Saatchi & Saatchi was in a recession period throughout the 1990s as the large agency was at the edge of becoming bankrupt. Before they managed to adopt the balanced scorecard, Saatchi & Saatchi went through a phase of reformulating their strategy and changing the structural organization of the agency. The aim for this step was to avoid the fast oncoming danger of running bankrupt. Other than adopting a customer perspective strategy, the agency focused on the financial perspective as well to ensure that the company had a balanced improvement in both the services they offered and their financial status (Greenhalgh, 2004).
In terms of the financial perspective, the Saatchi & Saatchi leadership during the mid 1990s set up several goals for the company in order to boost their need for financial breakthrough. A public announcement was made during the period of the de-merger that there would be a release of a blueprint with the full details of the agency’s comeback that was to be met within a period of three years from then. The first goal of the agency was to grow their overall revenue base better than the market. The revenue base is the main source of the major and regular overall revenue of a firm. If Saatchi & Saatchi was able to grow their revenue base to be better than the market as expected, this would give them the financial stability required to propel them from their current situation to the better one they aspired for. Secondly, Saatchi & Saatchi set a goal to convert 30 percent of the achieved incremental revenue here above into an operating profit. Therefore the second goal was rooted to the achievement of the first goal and this systematic setting would ensure continuity in achievement of the set goals. Since the agency was in a threatening period of bankruptcy, increasing their operating profit would give them more cash to work with and in turn they would be in a comparatively better position to outrun the bankruptcy chasing after them. Last but not least, the agency set a goal to double their earning per share with the hope to gain more shareholders. Saatchi & Saatchi therefore had an obligation to work hard enough to achieve enough income to be able to achieve the set goal of doubling their income per share. In addition, if the managed to double the income per share, more people would gain interest in their shares. In turn, the increasing number of shareholders would add in more money to the agency therefore supplying them with enough money to set them off the bankruptcy ground and into motion towards accomplishing their set goals.
Following to the results of Kevin’s visits to all the 45 business units dispersed all over the globe, there was the urge to create a management tool that would assist communication between these units and play a role in making operational the new vision. However much great work was being done in each of them, they lacked coordination as each unit had its own agenda and consequently there was nil improvement in corporate value. After a financial health check conducted to determine the agencies that made money for the agency and which did not, three agency categories were created; lead, drive and prosper. In a hierarchical manner, a prosper agency had less than 50 overall employees and most agencies were classified under it. They had a very limited potential to become big agencies ever. The new strategic focus therefore expected this group of agencies to achieve high margins in the market rather than grow dramatically. The drive unit was typically composed of between 50 and 150 employees and the goal set for them was to maintain their revenue base or slightly grow it. They were to increase their overall margins as well so they worked hand in hand with the lead unit. The lead unit comprised of the largest agencies worldwide such as the New York, China and United Kingdom. It is in this unit that the goal of rapid growth was set and enormous immediate results expected. The largest share of investments was allocated in the lead unit too because they were perceived to incur more profit margins. These classifications would ensure coordination and reciprocate to financial success depending on how close attention was paid to the agency’s units. In relation to customer perspective, a number of strategies were adopted. Closer attention was to be paid to the main client-base of the agency.
Other than the agency being loved by Wall Street, they also needed their clients to love them therefore the executive team adopted the phrase ‘Permanently Infatuated Clients’. Research conducted showed that between 20-30 percent of the agency’s clients contributed to between 70 and 80 percent of the total revenues. This prompted all the units to focus most of their attention to the clients earning them large revenues. This also served the purpose of promoting the new classification of the agencies and merge up the units into one global organization. For the creation of ‘Permanently Infatuated Clients’ to succeed, the agency and its employees came up with a strategy of creating big ideas that would propel its prosperity. It was phrased ‘Big Fabulous Ideas’ and it was meant to present big moving ideas not in form of volume but their quality. The ‘Big Fabulous Ideas’ were meant to promote success in the businesses, brands as well as boost the reputation of their clients. For this to be made possible and achievable, the agency needed employees who really bought into the Saatchi & Saatchi way of life and had passion on their history, creative culture and their proprietary tools. If this demand was countered it would ensure a smooth flow of big ideas with the assistance of inspirational leadership in every unit.
The adopted financial strategies made sense almost similarly for all the units. They ensured that even with the classification, the units still upheld the overall vision of the agency. For instance, the prosper and the drive unit were obliged with the task of increasing the growth of the agency’s revenue base and this would set pace for the lead unit. Subsequently, the increased revenues would then be converted to operating profits and play a role in doubling the income per share. Its purchase by the Publicis Groupe SA in the year 2000 was not of noticeable effect to the results of the balanced scorecard since the set goals for the agency had already been achieved by then. Therefore the implementation of the newly achieved goals continued.
The two approaches served the better purpose promoting improvement because they worked in synthesis towards one major vision. Since it is the availability and devotion of customers that provided the finances required, both approaches ensured that improvement took place systematically uplifting the agency from both the customer and financial perspective. The customer perspective clearly reinforced the adopted financial strategies. This is mainly because the customer perspective would initiate the success of the financial perspective by creating a pathway through acquiring more customers for the agency. The implementation was professionally done and with the proof of the results achieved it is clear that it was proper and successful. In addition, with the support of the customer perspective, the perceived results were achieved in lesser time than the set time. This showed the successful implementation and coordinated work of both approaches towards realizing the set goals.
United Airlines is rated as the fourth largest airline in the United States of America and it is among the largest airlines worldwide. Its aviation history dates back to 1929 (Hameed, 2010). Following to extensive research on this corporation, it is notable that in place of vision, mission and value statements it has incorporated the “Focus on Five” approach. This refers to a set of prioritized factors that focus on how best to run the airline: one that runs on time, with clean planes and courteous employees, delivers industry-leading revenues and competitive costs, and does so safely. This approach is purposed to enable the airline to achieve classy performance, outstanding satisfaction of their customers, increased more organized cash flow as well as lead the industry with an exceptional margin.
Objective
Measure
Target
Action
Worldwide Competition mainly in transportation of passengers as enlisted on their corporate level strategy. Currently United Airlines is the fourth largest airline in the United States of America and it will become the largest airline after the merger is finalized. It has a higher competitive advantage over other airlines on several routes. For example, it is the largest United States’ courier to China.
It is possible to measure performance of this specific objective by statistically analyzing the number of passengers using the airline annually and then comparing it to similar statistical analysis for other airlines.
Initially, the target could be set at 170 million passengers. According to statistical analysis of previous years, the airline has not reached that number but with this new action it would be possible.
The United Airlines should work to gain more routes so as to increase their worldwide network. This will allow them to offer their services to an increased number of countries and customers as well. An increase in air routes will act as a boost to their financial position because they will be allowed to offer their services to a lot more countries and regions than they are currently. For example, there are ongoing negotiations with many middle eastern countries with purpose to acquire routes. This will even give them the chance to offer their services for transportation of the middle eastern minerals like oil. In relation to their “Focus on Five” approach, they would also be able to increase their cash flow and lead the industry as well.
Offer the right kind of service to the rightful customer at the right price. With the business level strategy and proper utilization of both cost effective and differentiation strategies in coordination. This will ensure they have more customers compared to their competitors and that the customers prefer their airline to others.
This would be measured by observing the statistical increment in their number of customers or passengers after implementation of the new action focused on obtaining the respective objective.
Since the aim in focus is to increase and lift the financial positions, te target for this objective could also be set at 170 million passengers annually because increase on finances is dependent on increment on the general number of customers.
Implement a strategy that not only focuses on the wealthy and well up but also the middle class and average person. This initiative would give them a wider distribution because if they were able to offer their quality services at a lower price it would be a major attraction to customers from all social and economical classes. This will also serve the purpose of delivering industry-leading revenues and services as stated in their “Focus on Five” approach.
General hierarchical set up after the merge. Currently, the airline is headquartered in Chicago and offices distributed worldwide. The long hierarchical structure is expected to change due to the alterations brought about by the merging process of United and Continental.
The best suited measure for this objective would be keen observation of the financial trends. This would help ensure that during the merge period onwards the airlines finances continuously increase to the targeted value.
The target in this objective is to maintain the financial income through the merge and after the merge, increase the income to above the total of each company before the merge.
To be able to counter the change and avoid the airlines financial distress, the airline should focus on maintaining the same organizational structure and change it slowly after the merge has been completed. This will ensure continuous and increased cash flow because instead of one company’s income, the merge will allow for income from both.
References
Greenhalgh, C. (2004). Building a Strategic Balanced Scorecard: Saatchi & Saatchi
Complementary Case Study. Business Intelligence Company.
Hameed, K. (2010). United Airlines Corporation: Company Analysis, 1-23. WordPress.
Robin, D. (2010). Vision, Mission and Values: Management Tools for Building a Better
Workplace. Daniel, Robin & Associates.
MyStrategicPlan. (2010). Balanced Scorecard: Perfomance Measurements for Success.
The impact of the global financial crisis on public private partnerships: a UK perspective
This chapter examines how Public Private Partnerships (PPPs) have been affected by the global financial crisis (GFC). After briefly discussing PPPs, particularly with reference to risk, the chapter outlines their contribution to the development of worldwide public infrastructure and highlights some initiatives designed to assist projects following the withdrawal of credit. It then analyses the effect the GFC has had on United Kingdom (UK) PPPs by investigating approximately 630 projects to assess whether difficulties in obtaining finance brought about by the crisis has led to a delay in PPPs reaching financial close. The findings confirm that PPPs currently in procurement are finding it more difficult to achieve financial close than pre-GFC projects and that therefore there are fewer PPPs now underway. The chapter concludes by looking at the future of PPPs in the UK following the change of government in 2010.
INTRODUCTION
Her Majesty’s Treasury (HMT) (2000) claims that PPPs bring the public and private sectors together in long term partnership for mutual benefit, asserting that the PPP label covers a wide range of different types of partnership including (p. 8):
the introduction of private sector ownership into state-owned businesses, with sales of either a majority or a minority stake;
arrangements where the public sector contracts to purchase services on a long-term basis so as to take advantage of private sector management skills incentivised by having private finance at risk. This includes concessions and franchises, where a private sector partner takes on the responsibility for providing a public service, including maintaining, enhancing or constructing the necessary infrastructure; and
selling government services into wider markets and other partnership arrangements where private sector expertise and finance are used to exploit the commercial potential of government assets.
In many cases, PPPs use a private company to design, build, finance and operate (DBFO) a new development such as a hospital or school over a contract period of 20-30 years. Throughout this period, payments are recouped from the public sector, which is ultimately responsible for the delivery of these services. When first introduced in the UK by the Conservative Government in 1992, the PPP initiative[1] was met with relative scepticism and, although Labour opposed the scheme in opposition, it embraced PPP when it came to power in 1997. Since then the volume of PPPs, not only in the UK but throughout the world (Grimsey and Lewis, 2004), has increased significantly. Despite widespread criticism, the use of PPPs showed no sign of abating. However, the GFC that began in 2007 has significantly reduced the availability of private finance, and has therefore had a detrimental impact upon PPPs.
There are a number of well-documented reasons behind the GFC. One of the principal factors was the sharp rise in the number of subprime mortgages sold in the United States of America (USA) (Krinsman, 2007; Brunnermeier, 2009) and the subsequent ramifications in other countries, including the UK (Hall, 2008a). Uncertainty over the magnitude of the crisis has meant that banks have been reluctant to lend, with even the largest companies finding it difficult to obtain finance due to default and insolvency fears (Hall, 2008a). In the UK, the desire to safeguard existing PPPs and future infrastructure projects led at the time to government initiatives and increased borrowing from the European Investment Bank (EIB). Since, then, concerns over sovereign debt levels have also emerged in many countries within the European Union (EU) (for example Greece, Italy, Spain and Portugal) as well as elsewhere (for example, Japan and the USA). These concerns have exacerbated financial nervousness. Whilst Burger et al. (2009) provide some general statistics for how the GFC has affected PPPs in a number of countries; this chapter examines approximately 630 PPPs in the UK, a key user of this procurement method, to assess the impact of the GFC on the programme.
