South Africa’s financial education vacuum
South Africa has a long way to go before it converts an 88% basic literacy level into higher awareness of key financial topics. According to the FinScope 2008 survey “there are still high levels of misunderstanding – or no knowledge at all – of key financial terms, particularly in the area of debt.” A better understanding of such financial topics is imperative in a country where debt-to-income ratios are on the rise.
FinScope 2008 is conducted by FinMark Trust and is described as “an annual study of South African financial habits.” Before we go into detail on this section of the survey it might be useful to supply some background information. FinScope SA 2008 was conducted among 3 900 South African residents (aged 16 and older) during August and October last year. The research was conducted by TNS Research Survey, a leading local marketing insights company, and took the form of face-to-face interviews with each respondent. FinScope was launched in 2003 by FinMark trust with the aim to establish credible benchmarks for the use of, and access to, financial services in South Africa. The 2008 FinMark Trust syndicate members include Absa, First National Bank, Liberty Life, Metropolitan Life, National Treasury, Nedbank, Old Mutual, Sanlam, Standard Bank and Teba Bank.
Four in 10 have never heard of bad debt
The survey includes that four in 10 people have never heard of bad debt. But there are other terms which trigger less than a glimmer of recognition. More than 60% of survey respondents claim they’ve never heard of garnishee orders, debt administration, interest rate capping, national credit regulator certificates, debt rescheduling and the co-operative banks act. It’s a surprising statistic given the massive rise in impairments at South Africa’s big four banks in recent years. And recent reports by Auction Alliance suggest 80 000 mortgage holders are in severe stress, defined as four or more payments in arrears. “While more people know about personal credit records and other terms related to debt, the consequences and remedies remain less well know. It is clear that more education is needed about the whole are of debt,” concludes the survey.
Similar trends emerge in the vital area of retirement funding. The survey found that 48% had never heard of retirement planning, 56% knew nothing about retirement annuity and 65% shrugged when tax savings on retirement fund contributions were mentioned. This is extremely worrying in a country where as few as 60% of those saving for retirement will reach retirement age with sufficient savings. It also reflects the extreme levels of poverty in the country. The majority of South Africans still rely on the so-called state old age grant when they reach 60 years.
The survey concludes that for “many people, especially poorer people, the concept of retirement planning may well be almost impossible to visualise due to their impoverished circumstances.” They note that approximately 67% of people in the LSM 1 to 5 had no knowledge of any of the terms used in this section of the survey.
Shopping for knowledge
So where do South Africans go when they want to learn more about a particular financial product or concept? The survey found that financial services intermediaries topped the list, with 29% of survey respondents mentioning financial advisers as a source of such information. The next most popular knowledge centres are the workplace or employers (9%), community leaders (6%) and churches (6%). “Wealthier people tend to rely more on formal sources of knowledge while the less wealthy tend to use informal sources more.” The survey also found that extremely poor people had almost no need for financial advice.
What did people want to know? The survey found that “the effective use of savings products and how interest rates work and how they are calculated” remain top of the list. People also want to know how to draw up and manage a budget effectively. And 25% of the sample wanted to know more about selecting investment products and how to purchase life cover. Most survey respondents also wanted guidance on the best companies for these financial products. “One person in five was interested in educating their children on financial matters, while a quarter of the sample evinced no interest in more financial information,” concludes the survey.
Wealth gap equals knowledge gap
The survey found a strong correlation between wealth and financial knowledge. According to FinScope 2008 “This has important implications for those dealing with people entering into the formal financial system and formal financial agreements” for the first time. Of course regular readers of FAnews Online will recall the many FAIS Ombudsman rulings where financial services advisers tripped up in this area. Don’t assume that your client knows something based on their wealth, education or occupation. It’s best to explain the workings of each product in detail and to keep all the bases covered.
The survey says there’s plenty of work to be done in the financial education and training arena. “The relatively low growth in knowledge about the National Credit Act is of some concern,” they say, adding that the numerous gray areas “regarding the use of credit in any form” need to be urgently addressed. The good news is that “the interest in savings vehicles, interest rates and running a budget are positive and represent an opportunity for service providers.”
Editor’s thoughts:
One of the major challenges facing our emerging democracy is education. The poor state of the country’s schooling system means the burden of financial literacy falls on the hard working professionals in the financial services industry. Is there a case for more financial literacy training in schools – or do you prefer educating your clients from scratch? Add your comments below, or send them to gareth@fanews.co.za
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