The impact of the lack of financial education amongst consumers a South African perspective

The impact of the lack of financial education amongst consumers: a South African perspective

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Abstract

The purpose of this article is to investigate how financial literacy interface models contribute towards financial information comprehensibility to decision makers in the South Africa. The way South African consumers and institutions use financial literacy concept suggest that various people attach different meanings to the financial literacy aspect. To establish a theoretical model for any given financial literacy, this study accomplishes what financial literacy entails.

CHAPTER 1: INTRODUCTION

Financial stress occurs when an individual or a system is undergoing some strain (Tytell et al, 2009, p. 12). When somebody is undergoing financial stress, he or she finds it difficult to meet some of his or her financial obligations. Performing his or her duties at home or at work might also be challenging for the individual, even though the origin of the problem is financial in nature. This is a dilemma that so many people across the world go through and finding ways of overcoming these problems might turn out to be beneficial. Diamond and Vartiainen, in their book Behavioral Economics and Its Applications (2007) indicate that the financial literacy relates to how the individual behaves in regards to how they handle their finances (Diamond and Vartiainen, 2007, p. 25).

Financial stress has a negative impact on the employee performance. When an employee goes through financial stress, the possibility of being absent from work is high, he or she does not get the satisfaction from the payment given, committing to the job also becomes a challenge and the general performance of the employee diminishes (XIAO, 2008 p. 382). Researchers have also found financial stress as one of the reasons that can affect an individual’s health negatively, which in turn affects the performance of the employee at the work place (XIAO, 2008 p. 382). According to Xiao (2008), the workers that have higher stress levels are likely to have the be absent from work frequently and if they are at work, they spend a lot of time thinking about their finances, which reduces the time that they spend working (XIAO, 2008 p. 382).

Managing an employee well is an asset for an organization. This is because managing an employee well leads to his or her commitment to performing tasks, which is an asset to the organization (Aftab & Javeed, 2012 p. 10). If the employer ignores their stress and does not cater for the needs of the employees, there is a possibility of having counterproductive behavior at the work place. This behavior does not only affect the organization, but when a majority of the work force in a nation is not productive in their work place, it might end up affecting the economy of the whole nation. In the first class and emerging economies, there is a big challenge on how to handle stress that is a product of mismanagement of finances on a personal level. It is a challenge because there are consequences to the performance of the economy when the work force cannot perform their work-related duties efficiently. Changing the attitudes that people have over money is not easy because people tend to prefer immediate gratification when spending their money. Not so many people think of saving for the future needs after retirement.

Problem Statement

Many South Africans face economic hardships brought about by the lack of financial literacy. Lack of financial literacy causes several problems; one of the major problems being the unequal distribution of resources. In South Africa, including some other countries in the world, many people go through hardships because of the lack of financial education. This does not only affect the personal lives of the people but also the economy as a whole. It affects the economy through a decrease in production that results from the financial stress that the work force goes through. Little or lack of money can be something that affects relationships, health and even the performance of an individual in the work place. The stress reduces their ability to work efficiently, which might create an economic underperformance. When the country goes through this type of crisis, distributing resources across the population becomes difficult.

It is important to fix the problem of financial illiteracy because of a number of reasons. The main reason would be to change the attitude of people towards how they handle their finances. This attitudinal change focuses on directing people towards making wise financial decisions, consequently reducing their stress levels, and enhancing their productivity in the workplace. The lessons should not only focus on the benefits of making wise financial decisions in their daily lives but also on the need to have a plan for the retirement years.

Purpose of the study

This study aims at analyzing the current levels of financial education among the consumers in South Africa. After the analysis of the current education levels among the consumers, the identification of the weaknesses becomes easy, making it possible to look for ways to improve the situation. The analysis will also make it easy for the identification of the strengths. Improving in the strengths is necessary not only for the individual but also for the entire country. It is important for the entire nation in the sense that the improvements might work in reducing the stress levels that the people go through, which would make them more productive in their work place. Once their productivity improves, the entire output of the country might also improve.

OECD defines financial education as the process that people go through to improve their understanding of the financial products and financial concepts. They get this information through advice from experts in the field and through reading materials with the information. This makes them have the ability to develop skills essential for making wise decisions in the management of their finances. The education does not only make the people aware of the financial opportunities and the risks, but it also improves their financial decision-making ability (OECD, 2005, p. 26). The financial information includes data that gives the individuals the knowledge necessary for the discovery of opportunities and for making valuable choices. The individual is also able to make financial decisions while fully aware the consequences of some of the decisions they make (OECD, 2005, p. 26).

