Financial literacy is about knowing how to earn and spend

FILE | NATION: Prof Njuguna Ndung'u Governor of Central Bank of Kenya during a past function

What you need to know:

Fact Box
The current state of affairs in the industry

  • Plans are ongoing to strengthen safety nets such as the Depository Protection Fund to protect the millions of micro-savers entering the formal financial system as the country moves from the ‘too big to fail’ syndrome.
  • Kenya will need strong institutions supported by large capital bases.
  • To inspire confidence among savers, authorities need to assure users of the financial system that their interests are safe.
  • With technology leading to virtual money transfer services, there are challenges that have to be surmounted to curb fraud among other issues.
  • Easy borrowing terms and competition among banks good for man on the ground

For most people, having a job and deriving an income is the key to personal financial well-being and independence.

They entertain the notion that from this, they can make informed decisions about what to do with the money once it is in their hands.

However, earning an income does not equal to being able to make thoughtful and informed options about your personal finances or gain long-term benefits of savings and investing.

But as we found out, a majority of the people acquire their financial knowledge arbitrarily; by trial and error. So, this means one might have grown up not learning any principles of personal finance systematically from his/her parents.

Some may have picked up bits and pieces in school or from the media and perhaps through their business dealings with financial service providers.

But, experts warn, such information is misleading and fraught with inaccuracies.

Financial freedom and prosperity are challenges that we all meet in our lifetime.

It’s the reason why so many people spend money on gambling and other events in the hope of striking it rich without the pain and effort needed to get there.

So is financial education necessary? And what does it mean for one to be financially literate?
Well, financial literacy means different things to different people. To the average person, it denotes knowing how to maintain a simple household budget with a bank account and credit cards.

This includes knowing how to save for emergencies, putting aside cash for special purchases, and leaving some for retirement.
For some bankers and business owners, financial literacy is their job skill.

They need to know a lot more about how money is used in credit situations. They must understand the terms of financial contracts and know how to read an income statement and a balance sheet.

They also have to understand complex tax codes and insurance practices.

Financial experts and educators, who met at a recent seminar held in Naivasha, believe that developing and increasing your financial literacy is key to your financial stability and wealth creation.

Central Bank of Kenya governor Njuguna Ndung’u says that education in matters financial is beginning to pay off. He says that reforms in the sector over the last five years are bearing fruit.

“There is need for us as a country to take advantage of the opportunities created by these reforms in the financial sector in the last couple of years,” says Prof Ndung’u. “What we probably lack is financial literacy,” he notes.

“Financial literacy does not refer to formal education in finance. So, you don’t need to acquire a Bsc, Msc or PhD in finance or accounting to develop or increase your financial literacy.

All one needs is the knowledge necessary for managing personal finances to achieve financial goals.

These include an understanding of how to manage your money well, minimising financial risks, investing prudently and using credit responsibly,” said Mr Manyara Kirago financial analyst.

Stimulate wealth creation
He spoke during the Financial Education And Consumer Protection Partnership workshop organised by The Financial Sector Deepening Trust (FSD) Kenya.

The trust was set up in 2005 to support development of financial markets in Kenya in a bid to stimulate wealth creation and reduce poverty.

According to the research released during the five-day conference, 51.3 per cent of Kenyans feel out of control of their finances, a majority of which are those in rural areas.

It also indicates that 41 per cent are using financial instruments to smooth consumption.

On the other hand, 50 per cent of Kenyans save to meet day-to-day needs rather than long term needs, while 61 per cent are worried about their financial status in old age.

Thirty six per cent of the population is said to have loans and 28 per cent of total population (46.7 per cent of those with credit cards) take new loans to pay old ones. Twenty five per cent of customers love to spend even if to use credit.

Statistics further show that 67.3 of the population says it never seeks financial advice and 46 per cent turn to family and friends for advise.

Addressing the participants, Mr Kirago said there is an urgency for financial education because “most people are feeling hopeless and are becoming slaves to their credit cards”.

“Financial education is a very good alternative and cost effective strategy for a consumer to be more money and investment smart; this kind of education develops confidence and the knowledge to be in control of your own finances without anybody taking advantage of you,” he said.

Mrs Phyllis Wangwe from the Kenya Bankers Association during the same event said that financial well-being is no different than playing golf.

“To benefit from the ability to control your own finances, you need a properly structured financial education programme. It’s more like learning how to play golf. If you have never played before, then the best way to learn is to seek a professional who will show you how to achieve that low handicap through a perfect swing,” she said.

Performance on golf course
“Your performance on the golf course” she adds, “depends on your ongoing practice and continued support from the golf professional. And we all know what sort of golfer a person is likely to be who has never taken a golf lesson and relies on advice from his/her mates when things go from bad to worse with the swing.”

The FEPP project manager and financial educator, Mrs Bilha Maina, said it’s important when children get to learn about finance earlier in life. “A literate person is one who can read and comprehend what they are reading.

But a financially literate person is one who can keep track of their money and make decisions about how they spend it and invest to accomplish their objectives. Financial literacy is developed over a lifetime, but I think it needs to start in school.

“Schools need community support to encourage the development of strong curriculum that include financial decision strategies. After students get that basic foundation of knowledge in school, they will be better able to use the pieces of information that will be picked up later in life.”

Experts believe that five basic areas that one needs to understand to improve his/her financial literacy are money and income, money management, spending and debt, saving and investing and risk management.