Financial literacy is crucial to improve our national savings rate

Gareth Stokes, FAnews Online Editor

Financial intermediaries play a crucial role in improving a country’s savings rate. As professionals in the savings and retirement space they influence how much and in which financial product consumers typically invest. But despite the industry’s best efforts South African households only save 1.5% of GDP (Reserve Bank Quarterly Bulleting March 2011), preferring to divert surplus cash to life’s luxuries. July is National Savings month so FAnews asked the Banking Association of South Africa what needs to be done to improve the domestic savings outlook. According to them financial literacy is key!

A lack of financial literacy has been bandied about as one of the factors that brought about the global financial crisis. Although we cannot claim it impacted international finance at the highest level, it certainly affected how individuals responded. In South Africa, consumer financial vulnerability worsened during the recession due to job losses and continued high levels of indebtedness. The Banking Association says that promoting financial literacy – and thereby savings –will foster the “creative capitalism” needed to drive market-based social change. It’s a bit of mouthful – but they’re essentially saying that financial ‘freedom’ is imperative for sustainable socio-economic development.

Financial literacy to promote savings!

One of the reasons South Africa has such a poor savings record – and high debt levels – is that we have a poor savings culture. The recent financial crisis has certainly raised awareness among ordinary South African households of the need to save… But we have a long way to go before we instil a savings culture countrywide. Financial literacy is one of the key ‘weapons’ against such complacency. The Banking Association notes that financially savvy consumers are more likely to save their money, compare financial products and services, and discuss money matters with their children.

For emerging economies like ours, financially educated consumers can help ensure that the financial sector makes an effective contribution to real economic growth and poverty reduction. Unfortunately Africa is considered to be very low on the financial literacy ladder, as confirmed by a study compiled by FinMark Trust and based on FinScope data.

Begin saving at a young age

FinScope South Africa 2010 notes: “Only 35% of South Africans aged 16 years and older have savings products and/or services. However, most savings are to manage day-to-day living: an emergency, school fees/education, money for food and funeral costs. 65% of South African adults who are not currently saving single out joblessness and not having the money to save as their biggest reasons for not saving.” How do we remedy the situation?

Financial literacy and saving falls under the Consumer Education space in the banking industry. One of the innovative programs in this space is the Teach Children to Save South Africa™ (TCTS SA) program which is a collaborative effort of the banking industry and broader financial sector coordinated by the Banking Association in conjunction with the South African Savings Institute (SASI). The program aims to teach children to save by targeting primary school learners from Grades 4 to 7. Over the three years ending December 2010 the program has empowered more than 250 000 learners nationwide, with ambitious plans to reach another 100 000 students this year.

Another major area of focus of the Banking Association is SME Financial Literacy. The organisation realises that small emerging enterprises contribute 34% to South Africa’s GDP and provide more than 60% of local jobs. SME Financial Literacy is one of the four fronts of comprehensive ‘access to finance’ and ‘financial inclusion’ programs for any emerging economy.

Taking steps to improve the savings situation

Another major challenge in the South African context is the cost of entry level bank savings accounts. The Banking Association encourages its members to provide more efficient savings accounts such as the Mzansi product. Mzansi is an entry-level transactional account aimed at ensuring that the lower socio-economic groups have access to first-order retail banking products. Mzansi was launched collaboratively by the four major banks in 2004 as part of their Financial Sector Charter (FSC) commitments. Post Bank has been a significant player in the Mzansi space too. The product is based on the ‘inclusive banking’ concept, which refers to the delivery of financial services reasonably and at a lower cost to the disadvantaged and low income.

Banking is a knowledge-intensive business requiring a significant investment in financial education programmes. The banking industry has a responsibility to investment in South Africa’s greatest resource – people, consumers, children and the community at large. Financial literacy and saving will contribute to South Africa’s ongoing economic growth. We celebrate National Savings Month in July each year, but the Banking Association believes the savings message should be broadcast 365 days a year!

Editor’s thoughts: The various initiatives taken each year to raise awareness of savings seem to fall largely on deaf ears. Perhaps saving in an economy where unemployment tops 25% is simply impossible. What steps would you take, at grass roots level, to improve South Africa’s savings rate? Please add your comment below, or send it to gareth@fanews.co.za