The World Bank published in 2015 the report “Enhancing Financial Capability and Inclusion in the Philippines—a Demand-side assessment.” It was based on a survey conducted in 2014 covering 3,000 respondents in an attempt to profile, understand and compare the financial capabilities of Filipinos. The World Bank defined financial capability as the capacity of individuals to act in their best financial interests given the socio-economic and environmental conditions. Capacity here includes knowledge/literacy, skills, attitudes and behavior with respect to understanding, selecting and using financial services.
There are three aspects included in the report, but we will focus only on the financial capability aspect. Using a seven-question basic financial literacy test, the report showed that the average score of Filipinos is about 3.2 out of seven questions. This means that the respondents could only answer less than half of the questions correctly. Worst, about 20 percent of the respondents did not answer correctly. The most difficult concept for Filipinos is compound interest, where only 29 percent of the respondents was able to answer correctly. When cross-tabulated for socioeconomic status, those having low financial literacy scores are those who did not save as a child, non-household heads and men. As regards retirement, less than 25 percent of the surveyed aged 60 and below are prepared for their old age. The study also showed that those who are not prepared for old age are “not worried” about their future.
These results actually validated a continuing research that my colleague Jeremaiah Opiniano (PhD student at University of Adelaide) and I have been working regarding financial behaviors of Filipino migrant workers, their families and their communities. From 2011 to the present, we have studied about nine municipalities across the country and conducted surveys and focused group discussions to find out how remittances can be channeled for development purposes at local government levels. Similar to the World Bank study, we found that less than half of respondents are able to answer correctly questions about loans and prices, and those with migration experience have more correct responses than those who do not have any migrants in the family. When asked where they get their information about handling money, the majority said that they get it from their own ideas. They also rated their money handling skills as good and when asked if they need help in handling money, they responded in the negative. We then asked them if they record their income and expenses—the majority answered that they do not record their income and expenses but they have a general idea of how money enters and goes out of their family.
Both studies, and I am certain there are a lot more out there, will conclude that our society is in dire need of a good financial education. In the World Bank study, they found that financial capacity improves with the level of education. Toward this the government has initiated a number of policy reforms and advocacies to increase financial awareness among the population and especially the young. Republic Act 10922 mandated the celebration every second week of November of the Economic and Financial Literacy Week to develop the national consciousness. Likewise, one of the offshoot of the World Bank study is that the Bangko Sentral ng Pilipinas, BDO Foundation and the Department of Education have partnered to develop financial literacy materials for use in basic education.
Since we are combatting a challenge that begins from childhood, it will not be enough to go and fight it at the school level. We must respond to this challenge across the lifecycle. In an Economist magazine article written in the 1990s, it is said that people make decisions based on recent data. We have short memories that even if we know something looks like a scam, we tend to think that it is not. Also, for matters concerning investments, we think in inductive manner (using specific cases then relating to general situation) because understanding the bigger picture is expensive both in terms of time and money. This is why we easily believe when someone (who is credible to us) said her/his investments got a 100 percent return in a month’s time. In many scams, people do not bother checking the company, products or services that are being offered. They rely on the word of mouth/credibility of someone they know who already gained out of it.
I have developed the following table to analyze any investment offer. Any investment must have four components. It must have risk (the probability of losing the investment), return (the possible earnings out of the investment), liquidity (how soon can the investment be pooled out) and tax (a true investment has to be registered with the government and should be subject to some kind of an income tax). A quick analysis should tell us that if any one of the four components is missing—consider that as a scam. This takes away any personal and emotional opinion, just a good old checklist. A good financial advisor should be able to explain these four components in any solicitation that she/he is offering. In the end, the best way to analyze a scam is when one is too good to be true, then it is not true.