Where are we in terms of financial literacy?

By Eng. Thushara Dissanayake

The country is in a deep economic crisis to which everyone equally contributed. We, as citizens, have consumed beyond our capacities prompted by the economic mismanagement of the leaders. The higher officials and advisors either misled those leaders or humbly remained without being at odds. In terms of investments, the government massively spent on some politically, motivated white-elephant infrastructure projects. By keeping the dollar at a lower rate at the cost of foreign reserves, various cheaper imports were dumped into the country, and also provided the public with many concessions and subsidies to grab their votes at elections.

In the meantime, we have been happily consuming a wide range of things, from expensive fossil fuel-driven motor cars to the toy cars our children play with. We took that highly consumptive lifestyle for granted. Many luxurious things were affordable to the majority of the society but the question is whether these expenditures, rather debts, are tolerable as a nation, considering our economic output. Eventually, we are in an economic crisis, and let me shed light on a related issue, rather a significant cause for the crisis. In a nutshell, it is the lack of financial literacy of our citizenry. I have come across the following and elaborate here only to acknowledge the real situation of the society, which is worse than we think.

Often, we can see congested bank counters that are dedicated to opening accounts, obtaining loans, and similar services. If closely observed, it can be realized that in most cases it is not because of the lack of staff or their inefficiency to serve the customers but the lack of knowledge of customers themselves that create such delays in service. Although the customer base varies from the average man to even professionals many of them lack basic financial literacy. Even bank officers find it hard to explain and make the customers understand the things correctly.

A popular Youtuber, a reputed professional, recently presented a video about the possibility of a hyperinflationary situation in the country and he illustrated graphically that the price of a good sold at Rs 100 at present would go up to nearly Rs 3,000 by the end of this year. For his calculation, he mistakenly considered the inflation index as an increase per month, whereas it is the change of the index over a year. After pointing out the mistake he has corrected it, which otherwise would have unnecessarily caused more than one hundred thousand of his viewers to panic.

Another Youtuber, a master’s graduate according to the profile picture, advises her viewers about how to invest. In one video, she advises how to buy a house worth Rs 10 million without paying in full. She suggests obtaining a 25-year bank loan of Rs 7 million at an assumed annual interest rate of 12% and to pay only the balance of Rs 3 million in cash. After the purchase, she suggests opening a fixed deposit of Rs 7 million at an assumed interest rate of 10%. Then she asks the investor to pay only the loan installments for the first three years (present value of about Rs 2.3 million) again in cash. According to her calculations by the fourth year interest earned by the fixed deposit is higher than the loan installment enabling the investor to settle the future loan installments with the interest earned. She concludes that the total cash paid by the investor for buying the house is just about Rs 5.3 million at present value, and now he has got Rs 7 million in the FD and Rs 10 million worth of a house bought on the mortgage loan, which will be settled solely by the FD interest after the third year.

At first sight, a novice will see this to be a lucrative investment. Anybody with basic financial literacy will realise that obtaining a Rs 7 million loan at 12% interest and depositing the same amount in a fixed deposit at 10% interest means that you are losing 2% per annum. Then what’s wrong with this calculation? If you work this out, you will see that this is a manipulation. Nevertheless, viewers who were misled by this type of wrong analysis would surely be in trouble.

This story about a Minister of Irrigation was narrated by a friend of mine, an engineer. A meeting was held to discuss a new small-scale reservoir project and my friend attended it with the feasibility report. He explained to the minister that the project was not economically feasible and hence not suitable for implementation. Having heard the engineer’s explanation, the minister said, “I say, hundreds of farmers are asking for this reservoir because it is feasible. Why are these engineers talking nonsense?” These are the classic examples of the financial literacy of the elite in our society and the situation of the average man will go without saying. Sri Lanka has a literacy rate of over 90%, though financial literacy, a very important statistic, is around 35% according to unofficial estimates. In other words, only 35% of the population knows the financial fundamentals of savings, debt, investment, interest rates, inflation, taxation, etc., and possesses mathematical skills needed for correct financial decision making as our schools have failed to deliver that essential knowledge to our children.

We are at a crossroads where many are talking about a system change in the country. Abolishing the executive presidency, establishing rule of law, and strengthening social harmony is on the agenda many are fighting for. Yet one of the important, though the less focused area, is the education system of the country. Instead of producing certificate holders who act like robots, we need citizens with pragmatic knowledge in finance and economics among other things for the economic development of the country. Schools teach students the financial theories related to interest calculations, price increases, or discount calculations but not their application. Hence, many fail to make correct decisions where money matters.

The Sri Lankan economy is composed of many small and medium entrepreneurs. Economic development in all spheres depends on the correct decision-making even at the individual level and for that, we have to harness people’s financial literacy. Therefore, necessary educational reforms must be part and parcel of the much-talked-about system change.