Financial literacy in Pakistan: Challenges and strategies for improvement, an overview

by Abdullah Wajid

Financial decision making from the early to mid-twenty centuries was relatively easy because trading volume was low and the financial products and markets were not complex. But with the passage of time because of industrial revolution trade volume increased, varieties of goods emerged, size and diversity of the world trade increased because of improved communication networks. Because of this sales were increased rapidly and spending was sored. These circumstances led toward the increased complexity of financial products and markets and similarly financial management and decision making also got more complex (National Institute of Financial Education of America, 2010). This complexity of the financial management, decision making and economic instability has threatened the lives of individuals (Taft et al., 2013). In the past two decade we have seen the economic instability, recession, high unemployment rates and increased inflation which reduced the community’s income. In this instance financial wellbeing and concerns are the two main factors which contribute toward quality of life. In the world, the recession has threatened financial well-being and prompted economic concerns, including concerns about health, indebtedness, income, and professional progression. These issues have a negative impact on psychological and physical health, impair workplace confidence and productivity, and increase absenteeism, lack of attention, and conservative behavior (Godfrey, 2006; Van Praag et al., 2003).

Financial literacy is the one thing which can contribute to the economic capability and can help on the issues and complexity of financial management, decision making and recession. Different authors provided different definitions of financial literacy but the most comprehensive definition of financial literacy is provided by the (OECD, 2014) according to them Financial literacy can be defined as “Understanding and knowledge of financial concepts, associated risks, financial skills, motivation and confidence of applying these knowledge and understanding of financial concepts and skills across a wide and diverse range of financial context to improve the financial wellbeing of the individuals and society at large.

Pakistan has a population around 231.4 million. However according to State Bank of Pakistan penetration in financial sector is too low and only 2.4% of the total population has access to the formal financial products and services. Similarly, out of the total adult population 53 percent of the population is still financially excluded. According to the (Mundial, 2015) only 8.7 percent of the total population hold account at financial institution and 5.8 percent hold mobile accounts. In addition to this only 3.3 percent of the total population saved their funds at the financial institution and only 1.5 percent of the total population borrowed from the financial institution which is too low for any country. One of the most obvious reason behind financial exclusion of large chunk of population is that most of the population don’t have the sufficient awareness and knowledge of the financial products and their usage and most of them lack the basic money and financial management skills such as budgeting, investments and savings. From these facts we can say that in Pakistan majority of the population is financial illiterate and the level of financial literacy is too low in Pakistan. There are some predominant barriers and challenges to financial literacy in Pakistan. Some of them are discussed in the following paragraphs.

Challenges:

Barriers to financial inclusion

One of the major reasons behind low level of financial literacy is that most of the population is still outside the formal financial system or financially excluded. There are many reasons behind such high levels of financial exclusion. According to (Nenova et al., 2009) large and complex documentation, lack of financial literacy, accessibility such as distance of bank from home as the most important reasons because of which large chunk of the Pakistan’s population is still financially excluded. These barriers to financial inclusion are positive factor behind the low level of financial inclusion and financial literacy in Pakistan. According to (Morgan & Long, 2020) financial literacy can increase the levels of financial inclusion which is true as when people have more literacy and knowledge about their consumption, saving and investment they will use the different financial services and products.

Limited Financial Literacy Programs and Education

In addition to barriers of the financial inclusion, limited number of financial literacy programs and education is also the major contributory factor toward low levels of financial literacy in Pakistan. In Pakistan only a limited number of financial literacy programs are available e.g. National Financial Literacy Program for Youth NFLP-Y which is running by State Bank of Pakistan with collaboration of National Institute for Banking and Finance-NIBAF. Previously in 2012 State Bank of Pakistan Launched National Finance Literacy Programs. The main aim of this program was to increase the financial inclusion by providing the financial education to the population. But we should note that these programs are not sufficient and alone they cannot full fill the requirement and need of such large population. Therefore, still a large portion of population don’t have the financial literacy. Low levels of education are also a contributory factor behind low levels of financial literacy.

High Levels of Informal Economy

Participant in the informal economy may not have access to formal financial services such as banks or other financial institution. As a result, participants of the informal economy system may miss out on learning about financial principles or how to efficiently manage their resources. This can limit their ability of learning financial concepts and best practices. Thus this make it more difficult for them to improve their level of financial literacy. Overall we can say that high levels of informal economy can contribute toward the low levels of financial literacy by limiting the access of its participants in education and financial literacy. This can also promote informal practices and make it more difficult and challenging for its participants to develop and acquire financial literacy.

Socio-cultural Difference and Financial Literacy

Some Socio-cultural differences such as lack or trust and because of religious reasons people do not take part into the formal financial systems (Nenova et al., 2009) which can limit their understanding of financial concepts. In this regard Pakistan is no exception. In the past decade most of people used to avoid formal banking channel as they think that because banks deal with interest and interest is prohibited in Islam. Overall, cultural barriers can lower financial literacy by causing language and cultural variations in comprehending financial concepts, limiting access to financial information, and lowering trust in formal financial institutions.

