Financial literacy is not a new concept, although it has only come into vogue in the last three decades due to the increasing complexity of financial products and the growing role played by personal finance in people’s lives.
According to an article in the Boston Economist Publication, the roots of financial literacy in the United States, which often leads the world in economic practices, “can be traced back to the early 20th century when rudimentary concepts of financial management were introduced in schools. However, the notion of widespread financial education gained prominence during the Great Depression of the 1930s.”
The Wall Street crash of 1929, which plunged the US and the rest of the world into recession, prompted policymakers and educators to recognise the need for people to develop an understanding of financial principles. However, subsequent attempts to introduce the subject of finance into school curricula were not very successful.
It was not until the late ‘90s and the early 21st century that the countries of the developed world started recognising financial literacy as something that should be incorporated into the school curriculum, in order to protect people. The 2008 housing market collapse, brought on by easy credit which encouraged people to take housing loans they could not repay, sent the global financial system into free-fall.
Could the housing bubble have been avoided if people were more financially literate? It’s uncertain, as US banks were targeting low-income homebuyers who could not afford the housing loans they were granted, leading to a buildup of toxic assets that affected the international banking system.
Another compelling reason for financial literacy is the internet which provides easy access to various financial products and alleged money-making opportunities. People can invest money in any venture they choose, regardless of the risks involved. Higher financial literacy is essential to protect online investors.
The Cyprus government plans on introducing financial literacy into the curriculum in the new school year, which is overdue. The low financial literacy was evident in 1999/2000, during the big stock market bubble that caused thousands of inexperienced investors to incur huge losses and large debts to banks.
The emphasis of financial literacy is said to be on economic concepts such as budgeting, saving and developing an understanding of credit. Considering what happened in 2013, when the banking system came to the brink of total collapse due to record levels of non-performing loans, the education ministry should give special emphasis to understanding credit.
It was not only individuals who engaged in irresponsible borrowing. Ironically, some of the biggest companies in Cyprus, run by well-qualified executives, had huge loans they could not service and were forced to sell off assets and drastically downsize after 2013 in order to repay the banks. Were these company executives financially illiterate and in need of an education on responsible borrowing?
While reckless economic behaviour is not exclusive to the financially ignorant, governments recognise that financial literacy is the only way to protect people, helping them avoid potentially ruinous financial decisions.
After the devastating crisis of 2013 which led to a bailout and recession, the need for providing basic financial knowledge became an imperative. While it may not be enough in the evolving economic environment with complex financial instruments promoted through clever online marketing, it is certainly a start. Whether teenagers in schools will stay engaged while being taught about interest rates, government bonds, cash flow, mutual funds and derivatives, is another matter.
