MEASURING FINANCIAL LITERACY: CONCEPTUAL STUDY

MEASURING FINANCIAL LITERACY:
CONCEPTUAL STUDY
Sudindra
V R
1.     INTRODUCTION:
Unlike
traditional roles played by governments and employers in managing investments
on behalf of individual significantly transformed in recent past due to change
in social structure across the world.  It
is responsibility of individuals in managing their own finance to secure their
financial future.  In the complex
financial environment, it is imperative that individuals develop nuanced
understanding of world of finance to meet their financial goals and needs. It
is observed that most of the individuals under-saved, fail to invest wisely and
continued to be overburdened with loans/advances.
2.     
CONCEPT
OF FINANCIAL LITERACY:
OECD-
Organization of Economic Co-operation and Development, defines financial
literacy is a combination of awareness, knowledge, skills , attitude and
behaviors necessary to make sound financial decisions and ultimately achieve
individual financial wellbeing.
3.     
COMPONENTS
OF MEASURING FINANCIAL LITERACY:
Measuring
financial literacy requires a clear understanding of financial literacy
concepts and application of appropriate evaluation tools.
Major components of financial
literacy includes:
Ø  Savings/borrowings:  basic understanding of savings alternatives, different
types of savings account, borrowing procedures, debt literacy and ability to
plan for future.
Ø  Personal budgeting:
understanding of personal budgeting, budget balance, taxation impact on income,
disposable income and estimation using appropriate measures.
Ø  Economic issues:
understanding of economic situation, economic ratio’s, knowledge of economic
terms and etc.
Ø  Financial concepts:
understanding of time value of money, risk and returns, risk profiling, timing
in investments and other related concepts.
Ø  Financial services:
knowledge of financial products, services, mechanism of card services,
insurance, broking services, online services and other financial services.
Ø  Investing:
understanding of investment opportunities, risk and rewards and other investment
related risks.
4.     
OECD
FINANCIAL LITERACY MEASUREMENT DEVELOPMENT PROCESS:
Based
on 18 existing survey from 16 countries, OECD developed international good
practice in financial literacy measurement.  With support and guidance from expert sub
group developed survey instrument (questionnaire), which covers attitude and
knowledge as well as capturing behavior related topics like money management,
planning, financial/investment goals and awareness of financial product &
financial services.
Measurement
instrument must achieves the following objectives:
Ø  Questionnaire
must be based on widely accepted definition of financial literacy which
emphasis general behavior, attitude and knowledge.
Ø  All
the components of financial literacy must be able to identify the relationship
with financial product awareness, use and recent choices and socio demographic:
age, gender, education, work and income variables.
Ø  It
should be read loud by an interviewer and consists of Likert type scales.
Ø  It
should be market specific questions: such as product awareness, access to
information about the product and comparable to international data.
Ø   It should stress on individual capacity to
draw on savings is relative rather than absolute. Focused on amount of time
they could manage for, rather than the amount of money they have saved.
Ø  Sequential
approach to review product awareness to ensure respondents not made to feel
financially excluded.
5.     
CONCLUSION:
Traditionally
government use to play vital role in managing investment of individuals but in
today’s complex environment, individuals has to manage their own finance their
future financial goals and needs. It is observed that most of individuals are
under-saved, fail to invest wisely and indebtedness. To understand level of
financial literacy majorly savings/borrowing, personal budge, economic issue,
financial concepts, financial service, financial product and investment
components can be consider. OECD developed the instrument based on existing
survey which considered widely accepted definition, market specific questions,
focused rather than absolute and sequential review of product awareness.
<https://www.oecd.org/finance/financial-education/49319977.pdf>

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