Does Financial Literacy help in developing “Financially Smart Individuals”?

Making informed financial decisions is the key to effective financial planning. Every individual is required to deal with many financial decisions daily. Easy availability of a wide range of complex financial products in the market has led to a situation of “Paradox of Choice”, Killins, R. N. (2017) for the Individuals. It is thus imperative for individuals to be financially literate. To be equipped to make decisions, people must have an understanding of the basic financial concepts. Lack of such understanding may result in unproductive decisions. Financial choices relating to investments, savings, borrowings, retirement planning, estate planning, etc are effective and more productive if made by financially literate people.

What does Financial Literacy mean?

Financial literacy is achieved when an individual has access to the information about the various products and services available in the market; the information is achieved through an authentic source; the individual can comprehend that information in a way which results in informed financial decisions, thereby leading to financial betterment and well-being. 

According to OECD INFE, financial literacy has been defined as “A combination of awareness, knowledge, skill, attitude, and behavior necessary to make sound financial decisions and ultimately achieve individual financial wellbeing.”

The U.S. Government Accountability Office (GAO) has defined financial literacy as “the ability to make informed judgments and to take effective actions regarding the current and future use and management of money. It includes the ability to understand financial choices, plan for the future, spend wisely, and manage the challenges associated with life events such as a job loss, saving for retirement, or paying for a child‟s education.” 

Basic understanding of the various financial products and services and the applicable framework of risk-reward forms the broad base for achieving financial literacy. Individuals must, therefore, appraise the key determinants of financial literacy and how they impact our daily lives. This can be the only way to wiser financial planning and welfare maximization, both- at the individual level and for the society as a whole. 

What are the key determinants of financial literacy?

The ability of individuals to control their Financials, how well they make their ends meet and their approach towards choosing appropriate products reflects an individual’s money management skills. An Individual’s level of financial planning, however, depends on the provision for Savings, knowledge about investments and attitude towards financial planning. Whereas financial knowledge of an individual can be assessed based on their understanding of key concepts such as inflation and compounding; and their knowledge about the concept of diversification. Thus, money management, Financial Planning, Financial Knowledge and Understanding are the key determinants of Financial Literacy levels. OECD INFE (2011), S&P FINLIT (2014).



As per a Global Fin Lit survey by Standard & Poor‟s Financial Services LLC (S&P) only 24% of adults or less are financially literate in India, S&P Fin Lit Survey (2014). Among the group of emerging economies, India stands at the lowest level in terms of financial literacy. This proves that financial literacy is yet to be given priority by Indian citizens. Being in a situation where 76% of its adult population in India does not understand even the basic financial concepts, the need of the hour is to refurbish the savings and investments approach of the Indian Households and develop financially smart individuals.

Killins, R. N. (2017). The financial literacy of Generation Y and the influence that personality traits have on financial knowledge: Evidence from Canada. Financial Services Review, 26(2), 143-165.

Role of financial inclusion in achieving sustainable development goals…

What is financial inclusion?
According to world bank, Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.
Financial inclusion does not only include the access to and usage of financial services by individuals and businesses but also includes the dimension of quality of the products and the service delivery. It is also a key to prudent financial development and well being, both- at the individual level and for the economy as a whole. An all-inclusive approach which considers both demand side and supply side needs to be adopted to reach global goal of Universal Financial Access (UFA) by 2020, says World bank.

What are the key indicators of financial inclusion?
First and the foremost step towards broader financial inclusion is to have access to a transaction account allowing people to exchange and save money. Thus, ensuring that people have a transaction account is the most crucial dimension of financial inclusion (Universal Financial Access 2020 initiative). Financial access opens the doorway to various financial services such as managing daily monetary requirements, long term planning and even planning for future unforeseen circumstances. However, by merely having an account, the objective of financial inclusiveness cannot be achieved. It is therefore imperative that the focus should equally be levied on the usage of these financial services, which forms the second dimension of financial inclusion.

The current status: According to Global Findex database, 2017; about 515 million adults worldwide opened an account at a financial institution or through a mobile money provider between 2014 and 2017.
• About 69 percent of adults now have an account, Up from 62 percent in 2014 and 51 percent in 2011.
• About 65% of the women adults now have an account.
• About 52% of adults either receive or make payments.
• About 87% of SME’S have an account with a formal financial institution.
• About 30% of people worldwide have Received wages or government transfer payments directly to an account.


The above facts reveal that the economy’s worldwide are progressing towards the goal of financial inclusion by staying committed to G20 High-Level Principles for Digital Financial Inclusion, Universal Financial Access (UFA) by 2020, Sustainable Development Goals, National financial inclusion strategies, financial consumer protection and literacy and many more initiatives taken so far in this direction.

What are Sustainable Development Goals?
A new set of development goals adopted by the United Nations General Assembly in Sept 2015, are collectively called as Sustainable Development Goals (SDGs),2030. After years of deliberation and negotiation, the agenda for these goals was put in place and has been endorsed by around 193 member nations of the General Assembly including booth developed and developing countries. The SDGs cover a set of 17 goals.(

How does financial inclusion help in achieving sustainable development goals?
Financial inclusion offers wide range of benefits such as Improving earning potential, enhanced women empowerment by encouraging women entrepreneurs, reduction in the costs of transactions, easy accumulation of funds, increased use of digital platforms etc. While financial inclusion does not explicitly targets achieving the SDG’s, greater access to financial services has paved the way for achieving a number of sustainable development goals. Financial inclusion has been identified as an enabler for 7 out of the 17 Sustainable Development Goals, says World Bank.

The following SDG’s can be achieved via increased financial inclusion:
A better access to financial services enables the people even in the rural segments of any country to have better access to funds and other related financial services. This enables people to come out of poverty and thereby enabling the first SDG i.e Eliminating extreme poverty (SDG 1). Better and improved access to avenues for raising funds, access to crop agricultural insurance and improved credit facilities also enables the people working in the primary sector to mange their finances in the season for plantation and thereby generate higher yields. It not only improves food production in the country but also generates food security in the economy, which is the second SDG i.e. Reducing hunger and promoting food security (SDG 2).When people are able to come out of the poverty line, are ensured of their food security ,have access to various insurance facilities; achieving the third SDG i.e. Achieving good health and well-being (SDG 3), is bound to fall in place. Increased availability of funding options has removed the barrier of monetary constraints which stop people from getting educated. People are encouraged to invest in educating their children and this enables the achievement of the fourth SDG i.e. Fostering quality education (SDG 4). Financial inclusion has also encouraged women entrepreneurs to take up ventures which earlier were impossible for them. Enhanced women empowerment is the key to promoting gender equality (SDG 5), the fifth SDG. Financial exclusivity weakens up the thread between smaller goals and larger socio-economic goals. These five SDG’s acts as a strong base for achieving broader socio-economic goals such as Promoting shared economic growth (SDG 8) and Promoting innovation and sustainable industrialization (SDG 9).

Given the fact that there exists an association between Financial inclusion and overall economic development, it can be concluded that greater emphasis should be laid on financial inclusiveness.