Financial Literacy is Essential for Financial Inclusion

by | 03/23/14 | Commentary, News, Uncategorized

Among the fastest growing segments of the financial services industry are financial literacy and financial inclusion.  But industry observers increasingly are asserting that the future growth and success of financial inclusion hinges largely on financial literacy.  Many contend that as more individuals gain greater access to traditional banking products and services by virtue of financial inclusion initiatives, the widespread lack of financial literacy in both developed and developing countries limits the ability of individuals and families to understand and effectively use banking and other financial products.

Approximately 2.5 billion adults worldwide lack access to the traditional financial services more widely available in regions that have more formal and institutionalized banking entities.  To address these staggering statistics, governments, corporations, foundations, academia and other key constituencies have been moving forward aggressively with strategies, public policies and the execution of programs that drive greater access to banking and other services through financial inclusion initiatives.

At the same time, however, the skyrocketing rates of financial illiteracy present important challenges for the long-term success of financial inclusion.  Simply put, if individuals gain access to new financial products, but do not understand how to use them, or lack basic knowledge with respect to budgeting, credit, debt, financial planning and other important elements required to manage their overall financial affairs, then the value of financial inclusion arguably plummets considerably.

Interestingly, low levels of financial education in many areas in which financial inclusion is being targeted extend even to the lack of awareness of how and where new financial products and services could be found.  In other words, even if financial inclusion proponents accomplish their objectives with regard to their financial inclusion initiatives, the lack of understanding and awareness of the newly created access yields ceilings on the potential success of financial inclusion.

The good news is that the trend of incorporating financial education components into financial inclusion strategies is growing extremely quickly.   Many countries throughout the world that are developing and executing national financial inclusion plans are requiring financial literacy elements in those plans as a prerequisite for approval and funding.  The same trend is taking place on the local levels, where financial education programs and policies are dominating the legislative, corporate and other institutional agendas in local and regional communities.  As this trend continues to grow, the success of both financial literacy and financial inclusion is very likely to reach heights that are far beyond those predicted throughout the industry today.

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