The experts on the other hand provide the individuals with the skills necessary for understanding some of the financial concepts. They do this through training the individuals and through providing guidance to enable the people to acquire the necessary skills when making investments (OECD, 2005, p. 26). The lack of financial education determines the attitude that people have when it comes to investments and saving for the future, which is not positive. There are quite a number of investment programs available for the people in South Africa to use in the improvement of their financial status. Apart from these investment programs, there are pension schemes that individuals could use to ensure that their life after retirement will be comfortable. Because of the poor saving culture in South Africa, not so many people invest in such programs. A majority of the people only focus on the fulfillment of their immediate needs. Living in debt is also a problem that the people go through which contributes to the crisis. Because of the poor saving culture and the reluctance that people exhibit towards savings, they might experience a crisis in case they lose their job (Shorb, 2009). To prevent this crisis, the only appropriate thing to do would be to offer financial education to the people (OECD, 2005, p. 123).

Importance of the study

It is vital for the individual to have the necessary skills for preventing a financial crisis on a personal level. This would also go a long way in preventing a crisis in the economy of a country. The most vital component that requires a lot of emphasis is changing the saving culture that the people have. Through this, an individual can easily manage his or her finances, which would influence their performance in the work place (Schreiner & Sherraden, 2008, p. 233).

Some people know the importance of saving and they are aware of some of the most appropriate saving schemes. These people might still show some reluctance in participating in these programs. This shows that the saving culture is heterogenic among the people. According to some studies on behavioral economics, an individual’s behavior towards saving relates to the individuals psychological factors (OECD, 2005, p. 123). The studies reveal that very few people prefer saving to spending their money. Through financial education, it is possible to change the attitudes of these people toward the saving culture. This education is vital for enabling the people to gain planning skills necessary for cushioning them from the crisis.

South Africa is a middle-income country with a marketing economy, which enjoys considerable natural resources. The country has proper financials, with one of the largest stock exchanges around the world. The country also boosts of proper communication and energy systems around the continent. South Africa boosts of modern transportation systems, which enables proper distribution of goods and services throughout the nation. In 2007, the country had one of the best economic performances in the entire globe but this drastically slowed down in the following years. This was due to the country’s economic constraints in addition to the decline in global economy, which was heavily associated with Great recession in 2008. However, in 2011, the country’s economic performance rebounded. Despite the country’s good economy performances in 2011, the unemployment levels in the country remained a big challenge in both the private and public sectors.

The United States government analysts claim that the South African economic policy is financially traditional. The country’s financial traditions are evident on how the country controls its price increase, balances its budget, and generates a budget surplus. As the country pursues its economic goals, its economy is still on the rise despite the fact that it faces an increasing pressure from its citizens to make use of its own enterprises. The South African citizens believed that the state-owned enterprises would be beneficial in delivering basic services to low low-income regions and rural areas. Despite some of these constraints, the country boosts of the most developed economies in the entire continent. The country’s telecommunication systems, paved roads, skilled professionals, and banking systems are among the best in the Africa. South Africa is globally viewed as a commercial jewel among the sub-Saharan nations and Africa in general. With these, most of the South African consumers and citizens are seeking a fair share of the nation’s resources. However, the country’s scarcity of financial literacy between the customers still constrains the country’s financial resources.

Background

South African consumers are poor at financial literary and this heavily contributes to the country’s constrains in financial resources. It is with these aspects that Vartianen and Diamond insist that also the wealthy countries, the collective existing studies reflect a poor picture of financial literacy and economy. One of the confusing aspects involved in financial literacy rates improvement in any nation is the general tendency of individuals to make use of the seat-of-the-pants financial planning designs which various families and friends use. There is also the cultural factor, which prohibits consumers from searching for professional assistance. On this note, Vartiainen and Diamond report that, financially illiterate people should seek guidance from professionals. Practically, 60% of almost every population subgroups depends on relatives, parents, personal judgments, and friends. Despite this, every consumer’s situation is different and unique.

