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Financial Literacy in Developing Countries

Abstract

Focusing on different façades of financial well-being such as wealth accumulation and retirement planning, various determinants of financial well-being have been unearthed, and financial literacy has emerged as a crucial factor that increases financial well-being. Hence, financial literacy has been an important policy instrument to increase the financial well-being of individuals, particularly given that it is relatively easy to implement. This paper is an attempt to pave the way for such policies in a group of middle income countries, namely Mexico, Lebanon, Uruguay, Colombia and Turkey. After establishing financial literacy levels, we identify the least financially literate groups in each country to facilitate targeting of public policy. We find that women, younger adults and individuals who cannot read or write in the official language of their country of residence have lower financial literacy scores. In line with the previous findings in the literature on the developed countries, our results indicate that financial literacy increases with education. We also show that it is not only the years of education, but also the quality. In Mexico and Turkey, there are large regional differences that must be addressed. We also find that differences in financial literacy across countries persist even when differences in structural characteristics are taken into account. A partial explanation may be provided by differences in financial inclusion.

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Notes

  1. 1.

    PISA tests are administrated to students who are currently enrolled, thereby excluding school dropouts in the sample.

  2. 2.

    In Lebanon, the bank deposits are highly concentrated. The largest 1 percent of the accounts hold 50% of the bank deposits as reported by IMF (2017).

  3. 3.

    The Central Bank of Armenia, The Central Bank of Colombia, The Institute of Finance in Lebanon, CNBV and CONDUSEF in Mexico, The National Bureau of Statistics in Nigeria, the Capital Markets Board of Turkey, the Central Bank of Turkey, Turkish Statistical Agency and the Central Bank of Uruguay co-funded the project as explained at the following web site. https://www.finlitedu.org/measurement/wb/data/ accessed at 23 December 2013.

  4. 4.

    Country teams worked with the main team at the World Bank to ensure that the questionnaire was adapted to the specific conditions of each country. Needless to say, all the US dollars in the questions were replaced with local currencies, e.g. 1000 TL.

  5. 5.

    In the second question, the interviewer read out loud the first three answers to the interviewee. If the interviewee’s answer was either (d) or (e), their answer was coded accordingly. We choose to accept these as correct answers. We also experimented with another definition where these answers were taken to be wrong, and the results were qualitatively and quantitatively similar.

  6. 6.

    When the income quartiles were being calculated, each country team was responsible for calculating the cutoff income levels from nationally representative data sets. Note that in Uruguay and Turkey, the share of the population in the higher income quartiles is higher than 25%. In other words, the individuals in the sample are relatively from higher income groups. As shown below, financial literacy is positively correlated with income, which implies that the actual financial literacy levels in Uruguay and Turkey could be even lower. A converse argument implies that financial literacy may be higher in Colombia. We would like to thank a referee for pointing this out.

  7. 7.

    The “other” category was defined to be the residual category. Substantially higher shares in this category are in Mexico and in Colombia may reflect measurement issues in these two countries.

  8. 8.

    Note that not all 31 states of Mexico are covered in the survey data. We contacted the country team to clarify this issue, but they did not respond.

  9. 9.

    The results are available from the authors upon request.

  10. 10.

    The econometric results are available upon request from the authors.

  11. 11.

    We would like to thank one of our referees for suggesting this.

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Author information

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Authors

Corresponding author

Correspondence to Gokce Uysal.

Additional information

The authors gratefully acknowledge funding from the Russia Financial Literacy and Education Trust Fund, the Central Bank of Turkey and the Capital Markets Board of Turkey. The data was collected as a part of the Financial Capability Survey carried out by the World Bank. The usual disclaimer applies. We would like to thank anonymous referees, Prof. Seyfettin Gursel and the seminar participants in 13th EBES Conference 2014 for valuable comments and suggestions. All remaining errors are our own.

Appendices

A Survey Questions on Financial Literacy

  1. 1.

    (Division) Imagine that five brothers are given a gift of $1000. If the brothers have to share the money equally how much does each one get?

  2. 2.

    (Time value of money) Now imagine that the brothers have to wait for one year to get their share of the $1000. In one year’s time will they be able to buy:

    1. (a)

      (Read out) More with their share of the money than they could today;

    2. (b)

      (Read out) The same amount;

    3. (c)

      (Read out) Or, less than they could buy today.

    4. (d)

      It depends on inflation

    5. (e)

      It depends on the types of things that they want to buy

  3. 3.

    (Interest on a loan) You lend $25 to a friend one evening and he gives you $25 back the next day. How much interest has he paid on this loan?

  4. 4.

    (Simple interest) Suppose you put $100 into a savings account with a guaranteed interest rate of 2% per year. You don’t make any further payments into this account and you don’t withdraw any money. How much would be in the account at the end of the first year, once the interest payment is made?

  5. 5.

    (Compound interest) And how much would be in the account at the end of five years? Would it be: (Read out)

    1. (a)

      More than $110

    2. (b)

      Exactly $110

    3. (c)

      Less than $110

    4. (d)

      Or is it impossible to tell from the information given

B Further Regression Results

Table 13 Regression results: regional controls included
Table 14 Regression result including personal income and region

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Karakurum-Ozdemir, K., Kokkizil, M. & Uysal, G. Financial Literacy in Developing Countries. Soc Indic Res 143, 325–353 (2019). https://doi.org/10.1007/s11205-018-1952-x

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Keywords

  • Financial literacy
  • Financial well-being
  • Financial inclusion
  • Gender
  • Developing countries