The ABCs of the 123s

A collective responsibility

Educating borrows is an ethical obligation | Dave Dugdale | CC BY-SA 2.0

Finance is a complicated topic to understand. The jargon and math don’t help. Top employees of Lebanese lending institutions have admitted to Executive that even some bankers cannot define an annual percentage rate (APR). Look it up on Wikipedia, and you’ll no doubt be researching more new terms (such as nominal APR and effective APR) before you finish reading the first sentence. Financial literacy is not a global strong-suit. Surveys from 2011 conducted by researchers with the non-profit, US-based National Bureau of Economic Research asked residents of Germany, Italy, Japan, the Netherlands, New Zealand, Russia, Sweden and the United States three short questions designed to assess respondents’ ability to calculate interest rates, understand inflation and understand risk diversification. Only in Germany did more than 50 percent of those surveyed answer all three questions correct. In all eight countries, at least 10 percent of respondents got all three wrong.

Financial literacy is becoming a hot topic internationally, according to the Organization for Economic Co-operation and Development. The OECD explains that this stems, in part, from a global “concern about the potential impact of shrinking public and private welfare systems, shifting demographics, including the ageing of the population in many countries, and the increased sophistication and expansion of financial services.” In other words, people around the world are likely to be increasingly responsible for taking care of themselves financially rather than being able to rely on state-organized savings or pension schemes. In response, the OECD also reports that “as of 2014, more than 50 countries at different income levels are well advanced in the design or implementation of a national strategy for financial education, and many other countries are considering developing one.” While Executive was unable to find financial literacy statistics for Lebanon, it is safe to assume we would not score higher than the majority of other countries. What we know, however, is that this country has no effective pension system, and citizens are basically left to fend for themselves when it comes to having a secure financial future. We were shocked to see advertisements featuring an elderly man taking out a loan with his house as collateral. In fact, this ad inspired this month’s investigation into loan sharking in Lebanon. We we saw that advertisement, We didn’t see a man securing his family’s financial future. We saw an attempt to dupe the vulnerable. We saw a population in need of protection. In this regard, we must once again tip our hat to Central Bank Governor Riad Salameh. Banque du Liban (BDL), our central bank, recently passed much needed regulation to limit the potential bite of loan sharks (see Shark hunt), but there is still a lot more work to be done to educate and protect the population.

In the United Kingdom, there exists a company called Lending Stream. It offers so-called “payday loans” – short-term, high-interest credit many borrowers cannot repay on time, which can rather quickly bury them in unsustainable debt. Quite prominently on the company’s homepage is the following note of caution: “Warning: Late payment can cause you serious money problems. For help, go to moneyadviceservice.org.uk.” Money Advice Service describes itself as  “an independent service, set up by government” with a mandate to “help people manage their money.” Their offerings are diverse, and their financial advice is clearly aimed at helping people who understand nothing about finance get a grip on the basics. Lebanon needs something like this. While it may be too much to ask the government to follow the exact model, the Ministry of Economy and Trade could quite easily include information like this (do’s and don’t’s of borrowing, understanding interest rates and how to calculate them, identifying and mitigating risks, etc.) on the consumer protection section of its website.

Given that government is not the only stakeholder in citizens’ economic well being, the impetus to act should not be expected to come from elected and appointed officials alone. Civil society, business and economic associations, and even banks and financial institutions themselves can easily step up and help financially educate the public. We already have one example of a local ad company and a local bank partnering to produce 30-second financial literacy spots (see Q&A with George Jabbour). We need much more of this. And as an increasing number of local corporations seek ways to deploy capital on do-good initiatives under the banner of corporate social responsibility, here is a perfect place to start spending. For banks in particular, increasing financial literacy can actually translate into more business opportunities. Research out of China from 2013 shows that people increase the amount they deposit into retirement savings accounts the more they understand interest compounding (which means that interest earned is added to the principal after a certain time period – yearly, for example – thus generating the account holder more money the longer said money is kept in the account. See, increasing financial literacy can be that simple). The central bank can even help incentivize private-sector efforts to increase financial literacy by awarding the corporations doing the best job each year. Companies love affirmations of how excellent they are.

Stopping at financial literacy is not enough. We also need all relevant stakeholders to understand that they must never exploit financial illiteracy. Again, BDL has done commendable work in this regard – twice passing decisions demanding that banks, financial institutions and now even loan sharks fully explain products and services to customers. These are excellent developments, but we need more players to understand their ethical obligation not to mislead people into making poor financial decisions. The head of Lebanon’s Advertising Association says he’s keen to develop an industry code of ethics. This is a must, and it requires buy-in from not only the agencies producing ads, but the media outlets that run them and the intermediaries in between.

To build a prosperous future, we have to understand how to get there without being duped into bankruptcy along the way.

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