All about money
- With support from banking and financial institutions, Nepal can turn into a nation of responsible debtors
Jan 22, 2015-
After mulling over for months, the Nepal Rastra Bank (NRB) recently issued a circular with provisions on consumer protection and financial literacy. The circular aims to not only relieve financial consumers from non-transparent banking practices but also seeks to engage banks and financial institutions (BFIs) in educating the general population about finance and banking.
Nepal saw unprecedented development in the financial sector in the last three decades but still, around two-thirds of the population is financially excluded. Even many of those with access to finance are financially incompetent. Most economists today agree that financial literacy, along with access to finance, is important for the benefits of financial development to transmit to the national economy. However, taking strides toward achieving higher financial literacy requires combined efforts from various sectors. While the central bank is taking the lead to develop a financially knowledgeable population, BFIs should definitely lend support.
Financial literacy refers to a set of skills and knowledge that enables individuals to make informed and effective decisions with all available financial resources. Research reveals that even as more people are getting access to financial tools, the level of financial literacy remains low in most countries. According to a recent survey conducted by the Organisation for Economic Cooperation and Development (OECD) on financial education in Malaysia and the UK, only 30 and 37 percent of adult respondents respectively understood the impact of compounding on interest calculation. Due to the grim state of financial literacy, but given its great importance, governments around the world have lately started focussing on financial education programmes.
In Nepal, efforts to address the problem of financial illiteracy are gaining pace. Towards that end, the NRB has begun emphasising the issue by including it in its monetary policy. The central bank is running programmes like ‘Biddhyarthi Sanga Nepal Rastra Bank’ and has been publishing various financial education materials, especially for youth and children. Similarly, concerned authorities are also getting serious about incorporating some form of financial education in our formal education system. The Ministry of Education is currently testing one such programme—Child Social and Financial Education, developed by Unicef—for its integration in the national curriculum. Educating people to make effective financial decisions, however, should not be taken as the sole responsibility of financial supervisors and policymakers. The private sector, especially BFIs, also have an important role to play.
After the liberalisation of the financial sector, Nepal saw rapid growth in the number and size of BFIs. Albeit mostly in urban areas, these institutions are providing various financial services at competitive prices. Unfortunately, they are mainly focussed on soliciting deposits and extending loans, and are less interested in educating customers about financial concepts like budgeting, investment, and debt management. Although we have seen a few instances where BFIs are involved in organising financial literacy trainings, such efforts are mainly fragmented and rare.
Now that NRB has made it mandatory for BFIs to include financial literacy in their programme portfolio, we can expect more of these programmes in the future. But what they should do is go beyond the regulatory requirement and take a comprehensive approach toward financial education, devoting significant resources for the purpose. BFIs should adopt the measures mentioned below to promote financial literacy.
First, BFIs need to revamp their customer service departments. These departments are the primary contact point between customers and financial institutions. Ironically, most bank branches have small customer service areas that are handled by entry level, mostly untrained, staff or even interns. And the result is minimal meaningful communication between service providers and takers. BFIs need to redesign their floors and staff arrangements to create an environment that enables customers to learn about available financial instruments and utilise them effectively.
Second, BFIs should develop proprietary financial education programmes and materials and share them through websites and booklets. These materials need to be written in simple and clear language, and can be in the form of modules, tutorials, or even interesting stories. Financial institutions can develop educational materials tailored to suite various specialised groups like college students and retired people, as well as spread awareness on important life planning aspects, such as basic savings, investments, emergency funds, and insurance.
Next, BFIs can forge partnership with schools, NGOs, and government agencies in order to expand their delivery channels for financial education. Through such partnerships, BFIs can also make significant contributions to the community while teaching financial skills. A good example to follow would be the’ Kindergarten to College’ programme launched jointly by Citi Bank and the County of San Francisco in the US in 2010. The programme helps children from low-income families attend higher education and at the same time, obtain access to financial tools with knowledge.
BFIs should not consider spending on financial education programmes solely as their corporate social responsibility initiative. These expenses make perfect business sense. Financially savvy customers are more likely to save and less likely to default on their loans. Financial education programmes further help BFIs penetrate Nepal’s large unbanked market. Likewise, these programmes could create goodwill for BFIs at the community level and strengthen relationships with local individual and business customers. All these consequences have a positive impact on the BFIs’ profitability, a principal concern for their stakeholders.
Issuing the circular on financial literacy, NRB has pushed BFIs to contribute more to financial education. Now, these institutions should gain momentum from the push and take responsibility for raising the financial competency of their customers. With large branch networks and proximity to financial consumers, BFIs are uniquely positioned to make significant contributions to this field.
While financial decisions are mainly private matters of individual consumers, comprehensive financial education programmes can definitely change behaviours. With strong support from BFIs, Nepal can turn into a nation of consistent savers and responsible debtors. And, this is what a nation needs for sustained economic development.
Piya is assistant director at Nepal Rastra Bank
Published: 23-01-2015 09:20