The Impact overview of Financial Literacy in Nepal
Dr.Dibakar Bashistha
What is Financial Literacy?
Continual increase in the level of financial awareness has been observed among various age groups worldwide because of rapid established and improvements in financial services as well as various financial crises throughout the world. Financial literacy of individuals involves numerous parameters such as money, saving, financial investment, financial planning and budgeting etc. Thus, people require adequate knowledge, proficiency and attitude regarding financial issues to be able to survive daily financial struggles. Therefore, financially literate people are likely to be more equipped to sustain their wealth level when their income is affected. These facts emphasise the importance of financial literacy for making sound financial decisions that lead to personal financial wellbeing.
The concept of financial literacy has become one of the important financial topics in recent years. Financial literacy refers to the ability to understand and manage personal finances effectively, making informed decisions about earning, saving, investing, borrowing and spending money. Financial Literacy focuses to the ability to use and handle money effectively. Now a days financial literacy is crucial to making informed financial decisions, enhance savings an investment, reducing poverty, empowering socially, and fostering economic growth, especially, in emerging nations like Nepal, where a significant portion of the population is still excluded from the formal sector. When people are financially literate, they tend to understand basic financial concepts like budgeting, saving, investment and managing debt.
When you are financially literate, you have the essential foundation for a smart relationship with money and its uses. This can help start a lifelong journey of learning about the financial aspects of your life. The earlier you start to become financially literate, the better off you’ll be because education is the key to a successful financial future. A strong foundation of financial literacy can help support various life goals, such as saving for education or retirement, using debt responsibly, and running a business. Key aspects of financial literacy include knowing how to create a budget, plan for retirement, manage debt, and track personal spending. So Financial literacy can be obtained through reading books, listening to podcasts, subscribing to financial content, or talking to a financial professional as well as consulting with Bankers and related areas.
Regulatory initiatives and Results
According to Financial Stability Report (2022/2023) of Nepal Rastra Bank as a regulatory body; “Financial literacy level is on an increasing trend. In December 2022, NRB published the results of a Baseline Survey on Financial Literacy in Nepal . Using the methodology of the Organization for Economic Co-operation and Development (OECD) and International Network on Financial Education (INFE), the survey measured financial literacy across three key components – financial knowledge, financial behavior, and financial attitudes. The survey found that the overall national financial literacy score is 11.59 out of the maximum score of 20. This is among the lowest scores among the 26 countries surveyed by OECD/ INFE in 2020, and lower than countries in the neighbor region. Overall national financial literacy stands at 57.9 percent.
Nepal financial literacy survey also found that only 27.5 percent of the adult population passed the minimum target score in all financial literacy components. By provinces, financial literacy is highest in Bagmati Province, whereas Madhesh Province scores the lowest. Men have higher scores than women by 7.5 percentage points. Financial literacy and its entire components have an inverse relation with the age of people, with younger people (18-30 years old) showing better financial knowledge scores compared to other age groups. Among the younger, the share of those reaching the minimum target score is 63.2 percent compared to 27.9 percent percent of people aged 60 and above. Similarly, higher levels of formal education have a positive impact on the financial literacy score. Finally, the financial literacy score is higher among individuals working in the formal sector than those working in the informal sector; among people working in industrial and service sectors than the agriculture sector; and among those living in urban versus rural areas.
Nepal financial literacy survey also measured the use of key financial services. And while it used a different methodology from the A2F Survey 2021/22, the main findings are consistent in showing increased overall use of financial services, while often still much lower use of formal institutions and channels. The awareness and use of financial products were found to be directly correlated with levels of education, urban dwelling, employment in the formal sector, and higher income levels. The study also concludes that the marginal contribution of financial literacy score to the utilization of financial products is significantly greater at lower levels of financial literacy.