In terms of the format of the chapter, the next section reviews the literature associated with PPPs and risk. The effect of the GFC on PPP funding is then considered, together with several of the initiatives designed to safeguard existing and future projects. The methodology is then outlined before the research findings are presented and conclusions drawn.
public private partnerships
The introduction of PPPs was in response to concerns about the need to provide public infrastructure despite the high level of public debt, which grew rapidly during the macroeconomic dislocation of the 1970s and 1980s. As a consequence, pressure mounted to change the standard model of public procurement. In essence, a PPP is a contract between government and a consortium of private companies (referred to as a Special Purpose Vehicle (SPV)), under which the latter is required to DBFO an asset in return for payment over a number of years for both the cost of construction and the operation of the related service. Such payments may be based on either direct user charges (for example, toll roads), or a unitary payment from a public authority or a combination of both (Grimsey and Lewis, 2004).
The original objective of PPPs in the UK was to enable new infrastructure to be provided outside of the public sector borrowing requirement; however when Labour came into power in 1997 the emphasis shifted towards the achievement of value for money (VFM). This change in focus was in response to an amendment of Financial Reporting Standard (FRS) 5 which stated that the purchaser (the public sector) was required to demonstrate that the involvement of the private sector offered VFM when compared with alternative ways of providing the services (Accounting Standards Board (ASB), 1998). This VFM calculus was achieved by valuing the transfer of risk from the public to the private sector, with VFM being assessed through a comparison of the Public Sector Comparator (PSC) – the hypothetical cost of undertaking a project under conventional procurement – with the cost of procuring via PPP. VFM was deemed to be achieved when the price established under the PSC exceeded the price offered by the most competitive private bidder.
Since its conception, PPP has been heavily criticised. Some critics argue that the transfer of risk to the private sector is inappropriate, overvalued or does not take place at all. This criticism is on the basis that PPPs are rarely terminated, often due to potentially high litigation and counter claims by contractors (Hencke, 2003). Furthermore, as essential public services must continue to be delivered even if the contractor fails, this risk cannot be transferred. Edwards et al. (2004), for example, raised concerns over the level of risks actually being transferred and questioned whether those who are not best able to manage the risks are bearing them nonetheless, with the public sector being left with risks which are not easily quantified. Broadbent et al. (2008) also found that with regard to 17 PPP health projects certain items could be made invisible, whilst others that were either deemed more significant or possibly easier to monitor, were given unprecedented attention. Moreover, Pollock and Price (2008, p. 176) suggested that ‘the government’s central justification for PPP in terms of risk transfer remains largely unevaluated’ due to a lack of oversight in this area by government and reported that out of 622 PPP contracts signed up to October 2007, ‘only 10 financial inquiries into central government operational PFIs had been undertaken by the NAO [National Audit Office] by 2006, and of these only three examined the relationship between risk transfer and risk premiums’ (p. 177).
The risks posed by the GFC and today’s continuing market turbulence on PPPs stem from the interaction of threats and vulnerabilities. Burger et al. (2009, p. 10) identify the follows threats (i.e. the likelihood of a negative event occurring in the future):
The risk of an increase in interest rates leading to increasing costs, liquidity problems and project feasibility considerations for private partners and the possible postponement of projects by the government or it having to inject cash to support the SPV;
The risk of credit being unavailable leading to the termination of existing projects, existing projects failing to reach financial close and capital injections from government;
The risk of a decline in stock market prices leading to banks having reduced capital, which affects their ability to lend and causes reduced investment in new and existing PPPs;
The risk of exchange rate depreciation making new investments that rely on external borrowing less attractive, with private partners being tempted to export their services thus reducing the pool of domestic bidders; and
The risk that there is a slump in domestic demand leading to liquidity problems for private partners and lower domestic revenue for governments, meaning lower investment for new and existing PPPs.
PPP vulnerabilities (i.e. the preparedness of the partners to either prevent a threat or cope with its impact) to market turbulence can be project specific or extend more widely. The former includes overly optimistic revenue projections (for example, with respect to toll roads) while the latter may be related to the institutional framework. The institutional context is fundamental to managing PPPs to secure their benefits whilst containing the risks, which can be can be classified in a number of ways.
The ASB (1998) identified six main risks: demand; residual value; design; performance/availability; potential changes in relevant costs; and obsolescence. Moreover, a distinction may be made between commercial, macroeconomic and political risk. Macroeconomic risks entail aggregate demand risk, interest rate risk, liquidity risk and exchange rate risk. The materialisation of macroeconomic risk can, in turn, cause other risks. For instance, interest rate or demand risk can cause credit risk. Risk may also be categorised as exogenous and endogenous, with the latter being those risks that can be actively managed by changing behaviour. The risk management philosophy underpinning VFM has long asserted that risk should be allocated to the party best suited to carry, or manage, that risk. In principle, this should incentivise each party to act in a manner that manages the risk allocated to them and therefore improves the overall efficiency of the PPP.
To best allocate risk, two questions need to be answered (Organisation for Economic Co-operation and Development (OECD), 2008): first, which party is best able to prevent an adverse occurrence from occurring, and thereby ensure that the actual outcome conforms as closely as possible to the expected outcome; and second, in the case where no party can prevent an adverse occurrence (an exogenous risk), which party is best able to manage its outcome. Different parties carry different types and amounts of risk, and not all are affected in the same way. This may alter the attractiveness of PPPs for the parties most affected and reduce their interest in participating in PPPs unless they are compensated. As such they may not want to: enter into new PPPs; refinance debt in existing PPPs; or continue operating under an existing agreement. Risk can be managed in several ways including through (OECD, 2008): risk avoidance – the risky activity is not undertaken as, for example, when a public body forgoes an investment; risk prevention – action is taken to reduce vulnerabilities, for example, when a PPP consortium borrows in domestic currency to avoid exchange rate risk; and risk transfer – risk is transferred to another party through a contractual arrangement, such as minimum traffic guarantees.
The notion of ‘risk transfer’ plays an important role in justifying PPPs. Firstly, it is a key element in Eurostat’s definition of whether the debt is treated as being on or off the government’s balance sheet. Secondly, it is used, especially in the UK, to justify the use of PPPs which do not demonstrate that they are better value than the public sector option. This occurs when the aforementioned PSC is compared with a PPP bid and the latter is made less expensive by factoring in risk. However, transferring risk is not free. While it is possible to create contracts that transfer the risk of construction delays to the contractor, such contracts cost about 25 per cent more than conventional contracts (Hall, 2008b). Nor is risk transfer necessarily the best policy option, and it needs to be subjected to a cost-benefit analysis. For example, a theoretical analysis of risks and PPPs concluded that it is most efficient for demand risk to remain with governments (Engel et al., 2011). The International Monetary Fund (2004, p. 14) warns that governments may ‘overprice risk and overcompensate the private sector for taking it on, which would raise the cost of PPPs relative to direct public investment’. It is argued that this may have occurred in the UK as no attempt appears to have been made to monitor if risk transfer happens in reality, or how much benefit it really brings (Pollock and Price, 2008).
THE IMPACT OF GFC ON PPPs
The value of PPPs in Europe (excluding the UK) rose sharply during the period 2004 to 2006 to approximately €18 billion per annum (European PPP Expertise Centre (EPEC), 2010). The total value of PPPs signed by the end of 2006 was €31.6 billion, of which €23.6 billion were signed between 2004 and 2006. Moreover, at the start of 2007, projects valued at €67.6 billion were in procurement (Hall, 2008a). In the UK, the annual PPP programme increased from nine projects valued at £667 million in 1995 to 65 projects valued at £7.6 billion in 2002 (HMT, 2003). In addition, it was estimated that a further 200 projects with a total value of £26 billion would be closed between 2005 and 2010 (HMT, 2006). However, the value of PPP transactions reaching financial close fell sharply across Europe in 2008 and 2009 (from a high of approximately €30 billion in 2007) and, whilst returning to the 2004-6 levels in 2010, it remains well below the record years of 2005-7 (EPEC, 2010). In terms of the number of transactions, the UK remains by far the most active market across the European Union, with 44 PPP deals reaching financial close in 2010 (EPEC, 2010) and 20 during the first half of 2011 (with a total value of approximately €1.8 billion) (EPEC, 2011a). In value terms, Spain was the largest PPP country in 2010 (with 13 deals totalling approximately €4.4 billion) (EPEC, 2010), with France being the largest during the first half of 2011 (with eight deals totalling approximately €8 billion). Regardless of the improvement in 2010 and the first half of 2011 reflected in the figures above, the numbers and value of PPP transactions remain considerably less than those observed prior to 2008. To put the extent of this reduction in context, while the value of all European PPP deals for 2007 was approximately €30 billion, this figure had fallen to €18.3 billion in 2010 (recovering from just over €15 billion in 2009); this represents a decline of 39 per cent. (See Figure 1 for an illustration of the financial details of European PPPs between 2003 and 2011a.) Moreover, few large deals closed in the UK in 2010 and the first half of 2011 (EPEC, 2010 and 2011a).
FIGURE 1 European PPP Market 2003-2011 by € Billion
Source: EPEC, 2011b
PPPs are normally funded by 90 per cent debt finance and 10 per cent equity finance. Equity is higher risk as it will be lost first if the project company fails. Therefore, such shareholder loans are seen as junior to the external debt, known as senior debt, which is repaid first (NAO, 2010). Between 1995 and 2002 the use of both indexed linked and wrapped bonds in the financing of PPPs grew (see Kirk and Wall (2002) for a fuller explanation). However, following the 2007 housing market decline, the monoline industry, which guaranteed bond repayment if an issuer defaulted, collapsed resulting in the closure of the wrapped bond market (BBC, 2009). Consequently, the only viable source of finance for infrastructure projects was banks; however, the demise of Lehman Brothers in September 2008, widely accepted as the tipping point for the GFC, meant that the global interbank lending market dried up as banks stopped trusting each other. At the height of the crisis, banks were unable to fund themselves at the wholesale money market reference rates and there were suggestions that those rates had become unrepresentative. This constraint on liquidity meant:
less debt available for any given project and the need for a consortium of banks for all but the smallest of projects;
a higher price of debt, making it harder for privately financed deals to beat the PSC;
a shorter term for debt leading to refinancing risk and hedging issues; and
greater conditionality relating to the debt during the procurement phase.
A global review by PricewaterhouseCoopers (2008) reported that interest rates for lending to infrastructure projects had risen between 1.5 and 2 per cent above the lowest rates obtainable by governments, causing difficulties for both existing and future PPPs. Indeed, the NAO (2010) found that loan margins (i.e. above the interbank rate) for UK PPP projects had increased to around 2.5 per cent on average, with some complex projects facing margins of 3 per cent. EPEC (2010) reports similar commercial debt pricing. With respect to existing PPPs, loan repayments become more difficult, refinancing problematical due to the reluctance of banks to provide funding and, for concession-type PPPs such as toll roads, forecasted earnings are unlikely to be achieved due to a slump in domestic demand (Hall, 2009). Consequently, as reported above, the flow of new PPPs has slowed down.
Standard and Poor’s (2008) warned that some Spanish public authorities may have their credit rating revised downwards unless expenditure on employment and services is reduced because of the inflexible burden of PPP debt coupled with declining tax revenues due to the GFC. Ironically, this will increase the cost of debt and further reduce uncommitted income. In other countries there is also evidence that PPPs are being cancelled because of the GFC. For example, in Ireland, six social housing PPPs have been cancelled, a planned prison PPP was postponed indefinitely (Hall, 2009) and a metro PPP has been deferred (Department of Transport, Tourism and Sport, 2011). In Australia, despite its extensive use of the PPP model, there has also been a renewed questioning of overinflated traffic forecasts (Ferguson, 2009; KPMG, 2009a) following the failure of a number of projects.
