THE IMPACT OF FINANCIAL LITERACY ON ECONOMIC DEVELOPMENT IN NIGERIA
1.1 BACKGROUND TO THE STUDY
Financial literacy remains an interesting issue in both developed and developing economies, and has elicited much interest in the recent past with the rapid change in the finance landscape. OECD (2005), defines financial literacy as the combination of consumers’/investors’ understanding of financial products and concepts and their ability and confidence to appreciate financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being (Miller et al., 2009). Financial literacy helps in empowering and educating consumers so that they are knowledgeable about finance in a way that is relevant to their lives and enables them to use this knowledge to evaluate products and make informed decisions. It is widely expected that greater financial knowledge would help overcome recent difficulties in advanced credit markets. Financial literacy prepares consumers for tough financial times, through strategies that mitigate risk such as accumulating savings, diversifying assets, and purchasing insurance. Financial literacy facilitates the decision making processes such as payment of bills on time, proper debt management which improve the credit worthiness of potential borrowers to support livelihoods, economic growth, sound financial systems, and poverty reduction. It also provides greater control of one’s financial future, more effective use of financial products and services, and reduced vulnerability to overzealous retailers or fraudulent schemes.
Facing an educated lot, financial regulators are forced to improve the efficiency and quality of financial services. This is because financially literate consumers create competitive pressures on financial institutions to offer more appropriately priced and transparent services, by comparing options, asking the right questions, and negotiating more effectively. Consumers on their part are able to evaluate and compare financial products, such as bank accounts, saving products, credit and loan options, payment instruments, investments, insurance coverage, so as to make optimal decisions.
Financial literacy as the name implies occupies a centre-stage in the quest to achieve an overall degree of success in an organization, (Bernheim, 2008). It also enhances to a reasonable degree, a business goal of financial profit. Thus, financial literacy (or lake thereof) has played a key role in the success and failure of our nation’s business for the past centuries. Greenspan (2002) argues that financial literacy helps to inculcate individuals with the financial knowledge necessary to create household budgets, initiate savings plans, and make strategic investment decisions. Proper application of that knowledge helps households to meet their financial obligations through wise planning, and resource allocation so as to derive maximum uitility. (Hilgert, Hogarth, & Beverly, 2003) asserts that financial knowledge appears to be directly correlated with self-beneficial financial behavior. However, Sceptics (Lyons, Palmer, Jayaratne, & Scherpf, 2006) question the effectiveness of financial education in improving financial literacy.
Van Rooij, Lusardi, and Alessie, 2007) in a study of Dutch adults, established that households with low levels of financial literacy are more likely than others to base their behavior on financial advice from friends and are less likely to invest in stocks. Mounting evidence shows that those who are less financially literate are likely to face more challenges with regard to debt management, savings and credit, and are less likely to plan for the future. Regulators of financial services, have a responsibility to help consumers of financial services in making informed financial decisions so as to promote consumer protection, public awareness, and maintainance of market confidence.
On the other hand, information assymetry between financial service providers (FSPs) and potential users leads to weakened financial markets. It also denies consumers an opportunity to fully appreciate their rights and responsibilities, the financial risks they may be exposed to, and any other information related to the financial products. Financial literacy not only benefits consumers but also FSPs. Finacially literate consumers pose less risk to the financial system due to their responsible use of financial services which help to underpin financial market stability, and contribute to increased savings, wider economic growth and development.
1.2 STATEMENT OF THE PROBLEM
The problem addressed in this article relates to the complexity of the financial literacy phenomenon to act as a mechanism in economic development. This phenomenon can be conceptualised in the following dimensions: firstly, it involves the haphazard use of the term ‘financial literacy’; secondly, it relates to the perception that financial literacy involves two separate systems (the information system and the human behaviour system), which means that it is not regarded as a single encompassing process; and thirdly, the gap between complex financial and economic information, on the one hand, and the decision-makers’ mental processes, on the other.
The research problem focuses specifically on the complexity of the financial literacy construct with regard to its role in economic development. The problem is further exacerbated by the fact that the majority of existing financial literacy programmes focus on financial literacy at consumer level rather than in relation to the economy. Although it is acknowledged that decision-makers in organisations are also consumers in their personal capacity, it should also be recognised that financial decision making in an economy requires an industry-specific kind of financial literacy. Hence, before financial literacy education for decision-makers in an economy can be contemplated, it is necessary to determine the decision-makers’ perception of the financial literacy construct. Those who study financial literacy generally agree that many, if not most, consumers lack the financial literacy necessary to make important financial decisions in their own best interests (Perry, 2008).
