October marks the “Financial Literacy Month” in Malaysia. The on-going event is jointly organised by Bank Negara Malaysia (the Central Bank of Malaysia), Federation of Malaysian Consumers Association (FOMCA) and the Associations of Banks in Malaysia (ABM). Having been first organised in 2011, the event is currently in its third year. The theme chosen for 2013 is quite interesting and meaningful, “Financial responsibility begins with me.”
Similar events are celebrated in North America. The United States (US) has declared April as her National Financial Literacy month, whilst Canada celebrates the same event in November annually. The main emphasis of the event is to highlight the importance of financial literacy and teach households how to establish and maintain healthy financial habits. Furthermore, it promotes national awareness and engagement campaigns through various community events.
During the 7th October 2013 launch, Bank Negara Malaysia was said to be introducing financial literacy programmes in schools next year, in view of the growing concerns over rising household debts in the country. A similar initiative will also be undertaken in the United Kingdom (UK) in the form of personal finance instruction in her school system beginning 2014.
Evidently, the foregoing reflects financial literacy as a global phenomenon which is hardly confined to Malaysia alone. Across the world, households are made to assume greater responsibility for their financial well-being. This is due to, among others, changes in the economic landscape which compel governments to cut down or “rationalise” economic safety nets, which is understood in various terms as “subsidy” or payments for “social-welfare” benefits. Changes also take place in the pension landscape, for example, a shift from defined benefit to defined contribution type pensions, whereby individuals need to determine not only how much to save for retirement, but also how to allocate the retirement wealth. On the other hand, financial institutions nowadays have been introducing financial products that are highly attractive for households to increase their borrowings. For that matter, statistics show that Malaysia’s household debt to Gross Domestic Product (GDP) ratio was at 81% at the end of 2012 This is the second highest in Asia, after that of South Korea (91%). Nevertheless, the ratio was lower than that of other developed economies, which recorded an average of 90%. Currently, household debt in Malaysia is at 82.9% of GDP and growing at 11.5% a year. A research reports that it could hit 97% in 2018 if GDP was at 7.5% per annum.
Essentially, financial literacy education can bring many benefits to households of all ages, income levels and professions. For example, youths can make use of the skill as a basic tool for budgeting and saving to manage expenses and debts. Next, it can assist senior workers so that they have enough savings for a comfortable retirement by providing them with information and skills to make wise investments or saving choices. Also, it can promote more mindful consumption and inculcate good saving habits among children. Moreover, financial literacy education can help households to understand risks much better for them to take more calculated risks when investing their hard-earned income. In addition, financial literacy education could be one of the key components that would support the country’s efforts to produce successful entrepreneurs. Indeed, financial literacy is an inevitable living skill for all of us to build financial security, and in turn, achieve financial well-being, amidst the prevailing economic landscape.
Within this context, researchers have found that individuals who have low financial literacy are significantly less likely to take calculated risks and invest their money in the capital market, particularly in the stock exchange. Nevertheless, as seen recently, many have fallen prey to financial scams and lost their life savings. Such incidents occur on the back of Malaysia’s thriving capital markets with a significant part contributed by the Islamic Capital Market.
Based on the Securities Commission (SC) 2012 annual report, the Malaysian capital markets grew by 16.4% to RM2.47 trillion, with equity market capitalisation increasing by 14.1% to RM1.46 trillion, whilst the Islamic capital market growing by 22.6% to RM1.41 trillion. The initial public offering (IPO) market in 2012 raised RM22.1bil, making it the fifth largest globally. Two Malaysian IPOs made it to the top 10 global IPOs. Moving forward, under the Capital Market Masterplan 2, the size of Malaysia’s Islamic capital market was projected to reach almost RM3 trillion by 2020 with an average growth rate of 10.6% per annum over a 10-year period. Apparently, two prominent IPOs were issued this month that Malaysian households should look out for.
Given the flourishing statistics of our thriving capital markets, one may wonder who gets all the benefits, as many Malaysians have to grapple with heavy debt burdens and financial hardships. While searching for higher returns on their savings to achieve better financial well-being, many Malaysian households had risked their life-savings to the perpetrators of financial scams, instead of investing in authorised investment instruments in the capital markets. Thus, just perhaps, foreign institutional investors are the ones reaping the benefits at the expense of our lack of financial literacy.
As such, we certainly welcome the effort by the Employees Provident Fund (EPF) to offer retirement and financial advice as a value-added service to its members starting next year. In part, this could widen the financial and investment literacy of the households, so that they can also benefit from our growing capital markets. In years to come, with greater financial literacy among Malaysian households, the balance equation of “cornerstone investor” in a fundamentally strong company listed on our equity market could be shifted towards the local retail investors’ rather than institutional foreign investors.
Over the years, the country has been embarking on the initiative to create more entrepreneurs among the people. In this regard, we tend to ignore financial literacy as a vital component for entrepreneurship, and instead, emphasise great ideas, products, and marketing. In fact, a successful entrepreneur is one who can manage one’s finances efficiently. For example, the basic understanding of the need to separate personal financial matters and that of the business is crucial in determining the success or failure of a business. Indeed, many financial incentives introduced by the government over the years have aimed at producing successful entrepreneurs in the country. To ensure such financial incentives work, prospective entrepreneurs who apply for the incentives should be vetted first for a certain level of financial literacy. Alternatively, such applicants are given a financial literacy course as a pre-requisite.
Indeed, financial literacy initiative is a continuous effort. Its benefits to a country are immense, in that individuals will derive greater financial well-being and quality life. Therefore, let us seize the opportunity offered during our financial literacy month to enhance our life-long skills.