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Financial literacy – The emerging market’s greatest challlenge

08 November 2012 Rowan Becker, Actuarial Specialist for Emerging Consumer Markets at Liberty

It’s not about how much you spend; it’s how you spend it.

South Africa’s emerging market has always been somewhat of a challenge for financial services providers. Although it is by far the largest economic segment in the country – one which, in many respects, powers the commercial engine which keeps our nation afloat– it is notoriously difficult to provide for.

This is due to complex, and often challenging, behavioural and cultural habits which are typically associated with this market; and few environments feel these effects as acutely as the insurance industry. The insurance industry is tasked with providing short and long term offerings which cater to cross-sections of customer needs and are seen to be responsible for the wellbeing and economic security of individuals and families in times of need, through the pay-out of insurance policies.

In the emerging market, the most prevalent product choice is funeral cover. Throughout the country, consumers earning between R3 000 - R11 000 monthly, consistently opt for small scale options which are positioned towards covering service, burial and other costs associated with the death of a loved one.

Despite this, in many instances, customers would be better placed to take out life insurance policies which offer long-term compensation in the event of death or disability.

According to Rowan Becker, Actuarial Specialist for Emerging Consumer Markets at Liberty, this trend has less to do with customer preference than it does education and habit.

“Individuals within disadvantaged communities are often inexperienced and somewhat trusting when it comes to matters of finance. As a result, those in the emerging market space who are able to invest in long term insurance policies often opt for products which are ill-suited to their needs.”

“This is why funeral plans are so prevalent within the emerging environment. These policies are typically simple in nature and pay out more swiftly than other options. Consumers tend to favour these, even though they will ultimately be covered for less and may not provide for their family’s needs.”

Although some responsibility for this does fall on the shoulders of financial service providers and brokers who poorly advise entry market consumers, financial illiteracy presents a far greater challenge to institutions which operate within this space.

“The average man on the street simply doesn’t understand complex financial products,” adds Unathi Kunju, Actuarial Analyst for Emerging consumer Markets at Liberty.

“These individuals are wary of the intricacy which accompanies life insurance cover and similar products and as a result tend to shy away from these offerings. Over and above anything else, success in this market is highly dependent on consumer education.”

For this reason, Liberty has identified and committed dedicated resources towards educating adults in developing communities on the merits of financial literacy, with the intention of encouraging greater awareness of these essential life skills.

Over the past five years, the company’s emerging market’s business division has devoted itself to training individuals though their financial literacy workshops. The aim is to equip individuals with necessary information and knowledge required to appropriately handle their personal finances.

These sessions focus on empowering learners with an understanding of money management, the consequences of bad debt, managing risk and creating wealth and the importance of a sound financial plan.

Basic tips on how to draw up a budget, save, deal with debt and select suitable financial products underpin these concepts, building a sound foundation upon which financial mindfulness can be built.

The aim of these workshops is to uplift individuals lacking in financial skills by empowering them to make informed decisions and empower them with the information to own their lives. Really encouraging those to give careful thought to what is best for their needs, as opposed to selecting the simplest product.

“The great challenge associated with a lack of financial understanding is that the needs of South Africa’s hardest working demographic are not being met. By offering free and open access to education, we hope to uplift developing communities to the point at which economic understanding becomes par for the course, and is passed down from generation to generation,” concludes Becker.

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