The GFC has also had a significant impact on PPPs in the UK with only 34 deals being signed in 2008 (Hall, 2009), which was approximately half that of 2007 and the lowest level of activity for over a decade (Kapoor, 2008). Although, as noted above, EPEC reports that this has recovered slightly to 44 deals in 2010 (albeit the value of such deals is much lower). The NAO (2010, p. 9) highlighted that as well as charging higher margins, banks are adopting a more cautious approach to lending following the credit crisis and are as a result: lowering the proportion of debt in projects; requiring the private sector to inject equity earlier; and placing more onerous conditions on when the private investors can withdraw cash from the project. Hence, UK public service programmes that currently rely on PPPs may suffer. Moreover, the GFC led to the collapse of land and property values which contributed to the failure of businesses, declines in consumer wealth, substantial financial commitments incurred by governments and a significant decline in economic activity. This impacted upon PPP deals which involved disposal of land as part of the financing, and may have contributed to the termination of the Defence Training Review programme (see Case Studies) (Defence Policy and Business, 2010). Further issues include increased government guarantees, greater state involvement in some UK banks and direct HMT lending (see below) which makes the achievement of VFM more difficult. This increased public sector risk coincides with substantial strain being put on public finances, arguably due to the measures taken by the previous Labour Government to protect the fragile economic recovery, support growth and job creation and provide reassurance to capital markets (Ostry et al., 2010). Consequently, the Coalition Government has reversed a number of policies implemented by the previous Labour Government, including the Building Schools for the Future (BSF) programme (see Case Studies) (Richardson, 2010). Given these difficulties, the UK and other countries have sought to introduce measures to assist PPPs struggling to reach financial close. Some of these are now outlined.
UK Initiatives
Four main approaches being were trialled in the absence of traditional financial approaches in the UK; they were mini perm structures, HMT lending, the non-profit distributing model and the prudential borrowing framework. Each of these is now briefly explained.
Mini-perm structures
Broadly speaking, a mini-perm is a short-term financing tool, usually payable in three to five years and typically used to pay off income-producing construction or commercial properties. The term ‘perm’ is short for ‘permanent’, alluding to permanent financing, albeit for a short period of time as indicated by the word ‘mini’. Mini-perm financing might be used by a developer until a project has been completed and can therefore start producing income and establish an operating history. In other words, this type of financing is used prior to being able to access long-term financing or permanent financing solutions. The interest payable on a mini-perm will usually be higher that longer-term financing options, often with a balloon payment at the end of the term in anticipation that the loan can then be easily refinanced due to the fact that the asset now has an operating history on which to successfully obtain less-expensive permanent financing. They can be split into two distinct types – hard and soft (KPMG, 2009b). The former has a relatively short maturity, typically five to seven years, at which point the bulk of the loan remains outstanding. Arguments for hard mini-perms are that they force refinancing, which would be at prevailing market prices, and they allow the lenders to price on a short term basis. In contrast, soft mini-perms have a longer maturity, for example 26 years of a 28 year contract. Nevertheless, two features encourage early refinancing. Firstly, incremental step ups of 25-50 basis points at certain dates result in the cost of borrowing being more expensive if the loan is not refinanced. Secondly, a cash sweep at a certain date is used to repay the outstanding debt rather than distribute rewards to shareholders. In 2009, it was reported that two large PPP projects and one small one had been financed using a mini-perm; however, it was felt that these projects had caused affordability issues for the public sector and increased the private sector’s risk exposure (KMPG, 2009b). Therefore it is doubtful that such structures will prove to be much of a solution, particularly with their emphasis on refinancing which is less likely due to the GFC. An example of a large project using a soft mini-perm structure would be London’s Riverside waste-to-energy £570 million PPP, which reached financial close in July 2008.
HMT lending
In 2009, the Labour Government announced its intention to lend to PPPs which were unable to raise sufficient finance (HMT, 2009). The aim was not to replace banks or capital markets, but to provide additional funding, with the private sector and EIB continuing to supply the majority of finance. To qualify for HMT lending, there must have been a failure to secure finance following a competitive process and any funding offered must have been unrepresentative of market terms. These loans would still bear interest and be repaid over the life of the project. However, HMT hoped that if favourable market conditions returned the loans could be sold prior to maturity at a profit. These loans were to be issued by HMT’s own finance unit known as The Infrastructure Finance Unit (TIFU), which was established with the aim of supporting PPP schemes in procurement, thereby safeguarding £13 billion of public investment (HMT, 2009). These included the Greater Manchester waste project (see Case Studies), the M25 widening, Merseyside Waste, Building Schools for the Future (see Case Studies) and a number of hospital projects. However, TIFU only provided lending for the Greater Manchester waste project (see Table 5) and was subsequently placed under the umbrella of Infrastructure UK, which has a much wider role in reducing the cost of infrastructure projects (NAO, 2010). As with mini-perms TIFU loans were seen as a short-term solution until the project could obtain more conventional finance.
Non-Profit Distributing model (NPD)
Although similar to PPP, the main difference is that the NPD provides economic or social infrastructure financed 100 per cent by debt (90 per cent senior and 10 per cent junior). This differs from PPP deals, which normally consist of 90 per cent debt and 10 per cent equity. Under an NPD, SPV shareholders receive a capped return on their capital, with any surpluses remaining at the end of the contract being passed to a designated charity as opposed to being paid out as dividends. Subsequently the dividend opportunity is removed, which is considered to flatten out overall risks when compared to equity-based PPPs or public procurement. NPDs are therefore still attractive to banks, but not as popular with investors or bidders as they do not obtain the same returns (Hellowell and Pollock, 2009). This model was piloted in Scotland in the Argyll and Bute Council’s schools’ project, which reached financial close in September 2005. Since then, two more schools’ projects (in Falkirk and Aberdeen) reached financial close in May and December 2007 respectively. Moreover, the National Health Service in Tayside has used this model for a PPP and the Borders rail link project, which was announced in 2008, will also use NPD.
Prudential Borrowing Framework (PBF)
Although it could be argued that the PBF was not initiated in response to banks’ reluctance to lend, it does provide an alternative to PPP. Indeed, as it excludes the private sector from all aspects of the project apart from construction it is closer to traditional procurement. Under the Local Government Act 2003, local authorities were given greater freedom over their capital expenditures; therefore whilst most of their revenue still comes from central government, it now has less say over how this money is spent. Therefore local authorities are no longer forced down the PPP route by central government. However, whilst Hood et al. (2007) believe that the PBF has benefits, they feel it is not as robust as PPP regarding the treatment and allocation of risk. One UK local authority spent £11 million on a programme of highways structural work via the PBF, which they calculated would not only deliver a better long-term solution but would deliver savings of £1 million from the highways maintenance budget and reduce future liabilities by a further £1.9m. Moreover the resurfacing work would increase the operational life of the road and reduce the number of insurance claims and litigation from potholes created by adverse weather conditions. Had they gone down the PPP route they would have had to deal with the substantial running costs of such projects, complex contractual arrangements and extended contractual periods, all of which contribute to a heightened risk profile (Hood et al., 2007).
Other initiatives
PPPs in France have never been equivalent to PPPs elsewhere from a legal perspective, but recent financial turmoil has prompted financial reforms, there too. In order to alleviate the problems with the financial markets, several measures have been introduced (Hall, 2009). These include: a government guarantee for all PPP bank loans; tax allowances; allowing the government to advance to a bank the majority of the loan required by the private partner (thus enabling the bank to pass on lower interest rates obtainable by government); and allowing PPPs to be signed on the basis of ‘adjustable financing’ without finalising a deal with banks so that it can proceed on the basis of government advances while waiting for improved conditions in the financial market. PPPs have been widely promoted in developing countries for many years by the World Bank and other donors and development banks. However, the International Finance Corporation (IFC), the World Bank’s private sector arm, believes that the GFC will make it even harder to finance PPPs. It estimates that projects totalling $110 billion may be delayed or cancelled, and that $70 billion of existing PPPs are at risk because of increased financing costs (IFC, 2008). Therefore, the IFC has created a global equity fund and a loan financing trust to support PPPs.
It can be seen therefore that the financial threats highlighted by Burger et al. (2009) have impacted on the PPP initiative. Interest rates have increased, credit has become less available, there has been a slump in domestic demand and increased borrowing from the EIB could expose the UK public sector to exchange rate risk.
METHODOLOGY
The data used for this research was obtained from two primary sources: HMT (2011) statistics for both signed projects (698) and those still in procurement (61) at 16 March 2011 and Partnerships UK’s (PUK) (2011) project database[2]. The HMT signed projects’ list is revised on a six-monthly basis to reflect the updates HMT receives from departments at Budget and Pre-budget Review. The list of projects in procurement is also updated regularly. The PUK database holds details of 920 projects that have all achieved financial close. In compiling this database, PUK liaise with HMT, government departments, the Welsh Assembly and the Northern Ireland (NI) and Scottish Executives. The main reason for the difference between the HMT signed list of 698 projects and the PUK database of 920 is that the latter also contains non-PPP projects. Furthermore, with respect to the HMT list of both signed projects and those in procurement, the same amount of information is not provided for each project. Accordingly, for the purposes of this research, 570 (82 per cent) signed projects and 57 (93 per cent) of those in procurement were deemed useable.
In order to ascertain whether the GFC has led to delays in projects being closed, the length of time between the appearance of the project in the Official Journal of the EU (OJEU) and financial close was measured. The EU Public Procurement Directives require all public sector bodies to publish details of tenders and contract opportunities in the OJEU and financial close is deemed to be when both the bidder and the purchaser have reached agreement on: all the contractual documents; all relevant technical issues; and all matters affecting the unitary charge. The only remaining issue is for the bidder to fix the interest rate on the debt taken out to finance the project. Comparisons were then made between the length of time from the OJEU notice to financial close for projects signed since the beginning of the PPP scheme in 1992 and those in procurement at 16 March 2011. It was expected that these latter projects would have been delayed due to the reluctance of banks to lend.
Three case studies are also presented to demonstrate some of the difficulties that projects have had in obtaining finance and the attempts to overcome these.
FINDINGS
Table 1 presents a list of both signed projects (570) and those in procurement (57) by government department. As can be seen the average number of months from the OJEU date to financial close for signed projects was 33.9. If departments with three or less projects are excluded, the time to financial close ranges from 25.8 months (HMRC) to 40.6 months (Health and MoD). Table 1 also indicates that on average it is estimated that projects in procurement will reach financial close in 42.1 months (which is approximately eight months longer than for signed projects). However, while this difference in the time to reach financial close may not appear that significant in the context of the GFC, the following points need to be considered. Firstly, the figure for projects in procurement is only an estimate, and in a number of cases this has been exceeded. Secondly, the signed projects list takes into account all projects since the scheme was launched in 1992, therefore one would expect the earlier projects to have taken longer as the process was new to all parties. Thirdly, as the average figure only provides an overall perspective, it is necessary to examine each department separately.
TABLE 1 UK PPP projects signed and in procurement at 16 March 2011 by government department
Department
Number of Projects
Average Months – OJEU to Financial Close
Signed
In Procurement
Signed
In Procurement
Business, Innovation and Skills
1
–
20.0
–
Communities and Local Government (CLG)
50
14
39.3
47.1
Culture, Media and Sport (CMS)
15
1
35.9
50.3
Education
118
11
26.6
48.8
Environment, Food and Rural Affairs (EFRA)
22
11
35.7
39.8
Foreign and Commonwealth
1
–
48.6
–
Government Communications Headquarters (GCHQ)
1
–
36.7
–
Health
102
5
40.6
30.6
HM Revenue and Customs (HMRC)
6
–
25.8
–
HMT
1
–
58.1
–
Home Office
22
2
34.4
24.8
Ministry of Defence (MoD)
28
–
40.6
–
Ministry of Justice (MoJ)
19
–
33.4
–
NI Executive
32
5
35.4
38.5
Scottish Government
81
–
30.4
–
Transport
45
8
30.2
40.3
Welsh Assembly Government
23
–
36.2
–
Work and Pensions
3
–
40.8
–
Overall
570
57
33.9
42.1
Comparing signed projects with those in procurement, it is estimated that the latter projects in CLG, CMS, Education, EFRA, the NI Executive and Transport will take longer to reach financial close than those already signed in the same departments; whereas it is predicted that projects in procurement in only Health and Home Office will close more quickly than those already signed. However, as will be seen later in the chapter, four projects across three of the departments named above (Education, Transport and the NI Executive) have missed their predicted financial closure date at 16 March 2011 and will take longer still. In addition, as illustrated in Table 4, while 29 of the 57 projects in procurement at 16 March 2011 were due to reach financial close by 31 October 2011[3], only six had done so by this date; thus 23 (79 per cent) missed their predicted date of financial close.
