comes to alcohol, however, the picture is less positive. We may be smoking less, but we’re not necessarily drinking less too. The average rate of alcohol consumption in the OECD has gradually fallen during the past 30 years, but by how much varies widely from country to country, and drinking has even increased in places. We’re getting fatter too. Data show that more than 50% of adults are overweight or obese in 19 out of the 34 OECD countries and this is projected to rise to 65% or more in some OECD countries by 2020.
While our bodies might not be faring so well, our minds are. More adults than ever have at least a high school education in the OECD and the same is true for higher education. The rate of graduates has been steadily rising as well and today nearly 210 million people in OECD countries have completed a degree. For those finishing their education today, however, the job market is tough, as it is for those with lower levels of skills or long periods of unemployment. With 15 million more people unemployed today than five years ago, it’s clear that finding or changing jobs in today’s economic climate is challenging.
What about managing our money? If the crisis has showed us anything, it was that many of us need some financial education. The OECD is working on measuring what we know: the Programme for International Student Assessment (PISA), for example, is including financial literacy in its 2012 testing of 15-year-olds’ competencies. And the OECD and the International Network on Financial Education are collaborating on a portal for financial education information and resources.
So the picture is mixed as we start 2013… perhaps we need those resolutions after all. The real question is, perhaps, where is the data on keeping resolutions?
Gateway for Financial Education
Today’s post is contributed by Chiara Monticone and Flore-Anne Messy of the OECD’s Financial Affairs Division
International Women’s Day traditionally attracts media attention to differences between men and women, such as the number of women on company boards, income gaps, and so on. However, awareness of gender differences in financial literacy and of their potential implications has remained quite low even though policy makers now recognise financial literacy as an essential life-skill, and financial education has become an important policy priority as a complement to financial consumer protection, inclusion and prudential regulation. The G20 Mexican Presidency for example has called on the OECD to develop High Level Principles on National Strategy for Financial Education that are expected to be approved by G20 leaders in June 2012.
A new working paper from the OECD’s Financial Affairs Division, Empowering Women through Financial Awareness and Education, reveals that women perform worse than men on tests of financial knowledge on average. For instance, in the US, while 60-70% of men can correctly answer questions about calculating interest or about inflation and risk diversification, only 50-60% of women can do so.
Moreover, women tend to be less confident about their financial skills than men in several domains. For instance, a study conducted in Australia reveals that women are generally as confident as men in their ability with everyday money management, including budgeting, saving, dealing with credit and managing debt, but that they are less confident than men when it comes to more complex issues like investing, understanding financial language and planning for retirement.
Evidence on vulnerable sub-populations suggests that women at either end of the age spectrum, low-income women, and widows may be more vulnerable to the negative consequences of low levels of financial literacy than other women, or men in the same subgroups.
This is worrying because lower levels of financial literacy can reduce women’s active participation within the economy, as well as effective personal and household financial management. Greater financial literacy could enable women to be better equipped to access and choose appropriate financial services , as well as to develop and manage entrepreneurial activities. Moreover, as women tend both to live longer and earn less than men, they are more likely to face poverty or financial hardship later in life.
All this is amplified by the fact that public policies in many countries have shifted a range of financial risks and related decisions to individual consumers. In addition, women’s lower financial literacy can reduce their economic power within the household, and the transmission of knowledge to the next generation.
A survey of authorities in developed and emerging economies reveals that some of them – including Australia, India, Lebanon, New Zealand, Poland, Turkey, the UK and the US – acknowledge the need to address the financial literacy of women and girls, and have implemented financial education programmes targeting them.
However, there is scope for improvement. Gender differences in financial literacy and behaviour should be explored further, to gain a deeper understanding of the specific aspects of financial literacy that might negatively affect the financial wellbeing of women, and design better targeted policy interventions. For instance, more needs to be learnt about why women’s levels of financial literacy are lower than men’s.
The OECD International Network on Financial Education (INFE) is working to address these issues by collecting and analysing internationally comparable data using the OECD/INFE Financial Literacy Core Questionnaire for adults and the 2012 PISA Financial Literacy international option for 15 year olds; identifying and comparing effective financial education programmes; and developing high-level policy analysis.
8 March is the centenary of International Women’s Day. This year, we mark the occasion with a series of blog posts about initiatives to strengthen gender equality worldwide. In this post, Flore-Anne Messy of the OECD’s Directorate for Financial and Enterprise Affairs discusses women and financial education.
Elderly women in OECD countries are 30% more likely than men to be poor. Women receive $75,000 dollars less pension on average over their lifetime than men, despite living 5.6 years longer. But whatever their age, poverty rates for women in OECD countries are higher than for men.
It’s not just that women generally earn less than men. Where money is concerned, there are also big gender differences in knowledge and skills. Research in the US and other countries shows that women are less likely than men to give the correct answer to financial knowledge questions. They are also more likely to lack confidence in their own skills, be cautious investors, and to have insufficient funds for retirement. This cautious approach does have advantages but can severely impact on retirement funds. Studies in the US suggest that women’s retirement pots are, on average, a third smaller than men’s. (more…)