Dubai: When it comes to saving, investing or borrowing money, many people in the UAE could be prone to making mistakes.
Financial literacy level in the UAE still trails behind those in major advanced economies, with only less than half of adults in the country showing an understanding of basic financial concepts, according to a new study.
The recently published Standard & Poor’s Ratings Services Global Financial Literacy Survey attempted to find out how financially literate people are by asking basic questions to 150,000 respondents in more than 140 countries.
The questions were about the four fundamental concepts for financial decision-making: inflation, risk diversification, basic numeracy and interest compounding. Those who were able to answer at least three out of the four concepts were considered financially literate.
Worldwide, only one in three (33 per cent) of adults passed the test, which means that around 3.5 billion people globally lack an understanding of basic concepts in finance.
In the UAE, only 38 per cent, or nearly four out of ten people, got the answers right. The figure is lower than in major advanced economies like France, Italy, Japan and the United States, where 55 per cent of the respondents, on average, were found to be financially literate.
UAE’s financial literacy rate ranked third among the Gulf Cooperation Council (GCC) countries surveyed. Kuwait topped the list (44 per cent), followed by Bahrain (40 per cent). In Saudi Arabia, 31 per cent of adults are financially literate.
Financial knowledge is considered very important because without it, people won’t be able to make sound decisions regarding saving, investing, borrowing and other matters related to financial management. (Watch the video to learn more about the study.)
The countries with the highest scores were Australia, Canada, Denmark, Finland, Germany, Israel, the Netherlands, Norway, Sweden and United Kingdom, where 65 per cent or more of adults were considered financially literate.
The results for UAE are disappointing, but not surprising, according to Andrew Prince, financial planner at deVere Acuma.
“Clearly, from the figures, where even the US was only just over half of those surveyed were able to demonstrate financial literacy, it is not surprising that a relatively new country like the UAE should have disappointing figures,” Prince told Gulf News.
Prince had witnessed himself how badly people need financial education when he took part in an initiative by the Financial Services Authority, UK’s financial regulator, that sought to enhance financial literacy with government workers in 2007.
“I was shocked that some high flyers didn’t understand the basics when related to interest rates paid on a car loan,” he recalled.
“The key source of learning should be within academia and therefore part of the school curriculum. It’s not too late to learn and I would advocate using YouTube and search ‘the power of 72’, for as Eisntein said, compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… pays it.”
In S&P’s study, it was also found that Americans with less education and lower incomes didn’t do as well as their counterparts in other developed, wealthy countries. Adults in the US demonstrated a “relatively weak” understanding of compound interest, even though Americans’ credit card use is among the highest in the world according to the World Bank Global Findex database.
“We believe there are correlations between financial literacy, financial access and the strength of markets. Addressing financial literacy is a key strategy in building stronger, more accessible and sustainable markets around the globe,” said Courtney Geduldig, executive vice president of public affairs at McGraw Hill Financial, parent company of S&P.
Data for the study were collected in 2014 by Gallup as part of the Gallup World Poll and analytical support was provided by researchers at the World Bank Development Research Group and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University.