If the information in Table 1 is analysed by project category, it is found that the average time for signed projects to reach financial close ranges from 20.9 (Information Technology (IT)) to 52 months (Housing: Housing Revenue Account (HRA)). HRA housing refers to subsidised or ‘council’ housing and the long time taken to reach financial close is perhaps not surprising as the system has been under review since 2009 due to concerns over how the scheme is financed (Bury, 2010; Wilson, 2011). In October 2010, it was announced that the HRA system is to be reformed from April 2012 to give local authorities which own housing stock full control of their housing income and expenditure and allow them to make their own decisions on how and in what way they invest in tenants’ homes. If they wish they will even be able to build new homes using surplus rental income (Wilson, 2011). If single projects are excluded from the analysis, the estimated time to reach financial close for projects in procurement ranges from 24.8 months (Police) to 51.8 months (Housing (HRA)).
While the overall averages for signed projects and those in procurement (33.9 months and 42.1 months respectively) by government department and project category will be identical, analysing any differences in length by the type of project gives a clearer idea of those taking longer to come to financial close. Projects in procurement, in seven of the 12 project categories, in Housing (non-HRA) (5), Libraries (1), Roads and Highway Maintenance (4), Schools (BSF – 11; non-BSF – 1), Street Lighting (4) and Waste (14), which account for 40 (70 per cent) of the 57 projects in procurement, are taking longer than those already signed. Two project categories are taking approximately the same time (Fire and Housing (HRA)) and three are estimated to take less (Health, IT and Police). There is naturally a link between some of the projects in procurement that are estimated to take longer to reach financial close than similar signed projects and the equivalent position referred to above with respect to departments (Table 1) (for example: CLG – Housing; Education – Schools; EFRA – Waste; and Transport – Roads and Street Lighting).
In February 2001, the Labour Government launched a review of PPP, called Gateway, which sought to cut delays to PPP contract negotiations (HMT, 2001). In order to ascertain whether the length of time to financial close was subsequently reduced, the data was analysed in the following time frames: 1993 (the first OJEU date) to 2000; 2001 to 2006; and finally 2007 onwards (post-GFC). Table 2 displays projects by department with an OJEU date between 1993-2000 and 2001-6. It can be seen that the earlier projects took 34.8 months on average to reach financial close, whereas the later ones took approximately two months less (32.9 months). Of the 13 departments represented in both periods, eight reached financial close more quickly in 2001-6 than in the period 1993-2000 (CMS, Education, Health, Home Office, MoJ, Scottish Government, Transport and Work and Pensions); these eight departments accounted for 188 (74 per cent) of the 254 cases in 2001-6. The five departments taking longer to reach financial close in 2001-6 than 1993-2000 were CLG, EFRA, MoD, NI Executive and the Welsh Assembly Government; these five departments accounted for 66 (26 per cent) of the 254 cases in 2001-6.
TABLE 2 Signed PPP projects with OJEU dates 1993-2000 and 2001-6 by government department
Department
Number of Projects
Average Months – OJEU to Financial Close
1993-2000
2001-6
1993-2000
2001-6
Business, Innovation and Skills
1
–
20.0
–
CLG
22
26
33.4
45.1
CMS
4
10
41.9
35.8
Education
46
70
27.7
25.6
EFRA
11
11
31.2
40.2
Foreign and Commonwealth
1
–
48.6
–
GCHQ
1
–
36.7
–
Health
58
44
44.7
35.1
HMRC
6
–
25.8
–
HM T
1
–
58.1
–
Home Office
16
6
34.6
33.9
MoD
21
7
38.5
47.1
MoJ
18
1
34.1
20.0
NI Executive
13
19
34.3
36.2
Scottish Government
46
35
31.8
28.5
Transport
20
21
31.1
28.5
Welsh Assembly Government
20
3
33.0
57.4
Work and Pensions
2
1
48.3
25.8
Overall
307
254
34.8
32.9
An analysis of the information in Table 2 by project category reveals that of the 20 project categories represented in both periods, only eight reached financial close more quickly in 2001-6 than in the period 1993-2000 (Defence (Education and Training and Other), Health, Leisure Centres, Prisons and Secure Training Centres, Schools (non-BSF), Street Lighting and Water). However, these eight project categories accounted for 175 (73 per cent) of the 239 comparable cases (i.e. excluding 15 BSF Schools’ cases in 2001-6 for which there were no projects in 1993-2000 (see Case Studies). Therefore, it is clear that, overall, projects reached financial close more quickly following the Gateway review.
Due to the problems with regard to bank lending it could be reasonably expected that projects that had an OJEU date from January 2007 onwards would take longer to come to financial close. However, perhaps surprisingly, as can be seen from Table 3, which displays projects by department and project category with an OJEU date between 2007 and 16 March 2011, it was actually quicker (30.6 months). However, these figures must be put into context as they only refer to nine projects with a lower estimated average capital value[4] (£59 million) than other signed projects (£76 million) and projects in procurement (£122 million). Moreover, the extremely low number of projects signed between 2007 and 2011 when compared with the previous periods is in itself an indication of the impact of the GFC. It should also be noted that the reduction in PPP projects post 2006 is partly due to the unpopularity of the scheme in Scotland. As a result, those projects already signed have been allowed to continue; for those not yet in procurement the NPD model has been adopted (Scottish Government, 2008).
TABLE 3 Signed PPP projects with OJEU date between 2007 and 16 March 2011 by government department and project category
Department
Project Category
Number of Projects
Average Months – OJEU to Financial Close
CLG
Fire
1
28.3
CLG
Joint Service Centres
1
28.6
CMS
Leisure Centres
1
12.4
Education
Schools (BSF)
2
32.9
Transport
Street lighting
4
35.2
Overall
9
30.6
Prior to the GFC, it was estimated that projects would close more quickly than in the past due to all parties gaining more experience with the processes involved. This would appear to be confirmed by an initial analysis of the 57 projects in procurement at 16 March 2011 (see Table 1), which reveals that only four (7 per cent) had missed their estimated financial close date by 3.4 months on average. However, whilst this appears quite positive at first sight, further analysis of the projects in procurement at 16 March 2011 provides a different interpretation. Table 4 provides an analysis of the estimated financial close dates of projects in procurement at 16 March 2011. This indicates that the aforementioned four projects, which had missed their estimated financial close date, were the only projects that were due to close by this date. Of the 29 projects in procurement at 16 March 2011 which were due to reach financial close by 31 October 2011, only six (21 per cent) had actually closed by this date (not shown in tables); thus suggesting that a growing number of projects are having difficulties achieving financial close as originally expected.
TABLE 4 Analysis of the estimated financial close dates of projects in procurement at 16 March 2011
Estimated Date of Financial Close
2010
1 January 2011 to 16 March 2011
17 March 2011 to 31 October 2011
1 November 2011 to 31 December 2011
2012
2013
Total
Number of Projects
2
2
25
5
18
5
57
Whilst the analysis above has focussed on the length of time taken for PPP deals to come to financial close, it could be reasonably argued that this in itself does not confirm that PPPs have been affected by the financial crisis. The increase in time could be the result of a number of process issues such as the size or complexity of a project. Moreover, as with Scotland and some UK local authorities, delays could be down to a general dissatisfaction with PPPs as a method of procuring infrastructure. Likewise, on coming to power in 2010, the UK Coalition Government exhibited caution over the use of PPPs due to concerns over VFM. However, as the case studies in the following section illustrate, a lack of funding has clearly led to project delays. Furthermore, it is perhaps a little ingenuous to assume that factors apart from financing have been the major cause of the slowdown in PPPs when the falling number of projects directly coincides with the timing of the GFC. Additionally, Labour was still in power in the UK when the GFC begun and its appetite for PPPs had shown no signs of diminishing.
CASE STUDIES
Defense Training Review (DTR)
The DTR aimed to deliver military technical training on a defence basis rather than separately by the Royal Navy, Army and Royal Air Force and originally consisted of two separate PPPs, termed Package 1 and Package 2. The first, estimated to cost £12 billion, covers technical training, including aeronautical engineering and communications and information systems. The second was to include logistics, personnel administration, security, languages, intelligence, and photography. DTR involves considerable infrastructure investment as well as the sale of large amounts of MoD property. A consortium called Metrix, consisting of QinetiQ, the MoD’s privatised former research and development agency, and Land Securities Trillium (LST) as equity partners, was set up to finance and manage the project (Hansard, 2007).
In January 2008, funding issues forced MoD to retract Package 2, with LST withdrawing from Package 1 in December 2008 over financing concerns (Defence Management, 2009). In 2009, two years after the DTR was awarded to the Metrix consortium, major questions remained over the affordability of this project. This was brought about by the collapsing property market as the project was to be financed largely from the sale of vacant MoD land; but declining property prices meant Metrix’s original projections for financing the deal were no longer appropriate. Norton-Taylor (2009) reported in February 2009 that, according to the MoD, the DTR was in trouble as a result of increases in the cost of borrowing and other areas of cost growth which have arisen as a consequence of the GFC. The MoD stated that the project had been ‘more difficult and prolonged than expected’ and could fall victim to the ‘abnormal market environment’ – a reference to its dependence on banks affected by the GFC (Norton-Taylor 2009). Furthermore, in July 2009, Smith (2009) reported that the government had provided £44 million to keep the project going, in addition to ‘contingent liability’ funding of about £50 million. It was widely accepted that the future of the DTR was uncertain following the election of the Coalition Government (Public and Commercial Services Union, 2010) and the project was eventually terminated in October 2010 due to affordability issues as a result of falling asset values and increases in borrowing costs against a backdrop of already fragile UK public finances.
Greater Manchester Waste Disposal Authority (GMWDA)
An analysis of Table 1 by project category indicated that waste projects in procurement are estimated to take longer to reach financial close than those already signed, and a waste project was one of four that missed the estimated date of financial close at 16 March 2011.
The GMWDA project provides an interesting example of issues faced by large projects in general and waste projects in particular. GMWDA was given permission for a £640 million waste disposal and recycling project. This was the largest of its kind in Europe and involved the development of a network of state-of-the-art recycling facilities, comprising 36 plants on 23 sites across Greater Manchester, capable of handling 1.3 million tonnes of waste per annum. Shifrin (2009) identified the GMWDA project as a prime example of a PPP that had suffered serious delays due to banks’ reluctance to finance large and complex projects and reported that although interest rates had reached a record low, the costs of financing PPPs was higher than ever. Financial close was due in June 2008, but a lack of funding meant that this deadline was missed. Although the outlook for the project remained somewhat uncertain, PUK’s chief executive expressed confidence that even if they had to hold out for credit from existing banks or introduce new ones, they were reasonably confident that they would hit their 2013 completion target. However, the final financial package (see Table 5) demonstrates the reliance of the scheme on non-conventional sources.
TABLE 5 Funding for Greater Manchester waste project
Funder
Amount (£m)
Comment
PFI Credits
124.5
Grant from UK government
TIFU
120
Loan from UK government
GMWDA
103
Two-thirds equity and one-third loan facility
European Investment Bank (EIB)
100
Non UK bank
Bank of Ireland
95
Non UK bank
Viridor Laing Consortium
90
Equity stake
Banco Bilbao Vizcaya Argentaria
55
Non UK bank
Lloyds Banking Group
55
Partly owned by UK government
Sumitomo Mitsui BankingCorporation
40
Non UK bank
As can be seen from Table 5, only one UK bank committed finance to the project, and that is partially owned by the UK government. Banks from outside the UK contributed £290 million (37 per cent of total), which could expose the government to exchange rate risk, and £347.5 million (44 per cent) came directly from public sector sources. Eventually it took approximately 50 months for this project to reach financial close, which is much higher than the average of 36.6 months for signed waste projects[5]. Pinsent Masons (2009), who advised the construction company Viridor Laing, stated that ‘completing a transaction of this size and complexity in the face of the credit crunch provided a great challenge for the sponsors and their advisers’. A spokesperson from GMWDA (2009) also stated that the project had ‘been secured during a period of unprecedented financial turbulence’, underlining how the GFC had led to delays. Whilst the eventual funding of this project may be categorised as innovative and flexible, others may see it as highly risky on the part of the public sector. None of the debt is being forwarded by a conventional UK bank and thus the purchaser is primarily borrowing from overseas or public sector sources. This raises issues about the higher levels of risk being retained by the public sector, which could potentially jeopardise the achievement of VFM. Moreover, the NAO (2010) estimated that the increase in the financing charges of this project added 12 per cent to its annual contract price.
