Financial literacy is the understanding, knowledge and awareness of the different financial concepts including cash management, risk and return analysis, planning of short-term and long-term financial goals, the choice of financial products and utilising such knowledge to make effective decisions across the range of alternatives.
Financial literacy assists to increase an individual’s financial decision that increases the use of financial instruments and demand for overall financial services.
Financial access, on the other hand, is the ability of an individual or an institution to obtain financial services including credit, deposit, payment, insurance and alike. Similarly, financial inclusion means that individual and an institution have access to affordable financial products and services that satisfies their need.
So what is the status of financial literacy, access and inclusion in Nepal?
Need for financial literacy, access and inclusion
In the changing economic landscape, financial literacy affects shorter-term to longer-term financial decisions at the personal level and the overall saving and investment at the policy level.
Short-term decisions are related to day-to-day cash management for the operation and spending habits, and long-term decisions are associated with longer-term investment decisions and financial planning.
Additionally, the introduction of a wide range of financial products and the assessment of its impact on their use also necessitated financial literacy. Financial literacy increases the financial well-being of an individual by empowering them to make sound financial decisions, which helps develop an inclusive financial system.
Similarly, financial access and inclusion help to boost the economy by channelising the fund from the surplus unit to the deficit unit of an economy. Financial access and inclusion are prominent to both individuals and an institution as it provides a way to use financial products such as saving, loan, investment, payment services, and use of insurance products. All in all, it strengthens the financial environment by creating an investment-friendly environment for startups and small businesses.
International scenario
An international survey of adult financial literacy in 26 countries of three continents (Asia, Europe and Latin America) including 12 OECD member countries (based on the OECD/INFE 2020 Toolkit), found that the average financial literacy score of 61 per cent across all 26 participating countries and economies.
The average financial literacy score across 12 participating OECD member countries was 62 per cent, which is marginally higher than the average score of all 26 countries. Among the participating countries, Hong Kong and China have the highest score of 71 per cent. Italy has a minimum score of 53 per cent. The majority of economies have a financial literacy score ranging from 57 per cent to 67 per cent.
Similarly, in a report on “Financial Literacy around the world”, the top 10 financially literate countries include Denmark, Sweden and Norway each having 71 per cent literacy, Canada and Israel having 68 per cent, the UK with 67 per cent, Germany and Netherlands with 66 per cent, Australia with 64 per cent and Finland with 63 per cent.
National scenario
Nepal Rastra Bank has conducted the baseline financial literacy survey to explore the status of financial literacy and financial inclusion in Nepal.
Financial literacy is measured in the dimensions of financial knowledge, behaviour and attitude. Similarly, financial inclusion is assessed based on the indicators such as usage of payment products; usage of saving, investment or retirement products; usage of insurance products; usage of credit products; awareness of at least five financial products; and the status of relying on family and friends for financial need.
The summary of the financial literacy indicators is given below:
| Financial knowledge (understanding of financial concepts) | 47.3% |
| Financial attitude (individual responsibility towards the use of the financial products) | 63.5% |
| Financial attitude (individual responsibility towards the use of financial products) | 64.1% |
| Overall financial literacy | 57.9% |
The survey finds that financial behaviour and financial attitude found almost similar across all provinces. If the province-wise data are to be assessed, Bagmati has the highest financial literacy score and Madhesh has the lowest financial literacy.
Similarly, financial literacy and age group have an inverse relationship. The financial literacy score of people of age 18-30 is 63.2 per cent, compared to 27.9 per cent of people of age 60 years and above.
In addition to this, formal education and financial literacy have a positive correlation and the financial literacy score among the individual working in the formal sector is higher than that of those working in informal sectors (Industrial and service sector Vs agriculture sector).
The summary of the financial inclusion indicators
| Use of payment products (like mobile banking, internet banking, use of debit/credit cards and digital wallets) | 73.78% |
| Use of credit products (Bank loan, microfinance loan, loan from cooperatives and government grants) | 46.34% |
| Use of insurance products (Purchase of life and non-life insurance policies) | 30.20% |
| Use of saving, investment and retirement products (Bank saving, saving in cooperatives and informal group saving, provided fund, citizen investment trust and investment in shares and bonds) | 86.64% |
Further, the survey finds that only 8.5 per cent of the adult population uses non-life insurance products and only 26.8 per cent uses life insurance products. And, importantly, 71.83 per cent of the adult population relies on family and friends for borrowing to meet their financial needs. The use of bank loans is just limited to 17.6 per cent among the adult population.
Interestingly, around 85.9 per cent of surveyed population saves money in-house. Saving in banks and saving with family members is the next highest priority. Saving in cooperatives and collective saving are also popularly used. And, saving through the purchase of shares is done by nearly 21.2 per cent of the surveyed adult population. Similarly, the source of financial information for 68.1 per cent of surveyed population is friends and family.
Conclusion and the way forward
Financial literacy is the means to increase financial access and inclusion. There is no question at all regarding the assistance of financial literacy to increase the awareness and understanding of financial concepts that ultimately helps in better individual financial decision.
Individual financial decision promotes the use of different financial products like saving, investment, credit products, use of payment instruments, insurance products and alike, which ultimately leads to increasing the demand for overall financial services.
At the individual level, financial literacy, access and inclusion help in a better individual financial decision that helps to maximise their return on their investment, the better selection of the investment vehicle, utilisation of their idol fund, and all in all, it helps to maximise their wealth.
At the general level, financial literacy, access and inclusion help in channelising the idol fund from the surplus unit to the deficit unit of an economy. It promotes the habit of saving and investing in an economy. Furthermore, financial literacy, access and inclusion assist in transforming the shadow economy into a formalised economy. All in all, financial access and use increase financial inclusion and an overall inclusive economy.
However, it is a bitter fact to accept the findings of financial literacy in the economic landscape of Nepal. In an economy where bank account reaches 164 per cent of the population, it is the dark side to have just nearly 57.9 per cent of overall financial literacy and interestingly to believe the fact of just 17.4 per cent of the adult population us using a bank loan.
Similarly, the use of insurance products is very less the par. Only 8.5 per cent of the adult population uses non-life insurance products and only 26.8 per cent uses life insurance products. Similarly, informal saving in an economy constitutes a huge percentage that has shaded the saving in banking and the formal sector.
Irrespective of the bitter fact, there is a long way to go to improve financial literacy, access and inclusion. Financial literacy, access and inclusion have a direct impact on the business of financial institutions like banks, insurance companies, microfinance, cooperatives and some other financial institutions.
An increase in the different spectrums of financial literacy helps to increase the business of financial institutions in the form of deposits resulting from saving, the use of credit products to make investments, the use of payment instruments and others.
Therefore, BFIs and other corporate bodies need to promote financial literacy as a part of their corporate social responsibilities. Similarly, schools, colleges and community platforms better arrange the programme to deliver financial education, especially to the people of backward and marginalised societies.
As the survey reports, friends and family are the major sources of financial information. For this reason, they also need to play a positive role to increase the importance of financial awareness and education. And, at the national level, the government needs to initiate the financial literacy programme time and again to provide awareness regarding the introduction of new concepts and products in the field of the financial environment, the use of such products, and the impact of using such products and to inform the potential change in this field.
