Lack of understanding on how financial markets works is one of the significant deterrents to participation in the financial markets and in particular the stock market and share ownership. Research show that lack of literacy prevents households from participating in the stock market. Research further indicates the welfare loss from non-participation in the stock market can be sizable. Thus, the role of financial literacy should not be under-estimated. And as more people within societies live into a system where they have to decide how much to save for retirement and how to invest their retirement wealth, it is important to consider ways to enhance their level of financial knowledge or to guide them in their financial decisions.
As it were, individuals are increasingly put in charge of their financial security after retirement. Moreover, the supply of complex financial products has increased considerably over the years. However, we still have little or no information about whether individuals have the financial knowledge and skills to navigate this new financial environment. On the other hand individuals have become increasingly active in financial markets, and market participation has been accompanied or even promoted by the advent of new financial products and services. However, some of these products are complex and difficult to grasp, especially for financially unsophisticated investors. At the same time, in many economies market liberalization and structural reforms in social security and pensions have caused an ongoing shift in decision power away from the government and employers toward private individuals. Thus, individuals have to assume more responsibility for their own financial well-being.
Are individuals well-equipped to make financial decisions? Do they possess adequate financial literacy and knowledge? Existing research on this topic indicate that financial illiteracy is widespread, and individuals lack knowledge of even the most basic economic principles.
Some of the aspects for consideration as our society evolves includes asking ourselves questions such as what is the importance of financial literacy and what is its relation to the stock market development? Are financially knowledgeable individuals more likely to hold stocks? Is there a causality relationship between financial knowledge and investing in the stock market? The truth is that the lower the understanding of basic economic concepts related to economic growth (GDP), inflation and interest rate compounding outperforms the limited is the knowledge of investing in stocks, units and bonds, and what about the concept of risk diversification, on the working of financial markets?
Given what we know with regard to the limited knowledge about economics and finance among us, then it somehow says that financial literacy should not be taken for granted is we pursue domestic financial mobilization in the financing of our development. The truth is that majority of households possesses very limited financial literacy. Furthermore, given that financial literacy differs substantially depending on education, age and gender — this suggests that financial education programs are likely to be more effective when targeted to specific groups of the population. As such, privatization programs or policies and legislature actions for listing of companies from specific strategic sectors should take into account that, when put in charge of investing for their retirement, financially unsophisticated individuals may not invest in the stock market, not because they lack funds for investing in targeted companies but largely due to lack of the specific financial knowledge. Thus, to work effectively, privatization and strategic sectors’ listing programs need to be accompanied by well-designed financial education programs.
It is noted that the challenge of limited financial literacy is not only for us, but most financial literacy surveys also conducted worldwide show that a majority of the population in most nations do not have sufficient knowledge to understand even the basic financial products and the risks associated with the products. Thus, the majority of individuals may not adequately plan for their future and are likely to make ineffective decisions in managing their finances. The same is true for us where a significant proportion of the population has a very limited understanding of financial products and services. This is particularly the case among the rural poor but also across the relatively more affluent peri-urban and urban mass market.
As a result, efforts on improving financial literacy and educating consumers around financial products and services has become an essential means toward greater economic, social and financial inclusion as well as an important complement to market conduct and prudential regulation. For capital markets in particular, investor education is important to promote greater retail participation in the market on a sound basis – in other words the best protection for investors is education.
Again, for us, financial literacy, consumer education and investor education is in its early stage and programs for educating the public are conducted on a sectoral basis across the financial services sector. In most cases, within each sub-sector, whether banking, pensions, insurance or capital markets, these are done separately by the regulator, self-regulatory agencies, industry associations, and among individual firms. There are also external based efforts, mostly by non-profit, donor-funded, organisations which also provide financial literacy and education targeted at lower income groups. However, such pursuance are largely in silos and not coordinated.
That is to say though each of these initiatives is useful in its own right, a holistic and coordinated approach to financial education is needed to ensure consistent messaging and to educate consumers as to the benefits and risks of the full range of financial products on offer in market, including banking, insurance, retirement, capital market products as well as informal financial products.
At the same time, however, it is important to recognise that different strategies need to be applied to different groups of the population, owing to the heterogeneity of demand for financial services across the country, both demographically and geographically. By way of example, the content of financial education targeting the Tanzanians in the rural areas should differ significantly from the financial education provided for the urban retail mass market.