Building Schools for the Future (BSF)
Another project category that is estimated to take longer to close than existing signed projects is BSF Schools (48.8 months versus 36 months5). BSF, which was launched in February 2004, was a long-term strategic investment programme by the Labour Government intended to transform the delivery of secondary school education (Partnerships for Schools (PfS), 2010). It involved the rebuilding and renewal of 3,500 secondary schools in England and transforming them into a standard fit for 21st century education. In late 2008, the Labour Government announced that it would continue to invest in public services such as schools and hospitals; but the announcement of a review of three key education programmes, including the £45 billion BSF initiative, which almost inevitably meant a cut in investment, undermined these promises. The NAO (2009) revealed in January 2009 that BSF was £10 billion over-budget and two years behind schedule. While reports in February 2009 (Anon) confirmed that more than six banks were interested in providing financial backing for BSF, in previous years this figure was as high as 30. With an estimated £1.2 billion needed for the programme, there was concern that the funding committed by the banks would be insufficient. In March 2009, it was announced that the EIB was in talks with PfS over the possibility of doubling the £300 million it had already made to BSF. Many individual projects had already suffered significant delays, notably in Salford and Wigan, where the £350 million developments were already 15 months behind schedule and were expected to be further delayed because of financing difficulties (Richardson, 2009). A House of Commons Select Committee warned that the reliance placed on private funding by the BSF scheme meant it was severely under threat and could be one of the ‘first major casualties’ of government spending reductions (Curtis, 2009).
On 5 July 2010, the Secretary of State for Education, Michael Gove, announced that the BSF programme was to be abandoned and that BSF projects which had not achieved financial close would not proceed, meaning that 715 school refurbishments already signed up to the scheme would not now go ahead (Richardson, 2010) . The 706 schools which had reached financial close will continue, however officials have been charged with seeing how savings can be made within them.
THE UK POLICY ENVIRONMENT
It is difficult to draw any robust conclusions about changes to the UK’s attitude to PPPs, and in particular PPP funding, when less than two years after the first real impact of the GFC there was a change of government. However, despite an initial indication that the new Coalition Government would be more circumspect over the use of PPPs, like many new governments it has accepted that the private sector can play a major role in infrastructure development beyond purely design or construction. Notwithstanding, it can be argued that prior to the GFC financiers saw PPP projects as less risky than other investments due to factors such as implicit government guarantees (Asenova and Hood, 2006; Edwards et al., 2004), the passing on of risks to sub-contractors and the long-term returns on offer (Asenova and Beck, 2010). Consequently there was a tendency for PPP projects to be driven by private sector consortia that could transform a government wish list of desirable projects into concrete propositions. Raising finance was not a problem during the boom period of the late 1990s to the onset of the GFC and therefore the UK government, as with the governments of many other countries, could be seen to be actively rebuilding the nation’s infrastructure and concurrently creating and maintaining jobs across a range of sectors.
When the bond market collapsed and the banks became increasingly reluctant to lend, the Labour government, now under the premiership of Gordon Brown, took on what some would describe as a Post Keynesian (Holt and Pressman, 2001) approach to stimulating the economy by seeing the role of government as driving demand. However, the short term solutions offered by HMT lending or encouraging the use of mini-perms were not overly successful and thus initiatives such as quantitative easing (the printing of extra money to repurchase government debt) were introduced to encourage banks to begin lending again. As has been seen in this chapter, although the PPP market did not come to a complete halt, the number of projects reaching financial close decreased and those that proceeded became increasingly reliant on non-conventional lending. More recent announcements by the Chancellor of the Exchequer, George Osborne (at the time of writing), have emphasised the role that private finance still has to play in infrastructure development (BBC, 2011). Therefore it would be naïve to think that a new era has begun when the UK government has become so sceptical of the advice that it receives from the financial sector that it eschews increasing private involvement in the public sector. Indeed, it is likely that right of centre thinking will dominate and that the private sector will move into a number of new areas. For these reasons the dominant position held by the financial sector prior to the GFC is likely to remain in the UK regardless of pressure from the EU, and, despite different approaches in certain parts of the country and government rhetoric about caution, the private finance element of PPPs will continue.
CONCLUSIONS
This chapter does not claim the GFC is the only factor leading to project delays; indeed reasons such as project size, project complexity and policy learning leading to a general dissatisfaction with PPPs as a method of infrastructure development could all be contributing factors. However, it is proposed that the GFC is clearly having an adverse effect on the PPP initiative. This assertion is supported by Asenova and Beck (2010), who state that PPPs create profit opportunities for finance capital and that financiers apply strict risk-return criteria when making key investment and procurement decisions. They also felt that financiers had a preference ‘for the relatively safe long-term returns offered by PFI projects’ (p. 4). Therefore, if the risk-return ratio for PPPs remains unchanged, one reason why less PPPs are reaching financial close must be a lack of this capital. Prior to 2007, the impact PPPs were having on public infrastructure in the UK was significant. With 641 signed projects worth just over £64 billion and the number and value of PPPs steadily increasing between 2004 and 2007 (HMT, 2006), it appeared the momentum was set to continue, despite its many critics. However, the banking collapse that led to the GFC affected the private finance upon which PPPs were reliant. As a consequence of the GFC, banks were unable to fund themselves at the wholesale money market rates, which had become too high. This led to the subsequent constraint on liquidity in debt markets and, as the securing of finance is crucial to PPPs, the lack of funding was a contributing factor to half the usual number of projects being signed in 2008.
Therefore, whilst this research has shown that some recent projects have come to financial close relatively quickly, a far greater number are exceeding their estimated targets. Out of 57 projects in procurement at 16 March 2011 (Table 1), 29 had an estimated date for financial close on or before 31 October 2011. However, 23 of these projects (79 per cent) had not reached financial closure by this date; as the remainder of those projects in procurement at 16 March 2011 have estimated closure dates after 31 October 2011, whether these projects will close as predicted remains uncertain. The first case study demonstrated that whilst factors such as project complexity may have originally led to a delay, the impact of the GFC has also had an impact and that due to falling asset values and the higher cost of borrowing the DTR project was ultimately terminated. The second case study illustrated that whilst certain projects do eventually obtain funding, this is often not from traditional sources. The increasing reliance on the EIB as a source of PPP funding, and borrowing from foreign banks, exposes the UK to exchange rate risk (Burger et al., 2009). Furthermore, as the government is financing this and other projects, either directly or through banks in which it has a major share, it makes a mockery of the ‘private’ in PPP and completely undermines the claims of its proponents that it spreads the cost of projects as well as transfer the risk of borrowing away from the state and on to private firms. This has implications for the achievement of VFM.
It is clear that significant improvements are required in the economic circumstances, together with a greater availability of finance, before PPPs will become as substantial as they were prior to the GFC. The data provided by EPEC (2011) show that whilst large amounts of money are still being raised for PPPs, the totals remain considerably lower than they were before the crisis. However, a return to what may be termed as normal lending conditions may not be enough to resurrect PPPs as a major means of improving the UK’s infrastructure. Indeed, there should be no presumption that continuing the use of private finance at current rates will achieve VFM (NAO, 2010). Moreover, the abolition of the BSF scheme highlights the fact that the Coalition Government is prepared to abolish flagship PPP programmes introduced by the previous Labour Government. What has also become clear since the change of government in 2010 is that there is a much greater emphasis on what is appealingly referred to as ‘efficiency savings’ on projects; however, whether this leads to PPPs being seen as a less attractive proposition for the private sector remains to be seen. Indeed, the financial sector continues to have a dominant position in the UK economy and thus the role of private finance in infrastructure development is unlikely to disappear. What is more likely is a shift from bank lending to more market-based solutions such as pension and wealth funds and investment from insurance companies.
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[1] The PPP initiative was initially referred to as the Private Finance Initiative (PFI), and while these terms are not completely synonymous, they are often used interchangeably; the term PPP will be used primarily throughout the remainder of this chapter.
[2] PUK has embarked on a process of disposing of its various businesses and is expected to close down during 2011. Consequently, while PUK’s website is no longer updated, it can still be viewed, together with the Projects Database.
[3] The time of analysing the data presented in this Chapter.
The purpose of this article is to investigate how financial literacy interface models contribute towards financial information comprehensibility to decision makers in the South Africa. The way South African consumers and institutions use financial literacy concept suggest that various people attach different meanings to the financial literacy aspect. To establish a theoretical model for any given financial literacy, this study accomplishes what financial literacy entails.
CHAPTER 1: INTRODUCTION
Financial stress occurs when an individual or a system is undergoing some strain (Tytell et al, 2009, p. 12). When somebody is undergoing financial stress, he or she finds it difficult to meet some of his or her financial obligations. Performing his or her duties at home or at work might also be challenging for the individual, even though the origin of the problem is financial in nature. This is a dilemma that so many people across the world go through and finding ways of overcoming these problems might turn out to be beneficial. Diamond and Vartiainen, in their book Behavioral Economics and Its Applications (2007) indicate that the financial literacy relates to how the individual behaves in regards to how they handle their finances (Diamond and Vartiainen, 2007, p. 25).
Financial stress has a negative impact on the employee performance. When an employee goes through financial stress, the possibility of being absent from work is high, he or she does not get the satisfaction from the payment given, committing to the job also becomes a challenge and the general performance of the employee diminishes (XIAO, 2008 p. 382). Researchers have also found financial stress as one of the reasons that can affect an individual’s health negatively, which in turn affects the performance of the employee at the work place (XIAO, 2008 p. 382). According to Xiao (2008), the workers that have higher stress levels are likely to have the be absent from work frequently and if they are at work, they spend a lot of time thinking about their finances, which reduces the time that they spend working (XIAO, 2008 p. 382).
Managing an employee well is an asset for an organization. This is because managing an employee well leads to his or her commitment to performing tasks, which is an asset to the organization (Aftab & Javeed, 2012 p. 10). If the employer ignores their stress and does not cater for the needs of the employees, there is a possibility of having counterproductive behavior at the work place. This behavior does not only affect the organization, but when a majority of the work force in a nation is not productive in their work place, it might end up affecting the economy of the whole nation. In the first class and emerging economies, there is a big challenge on how to handle stress that is a product of mismanagement of finances on a personal level. It is a challenge because there are consequences to the performance of the economy when the work force cannot perform their work-related duties efficiently. Changing the attitudes that people have over money is not easy because people tend to prefer immediate gratification when spending their money. Not so many people think of saving for the future needs after retirement.
Problem Statement
Many South Africans face economic hardships brought about by the lack of financial literacy. Lack of financial literacy causes several problems; one of the major problems being the unequal distribution of resources. In South Africa, including some other countries in the world, many people go through hardships because of the lack of financial education. This does not only affect the personal lives of the people but also the economy as a whole. It affects the economy through a decrease in production that results from the financial stress that the work force goes through. Little or lack of money can be something that affects relationships, health and even the performance of an individual in the work place. The stress reduces their ability to work efficiently, which might create an economic underperformance. When the country goes through this type of crisis, distributing resources across the population becomes difficult.
It is important to fix the problem of financial illiteracy because of a number of reasons. The main reason would be to change the attitude of people towards how they handle their finances. This attitudinal change focuses on directing people towards making wise financial decisions, consequently reducing their stress levels, and enhancing their productivity in the workplace. The lessons should not only focus on the benefits of making wise financial decisions in their daily lives but also on the need to have a plan for the retirement years.
Purpose of the study
This study aims at analyzing the current levels of financial education among the consumers in South Africa. After the analysis of the current education levels among the consumers, the identification of the weaknesses becomes easy, making it possible to look for ways to improve the situation. The analysis will also make it easy for the identification of the strengths. Improving in the strengths is necessary not only for the individual but also for the entire country. It is important for the entire nation in the sense that the improvements might work in reducing the stress levels that the people go through, which would make them more productive in their work place. Once their productivity improves, the entire output of the country might also improve.
OECD defines financial education as the process that people go through to improve their understanding of the financial products and financial concepts. They get this information through advice from experts in the field and through reading materials with the information. This makes them have the ability to develop skills essential for making wise decisions in the management of their finances. The education does not only make the people aware of the financial opportunities and the risks, but it also improves their financial decision-making ability (OECD, 2005, p. 26). The financial information includes data that gives the individuals the knowledge necessary for the discovery of opportunities and for making valuable choices. The individual is also able to make financial decisions while fully aware the consequences of some of the decisions they make (OECD, 2005, p. 26).
