Why Financial Education Fails the Extremely Poor

Abstract

A common assumption is that the poor stay poor because of inadequate financial management and therefore need better ‘financial literacy’ as provided by conventional financial education programmes. These programmes usually focus on topics such as financial knowledge (e.g. compound interest), budgeting, choosing appropriate financial instruments, judicious use of debt, saving, investing and financial planning. While the assumption underlying these programmes is not always wrong, it is often wrong and neglects the reality of living in extreme poverty. Those who successfully cope with extreme poverty exhibit a financial sophistication and intellectual ability that is rarely captured in the conventional financial education programmes. In fact, they will very often do the very same things that will cause them to appear as financially illiterate in the conventional measures of financial literacy. All this suggests that conventional financial education programmes need to be adapted. Such programmes contain much that useful, but also much that is irrelevant to the poor. Instead of a normative point of departure, such programmes would be more useful if they started from an understanding of how the poor successfully cope when living on incomes as low as $2 per day. This paper draws implications for the design of financial literacy programmes that recognise the realities of poverty in South Africa based previous studies on how people actually manage their financial affairs effectively under conditions of extreme poverty (Collins et al. 2009, Onyango 2010, Mathebula 2013, Mosoetsa 2011).

Keywords: Financial literacy, financial education, poverty, survival

JEL Classification: A20, G20