A Call for Putting Focus on Financial Literacy

Nepal’s overall financial literacy score of 57.9 percent is slightly lower than the average OECD score. But much needs to be done to raise the level of financial literacy in the country as such score in rural areas is lower compared to urban areas

Amid the consolidation drive to strengthen the banking sector lately, one area that banks and financial institutions (BFIs) have seriously underlooked at is financial literacy.

While the policy of the Nepal Rastra Bank (NRB) that made it mandatory for commercial banks to open their branches at all local levels of the country has been considered a stepping stone in terms of increasing access to finance among ordinary Nepalis, financial literacy is still low in Nepal. There is a disparity in financial literacy as people living in rural areas are still behind when it comes to understanding financial services.

A new study report published by NRB titled ‘Baseline Survey on Financial Literacy in Nepal’ shows the disparity in financial literacy in rural and urban areas of Nepal.

While Nepal’s overall financial literacy score is 57.9 percent is slightly lower than the average OECD score, such score is lower in rural areas compared to urban areas of the country.

According to the report, the financial literacy score in rural areas is 55.7 percent while it is 65.4 percent in urban areas.

The NRB study finds that people living in metropolitan areas, younger age groups, those with a high level of formal education, self-employed, salaried and wage earners, employees from the formal sector, people with high skill levels and higher income groups have high level of awareness about financial products.
Province-wise, a disparity also exists as Bagmati and Gandaki provinces scored higher in financial literacy while Madhesh Province scored the lowest. Bagmati Province has the highest score of 64.5 percent while Madhesh Province has the lowest score of 52 percent.

The disparity, according to financial experts, shows Nepal needs massive reforms in educating the poor and rural population about banking and how to access financial services. “This is the first of its kind report published in Nepal. It shows a huge gap in financial literacy in rural and urban regions. After the report, the central bank has felt the need to improve financial literacy, especially in rural regions. For this, there should be collaborative efforts from both the private sector and the government,” said Prakash Kumar Shrestha, Executive Director of NRB.

Financial literacy among the male population is higher compared to the female population. The report shows financial literacy scores for men and women at 61.8 percent and 54.8 percent, respectively. The gender gap in financial literacy score exists in all provinces, with much a wider gap in Madhesh and Sudurpaschim provinces.

Financial literacy differs with age, education, income level, and occupational differences. Young people have a high financial literacy score compared to people of higher age groups. Those with formal education, are employed in the formal sector, and have a higher skill and income level have better financial literacy scores. The adult population employed in the agriculture and construction sectors has a very low level of financial literacy scores.

The financial literacy score of the top income group is 68.4 percent compared to just 50.7 percent in the lowest income group. Similarly, salaries/wage employees and self-employed have higher financial literacy scores of 64.2 percent and 63.6 percent respectively, compared to that of housewives (51.2 percent) and unemployed (47.2 percent). “People involved in the formal sector have a higher financial literacy score compared to those involved in the informal sector,” reads the report.

The higher score in the younger generation and increasing adult literacy rate, according to the report shows a better prospect for financial literacy and increasing demand for financial services in the days to come.

The NRB report shows, 73.78 percent of the adult population uses payment products, 86.64 percent uses saving, investment or retirement products, 46.34 percent uses credit products, and 30.2 percent uses insurance products.

Bagmati (85.62 percent) and Gandaki Province (84.88 percent) have the highest proportion of the adult population using payment products such as mobile banking, internet banking, credit card/debit card, saving and current account, and digital wallets.

The young generation has a higher usage of payment products than elderly people. About 79.84 percent people of aged 18 to 30 years use payment products compared to 68.82 percent of people of 60 years and above.

A saving account is the highly used (71.06 percent of the adult population) saving product. About 8.5 percent of the adult population uses non-life insurance products, while 26.8 percent use life insurance products. About two-thirds of the adult population are aware of at least five different financial products. Still, 71.83 percent of the adult population relies on family and friends for saving or borrowing to meet their financial needs.

Given the relatively low financial literacy score, the report suggests there is a big scope to improve financial literacy by targeting specific places, gender, and groups. “The female population and Madhesh Province need special intervention for increasing financial knowledge, though other Provinces also need similar types of intervention,” says the report.

According to Shrestha, the central bank has adopted a financial literacy framework under which BFIs have to submit their plans to conduct financial literacy programs within the first three months of every fiscal year. “This is a mandatory provision as banks have to invest at least one percent of their annual profits in financial literacy programs. The banks have to work on financial literacy as a part of their corporate social activities. And the progress has been seen,” he mentioned.

To support the attainment of financial literacy, the central bank has highlighted its need in the Strategic Plan (2022–2026) setting a strategic objective as “Enhance Financial Literacy, Inclusion and Access to Finance”.

According to NRB, financial literacy programs in Nepal are presently being conducted by various agencies including the central bank, banks, and financial institutions and non-bank financial institutions in a scattered and fragmented manner with different methodologies and delivery mechanisms. The central bank aims to enhance and systematize the current fragmented activities to facilitate monitoring and evaluation as well as regular assessment through a policy initiation in the form of a financial literacy framework.

According to Shrestha, the difference in financial knowledge scores among provinces is a major factor contributing to the difference in financial literacy scores. “The financial behavior and financial attitude scores are found almost similar across provinces,” he said.

Bankers agree that it is also the responsibility of banks to make people aware of financial products and services. Nischal Nath Pandey, CEO of Sanima Bank, says that banks have been conducting various financial literacy programs, especially in the rural parts of Nepal. “It is true that the status of financial literacy is weak in rural parts of the country. But the openings of new branches in all local units have helped people understand the concept of banking,” he said.

Since the usage of payment, saving, insurance, and credit is still lower in rural areas and especially in the female population, unemployed people, housewives, and unskilled people, the report says efforts on broadening financial literacy and availability of products should be made targeting these groups.

“People with low education levels need awareness campaigns. They are still unaware of the basics of the banking system. They prefer to keep cash at home rather than coming to the bank. This is where interventions are needed. And banks have been working on this,” said Pandey.

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