The experts on the other hand provide the individuals with the skills necessary for understanding some of the financial concepts. They do this through training the individuals and through providing guidance to enable the people to acquire the necessary skills when making investments (OECD, 2005, p. 26). The lack of financial education determines the attitude that people have when it comes to investments and saving for the future, which is not positive. There are quite a number of investment programs available for the people in South Africa to use in the improvement of their financial status. Apart from these investment programs, there are pension schemes that individuals could use to ensure that their life after retirement will be comfortable. Because of the poor saving culture in South Africa, not so many people invest in such programs. A majority of the people only focus on the fulfillment of their immediate needs. Living in debt is also a problem that the people go through which contributes to the crisis. Because of the poor saving culture and the reluctance that people exhibit towards savings, they might experience a crisis in case they lose their job (Shorb, 2009). To prevent this crisis, the only appropriate thing to do would be to offer financial education to the people (OECD, 2005, p. 123).
Importance of the study
It is vital for the individual to have the necessary skills for preventing a financial crisis on a personal level. This would also go a long way in preventing a crisis in the economy of a country. The most vital component that requires a lot of emphasis is changing the saving culture that the people have. Through this, an individual can easily manage his or her finances, which would influence their performance in the work place (Schreiner & Sherraden, 2008, p. 233).
Some people know the importance of saving and they are aware of some of the most appropriate saving schemes. These people might still show some reluctance in participating in these programs. This shows that the saving culture is heterogenic among the people. According to some studies on behavioral economics, an individual’s behavior towards saving relates to the individuals psychological factors (OECD, 2005, p. 123). The studies reveal that very few people prefer saving to spending their money. Through financial education, it is possible to change the attitudes of these people toward the saving culture. This education is vital for enabling the people to gain planning skills necessary for cushioning them from the crisis.
South Africa is a middle-income country with a marketing economy, which enjoys considerable natural resources. The country has proper financials, with one of the largest stock exchanges around the world. The country also boosts of proper communication and energy systems around the continent. South Africa boosts of modern transportation systems, which enables proper distribution of goods and services throughout the nation. In 2007, the country had one of the best economic performances in the entire globe but this drastically slowed down in the following years. This was due to the country’s economic constraints in addition to the decline in global economy, which was heavily associated with Great recession in 2008. However, in 2011, the country’s economic performance rebounded. Despite the country’s good economy performances in 2011, the unemployment levels in the country remained a big challenge in both the private and public sectors.
The United States government analysts claim that the South African economic policy is financially traditional. The country’s financial traditions are evident on how the country controls its price increase, balances its budget, and generates a budget surplus. As the country pursues its economic goals, its economy is still on the rise despite the fact that it faces an increasing pressure from its citizens to make use of its own enterprises. The South African citizens believed that the state-owned enterprises would be beneficial in delivering basic services to low low-income regions and rural areas. Despite some of these constraints, the country boosts of the most developed economies in the entire continent. The country’s telecommunication systems, paved roads, skilled professionals, and banking systems are among the best in the Africa. South Africa is globally viewed as a commercial jewel among the sub-Saharan nations and Africa in general. With these, most of the South African consumers and citizens are seeking a fair share of the nation’s resources. However, the country’s scarcity of financial literacy between the customers still constrains the country’s financial resources.
Background
South African consumers are poor at financial literary and this heavily contributes to the country’s constrains in financial resources. It is with these aspects that Vartianen and Diamond insist that also the wealthy countries, the collective existing studies reflect a poor picture of financial literacy and economy. One of the confusing aspects involved in financial literacy rates improvement in any nation is the general tendency of individuals to make use of the seat-of-the-pants financial planning designs which various families and friends use. There is also the cultural factor, which prohibits consumers from searching for professional assistance. On this note, Vartiainen and Diamond report that, financially illiterate people should seek guidance from professionals. Practically, 60% of almost every population subgroups depends on relatives, parents, personal judgments, and friends. Despite this, every consumer’s situation is different and unique.
There are various demographic factors, which indicate that financial literacy is a challenging prospect. Vartiainen and Diamond stresses the fact that individuals with poor education levels are likely to depend on their personal judgment. The analysts further claim that a minority of individuals seek advice from print media or financial professionals. Such tendencies have a lasting impact on the financially illiterate consumers. They also have a severe effect on the society in which the consumers exists. Financial literacy is closely related to behavior. Individuals who have poor financial literate levels tend to save minimum finances. Furthermore, there are various measure to which have been designed for consumers to address the financial illiteracy. These financial illiteracies have various significant effects on the choices the people make. In the South African, various initiatives are in place to help in the improvement of financial literacy for the young consumers. These policies are similar with the steps, which are taken in most countries for the same intentions. Some of these initiatives are beneficial outcomes to these countries. The policies, which mandate financial education for students in high school, result to higher asset accumulation in case the students reach adulthood. Similarly, financial education in a workplace can increase employee participation in employee-directed retirement fund plans and motivate savings. There are various positive outcomes which are associated with improve in financial literacy rate. These issues are beneficial in forming the basis of this study.
As demonstrated in the study on how levels of financial literacy are troubling the success of individuals and financial decisions, this study will identify some of the importance associated with consumer financial literacy and decisions among the consumers in South Africa. Regardless of the low consumer financial data and acquaintance in the South African nation, the country still boosts of one of the best economies in the entire continent. This demonstrates that, a financial development of any given country depends on the country’s budget instead of the financial knowledge and decisions of the consumer. In such a study, financial literacy questions will be beneficial in the whole research work. The financial literacy questions will also be beneficial in research surveys since it helps in evaluating the financial literacy influences especially during decision-making process. Generally, financial literacy is a challenging aspect especially to the poorly educated individuals, race, or gender. The outcomes from previous analysis as shown in this study indicate that people with low educations standards, women, and children are less knowledgeable especially on issues that relate to financial matters.
Research studies indicate that financial literacy is important in accounting also plays an important role during planning of financials. Planning for retirement is essential during wealth accumulation. In most cases, individuals who accommodate the plan tend to record twice the quantity of wealth than those individuals who do not embrace the same. Despite the positive aspects of financial literacy, some people disagree with the whole idea of financial literacy. For instance, most people still argue that reverse victims is a distress hence suggesting that financial planning improves consumer financial understanding. This demonstrates that financial literacy is native therefore; people who plan to invest in retirement plans will need to seek further financial knowledge and information. A person seeking financial plan will require various aspects and not just the basic knowledge. The basic knowledge is important since most financial plans including the retirement plans require a deeper understanding of the financial planning literacy and knowledge. Further studies demonstrate that, there is a positive relation between the household financial decisions and financial knowledge. For instance, a person who cannot interest rates in any payment correctly will tend to end up with more borrowings and a minimum wealth accumulation. Additionally, people with poor financial knowledge will not invest in the stock market or any other investments. This will mean that only the few consumers who are financially literate or those individuals with proper knowledge in financial matters will invest in stock markets and other investments plans packages. For individuals who undermine compound interests accumulation strengths have difficulties with debt matters because they will likely disagree with the calculation matters and interest rates. In such financial matters, results will tend to indicate how the young or the aged individuals are poor in calculation matters and financial knowledge. Most of these individuals will commit financial errors and mistakes unlike the middle-aged individuals. These two subgroups will also tend to record low levels of financial behavior and informed ability especially in the financial matters. Financial behaviors and financial knowledge demonstrates the linkage in various ways. In most cases, investors tend to ignore such subgroups especially when it comes to mortgage payments during a decline in interest rate. Generally, individuals with poor financial literacy and knowledge will tend to experience poor finances. Some of the investors also have poor knowledge on the terms and conditions of their mortgages and investment plans.
This study on financial illiteracies will be guided by various research questions.
Some of the research questions include; what are the outcomes of the current financial literacy levels among the South African consumers?
What are the main financial services that the South African consumers use today?
How do the existing levels of intelligence and financial education impact on the average South African consumers and their ability to acquire credit, secure mortgages, negotiate loans, and navigate through the financial service industries?
This study will make use of different methodologies and data collection methods. For most of the study, the proposal will use the qualitative analysis. The study will also use a critical review of the scholarly literature and peer-reviewed literature concerning the general financial literacy and its repercussions for the consumers in South Africa in particular. The research method in this study is congruent with financial literacy guidance. The study will highlight a clear understanding on the appropriate concepts and theories, outcomes of past research in the area, types of research designs and methodologies, which will, employed are in similar researches. One of the most significant outcomes
This study will use various approaches to data analysis and processes. The qualitative research process will then follow then classic inverted pyramid design, thus, beginning with an overview of primary issues interests followed by research, which are increasingly fine-tuned to develop conversant opinions and recognize different these which might undiscerned.
The increasing roles and complexities in financial markets in South Africa at all development stages have been beneficial in reinforcing the needs to improve consumer’s capacity to efficiently manage and access different interactions with such services especially among the middle and low income countries which have financial inclusions that have poor and educational accomplishments which are low. To facilitate consumers in South Africa to understand and make a better financial decision about bank accounts, savings, credits, retirements and insurance and a collection of various complex products, program development which aim at improving knowledge, attitude and skill in this aspect are required.
Rationale of Study
The basis of this study is to examine how financial literacy interface models contribute towards financial information comprehensibility to decision makers in the South Africa nation. The way South African institutions and consumers use financial literacy perception, suggest that various people attach different meanings to the financial literacy aspect. To establish a hypothetical model for any given financial literacy, this study bases on what financial literacy entails. Financial Information complexity and an increase in volume usually exceed the abilities of the users to comprehend and interpret it during decision-making purposes. A financial literacy interface gives the decision makers in institutions and organizations the window opportunity to infiltrate their concerns and fears while using the financial language and figures. Financial information users differ vastly depending on their financial capability levels and sophistication. They also differ in terms of financial information preparedness, which should take the fact’s cognizance. The basis of this study thus financial literacy is complex while the term covers various terms apart from financial and literacy. It further attempts to develop financial literacy interfaces as the coordinating interface between decision makers in South Africa and financial information. The main reasoning behind this study is to establish South African consumer’s financial education levels. Based on the study’s analysis, the rationale of the study is to recognize various opportunities, which will be beneficial in improving visible flaws in South Africa consumer financial cultures and education. The study also aims to build South African consumer financial education strengths in ways which will allow them to actively participate in the economic development of the country.
Scope of Study
This study aims at assisting South Africans in achieving financial literacy goals by highlighting various opportunities, which exists; to assist the consumers acquire knowledge and skills, which relate to financial literacy. Various institutions and the South African Government will work to entrench financial literacy various opportunities and expectations in financial aspects. This study will have been updated to reflect on the changes, which relate to financial literacy in South Africa.
Overview of the study
Financial literacy is an ability to recognize and comprehend how money works globally. It is also the ability of how someone can manage to earn or make money, how an individual manages money, or how an individual can invest the money to get more money. Generally, financial literacy is the skills and knowledge, which allows individuals to be conversant and effective while making decisions that affect his financial resources. Financial literacy gives individuals the opportunity to understand financial decisions and management of money.
In South Africa, there are various programs, which sensitize individuals on money matters, an example being raising interests in personal finances. There are various institutions in South Africa and other parts of Africa, which assists consumers in achieving financial literacy. The institutions also focus on helping the consumers improve their financial opportunities through various ways such microcredit initiatives, which provide them with small loans for their enterprises. Some of these problems have been effective in trying to bring marginalized South African consumers into the conventional economy. There are also some indications concerning the ongoing commitments and dedications from International countries to help in the improvement of financial literacy in the country. Most recently, the current Nobel Peace Prize winner has committed himself in providing microfinance with few loss ratios, which would rival any ordinary bank. He also helps in ensuring a free enterprise system and entrepreneurships work for the poor.
