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“More people should learn to tell their dollars where to go instead of asking them where they went.”
– Roger Babson
Financial literacy is defined as the ability to use knowledge and skills to manage one’s financial resources effectively, for lifetime financial security. I like this definition because of the lifetime financial security angle. Essentially, without financial literacy, you stand the chance of financial mayhem before your maker calls you home.
Have you ever sat down and really thought, how does all this money story work aside from just earning and spending it? For instance, a common misconception is that when you go to a bank to borrow a loan, you are given the loan amount from deposits made by other customers. This is not entirely true. It may be what most of us have been taught even in business school, but kwa ground vitu ni different.
What happens is that banks have the ability to make money out of thin air, by the click of a button. The moment you borrow a loan, new money or digital money is created by crediting your account with the amount. You can now spend this new money, and when you pay it back the loan disappears. Need I delve into how this cycle of new money that is not backed by commodities (fiat currency) is what led to the global economic crisis of 2008.
The allure of the instant loan
Borrowings from Safaricom’s overdraft service rose to Sh1.2 billion daily in the six months to June this year, signaling the income shortfalls that have pushed many Kenyans to rely on short-term expensive debt. The surge in borrowing is as a result of an elongated period when the economy is slowly recovering from the loss of millions of jobs that have affected household incomes throughout the Covid-19 pandemic.
While technology has played a great role in fintech by making it more efficient to transact money and even more importantly resulted in financial inclusion, it is evident that financial literacy has been neglected, especially by the proponents of such technology.
Recent research has shown that in any typical survey testing financial literacy, two-thirds of the respondents, regardless of age or income levels, struggle with simple concepts about interest rates, inflation and risk diversification.
However, money is more than just the numbers, you need to understand your legal rights in transactions, where to find credible information and what questions to ask. This article points out some factors negatively affecting financial literacy.
The curse and blessing that is Fintech
A few years back, before the dawn of Mpesa and mobile banking, you had to visit your bank to withdraw cash before spending. As you made your way, you had enough time to rationalize and think about whether the intended use of the money was in your best interest. Fast forward to the new world of mobile banking and you can pay for anything at the click of a button. With eCommerce catching up as well, impulse buying has become more rampant. Before you realize it, you have probably maxed out your account.
However, this is not to say that the ease with which we transact is a bad thing. It goes back to planning and budgeting at an individual level, to maintain fiscal discipline and avoid unnecessary debt.
The vultures are lurking
And as you’d expect, there is an interesting category of capitalists that have moved in on the lack of fiscal discipline known as mobile loan apps offering pay-day loans. In Kenya, you have apps that have democratized the flow of money and thus to some extent contributed to financial inclusion. These players have realized that they can lend short-term financing at a premium of up to 19% a month!
Quite expensive debt if you ask me.
With banks shunning risky borrowers, this niche has developed gradually and is moving a significant chunk of money in the economy. There have been calls to regulate such apps whose motive though noble at first seems to be predatory in the long term. People are now surviving month on month from one loan to the next, an unsustainable way to do life. For an economy that is already grappling with public debt which is ultimately borne by the citizens, the huge pile of accumulating personal debt is a point of concern.
It’s a race to the bottom
Despite the emergence of fintech, it is clear that most of these innovations are not making people smarter about money. Instead, it is leading to burgeoning debt amongst especially the lower classes, thereby increasing the inequality gap, manifesting capitalism at its best. And it goes without saying that increase in debt uptake has longer-lasting effects at both individual and country levels.
And it’s not just a Kenyan problem – the question of grappling with financial literacy. With improved healthcare and hence increased lifespans, most developed nations are now grappling with how to support an ageing population that continues to make uninformed decisions on their retirement savings.
Locally, regulatory authorities have not moved in to decisively rein in on the mushrooming lending apps with exorbitant interest rates, and so the onus lies with individuals to make sound financial decisions.
While it might be unrealistic to require everyone to understand the deeper workings of finance, basic working knowledge is becoming imperative. The government, too, has to come up with regulations that safeguard citizens’ financial wellbeing in this cutthroat lending industry. Financial literacy should also be taught in schools, right from primary school. A healthy economy will require financially savvy citizens.