Therefore, financial literacy interventions will have a significant impact on populations with lower levels of financial inclusion. Financial literacy programs in Nepal are being conducted by various agencies including the central bank, BFIs, and non-bank financial institutions in a scattered and fragmented manner with different methodologies and delivery mechanisms. NRB, with an aim to enhance and systematize the fragmented activities and make them more effective, implemented Financial Literacy Framework, 2022, and issues Financial Literacy Guidelines, 2023 to banks and financial institutions. As financial literacy initiatives, NRB organizes grassroots efforts through one-day literacy programs at the programs in Provincial level, and facilitates awareness programs through nongovernmental organizations to provide awareness out the importance of saving, the banking system, risks of fraudulent activities, clean note policies and financial digitalization on regular basis.
The ‘NRB with Students’ has been initiated by NRB since FY 2013/14. In this program, a team of NRB visits a school to organize a brief presentation on financial literacy, focusing on financial awareness and personal finance and distributes the financial literacy materials to the students. NRB also celebrated Global Money Week, 2023 on request of OECD. Banks and financial institutions (BFIs) are required to allocate budget (out of profit) for CSR initiatives including promoting Digital Financial Services (DFS) and for Financial Literacy, with a focus on women and underserved groups. NRB has also developed a roster for financial literacy Trainers via Training of Trainers (TOT) program. NRB publishes various knowledge materials, books and audiovisual materials, to promote financial literacy. NRB has been working closely with the Ministry of Education to incorporate the issues of financial literacy in formal educational curriculum. In addition, NRB also celebrated Global Money Week 2023 by organizing various activities to increase awareness among market participants”.
These efforts aim to improve financial literacy across Nepal, empowering citizens to make informed financial choices and ultimately fostering financial stability and growth. Financial literacy level in Nepal is moderately satisfactory, significant disparities persist across various demographics, including gender, age, income, education, and geographic region. Efforts should be focused on providing tailored financial products for underserved groups—such as no-fee bank accounts, discounted interest rates, simplified account opening processes, flexible loan options, and services specifically designed for women, informal sector workers, and low-income households. Ultimately, financial literacy is not just about numbers; it’s about building financially resilient and empowered communities across Nepal.
Impacts on Banking
Financial literacy has a profound impact on Nepalese banking business. With a more financially literate population, banks can expect to see:
Improved Financial Decision Making: Individual with a better understanding of financial concepts are more likely to make informed decisions about borrowing, saving and investing, leading to reduced credit risk and increased financial stability.
Enhance Customer Trust: When customers understand the financial products and services offered by banks, they are more likely to trust the banks and feel confident in their financial decisions. This in turn, can lead to increased customer loyalty and retention.
Promote Financial Inclusion: By educating individual about the benefits and risks of financial products, banks can increase access to financial services for undeserved populations. This can lead to increased economic growth and development in Nepal.
Reduce Non-Performing Loans (NPLs): When borrowers have a better understanding of their financial obligations, they are more likely to prepay their loans on time, reducing the risk of NPLs.
In Nepal, formal education has been shown to have a positive impact on financial literacy scores. Nepalese financial literacy scores are a mixed bag. Overall, the country scored 57.9% in survey, with a breakdown of 47.3% for financial knowledge, 63.5% for financial behavior and 64.1% for financial attitude. Interestingly, there’s noticeable gap in financial literacy scores between males and females. Men scored 7.5% higher than women. In terms of financial behavior and attitude, the scores are relatively consistent across provinces. However, there’s still room for improvement, especially when it comes to financial knowledge. These scores highlight the need for continued efforts to improve financial literacy in Nepal particularly among women and rural areas.
Impact on Society
Financial literacy plays a crucial role in shaping societies and has a significant impact on individuals, families, and communities as it is linked with their financial attitude, behaviour, knowledge and financial skills. Financial education enables an individual to understand about the basic financial concepts and enable them to take sound financial decisions. It also encourages an individual to have the good financial habits, knowledge and positive financial attitude, which in turn helps them to create confidence in their finance management and positive impact on their mind-set. Here are some key ways in which financial literacy affects society:
Personal Financial Stability: When individuals possess financial literacy skills, they are better equipped to manage their money effectively. They can create budgets, save, invest wisely, and avoid excessive debt. This leads to greater personal financial stability and reduces the likelihood of financial problems.