South Africa’s general financial literacy score stands at 54 percent. This means that the score is not distressingly low; however, the score conceals gross inequalities in the country’s financial literacy. The result shows that most South Africans living in poor conditions or lower living standards have lower financial literacy levels compared to people who have an average living standard. Generally, increase in financial literacy levels depicts an increase in schooling levels. This means that the rich and the well-informed South Africans have to score higher than the poor and less educated individuals do. Financial literature goes hand in hand with financial planning. In this study, financial plan are the goals and steps, which individuals and businesses use. They are also the cumulative and progressive attainments, which intend to achieve financial goals. Examples of these include retirement preparedness and debt elimination. In most cases, it involves a budget that will benefit an individual financially. Sometimes it includes a person’s specific goals and savings for the future. Financial plan allocates future income in to different types of expenses including utilities and rent. It also preserves a little income for long-term and short-term savings. Financial plans are also investment plans. On the same aspect, financial knowledge help in assessing people’s proficiency and familiarity levels with fundamental financial concepts.
Objective
The main objective of this study is to assess financial literacy levels and understanding of financial schemes in South Africa. The study also aims at recognizing and comprehending how money works around the world. Through the study, individuals will have the ability to manage and make money; individuals will also have the skills to invest the money to get more money. Generally, financial literacy gives individuals the skills and knowledge, which allows individuals to be conversant and effective while making decisions that affect his financial resources. Financial literacy gives individuals the opportunity to understand financial decisions and management of money.
This study also aims to determine the current financial education levels among the consumers in South African. Depending on this study, the study aims at identifying various opportunities, which are beneficial in improving visible weaknesses among the South African consumers and their financial education. Through the study, the South Africans will be able to develop their existing strengths and potentials in ways, which will enable them to participate in the development of the country’s economy. The study will investigate how financial literacy interface models affect financial informationlucidity to decision makers in the South African nation. How various institutions and the South African consumers use financial literacy theories to suggest that various people attach different meanings to the financial literacy aspect. To establish a theoretical model for any given financial literacy, this study aims at accomplishing what financial literacy demands.
The specific aims of this study are;
Analyzing the current financial literacy and financial knowledge among the South African consumers;
Analyzing the South African’s financial literacy levels and how they heavily contribute to constrains in financial resources;
Identifying the constraints, which affect South Africa and its consumers because of financial illiteracy
Providing estimates among the South African consumers and further market developments in the country.
Defining strategic options for the South African consumers and their development through financial literacy
CHAPTER 2: REVIEW OF RELATED LITERATURE
In young people, financial literacy concerns the relationships they have with other people, institutions, and the way that they perceive the world. In adults, and institutions like banks, financial literacy may focus on educating the masses on managing their finances since the role of profit and consumerism hampers the capacity of an individual to manage and save money. The issue on financial literacy extensive as it touches on various elements in terms of finances and human issues such as credit and consumerism. The household proportion debt in South Africa, to the disposable earnings is 60%. The society South Africa is a buy now, pay later culture. Individuals through institutions such as micro finances or retail outlets easily reach credit card accessibility in South Africa. Majority of the population, experience problems in accessing credit cards from reliable places like banks. According to a study by Di Turpin, SASI, majority of the household in South Africa use debt as a saving alternative. People have a tendency of borrowing money first, then using their savings and lastly sell their assets (Barr et al, 2007, p. 200).
Noelani King-Conradie, ABSA bank economics defines savings as the amount of resources that an economy produces within a specified year, which the country puts to use in a manner that will provide profit to the economy in the years that follow. A country requires 25% domestic savings in order to boost its economic growth but South Africa has only 16%. This suggests the country puts more emphasis on investment inflows rather than domestic savings. This is evident that the government considers direct foreign investment as a solution to the development of the economy and creation of jobs. The saving instruments in this country are not favorable for the poor people who need to access income particularly emergency needs. The savings that poor households make are out of their livelihood strategies, which call for regular withdrawals to smooth income flows from savings. Since 1995, the government of South Africa makes efforts to develop land accessibility for the purpose of production. The foundation of this program was that giving black people financial assistance would enable them to purchase land based on willing-buyer willing-seller. This will enable the forces in the market play their part thus minimize the government’s role. (Beck, 2011, p. 50).
Camac & Gordon argue that, the government has the responsibility of making land acquisition grants available to the people thus encouraging them to form associations and club together. It is also essential for the government to coordinate with other stakeholders such as NGOs who take up a lobbying position in the processes of land reform. The issue of redistribution; therefore, sets right the off-centre land distribution ownership between smallholder and large farmers. This is essential as it ensures that the smallholder farmers can access land for productive and residential purposes in order to improve their livelihoods. However, for this reform program to be effective, the government should ensure that the farmers have an access to farmer support services. This is since most smallholder farmers are in the rural areas in former homelands, where both the institutional and physical infrastructure pose a challenge to their expansion (Lucey & Laney, 2012, p. 300).
The farmer’s inaccessibility to proper roads limits their ability to transport produce, inputs and access information. Poor infrastructure results to lack of markets for their agricultural inputs and outputs thus becoming unreliable for these farmers. Due to this, the smallholder farmers cannot acquire the agricultural resources and supply their market services; therefore, this hinders them from participating in potentially profitable markets. High cost of transaction is among the key factors constraining the growth of agriculture in African countries as this cost relates to poor infrastructure. The cost of transaction can come from various sources such as monitoring, cost of information, negotiation, and enforcement of contracts. According to Vink & Kirsten, unreliable distribution and poor road network will compel farmers to produce their own food, and commodities that are less perishable thus resulting to low resource productivity. When the cost of production increases it will also have an effect on the inputs that farmers use and the market strategies that they follow. The provision of a good infrastructure therefore will result to a higher agricultural profitability and productivity levels. The government of South Africa has collaborated with other non-governmental organizations to come up with initiatives that will improve the quantity and quality of infrastructure in these areas. Some of these programs include Poverty Relief and Infrastructure Program, Community Based Works Program, and Consolidated Municipal Investment Program among others (Vink & Kirsten, 2003, p. 257).
The government of South Africa has made huge investments in areas of smallholder irrigation. For example, the Provincial Agricultural Department has come up with a rehabilitation process for irrigation schemes in Limpopo province, and it intends to hand over the responsibility of managing the scheme to the smallholder farmers once the process becomes complete. Many of these farmers receive low price for their produce as they sell them at the local market or in their homesteads. These farmers could however, receive high prices for these products through selling them in urban markets. The difficulty that such farmers face is in finding a reliable market for their perishable goods. This is one of the sources of transaction cost, resulting from the farmers’ low bargaining power. These farmers have little selling skills, marketing knowledge and little recognition for product diversification opportunities or the connection between product development and the issue of market research. This in turn affects their market’s level of competitiveness.
The lack of knowledge for these farmers also challenges and limits them in areas of adopting new technologies. Market reforms are essential in lifting egregious barriers for smallholder farmer’s market participation but they always fail when it comes to addressing the crucial hidden reasons for market non-participation. These reasons may base on fear of unenforceable agreements, lack of information and lack of skills essential in dealing with foreign buyers. Kristen et al argues that improving the farmer’s access to credit is one of fundamental elements in raising agricultural efficiency. The government’s realisation that there has been insufficient progress with regard to improving the chances for the smallholder farmer to access credit, has encouraged the government to come up with Agricultural Credit Schemes. This schemes aim at addressing the credit requirements of the smallholder farmers (Vink & Kirsten, 2003, p. 257).
Shortage of skills not only implies the critical and scarce skills but also some form of sophisticated abilities in an environment with ‘high skills’. According to Andre Kraak, it is not sufficient to emphasize on ‘high skills’ in an economy that is developing such as that of South Africa. The author argues that individuals should view the emphases on low skilled strategies in a positive light especially with respect to addressing the issues of unemployment and motivating labor–intensive way of manufacture. Consequently, one should view the notion of ‘skills shortages’ as that, which comprises of everything from the most sophisticated qualifications to the most basic. The economy of South Africa had undergone extensive changes to the trade policy and industrial structure by 1994. Bhorat argues that, the primary sector got rid of about 1.5 million jobs over the period of 1970-1995. The manufacturing sector created around 4000,000 jobs whereas the tertiary sectors become so extensive such that it created a positive net employment from 1970-1995. The impact of trade liberalization in South Africa is uncertain where essential distinctions lie within the causality attributable to the liberalization of trade as opposed to the change in technology. When one considers South Africa’s labor demand in terms of nature, the implication of skills biased technology have been more crucial within-sector change employment than between-sector industrial organization changes. These two changes have a great impact on the labor demand skills intensity. When it comes to between-sector changes for example, a simultaneous decrease in the primary sector of employment due to the tertiary sector employment increase can result to structural unemployment. In this example, the worker that had the skills to perform their tasks competently in the primary sector such as mining and agricultural industries will face a sector with declining terms of trade (Kraak, 2005, p. 10).
These means that these workers will have to look for work in the tertiary sector, but they lack the basic skills essential in the tertiary sector. The tertiary sector requires basic retail skills in addition to numeracy and literacy. These workers will; therefore remain with no human capital essential to make a transition to the new profession. The workers may face the problem of unemployment for a long duration and this form of change has the prospective of creating scarce skills shortage. This is where both the relative and absolute shortages of workers in the tertiary sector may occur. On the other hand, within- sector changes arise from skills based technical changes. Firms introduce new production methods or technologies in an attempt to increase productivity. At the firm level of an individual, this leads to the need for trained workers but in an economy-wide level, it may lead to critical skills shortage. South Africa as a democratic nation found itself dealing with more problems than just the ‘Bantu’ education’s legacy along with both the resultant relative and absolute shortages of skills associated with this form of education. It also had to handle the issue reintegration into the global economy since this required skills based changes on the production methods and world of work. As a result, the few workers that had the sufficient skills or labor supply could not meet the labor demand (Bhorat, 2000, p. 300).
Bhorat and Lundall carried out an assessment regarding data on World Bank’s large production data, recorded the following relationship between capitals, training, firm output and employment. An increase in employment by one percent results to output increase of 0.45 percent; one percent raise in training expenditure results to an increase of 0.16 percent output; an increase in capital by one percent leads to 0.33 percent output increase. From this analysis, the training expenditure has a positive effect on output but it has a less impact in improving productivity through capital stock upgrading. It is likely cheaper for an individual to train than to carry out an upgrade on the capital stock or raise the number of employments. This makes this form of enhancing productivity extremely cost effective. This was evident in the National survey where 51 percent of the firms acknowledged that the most fundamental activity they have participated in, as a way of increasing labor productivity was providing training. It is unfortunate that firms in South Africa under invest in training even though it is an effective means of increasing labor productivity (Bhorat & Lundall, 2002, p. 200).
Cosser & du Toit highlight the objective of FETs in the educational sector of South Africa. FET seeks to address the extensive socio-economic issues of income inequality, unemployment, and poverty through creating opportunities for the youth and adults to continue with education. In South Africa, the FET sector has played a major role in the decline of intermediate skills shortages. FET should ensure that there can clearly distinguish between low skills, intermediate and high-level skills while similarly integrating the aspects of practise and theory in that profession. This will assist in strengthening the intermediate level of knowledge and skills. FET colleges have a big role to play in dealing with the economic and social challenges in South Africa. Social partners in South Africa have historically engaged in consultations on financial and economic policy choices especially in the National Economic Development and Labor council. South Africa financial system is a two-tier system. On one hand, it is home to highly competitive and developed financial sectors forming one of the ten major financial markets globally (Cosser & du Toit, 2002, p. 472).
It has high quality fiscal products modified for the privileged large companies and the elite. On the other hand, approximately half of the adult population lacks accessibility to fundamental financial services. There was a rapid transformation and major changes on the financial landscape of the country after apartheid in 1994. The country opened itself to new ideas and technology after years of isolation. During this integration process into the international economy, the banking sector was at the forefront of revolution, where leading aspect was capital mobility liberalization. This aspect modified the economy in two ways in that; it attracted the foreign capital in to the economy of the nation and led to the emergence of new banks in the market. Capital mobility resulted to the high efficiency of the system but brought with it a great level of vulnerability. Ludwig states that, South Africa has never experienced any post liberalization financial crisis and the country still experiences growth and efficiency up to date. Despite the accomplishments that South Africa has achieved in the financial and economic environment, half of the population in the country lives below the poverty level with over 25 percent unemployment level. This means that the first financial liberation phase did not accomplish the expected results regarding the poor and small businesses. In 1994, 60 percent of South Africa adult population did not have access to bank accounts (Cosser & du Toit, 2002, p. 253).
