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Financial exclusion is a global problem; estimates show that around one-third of the world population does not have a formal bank account. According to World Bank data, although the number of people with a formal bank account has increased from 61 percent in 2014 to 67 percent in 2017, but more than 80 percent of the current increase is made up of such bank accounts which have been inactive for over the past year. In terms of active accounts, the portion of the banked raised from 52 percent to 53 percent(World Bank, 2018) where the term ‘banked’ means a person having a formal bank account. Assess to formal financial system is important as it provides significant financial services to households and business enterprise which include safe savings and range of risk/return trade-off services- it helps buildup of financial assets which can provide a cushion against unforeseen events; by way of credit and insurance it helps in absorption of shocks due to unanticipated circumstances; it reduces dependence on informal financial resources such as pawn shops, moneylenders or informal groups relating to savings and credit associations; it facilitates payment between different parties and makes them safer to a cash transaction. The formal financial system also mobilizes savings into formal system which benefits the whole economy.
Financial inclusion is a multi-dimensional concept, as it focuses on not just access to better and affordable financial products and services, but also better usage of those products and services (Mani, 2018). Herein lies the challenge- better access and better products are of no worth without better usage. Increased availability does not automatically translate into effective use. Effective use is held back due to asymmetries of information between inexperienced-consumers and powerful-financial-institutions. The imbalance exists as the consumers feel uninformed to take decisions about sophisticated financial products and services. This imbalance often brings negative outcomes due to ignorant consumer decisions or institutional abuses.
Financial literacy is a means to tackle this imbalance and help consumers develop the skills to understand, compare and select the best products as per their requirement. It empowers the consumers to protect their rights in case of conflicting situations. Organisation for Economic Co-operation and Development (OECD) highlighted several direct and indirect benefits of financial literacy for unbanked: improved understanding of formal financial products and services; better understanding of risk and returns related to financial products; reduced cost of information and money transfer; high household savings into formal financial products and protection against unfair practices (OECD, 2005).
Financial literacy is defined as a combination of awareness, knowledge, skills, attitude and behaviours necessary to make sound financial decisions and ultimately achieve individual financial wellbeing (Atkinson & Messy, 2012). It is often confused with financial education albeit financial education is a tool to achieve financial literacy. Financial education is the process of creating knowledge, skills and attitude to become financially literate. Introduction to good money practices related to earnings, borrowing, spending, saving, and investing is the basic premise of financial education. Financial education might have different meaning to different people- in the already banked sections of society, financial education might mean knowledge of tax rules, insurance requirement and credit cards, while for unbanked sections it is more about basic concepts of safe saving, budgeting and wise borrowing. The aim of financial education is to achieve financial literacy which is the ability to make informed judgements and take effective actions regarding current and future use and management of money.