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Understanding Financial Competency

Understanding Financial Competency
July 04
11:00 2015

This is an informative publication, sponsored by The Fiji Sun, Fiji Bureau of Statistics and HFC Bank. All views expressed or implied are purely of the Treasurer at HFC Bank, Peter Fuata.

 

Financial competency is the ability to be able to successfully use money and interact with the financial system and one can do this by having the financial knowledge and skill, and social capabilities relating to financial inclusion.

Study has shown that low income households in Fiji have low-moderate levels of financial competence; understanding of the cost of money was found to be very low.

Lack of financial inclusion is a constraint to financial competence and, at the national level, may constrain economic growth and result in persistent income inequality.

Developing the financial sector and improving access to finance may accelerate growth and facilitate a reduction in income inequality and therefore promote an increase in wellbeing for the disadvantaged.

Low income households dig themselves deeper into debt because they do not know the costs associated with their financial products, nor do they understand the terms and conditions or the risks associated with the financial organisations used.

The lack of knowledge of interest paid on loans is of particular concern given the relatively high incidence of borrowing.

Understanding the cost of money, both interest and fees, financial terms and conditions associated with financial products and the risks associated with the use of financial institutions, are important competencies essential to using financial services, whether for transacting, saving or borrowing.

It is always advisable to read the terms and conditions and most importantly the fine prints.

Households with a budget appear to be competent at managing the household cash flow. It is an important component to financial success.

Study also shows that preparing a budget was inconsistent across low income households since most households spend money on non-essential items before spending money on essential items.

Budgeting assists people in making sensible decisions about how they allocate their money thus saving more in the end for retirement, unpredictable events, and so on.

Research also shows that households who are more financially competent:

  • Have a bank account;
  • Have a deeper involvement with the financial system;
  • Have a budget and
  • Manage their cash-flows collectively

Setting financial goals and planning the household’s future income and expenditure are core financial competencies.

Interventions to increase the level of financial competence, whether policy or programme focussed, will need to address each of these communities whether it be urban or in rural areas.

There is a need to continue to focus on increasing the number of households which have access to the formal financial system.

There is also a need to increase understanding of the cost of money, through both training and consumer protection.

As households become increasingly involved with the money economy, a failure to understand the cost of money and the associated risks of using financial institutions and financial instruments carries significant risks for low income households.

This is in particular in respect to poor financial choices and vulnerability to predatory practices.

Risks from low levels of Financial competence:

  • Risk of exploitation by financial predators, due to limited understanding of the actual cost of financial services and the risk associated with the financial services products and service providers. Households are also at heightened risk of unknowingly participating in financial scams.
  • Risk of ineffective use of household cash flows, due to limited understanding of their income and expenditure, therefore is at a risk of failing to use household cash flows effectively. These households have a more limited ability to build savings in order to provide for regular households requirements and are more likely to have to borrow for consumption expenditure.
  • Risk of poverty in old age, households do not prepare themselves for retirement because of the mentality that they will receive support from their children or the community. But the process of preparing oneself for retirement is slowly in transition due to urbanisation and monetisation.

 Feedback: rachnal@fijisun.com.fj

 

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