Economic Growth:A financially literate society can contribute to overall economic growth. As people make informed financial decisions, they are more likely to invest in productive assets leading to the expansion of businesses and job creation. This, in turn, can boost the economy at the local, regional, and national levels.
Reduction in Financial Stress:Financial stress can have a negative impact on mental health and overall well-being. Financially literate individuals are better equipped to handle financial challenges and are less likely to suffer from stress related to money matters. This leads to improved mental health outcomes and a happier society.
Retirement Preparedness:Financial literacy is critical for retirement planning. When people are knowledgeable about saving and investing for retirement, they are more likely to build sufficient retirement corpus and avoid facing financial difficulties during their retirement years. This reduces the burden on social welfare systems and ensures a better quality of life for retirees.
Consumer Protection:A financially literate population is less vulnerable to financial scams and predatory practices. They can make informed choices when it comes to financial products and services, reducing the likelihood of falling victim to fraudulent schemes.
Responsible Citizenship:Financially literate citizens are more likely to understand the implications of public policies related to taxation, government spending, and economic issues. This leads to a more informed and engaged citizenry, contributing to better decision-making in governance and public affairs.
Enhanced Financial Stability: The spillover effect contributes to an overall increase in financial stability within the community. As more individuals exhibit responsible financial behavior, the risk of financial hardships and defaults decreases, resulting in a more stable and prosperous society.
Inter-generational Impact: When parents are financially literate, they can pass down these skills and knowledge to their children. This creates a positive cycle of financial literacy across generations, promoting long-term financial security and resilience within families and communities.
Educated people are more knowledgeable in basic level of finance while they are less familiar with bank credit, taxes, share markets, financial statement and insurance. Instead of buying insurance policy, investing in stock markets, buying jewelry and lending friends, most of the people are involved in bank saving. Similarly, it was also found that financial knowledge is determined by income, age, stream of education and attitude of people while it is unaffected by gender, financial behavior and influence.
Conclusion
Financial literacy is an indispensable skill in today’s world. Beyond financial health, it empowers individuals, reduces stress, and fosters a sense of security. It involves budgeting, savings, investments, retirement planning, debt and risk management, and understanding financial products and concepts. To promote financial literacy in Nepal efforts should be focused by concern bodies on providing tailored financial products for underserved groups—such as no-fee bank accounts, discounted interest rates, simplified account opening processes, flexible loan options, and other services specifically designed for women, informal sector workers, and low-income households as well as smile service delivery. Ultimately, financial literacy is not just about numbers; it’s about building financially resilient and empowered communities across Nepal. A strong foundation of financial literacy can help support various life goals, such as saving for education or retirement, using debt responsibly and running a business. Key aspects of financial literacy include knowing how to create a budget, plan for retirement, manage debt, and track personal spending.
Financial literacy of individual increases the likelihood of access to sustainable finance of identifying and consuming appropriate financial services competitively. The consumption of financial services is sustainable when the consumers are financially aware, skilled and capable enough. The Nepal Rastra Bank as well as banks and financial institution as a policy maker therefore should be aware of formulating the necessary financial literacy policy, strategies. Therefore, it is concluded that literate people have basic level of financial knowledge which is determined by their family income, age, stream of education and their financial attitude.
Government, financial sector regulators, bank and financial institutions, NGOs, and educators must develop and revised their policies on the side of financial literacy as well as enforce to Universities for develop academic course of study. Overall, the impact of financial literacy on society is multifaceted, ranging from individual well-being to economic growth and stability. Encouraging and promoting financial education at various levels can lead to a stronger, more prosperous, and financially secured society.
Dr Bashistha is an expert of Bank and Financial Institutions