An important element in any economy is the level of financial literacy of the population. When transactions among persons used to be based on barter or when there was no trade at all, money was not an issue and there was no need to understand the function of money, and there was no need to be financially literate.
When students speak of financial literacy, they are usually referring to a range of financial skills and to one’s ability to understand them and use them effectively. As such, the more sophisticated an economy becomes, the more we require such financial skills and the more financially literate we need to be.
The evolution of the financial economy with an ever-increasing array of financial instruments has enabled people to increase their wealth simply by trading in such instruments as if they were tangible products.
When our options were just a choice between a savings account or keeping cash at home, it was easy. When it became possible to earn money from the simple movement of cash from one currency to another, from one financial instrument to another, matters became complicated and the need for financial literacy became evident.
We can take a practical example. We know that financial markets have been fairly volatile in the last couple of years. There were times when they generated interesting returns to investors and there were times when they generated negative returns. One needs to ask to what extent the average person, who had invested some of their life’s savings, understood what was really going on.
Another practical example is the recent spate of financial scams. Persons who are financially literate are more likely not to fall prey to financial fraud. Financial literacy can help a person understand better how to save for one’s retirement, use debt responsibly and run a business, among other things.
I strongly believe that one way of making our economic growth sustainable is through education
A recent Eurobarometer survey shows that 18 per cent of EU citizens have a high level of financial literacy, 64 per cent a medium level, and the remaining 18 per cent a low level. There are, however, wide differences across member states. In Malta, 20 per cent had a high level of financial literacy, 67 per cent a medium level and 13 per cent a low level. Twenty-one per cent of Maltese rate their overall knowledge about financial matters as very high or quite high when compared to other adults.
Another indicator of financial literacy is how confident persons are that they will have enough money to live comfortably throughout their retirement years. Forty-seven per cent stated that they are very confident or quite confident and 48 per cent stated that they are not so confident or not confident at all.
If they lose their main source of income today, 35 per cent of Maltese said they could continue to cover their living expenses without borrowing any money or moving house for six months or more. These results are worrying as there is a large segment of the population which can be described as financially vulnerable.
It is interesting to note that the situation is not much different from that in the whole of the EU, albeit there could be significant divergencies between countries. So we are close to the EU average – not that we are like the other EU member states.
The results also indicate a need for financial education to target mainly women, younger people and those with lower income and a lower level of general education, who tend to be on average less financially literate than other groups.
I have often said that the economic growth our country has had in recent years needs to be made sustainable. We have been reaping the benefits of past good economic policies and exploited opportunities that have come our way over the years. I strongly believe that one way of making our economic growth sustainable is through education, and financial literacy is one of the components of education.