Financial literacy is a crucial aspect of education for millions of people.
The power of accessibility and understanding assists in every aspect of managing personal finances, such as:
- Choosing suitable borrowing products and lenders.
- Organising a budget and controlling income vs expenses.
- Awareness of risks and exposure to high-interest rates.
Improving financial well-being hinges on financial literacy and selecting good credit choices that offer stability.
So, with this in mind, what are digital lenders doing to enhance financial literacy among their client bases – and is it enough?
How Are Lenders Addressing the Need for Financial Education?
CEO of Wonga, Brett van Aswegen, notes that while there are many initiatives, there is little coordination to make resources more inclusive.
The firm identifies that a substantial proportion of people in South Africa don’t have the awareness to make sound financial decisions.
Van Aswegen feels that all digital lenders have a part to play in increasing understanding of financial products and associated risks.
Poor financial literacy is a primary driver in:
- Distrust between consumers and lenders.
- Lack of awareness of charges.
- Misunderstandings about benefits on offer.
While the National Credit Act in South Africa demands credit providers act responsibly and do not enter into a reckless credit agreement, that situation can arise if the borrower does not have sufficient comprehension.
Therefore, digital market lenders must take this opportunity to showcase ethical behaviours both to protect consumers and comply with the legislative requirements.
How Serious is Financial Illiteracy in South Africa?
The groups most exposed to financial illiteracy risks are women and low-income citizens.
An average person in the country faces cash flow issues by mid-month, meaning their monthly income cannot cover essential costs such as food, rent and utility bills.
There is a glaring gap in financial inequality due to rising living costs and growing levels of short-term debt, as people without knowledge about alternative solutions rely on credit to cope with everyday expenditures.
Simple solutions could make a dramatic impact.
For example, they could include teaching individuals how to budget, providing information about beneficial savings strategies, and spotlighting loans with consumer-friendly terms.
Nationwide, around 23% of black South African women are uneducated, and 28% are illiterate, causing profound difficulties in accessing everything from social security to healthcare services.
Globally, poor financial awareness can have even more harmful impacts, including:
- Vulnerability to fraud and unacceptably high-interest rates.
- Exposure to poor credit and bankruptcy.
- Large volumes of debt beyond the individuals’ ability to cope.
- Risks of becoming a victim of predatory lending and subprime credit products.
It is impossible to overstate how severe these scenarios can be, with bad decisions leading to family instability, domestic violence and even suicide in the most desperate situations.
Therefore, given the critical nature of financial literacy, it makes sense that digital lenders shoulder at least some of the responsibility – helping borrowers understand the options available and which are most beneficial to support them in their quest for financial security.