Financial literacy and financial resilience: Evidence from around the world

• Author: Annamaria Lusardi,Leora Klapper
• Published date: 01 September 2020
• Date: 01 September 2020
• DOI: http://doi.org/10.1111/fima.12283

DOI: 10.1111/fima.12283

ORIGINAL ARTICLE

Financial literacy and financial resilience: Evidence

from around the world

Leora Klapper1Annamaria Lusardi2

1DevelopmentResearch Group, The World Bank,

Washington,DC

2Global Financial LiteracyExcellence Center

(GFLEC),The George Washington University

School of Business, Washington,DC

Correspondence

LeoraKlapper, DevelopmentResearch Group,

TheWorld Bank, 1818 H. St. NW, Washington, DC

20433.

Email:lklapper@worldbank.org

Fundinginformation

Standard& Poor’s Ratings Services; McGraw Hill

FinancialInc

Abstract

Wemeasure financial literacy using questions assessing basic knowl-

edge of four fundamental concepts in financial decision making:

knowledge of interest rates, interest compounding, inflation, and

risk diversification. Worldwide, just one in three adults are finan-

cially literate—that is, they know at least three out of the four finan-

cial concepts. Women, poor adults, and lower educated respondents

are more likely to suffer from gaps in financial knowledge. This is

true not only in developing countries but also in countries with well-

developed financial markets. Relatively low financial literacy levels

exacerbateconsumer and financial marketrisks as increasingly com-

plex financial instruments enter the market. Credit products, many

of which carry high interest rates and complexterms and conditions,

are becoming more readily available. Yet only around half of adults

in major emerging countries who use a credit card or borrow from

a financial institution are financially literate. We discuss policies to

protect borrowers against risks and encourage account holders to

save.

1FINANCIAL LITERACY: WHAT IT IS AND WHY IT MATTERS

Without an understanding of basic financial concepts, people are not well equipped to makedecisions related to finan-

cial management. People need to be financially literate to makeinformed financial choices regarding saving, investing,

borrowing, and more. Overall, financial literacy matters on many levels. In a world of escalating financial complexity,

there is an increasing need for basic financial knowledge (Lusardi & Mitchell, 2014). For example,with governments in

many countries pushing to boost access to financial services, the number of people with bank accounts and access to

credit products is rising rapidly.Moreover, changes in the pension landscape transfer decision-making responsibility to

participants who previously relied on their employersor governments for their financial security after retirement.

The potential benefits of financial literacy are manifold. People with strong financial skills do a better job planning

andsaving for retirement (Behrman, Mitchell, Soo, & Bravo, 2012; Lusardi & Mitchell, 2014). Moreover,individuals with

c

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Financial Management. 2020;49:589–614. wileyonlinelibrary.com/journal/fima 589

590 KLAPPER ANDLUSARDI

greater understanding of financial concepts are more likely to participate in financial markets and to invest in stocks

(Almenberg & Dreber 2015; Christelis, Jappelli, & Padula, 2010; VanRooij, Lusardi, & Alessie, 2011; Yoong, 2011).

Greater financial literacy can increase financial resilience and reduce risks, such as taking on too much debt. For

example, lower numerical ability—a crucial element of financial literacy—is strongly associated with mortgage delin-

quency and default (Gerardi, Goette, & Meier, 2013). Furthermore, adults with higher “debt literacy”—for example,

greater understanding of debt concepts and able to do calculations of future debt payments—are more likely to pay

their credit cards in full and less likely to be over-indebted (Lusardi & Tufano,2015). What is more, financially literate

individuals are more likelyto be savvy about choosing mutual funds and diversifying their savings (Hastings & Mitchell,

2011; Hastings, Mitchell, & Chyn, 2011; Hastings & Tejeda-Ashton,2008). Financial literacy is also linked to financial

fragility and the capacity to handle unexpectedshocks (Hasler, Lusardi, & Oggero, 2018).

The consequences of financial ignorance are high. Consumers who fail to understand the concept of interest com-

pounding,for example, pay higher transaction fees, run up bigger debts, and incur higher interest rates on loans (Lusardi

& Tufano,2015; Lusardi and de Bassa Scheresberg, 2013). They also end up borrowing more and saving less (Stango &

Zinman, 2009).

Financial literacy,according to Widdowson and Hailwood (2007), may have a considerable influence on the sound-

ness and efficiency of financial systems. For one, consumers who are more financially literate maybe better equipped

to make investment and product decisions, which, in turn, may motivate financial institutions to offer new and more

innovative products and services. Financiallyliterate consumers are also expected to have a greater awareness of risk-

return trade-offs. And they may be more emboldened to ask questions and scrutinize financial products and the insti-

tutions that they do business with. In response to consumer demand, financial service providers are expected to raise

standards of service and their management of investmentrisks, contributing to greater efficiencies in the financial ser-

vices marketplace, growth in the sector,and less cyclically volatile economies.

Against this backdrop, our paper uses data from the first and only global surveyon financial literacy that we helped

design to explore the relation between financial literacy and the financial system at both the individual level(personal

finance) and the aggregate level (financial markets). In the first part of the paper,we discuss some country-level cor-

relates of financial literacy.Our findings broaden the extant literature by examining population segments that are the

most and the least financially literate across countries of varying income level and financial development. The paper

also examines the relation between financial literacyand personal finance.

The paper is organized as follows. Section 2 of the paper describes the variation in financial literacy around the

world. Section 3 discusses the variation in financial literacy across demographic and income characteristics.Section 4

analyzes country-level correlates of financial literacy.Section 5 explores ways in which financial literacy relates to the

structure of financial systems. Section 6 concludes.

2VARIATION IN FINANCIAL LITERACY AROUND THE WORLD

2.1 The S&P Global FinLit Survey

This paper uses the Standard & Poor’s Ratings Services Global Financial Literacy Survey (S&P Global FinLit Survey),

which provides information from a wide array of countries.1It builds on earlier initiatives and numerous national sur-

veys that collect information on financial literacy.2TheS&P survey complements these efforts by delivering the first

and most comprehensive global measure of financial literacy to date.

1Country-levelsummary statistics are shown in Appendix B. Complete individual-level data for all countries are available upon request.

2Earlier initiativesinclude the International Network on Financial Education (INFE)/Organisation for Economic Co-operation and Development (OECD) sur-

vey,the World Bank’s Financial Capability and Household Surveys, and the Financial Literacy around the World (FLATWorld) project.