Experts also generally agree that, financial knowledge appears to be directly correlated with selfbeneficial financial behaviour (Hilgert et al., 2003). However, questions exist concerning the effectiveness of financial education in improving financial literacy (Lyons et al., 2006). Thus, a paradox exists between the efficacy of education in improving financial literacy and the impact of education on short-and long-term financial behaviour. How can education which is correlated to financial literacy improve financial behaviour without first improving financial literacy?
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to empirically examine the impact of financial literacy on economic development in Nigeria economy. The specific objectives of the study are as follows:
i. To evaluate the contribution of financial literacy in Nigeria.
ii. To examine factors that as hinder financial literacy in Nigeria.
iii. To make policy conclusions and recommendations based on the results of the study.
1.4 RESEARCH QUESTION
The research questions, which would guide this study are as follows:
(i) Is there is significant relationship between financial literacy and economic development?
(ii) Has financial literacy increased economic development over time?
(iii) What are the factors that hinder appropriate financial literacy programmes?
1.5 RESEARCH HYPOTHESIS
The hypothesis that will guide through this research is:
H0: Financial literacy has no significant relationship with economic development in Nigeria.
H1: Financial literacy has significant relationship with economic development in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
The quality of research work lies on the relevance to the society being studied. The importance is the ability to draw a relationship between financial literacy and economic development in Nigerian economy, whether financial literacy has significant impact on Nigeria economic development. Again, this research will be of immense value to the different sectors of the economy (both public and private) most especially individuals. In conclusion, the study would be of immense help to the government, monetary authority, individuals, economists, students, planners, financial analysts, stock brokers and others who might be interested in researching into the field in the future, by shedding more light into the widely held view about the relationship between financial development and economic development.
1.7 RESEARCH METHODOLOGY
The analysis that will be made in this study shall be based on macroeconomic data in Nigeria economy. Due to the linearity nature of the model formulation, Ordinary Least Square (OLS) estimation method would be employed in obtaining the numerical estimates of the coefficients in the model using Eviews. Two multiple regression models shall be used in the estimation. The model shall seek to investigate the effect of financial literacy on economic development in Nigeria economy. This is a follow up on the objectives of study stated earlier.
1.8 SCOPE AND LIMITATIONS OF THE STUDY
The economy is a large component with lot of diverse and sometimes complex parts; this research work will only look at a particular part of the economy (the education sector). This work cannot cover all the facets that make up the education sector, but will look at the financial literacy as being used by the government for the stabilization and attaining economic development. The empirical analysis and estimation covers the period between 1980 and 2013. This restriction is unavoidable because of the non-availability of some data.
The main limitation of this study is time constraint. The time allotted for the completion of this research is not adequate based on recent and contemporary happening with respect to the impact of financial literacy on the development of Nigeria economy.
The data for this study would be obtained mainly from secondary sources; particularly from Central Bank of Nigeria (CBN) publications such as the CBN Statistical Bulletin, CBN Annual Reports and Statements of Accounts, and National Bureau of Statistics publications.
1.9 ORGANISATION OF THE STUDY
This study shall be divided into five chapters. The first chapter provides the background of the subject matter justifying the need for the study. Chapter two presents related literature concerning financial literacy and economic development. The research methodology, which includes the theoretical framework, sources of data, model formulation, estimation techniques etc, are stated in chapter three while data presentation, analysis and interpretation of regression result were made in chapter four. Concluding comments in chapter five reflects on the summary, conclusion, recommendations and suggestion for further studies based on the findings of the study.
1.10 DEFINITION OF TERMS
Financial Literacy: Financial literacy is the ability to understand basic accounting and finance concepts as well as its application, the ability to use such knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.
Economic Growth: This refers to the increased over time of an economy’s capacity to produce those goods and services needed to improve the well-being of the citizens in increasing number and diversity. It is the study of the process by which productive capacity of the economy is increased over time to bring about rising level in national income.
Economic Development: This is a multi dimensional process involving the provision of basic needs, acceleration of economic growth, reduction of inequality and unemployment, eradication of poverty as well as changes in attitude, constitution and structure in the economy.
Bernheim, B. Douglas. 1998. “Financial Literacy, Education, and Retirement Saving.” In Living with Defined Contribution Pensions: Remaking Responsibility for Retirement, edited by Olivia S.
Mitchell and Sylvester J. Schieber, 38–68. Philadelphia: University of Pennsylvania Press.
Greenspan, A. (2005). The importance of financial education today. Social Education, 69(2), 64-66.
Hilgert, Marianne A., Jeanne M. Hogarth, and Sandra G. Beverly. 2003. “Household Financial Management: The Connection between Knowledge and Behaviour.” Federal Reserve Bulletin 89 (7): 309–22.
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