There are various demographic factors, which indicate that financial literacy is a challenging prospect. Vartiainen and Diamond stresses the fact that individuals with poor education levels are likely to depend on their personal judgment. The analysts further claim that a minority of individuals seek advice from print media or financial professionals. Such tendencies have a lasting impact on the financially illiterate consumers. They also have a severe effect on the society in which the consumers exists. Financial literacy is closely related to behavior. Individuals who have poor financial literate levels tend to save minimum finances. Furthermore, there are various measure to which have been designed for consumers to address the financial illiteracy. These financial illiteracies have various significant effects on the choices the people make. In the South African, various initiatives are in place to help in the improvement of financial literacy for the young consumers. These policies are similar with the steps, which are taken in most countries for the same intentions. Some of these initiatives are beneficial outcomes to these countries. The policies, which mandate financial education for students in high school, result to higher asset accumulation in case the students reach adulthood. Similarly, financial education in a workplace can increase employee participation in employee-directed retirement fund plans and motivate savings. There are various positive outcomes which are associated with improve in financial literacy rate. These issues are beneficial in forming the basis of this study.

As demonstrated in the study on how levels of financial literacy are troubling the success of individuals and financial decisions, this study will identify some of the importance associated with consumer financial literacy and decisions among the consumers in South Africa. Regardless of the low consumer financial data and acquaintance in the South African nation, the country still boosts of one of the best economies in the entire continent. This demonstrates that, a financial development of any given country depends on the country’s budget instead of the financial knowledge and decisions of the consumer. In such a study, financial literacy questions will be beneficial in the whole research work. The financial literacy questions will also be beneficial in research surveys since it helps in evaluating the financial literacy influences especially during decision-making process. Generally, financial literacy is a challenging aspect especially to the poorly educated individuals, race, or gender. The outcomes from previous analysis as shown in this study indicate that people with low educations standards, women, and children are less knowledgeable especially on issues that relate to financial matters.

Research studies indicate that financial literacy is important in accounting also plays an important role during planning of financials. Planning for retirement is essential during wealth accumulation. In most cases, individuals who accommodate the plan tend to record twice the quantity of wealth than those individuals who do not embrace the same. Despite the positive aspects of financial literacy, some people disagree with the whole idea of financial literacy. For instance, most people still argue that reverse victims is a distress hence suggesting that financial planning improves consumer financial understanding. This demonstrates that financial literacy is native therefore; people who plan to invest in retirement plans will need to seek further financial knowledge and information. A person seeking financial plan will require various aspects and not just the basic knowledge. The basic knowledge is important since most financial plans including the retirement plans require a deeper understanding of the financial planning literacy and knowledge. Further studies demonstrate that, there is a positive relation between the household financial decisions and financial knowledge. For instance, a person who cannot interest rates in any payment correctly will tend to end up with more borrowings and a minimum wealth accumulation. Additionally, people with poor financial knowledge will not invest in the stock market or any other investments. This will mean that only the few consumers who are financially literate or those individuals with proper knowledge in financial matters will invest in stock markets and other investments plans packages. For individuals who undermine compound interests accumulation strengths have difficulties with debt matters because they will likely disagree with the calculation matters and interest rates. In such financial matters, results will tend to indicate how the young or the aged individuals are poor in calculation matters and financial knowledge. Most of these individuals will commit financial errors and mistakes unlike the middle-aged individuals. These two subgroups will also tend to record low levels of financial behavior and informed ability especially in the financial matters. Financial behaviors and financial knowledge demonstrates the linkage in various ways. In most cases, investors tend to ignore such subgroups especially when it comes to mortgage payments during a decline in interest rate. Generally, individuals with poor financial literacy and knowledge will tend to experience poor finances. Some of the investors also have poor knowledge on the terms and conditions of their mortgages and investment plans.

This study on financial illiteracies will be guided by various research questions.

Some of the research questions include; what are the outcomes of the current financial literacy levels among the South African consumers?

What are the main financial services that the South African consumers use today?

How do the existing levels of intelligence and financial education impact on the average South African consumers and their ability to acquire credit, secure mortgages, negotiate loans, and navigate through the financial service industries?

This study will make use of different methodologies and data collection methods. For most of the study, the proposal will use the qualitative analysis. The study will also use a critical review of the scholarly literature and peer-reviewed literature concerning the general financial literacy and its repercussions for the consumers in South Africa in particular. The research method in this study is congruent with financial literacy guidance. The study will highlight a clear understanding on the appropriate concepts and theories, outcomes of past research in the area, types of research designs and methodologies, which will, employed are in similar researches. One of the most significant outcomes

This study will use various approaches to data analysis and processes. The qualitative research process will then follow then classic inverted pyramid design, thus, beginning with an overview of primary issues interests followed by research, which are increasingly fine-tuned to develop conversant opinions and recognize different these which might undiscerned.