These are the some of the challenges which are being faced by the Pakistan in increasing the level of financial literacy among its population. In addition to these challenges discussed above there are some other challenges which should be accounted for increasing the levels of financial literacy such as rapidly changing technologies, limited regulator frame work etc.

In the next section we will discuss some of the strategies which can be used to increase the level of financial literacy in Pakistan.

Strategies:

It is simply not possible to increase the financial literacy among population over the course of few months or years rather it required long term strategies such as ten to fifteen-year plan. Most financial literate nations such as Australia, Canada, Finland, Germany, Israel, the Netherlands, Sweden, and the United Kingdom followed the long term strategies to increase the financial literacy in their countries.

It is worth to note that all of the above stated nations except Finland have a national strategy for financial literacy (Faulkner, 2022). In 2021 Bank of Finland, Ministry of Justice and other key authorities came up with the proposal for strategy with the aim of making best financial literate country (Bank, 2021). In Pakistan we have seen that their no proper strategy available only State Bank of Pakistan and NIBAF offering some courses related to financial literacy. There is a need for a nationwide single financial literacy curriculum. This curriculum should be thought at schools, colleges and university students by which they can learn how can they effectively manage, save and invest their funds. State Bank of Pakistan and National Institute of Banking and Finance should increase their foot prints in the other remote areas as well where people don’t have proper access to these type of financial literacy courses. In these courses student should not be taught only about the traditional financial products and services rather they should also be taught about the digital financial products and services e.g. fintech etc.

Moreover, we have seen the population in Pakistan is financially excluded and they don’t have the proper access to the financial products and services. Financial inclusion can also play a pivotal role in increasing the levels of financial literacy such when people have to make choices among different financial products and services they will learn more about them. Financial literacy and financial inclusion goes side by side. Financial Inclusion is also a one of the main Sustainable Development Goals SDGS (2030). Financial literacy can help in achieving this goal. Financial inclusion can also remove one of the major barriers of financial literacy named informal economy in which most of the people usually exploited by the money lander for their own benefits and profits.

Socio economic difference should also be removed as in Pakistan majority of the women are still lack financial literacy because they are outside the formal financial system. Some people still don’t use the banking channels because they feel it against islam. Govt of Pakistan and State Bank of Pakistan is taking good steps in this regard as they have asked the commercial banks to convert their traditional banking to the Islamic banking. Moreover, they are also taking steps to include the more women in the proper financial systems by allowing the banks to work only for women e.g. Habib Bank recently started their services for solely women and first women bank.

These are some of the strategies which can be used to enhance the level of financial literacy in Pakistan but one strategy alone cannot full fill it purposes. Every department like Financial Institutions, State Bank of Pakistan, Govt of Pakistan and other departments have to work together to enhance the level of financial literacy in Pakistan.

Written and Research by : Abdullah Wajid abdullahwajid880@gmail.com

References

Bank, F. (2021). Proposal for a national strategy to promote financial literacy in Finland. . https://publications.bof.fi/

Faulkner, A. (2022). Financial Literacy around the World: What We Can Learn from the National Strategies and Contexts of the Top Ten Most Financially Literate Nations. The Reference Librarian, 63(1-2), 1-28.

Godfrey, N. S. (2006). Making our students smart about money. The Education Digest, 71(7), 21.

Morgan, P. J., & Long, T. Q. (2020). Financial literacy, financial inclusion, and savings behavior in Laos. Journal of Asian Economics, 68, 101197.

Mundial, B. (2015). The Little data book on financial inclusion. World Bank Group, Washington, EEUU.

Nenova, T., Niang, C. T., & Ahmad, A. (2009). Bringing Finance to Pakistan’s poor: Access to Finance for Small enterprises and the Underserved. World Bank Publications.

OECD. (2014). PISA 2012 technical background. In PISA 2012 Results: Students and Money: Financial Literacy Skills for the 21st Century (Vol. 6, pp. 123-145). OECD Publishing Paris.

Taft, M. K., Hosein, Z. Z., Mehrizi, S. M. T., & Roshan, A. (2013). The relation between financial literacy, financial wellbeing and financial concerns. International journal of business and management, 8(11), 63.

Van Praag, B. M., Frijters, P., & Ferrer-i-Carbonell, A. (2003). The anatomy of subjective well-being. Journal of Economic Behavior & Organization, 51(1), 29-49.

abdullahwajid880@gmail.com

1 thought on “Financial literacy in Pakistan: Challenges and strategies for improvement, an overview”

  1. Very comprehensively describe the financial situation of Pakistan one point I want to add if your judiciary involves in accountability of government official on daily basis our half of problems can be solve

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