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Why Asia needs more financial education

In the aftermath of the global financial crisis of 2007-2008, financial literacy and financial education are gaining more attention around the world. There were sobering lessons, for example, in how the mis-selling of financial products contributed directly to the severity of the crisis, both in developed economies and in Asia. Financial education can be viewed as a way to build awareness of such matter and systems throughout an individual's lifetime, results of which would include improved financial literacy and well-being. It is hard to quantify the benefits and costs of investing in financial education. With some exceptions, Asian economies only devote limited resources to financial education but there are substantial benefits involved with investing more in this field.

     First, a more financially literate population can take advantage of greater financial access of both households and small and medium-size enterprises. Second, a more financially literate population is likely to increase domestic savings rates, thereby reducing reliance on foreign capital. Third, higher and better-allocated savings can result in faster economic growth. Fourth, better financial education of households and entrepreneurs can reduce financial stability risks such as the probability of household or small business loan defaults. Fifth, better financial literacy will improve retirement planning and preparation for old age.

Aging demographics

Our analysis suggests that the ratio of the population aged 65 and over to the working-age population aged 15-64 will increase across Asia until 2050, although at varying rates in different countries and regions. Aging will be especially rapid in Hong Kong, South Korea, Singapore and Taiwan; followed by China and Thailand. The general tendency to shift from defined benefits to defined contribution pension plans will further increase the need for adequate financial education and planning.

     However, various costs also need to be factored in when considering investment in financial education. For example, the effectiveness and reach of financial education programs may be unclear. Additionally, the capacity of teachers and educational systems to deliver financial education may be limited. Finally, large financial costs could arise from broad-based financial education programs.

     Mapping the current status of financial literacy in Asia presents challenges to researchers and policy makers alike. It is a new area with limited data. The coverage of available surveys is relatively spotty and methodologies are not consistent. Only a limited number of Asian economies and target groups within them have been surveyed so far, and the results vary widely. There is some relation with per capita income, but rankings differ significantly across different studies. Greater coverage of target groups, such as students, the elderly, SMEs and the self-employed, is needed.

     The 2013 MasterCard Index of Financial Literacy illustrates some of these points. The index is based on a survey of more than 7,000 individuals aged 18-64 focused on three aspects of basic financial literacy: money management, financial planning and investment. New Zealand is ranked top, while Japan is ranked at the bottom. Strikingly, high-income Japan is ranked lower than less-developed economies such Bangladesh and Myanmar.

     Asian economies are only sparsely represented in other international surveys. A survey of adults by the Organization for Economic Co-operation and Development and the International Network on Financial Education includes only Malaysia in Asia, and the OECD Program for International Student Assessment, which covers 15-year-old high school students, only includes Shanghai within Asia. At the national level, the Bank of Thailand conducted a survey of financial literacy modeled on the OECD/INFE survey, and Japan carried out a survey of high school teachers involved with financial education. Because of the importance of having internationally comparable results, more Asian economies should be included in future rounds of OECD/INFE and OECD PISA surveys.

     There are still many policy gaps in Asia in the areas of financial literacy and financial education. The starting point for financial education is to have a national strategy, but so far in Asia, only India, Indonesia and Japan have implemented such strategies. Pakistan is in the process of finalizing its national policy. Central banks active in this area include those in India, Indonesia, Japan, Malaysia, the Philippines and Thailand. Financial regulators that are taking an interest include the Financial Services Authority of Indonesia and the China Banking Regulatory Commission in Beijing.

     However, most financial education programs in Asia tend to be small scale, targeting individual groups rather than the broader population. Only Japan includes financial education in its school curriculum, but the program faces many problems, including a lack of experienced teachers, lack of time and lack of motivation of students. Few programs address the needs of older people or SMEs.

Valuable lessons

Asia's experience in the area of financial education is still limited, but we believe there are significant potential gains from more concerted policy efforts. International experience offers several valuable lessons for promoting financial education.

     First, existing national surveys of various target groups -- such as those relating to financial literacy, access to finance and consumer finance -- are useful tools for understanding the needs and challenges of financial education. But more national surveys are required, particularly of poorer Asian countries, with consistent and internationally comparable methodology. Using international standard methodologies (such as those used in the OECD/INFE and OECD PISA surveys) would enable benchmarks to be established across countries and enrich national strategy development.

     Second, coherent national strategies for financial education tailored to national circumstances are essential for success. Effective national strategies for financial education seem to contain four key elements:

  • coordination among major stakeholders, including regulatory authorities such as central banks and financial supervision agencies, educational institutions and financial institutions such as commercial banks, non-bank financial institutions and microfinance institutions;
  • a greater emphasis on customer orientation and addressing demand-side as well as supply-side gaps;
  • a combination of broad-based functional interventions and targeted programs for vulnerable groups such as women, the young, the elderly and SMEs;
  • the adoption of a long-term horizon with flexibility to respond to changing needs.

     Third, monitoring and evaluation of national strategies for financial education is vital for lesson learning and program adaptation. With the appropriate incentives, think tanks and universities can help monitor and evaluate efforts.

     Fourth, since government support programs will not be enough to maintain adequate financing, the private sector, such as life insurance companies, must supply long-term financial products suitable for self-protection. Long-term asset allocation by households can support infrastructure and other investments where long-term finance is required.

     Fifth, governments need to strengthen overall sources of funding to help provide support for broader financial education programs. This includes broadening the tax base, increasing tax collection efficiency and reducing unnecessary expenditure such as energy subsidies.

Naoyuki Yoshino is dean of the Asian Development Bank Institute and a professor emeritus at Keio University in Tokyo, Peter Morgan is senior consultant for research at the ADBI, and Ganeshan Wignaraja is director of research at the ADBI.

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