The Organisation for Economic Co-operation and Development (OECD) defines financial literacy or financial capability as a combination of awareness, knowledge, skill, attitude, and behaviour necessary to manage financial resources effectively, as well as the ability to make sound financial decisions for a lifetime of financial wellbeing.
Who are the prebanked and why is it important to educate them?
According to the UN, children are categorised as those aged 14 and under, while youth are categorised between the ages of 15-24, also known as generation Z; the eldest of whom are out of university and are currently entering the job market. This generation is naturally digital, they have never lived without Google or social media. They are the “see now, buy now” generation, with an average attention span of eight seconds, compared to the average 12 seconds possessed by millennials. They are shaping up to be the most educated generation with a lot of spending power and are quickly changing the future of shopping, thereby becoming the new focus of marketers and brands, making it essential for them to be financially capable.
Financially including the youth is important because they have access to, and use money. They interact with money by receiving an allowance, earning it, or even receiving it as a form of gift or “Eidiyah”. Individuals who have limited financial literacy or are uninformed about money make poor financial decisions, thereby limiting their opportunities. Investing time to learn about money while young, leaves the youth in control of their finances with a good understanding of how the monetary system works, whereas a lack of financial knowledge or education could lead to unpleasant consequences.
According to the 2020 ASDA’A Arab Youth Survey, 35 per cent of youth in the Arab region are in debt, compared to 21 per cent in 2019. Personal debt is the highest among the youth in Syria, Jordan, Palestine and Iraq, with percentages reaching 73 per cent,70 per cent, 65 per cent, and 59 per cent respectively. The survey also revealed that 26 per cent of youth spend debt on student loans most commonly in the Levant and North Africa, followed by 21 per cent on car payments in the GCC countries. The majority (57 per cent) of Levant area respondents described their financial situation to be quite difficult, while only 8 per cent of respondents in the GCC felt the same way. Governments have a very important role to play here, to reduce the reliance of youth on loans for education.
With “buy now pay later” or BNPL becoming more popular, it is important to make sure that youth understand how these programmes work and the dangers of instant gratification and the normalisation of debt. This is especially noted among generation Z and younger millennials in other parts of the world, where they are the highest participants in the practice of BNPL.
Their understanding of fundamental personal finance concepts such as saving, budgeting, debt, protection and investing will impact every aspect of their life and could mean the difference between poverty and financial success.
Everything they do from graduation and up until retirement, will be affected by their education and how they manage their money. From career to real estate, to relationship choices, finance is also present in our day-to-day activities - negotiating prices, salaries, where to live and eat. Financial decisions affect it all.
Digital financial inclusion
Financial technology or fintech can be the key to educating Mena’s youth, but to do so, fintech players have to serve the youth’s needs and understand what this digitally innate generation wants. They are interested in convenience, flexibility, a relatable tone of voice and appealing features, whereas currently the majority of banks are not significantly serving nor meeting their interests.
Mena’s generation Z like to do things with a hands-on approach, according to Ipsos they like learning from experience as a form of guidance when making decisions, rather than being handed things or dictated. Fintech can provide this opportunity by giving them the required tools to experience things from themselves, thereby learning by doing.
The youth adopt technologies fast when given the opportunity. Currently, the Arab youth market is underserved, as around half of the region’s population is under the age of 24, but the majority still use cash. Fintech can help solve this issue and teach financial literacy firsthand by equipping this generation with the necessary tools to successfully handle their finances. Fintech can do this by offering 101 Money skills, explaining the difference between debit and credit cards, debt to income ratio and so on. The widespread adoption of smartphones among this demographic, along with the development of digital identity solutions for identification and verification, presents open banking with a huge opportunity for serving the needs of this generation. It has the potential to show them how to generate long term value from their money and can perhaps, allow them to play the market in a risk-free environment, while working around their natural inertia.
Positive financial habits should be taught at a young age
Personal finance is a basic life skill that should be taught at a young age and parents should not wait until their children become teenagers to instill positive financial behaviour. Research suggests that we begin forming our habits as young as seven years old- the window is zero to seven and reversing these habits later on in life is very difficult, but not impossible. Hence, children should start developing healthy financial habits even before they start earning money. Parents can play a huge role through leading by example and guiding them through financial situations. For example, this can include speaking to children about how they pay bills, breaking down their monthly expenses such as groceries, as well as explaining the difference between wants and needs. Parents can also tell their children to wait and save to buy something they want, thereby learning the value of money and saving.
Based on Stanford research, delayed gratification helps children become more successful in the future. It will also allow them to have better social skills, deal better with stress, receive higher examination scores, and lower levels of substance abuse. Most importantly, children should be taught the concept of compound interest, the sooner they start saving, the faster their money will grow i.e. earning interest on their previously saved interest.
This would help and encourage children to learn and ask questions about money, the more they are taught at a young age, the less financially dependent they will become as they grow. They are also influenced by their social environment, experiential learning and peer influence, which are all parts of their financial socialisation.