The increasing roles and complexities in financial markets in South Africa at all development stages have been beneficial in reinforcing the needs to improve consumer’s capacity to efficiently manage and access different interactions with such services especially among the middle and low income countries which have financial inclusions that have poor and educational accomplishments which are low. To facilitate consumers in South Africa to understand and make a better financial decision about bank accounts, savings, credits, retirements and insurance and a collection of various complex products, program development which aim at improving knowledge, attitude and skill in this aspect are required.

Rationale of Study

The basis of this study is to examine how financial literacy interface models contribute towards financial information comprehensibility to decision makers in the South Africa nation. The way South African institutions and consumers use financial literacy perception, suggest that various people attach different meanings to the financial literacy aspect. To establish a hypothetical model for any given financial literacy, this study bases on what financial literacy entails. Financial Information complexity and an increase in volume usually exceed the abilities of the users to comprehend and interpret it during decision-making purposes. A financial literacy interface gives the decision makers in institutions and organizations the window opportunity to infiltrate their concerns and fears while using the financial language and figures. Financial information users differ vastly depending on their financial capability levels and sophistication. They also differ in terms of financial information preparedness, which should take the fact’s cognizance. The basis of this study thus financial literacy is complex while the term covers various terms apart from financial and literacy. It further attempts to develop financial literacy interfaces as the coordinating interface between decision makers in South Africa and financial information. The main reasoning behind this study is to establish South African consumer’s financial education levels. Based on the study’s analysis, the rationale of the study is to recognize various opportunities, which will be beneficial in improving visible flaws in South Africa consumer financial cultures and education. The study also aims to build South African consumer financial education strengths in ways which will allow them to actively participate in the economic development of the country.

Scope of Study

This study aims at assisting South Africans in achieving financial literacy goals by highlighting various opportunities, which exists; to assist the consumers acquire knowledge and skills, which relate to financial literacy. Various institutions and the South African Government will work to entrench financial literacy various opportunities and expectations in financial aspects. This study will have been updated to reflect on the changes, which relate to financial literacy in South Africa.

Overview of the study

Financial literacy is an ability to recognize and comprehend how money works globally. It is also the ability of how someone can manage to earn or make money, how an individual manages money, or how an individual can invest the money to get more money. Generally, financial literacy is the skills and knowledge, which allows individuals to be conversant and effective while making decisions that affect his financial resources. Financial literacy gives individuals the opportunity to understand financial decisions and management of money.

In South Africa, there are various programs, which sensitize individuals on money matters, an example being raising interests in personal finances. There are various institutions in South Africa and other parts of Africa, which assists consumers in achieving financial literacy. The institutions also focus on helping the consumers improve their financial opportunities through various ways such microcredit initiatives, which provide them with small loans for their enterprises. Some of these problems have been effective in trying to bring marginalized South African consumers into the conventional economy. There are also some indications concerning the ongoing commitments and dedications from International countries to help in the improvement of financial literacy in the country. Most recently, the current Nobel Peace Prize winner has committed himself in providing microfinance with few loss ratios, which would rival any ordinary bank. He also helps in ensuring a free enterprise system and entrepreneurships work for the poor.

South Africa’s general financial literacy score stands at 54 percent. This means that the score is not distressingly low; however, the score conceals gross inequalities in the country’s financial literacy. The result shows that most South Africans living in poor conditions or lower living standards have lower financial literacy levels compared to people who have an average living standard. Generally, increase in financial literacy levels depicts an increase in schooling levels. This means that the rich and the well-informed South Africans have to score higher than the poor and less educated individuals do. Financial literature goes hand in hand with financial planning. In this study, financial plan are the goals and steps, which individuals and businesses use. They are also the cumulative and progressive attainments, which intend to achieve financial goals. Examples of these include retirement preparedness and debt elimination. In most cases, it involves a budget that will benefit an individual financially. Sometimes it includes a person’s specific goals and savings for the future. Financial plan allocates future income in to different types of expenses including utilities and rent. It also preserves a little income for long-term and short-term savings. Financial plans are also investment plans. On the same aspect, financial knowledge help in assessing people’s proficiency and familiarity levels with fundamental financial concepts.

