The effectiveness of financial literacy education on addressing overindebtedness:A South African perspective

Abstract

The current economic environment is forever volatile because of, most recently, macroeconomic factors that are not in the control of the ordinary individual but have a significant impact on the individual`s financial affairs. Many consumers find themselves being over-indebted due to the escalating cost of living. This results mostly from the increasing inflation and the subsequent increases in the interest rates, with the South African Reserve Bank trying hard to curb the inflation. It is in this context that an individual`s ability to make well informed financial decisions is key for long-term financial sustainability. On the other hand, making incorrect financial decisions potentially causes mental disorders such as anxiety and at worst it limits the individual`s ability to create and accumulate wealth. It is, therefore, critical that the individuals acquire the necessary financial knowledge to ensure that they can make the right decisions relating to the financial products and their daily financial management. Research indicates that the average South African is highly indebted and, in most cases, they are struggling to service this debt. This is especially true for the individuals in the middle-income class who have relatively easier access to credit. This is reflected in the statistical reports from the credit bureaus which indicate that this group spends over 70% of their income on debt servicing. The literature intimates that the major reason for the debt challenges that are faced by the consumers is the lack of or the inadequate financial literacy. The lack of adequate financial knowledge increases the risk of the consumers taking on unnecessary and costly debt which is often long term and includes unsecured debt which attracts abnormally higher interest rates. Various financial literacy initiatives have been developed and implemented over the last ten years by both the private and the public sectors in South Africa. Despite these initiatives, the level of over-indebtedness remains high. Over the same period, there has been a marked increase in the research that was conducted on financial literacy and its impact on financial behaviour and consumer over-indebtedness. Various South African researchers have investigated the aspects such as the indicators for measuring, profiling, and evaluating the financial literacy interventions. There has, however, been little research done on understanding the effectiveness of these interventions. The effectiveness is measured at face value in terms of the level of over indebtedness. The purpose of this research paper was to gauge the effectiveness of the financial literacy education initiatives from the perspective of the service providers and, to an extent, the corporate employers who enlist the services of these providers to empower their employees. The phenomenological research entailed interviews which were analysed both through ATLAS.ti and manually to detect the themes and the codes. Thematic analysis suggests a focus on the following aspects, amongst others, to address effectiveness: the frequency of education sessions, the follow through on an individual level and regulation.