The level of financial literacy of Russians: before and during the crisis of Olga Kuzina The State University –Higher School of Economics CIRET, October 2010

Goals of the research To define the concept of ‘financial literacy’ and to operationalise for measuring it in a survey To reveal the changes in the level of financial literacy of Russians during the period

Data In-depth expert interviews (March 2008) Representatives from Central Bank, Federal Financial Market Service, Deposit Insurance Agency, major commercial banks, insurance companies, investment funds, payment systems, business associations and the non-government noncommercial organizations - 37 experts in total All-Russian surveys 18+ World Bank (June 2008), Higher School of Economics and WCIOM (November 2009), NAFS (December 2009, February 2010, August 2010)) 1600 respondents were interviewed in each wave at 140 sampling points in 42 regions of Russia, cross-sections, similar samplings

The concept of Financial Literacy a working knowledge of financial concepts and ability to use the financial services to make decisions most advantageous to their economic well-being From a simple test on financial knowledge to a broader definition which takes into account behavior, attitudes and skills. From ‘financial literacy’ to ‘financial capability’

A concept of financial literacy Financial ‘literacy’ or financial ‘capability’? Only knowledge or behaviour and attitudes of people are also included? However, the institutional context of middle income countries – weak market institutions which result in the lack of financial savings or the presence of paternalistic attitudes If markets are manipulated by powerful players collective actions of minor shareholders could be considered as effective financially literate response

Institutional context of middle income countries - from paternalistic state to market economy Severe consumer goods deficits in the 1980-s Inflation of 2600 – 600 – 170 annual percentage points in the 1990-s State - non-delivery of its obligations Socially unfair results of the Voucher privatization Wage, pensions and benefit payment arrears of up to 9 months Waves of Savings Losses – financial pyramids 1998 – collapse on non-government banks

A concept of financial literacy Attitudes or preferences? The concept of rationality in Economics assumes that individuals attain their goals with the least possible costs, whatever these goals may be If a person aims at going bankrupt and does it efficiently with overcrediting and risky investments his or her actions better not to consider as non-rational and illiterate Better if financial literacy will be a new enlightenment, not a new religion

A concept of financial literacy Financial literacy or financial education? It is not clear if there is a genuine influence of economic education on personal finances or people who choose Economics and Finance as their university degree are different from other professionals by their social and economic characteristics. People with major degrees in Economics and Finance show better results in management of personal finances. If economic education will be given to the general population it may not end up with the same results

Indicators of financial literacy To operationalize this concept by measuring knowledge and skills the lack of which may prevent consumers from taking effective decisions For example: consumers may not read the text of the contract before signing it. As a result when taking a credit they do not know if the interest rate is fixed or floating, what the size of effective interest rate compared to the declared one is, what the penalties are if they delay their monthly payment, etc. If consumers do not compare offers from different banks and costs of different products before making the decision, they may not know that costs of using revolving credit cards are higher than costs of using consumer credits, that they pay more when they take consumer credit in shopping malls compared to banks, etc. Subjective versus objective indicators of FL – if subjective grades are much higher than the objective ones it indicates that people overestimate their abilities to control their finances. To operationalize this concept by measuring knowledge and skills the lack of which may prevent consumers from taking effective decisions For example: consumers may not read the text of the contract before signing it. As a result when taking a credit they do not know if the interest rate is fixed or floating, what the size of effective interest rate compared to the declared one is, what the penalties are if they delay their monthly payment, etc. If consumers do not compare offers from different banks and costs of different products before making the decision, they may not know that costs of using revolving credit cards are higher than costs of using consumer credits, that they pay more when they take consumer credit in shopping malls compared to banks, etc. Subjective versus objective indicators of FL – if subjective grades are much higher than the objective ones it indicates that people overestimate their abilities to control their finances.

Financial Capability (FSA, UK) Managing money - which was primarily concerned with being able to live within one’s means. Planning ahead - which was required to cope with unexpected events and to make provision for the long term. Making choices - which involved being aware of the financial products that were on offer, and being able to choose those that were most appropriate to an individual’s circumstances. Getting help - which had two dimensions: self-reliance and using third parties.

Indicators of financial literacy Managing money keeping records of income and expenditures reading the text of the contract before signing it Making choices comparing offers from different banks and costs of different products before making the decision knowing about the state deposit insurance Getting help being aware about the ways to protect consumer rights Managing money keeping records of income and expenditures reading the text of the contract before signing it Making choices comparing offers from different banks and costs of different products before making the decision knowing about the state deposit insurance Getting help being aware about the ways to protect consumer rights

How would you estimate the level of your financial literacy?

Is your family used to keep records of income and expenditures? Look at the card and say which option is the most accurate description of your (your family’s) practice?

How often do you compare the terms and conditions for provision of financial services by various companies before you buy such a service?

If a conflict with a financial organization (bank, insurance company or the like) arises regarding the provision of financial services to you, how confident are you in the quick and just resolution of the dispute? %

What kind of losses are covered by the State insurance system? %

Do you know that in Russia there is the State insurance system of bank deposits? %

Which offer does seem to be suspicious to make you think of a danger of fraud?

What do Russians want to know about personal finance? NAFI and World Bank, June 2008, first top options, 1600=100%

What kind of trainers do you see as the most suitable to deliver financial literacy educational programs?June 2008, first top options, 1600=100%

Doomed to succeed ? 21 Be cautious when the program is launched in the name of the state and better not aim it at increasing the use of financial services The state should focus on the consumer rights protection and the advancement of financial markets – transparent and just rules of play. Better not to impose the patterned models of ‘proper’ behaviour through social marketing Do not make people feel overconfident about the level of their financial literacy Be cautious when the program is launched in the name of the state and better not aim it at increasing the use of financial services The state should focus on the consumer rights protection and the advancement of financial markets – transparent and just rules of play. Better not to impose the patterned models of ‘proper’ behaviour through social marketing Do not make people feel overconfident about the level of their financial literacy