Objective

The main objective of this study is to assess financial literacy levels and understanding of financial schemes in South Africa. The study also aims at recognizing and comprehending how money works around the world. Through the study, individuals will have the ability to manage and make money; individuals will also have the skills to invest the money to get more money. Generally, financial literacy gives individuals the skills and knowledge, which allows individuals to be conversant and effective while making decisions that affect his financial resources. Financial literacy gives individuals the opportunity to understand financial decisions and management of money.

This study also aims to determine the current financial education levels among the consumers in South African. Depending on this study, the study aims at identifying various opportunities, which are beneficial in improving visible weaknesses among the South African consumers and their financial education. Through the study, the South Africans will be able to develop their existing strengths and potentials in ways, which will enable them to participate in the development of the country’s economy. The study will investigate how financial literacy interface models affect financial information lucidity to decision makers in the South African nation. How various institutions and the South African consumers use financial literacy theories to suggest that various people attach different meanings to the financial literacy aspect. To establish a theoretical model for any given financial literacy, this study aims at accomplishing what financial literacy demands.

The specific aims of this study are;

Analyzing the current financial literacy and financial knowledge among the South African consumers;

Analyzing the South African’s financial literacy levels and how they heavily contribute to constrains in financial resources;

Identifying the constraints, which affect South Africa and its consumers because of financial illiteracy

Providing estimates among the South African consumers and further market developments in the country.

Defining strategic options for the South African consumers and their development through financial literacy

CHAPTER 2: REVIEW OF RELATED LITERATURE

In young people, financial literacy concerns the relationships they have with other people, institutions, and the way that they perceive the world. In adults, and institutions like banks, financial literacy may focus on educating the masses on managing their finances since the role of profit and consumerism hampers the capacity of an individual to manage and save money. The issue on financial literacy extensive as it touches on various elements in terms of finances and human issues such as credit and consumerism. The household proportion debt in South Africa, to the disposable earnings is 60%. The society South Africa is a buy now, pay later culture. Individuals through institutions such as micro finances or retail outlets easily reach credit card accessibility in South Africa. Majority of the population, experience problems in accessing credit cards from reliable places like banks. According to a study by Di Turpin, SASI, majority of the household in South Africa use debt as a saving alternative. People have a tendency of borrowing money first, then using their savings and lastly sell their assets (Barr et al, 2007, p. 200).

Noelani King-Conradie, ABSA bank economics defines savings as the amount of resources that an economy produces within a specified year, which the country puts to use in a manner that will provide profit to the economy in the years that follow. A country requires 25% domestic savings in order to boost its economic growth but South Africa has only 16%. This suggests the country puts more emphasis on investment inflows rather than domestic savings. This is evident that the government considers direct foreign investment as a solution to the development of the economy and creation of jobs. The saving instruments in this country are not favorable for the poor people who need to access income particularly emergency needs. The savings that poor households make are out of their livelihood strategies, which call for regular withdrawals to smooth income flows from savings. Since 1995, the government of South Africa makes efforts to develop land accessibility for the purpose of production. The foundation of this program was that giving black people financial assistance would enable them to purchase land based on willing-buyer willing-seller. This will enable the forces in the market play their part thus minimize the government’s role. (Beck, 2011, p. 50).

Camac & Gordon argue that, the government has the responsibility of making land acquisition grants available to the people thus encouraging them to form associations and club together. It is also essential for the government to coordinate with other stakeholders such as NGOs who take up a lobbying position in the processes of land reform. The issue of redistribution; therefore, sets right the off-centre land distribution ownership between smallholder and large farmers. This is essential as it ensures that the smallholder farmers can access land for productive and residential purposes in order to improve their livelihoods. However, for this reform program to be effective, the government should ensure that the farmers have an access to farmer support services. This is since most smallholder farmers are in the rural areas in former homelands, where both the institutional and physical infrastructure pose a challenge to their expansion (Lucey & Laney, 2012, p. 300).

The farmer’s inaccessibility to proper roads limits their ability to transport produce, inputs and access information. Poor infrastructure results to lack of markets for their agricultural inputs and outputs thus becoming unreliable for these farmers. Due to this, the smallholder farmers cannot acquire the agricultural resources and supply their market services; therefore, this hinders them from participating in potentially profitable markets. High cost of transaction is among the key factors constraining the growth of agriculture in African countries as this cost relates to poor infrastructure. The cost of transaction can come from various sources such as monitoring, cost of information, negotiation, and enforcement of contracts. According to Vink & Kirsten, unreliable distribution and po