The new government not only had the challenge of modernizing its financial system but also had to wide it through introducing appropriate technology and infrastructure in order to open the financial access services. The government adopted a measure in 1992, which would assist in the reduction of the extent of the 1968 Usury act through elimination of the maximum interest rate for small loans. The results were immediate as micro-lending started growing rapidly in order to meet the excessive demand and hence integrate the country’s population of those individuals who are at the financial system’s margin. The creation of micro-lending institutions resulted to an increase in the number moneylenders who would charge an extremely high interest rate and use very abusive methods to recover their money. As a measure to overcome this, the government through the trade and industry ministry, published an Exception Notice in 1999, which entailed reintroduction of interest cap rate based on the declining loan. During this period, the Micro Finance Regulatory Council emerged and its role was to regulate the system while providing microcredit consumers with enhanced protection. According to Ludwig, by October 2000, discrimination, poverty and inequality issues were still high in South Africa, especially for the black population. The banks were reluctant to offer credit to poor communities (FinMark Trust,2006, p. 10).
The NEDLAC organized a summit, which involved small businesses, workers, trade unions, and other sectors, with an aim of bringing reforms to the financial sector. These groups launched an operation, which aimed at bringing the banks to the negotiating table at the summit. The result of the discussion was the creation of the financial sector charter in 2003, which signifies all financial actors’ commitment to work cooperatively with the civil society, government, and works. The banks united in 2004 in order to meet the objectives specified in the charter. They united and created a common bank account known as Mzansi accounts for the poor. The measure has been successful as it reaches the targeted population with a growth of 250 percent Mzansi account users in two years (Ivatury & Pickens, 2006, p. 106).
The financial system development including access to financial services plays an essential role in developing a country. Access to the financial services at the household level assists a family to save, insure property, invest, or borrow money. At the level of small businesses, accessibility to financial services enhances productivity and promotes entrepreneurship; therefore, contributes to the creation of jobs. These outcomes play a fundamental role in creation of favorable economic environment and economic growth improvements. Ivatury and Pickens point out some of the factors that limit an individual’s access to these formal services. They include high management and transaction cost both at the client and bank level, and the distance of the bank’s branches from the clients’ home especially in rural areas. The other feature is the legal framework and formality level. The high rate of illiteracy among the poor in developing countries, the supporting documents, and paper work compulsory for financial transactions cause a significant challenge (Ivatury & Pickens, 2006, p. 222).
A survey carried out by FinScope highlight that, the financial services accessibility level falls under three concepts; the formally included, informally served and financially excluded. The formally included individuals are those that use financial institutions, banks or any product accessible only through a legal framework. They form 51% of the adult population that access financial services. The informally served forms 16% of the adult population, and they include those individuals who cannot access formal services thus opt for the financial tools that the legal frame does not control. Lastly, the financially excluded are people who never uses any form of financial service and they form 33% of the population (FinMark Trust,2006, p. 50).
Trade unions in South Africa engage in the financial inclusion issue particularly those issues affecting low-income population. This since the issue symbolizes part of the element that fights against poverty, enhances social security, and advances the working conditions. The key determinant for the overall economy performance is the interest rate. It regulates the supply of money as well as has a bearing in savings, investment, collective demand for goods and services, exchange rate, and money demand. Since the South African financial sector service highly feels the impact of the connection and information era, there has been a growing acknowledgment across providers in this sector in terms of the concept of technology. These forms of technology include ATMs, mobile phones, the internet, computer hardware, and software among others. Technological innovations contribute to the channels of distribution in the financial service sector. One of the most outstanding channels is E Banking, which merges several technologies such as cell phone banking, sell technologies and internet banking (Cosser & du Toit, 2002, p. 352).
Consumers have mixed reactions regarding the technological advances that are ever changing. A study conducted in South Africa showed that the adult population does not like the rapid shifting technological advances. They argue that technological advances have become a burden, as they need an individual who has knowledge in technology to assist them most of the time. The younger population reacted differently with more than 43% of them regarding technology as a fundamental element for them to function effectively. Some of the arguments raised involve the use of technology for business purposes. Introduction of new technology came with many benefits but the study shows that 63% of the adult population in South Africa argues that banks compel them to use technology (Bhorat, 2000, p. 100).
The findings of Porteous and Hazelhurst present a closer analysis on technological issues. The problem does not lie with the issue of technology but lies on the application of technology. Two thirds of people in South Africa both the rich and poor prefer to use the services of the ATM. A third of the elderly population claims that they avoid the banking machine as much as they can. On the other hand, 83% of the rich and 75% if the poor claim that they are ready to learn new technology. The increase in the level of cell [hone acceptance across the population indicates the capability of learning new technology. Due to this, businesses must ascertain that consumers receive new technologies positively and that they carry out a thorough investigation of the market before investing in sophisticated technology that may discourage the consumer (Porteous & Hazelhurst, 2004, p. 72).
According to Jayamaha, the use of technological innovation sin South Africa has undoubtedly resulted to huge benefits to banks especially in the area of increase in productivity, reduction of cost through labor savings and increase in profitability. Employing new technology has resulted to increase in output and decline in cost in both human resource and capital investment technology as these have an affirmative association to technology. Institutions should give consumers an opportunity to enjoy the full benefits drawn from use of latest technical advancements. This will in turn increase the competitiveness of the bank through improvement of the customer service and differentiation, reduction in the cost of transaction, maintenance of a constant customer base, enhanced risk avoidance and market share (Jayamaha, 2008, p. 4).
Despite the benefits that come with technological innovation in banking, various challenges may arise among them economic and social problems. These problems may have huge consequences to the nation and the society. In communication and information technology, technical innovation has led to globalization of business operations. This may cause competitive pressures in many parts of the South African economy resulting to an effect in formerly protected sectors such as communication, transport, and agriculture. This result is due to an increase in the transition pressure, and may in turn lead to economical problems. Advancement in technology denotes that consumers have to learn the way to apply such technologies. This means that individuals with high learning capacity will benefit more since technology changes rapidly and one has tom learn new things each day. Individuals who are slow may feel frustrated and may even result to psychological issues. This affects profitability, service quality and efficiency Reixach, 2001, p. 68).
Financial literacy also affects the young people in various ways. These problems include job market and unemployment, financial dependencies, health and social implications. A recent article by Zed Tshabalala shows that most young people believe that they will never resort to crime, as they will always find jobs. However, the reality is that it not easy for a young person to get a formal job. This is evident from current statistics in South Africa, which shows that the country’s unemployment rate is 42% and institutions release approximately 500 000 matriculates to the job market each year. The connection between crime and unemployment may have some controversies. For example, the crime rate in Khayelitsha, a Cape Town suburb has the highest crime statistics in the country. The rate of unemployment is 75%, but the majority of the people who are unemployed, do not engage in crime (Reixach, 2001, p. 95).
Dominguez and Rubin show that, financial literacy results to financial dependencies. The first dependency is on parents where in South Africa it happens many times. This happens not just from the youth but also from adults and teenagers as the level of unemployment, in some areas such as Limpopo province, has grown to 56%. Individuals also create dependency on the economy in order to get jobs. Teenagers believe that they should get jobs rather than create them and this does not create any opportunity for entrepreneurship among the youth. However, Umsombomvu Fund organized a competition and according to its report, 20 000 young people applied. This shows that there is no lack of advancement but there is shortage in financial expertise, people lay blames on the government for its failure to create jobs. People fail to take responsibility of their own savings and this has affected them as they also give very little responsibility to creation of jobs (Dominguez & Robin, 2000, p. 14).
People also depend on old age pension. They should be conscious of the fact that saving plan should be a lifetime plan, and saving should start from a young age. They should also learn that savings vary and they entail more than just taking pensions, as it has to include investments from other areas. All the above dependency issues result to an individual’s ‘enslavement’ where a person becomes trapped. Unless this people have a kevel of financial literacy and can plan on their earnings, it is difficult to avoid ‘enslavement’.
A study on the programme on financial literacy in South Africa and found out that, despite the efforts that the government, non-profit organisations, the financial industry, private companies and the housing sector make to curb the financial literacy level, South Africans remain underserved by these programmes (Piprek et al, 2004, 32).
The study also indicated that many people among them the fully banked individual experience a high level of confusion regarding financial concepts. This level of confusion is an indication financial capacity building still has problems and that there is need for more programmes on financial literacy within the educational system. An investigation carried out by Kotzè & Smit examines the perceptions that the Business management students who have a minimum of three years in management and working experience. They carried out a study on the level of financial literacy of these students along with their desire and need for financial education. It was evident from the study that there is a high need for both increased financial literacy and financial education in South Africa (Kotze & Smit, 2008, p. 55).
Oseifuah carried out an examination on the relationship between youth entrepreneurship and financial literacy in South Africa’s Vhembe District. He measured the level of financial literacy based on the responses on computer literacy, financial behaviour, mathematical literacy, financial attitude and knowledge. Results from his study revealed that the financial level literacy among the Vhembe District youth entrepreneurs is above average. However, one cannot make generalisations on the results owing to the small sample size (Jayamaha, 2008, p. 367).
Practice, Research, and guidelines in financial literacy
Currently, financial literacy is a concept that remains a determining factor for the success of numerous financial institutions, government organizations, consumers, societal interest groups, and other related organizations. Interested agencies and policy makers raise their concerns that consumers lacks the necessary knowledge about the financial concepts, and they also lack significant resources that assists them in generating decisions that improves their economic affairs. Such deficiency in financial literacy is very dangerous since it can affect a person’s life or even devastate the family’s daily financial management and capacity to save money for purposes of long term goals, for instance, purchasing a home, seeking to advance education and even financial retirement benefits.
Ineffective financial management can stem out some behaviors that make consumers prone to rigorous financial predicaments. From a wider perspective, their lacks effective conciliation when market operations and competitive forces when consumes lacks then necessary skills to manage their financial matters efficiently. For this reason, the knowledgeable participants plays a larger role to ensure maintenance of a more competitive and effective market. When informed consumers demand products that satisfy their short and long-term objectives, on the other hand, the providers at the verge of ensuring that they meet the consumers needs by producing products that meet with those specifications (Guidolin & La Jeunesse, 2007; Helman, VanDerhei, & Copeland, 2007; and McVicker, 2007).
As the interest in financial matters increases, so is the issue of financial literacy, training systems, and the program providers. They attempt to solve the financial literacy issue by providing detailed information related to savings, credit and related matters for a wider audience, and others integrated to specific organizations, for instance, youth, or even military personnel, or targeted on a particular goal, for instance, Home ownership or savings.
There have been numerous studies on the efficacy of financial literacy training; however, the findings are mixed, and not every research is capable recommending the best way of dealing with the issues. Nonetheless, some programs have been very aggressive, particularly those embracing distinct objectives, and have succeeded in enhancing some aspects that affect the consumer’s individual financial management issues. Some of the aspects that these programs deal with are how to maintain a mortgage, increase of savings, and taking part in employer supported benefit programs. The mode of training used, together with individual traits – repugnance to change, plays a larger role in whether the programs will have an impact on the positive change that throws in some weight on household long-term financial success.
Putting into consideration for all the factors associated with financial literacy training, for example, when, how, and, the delivery point, the persons that require training, and the presentation of information causes great a challenge to the success of the program developers. Considering the resources necessary for the success of financial literacy training, millions of typical South African consumers will smile again and enjoy a fare share of their country’s resource without any limitations. The literature review herein attempts to evaluate the research, select the best practices, and take into consideration public policy alternatives that would amplify the objective of developing more financially perceptive consumers.
Changes that increase attention to financial literacy
There are numerous issues that have contributed towards an intricate, specialized financial services marketplace that necessitates consumers to play a larger role if they are to succeed in managing their finances efficiently. The technology forces as well as an innovative market, steered by high level of competition have led to sophisticated industry, in which consumers are to choose from numerous services provided by different providers. Other than, increased competitive forces and high level of innovative markets, there are other factors that increase the necessity surrounding financial literacy. These factors include increased consumer debts, low saving rates, and other consumer issues that are compelling but perceived insignificant.
In addition, there are other significant demographic and market patterns that increase the financial literacy concerns, for example, population diversity. An increase in population diversity results in the creation of households that suffer from language and cultural barriers among other others in creating a banking relation. This further result to restrictive access to obtain credit for a younger generation and employees has the responsibility of saving their investments with the employers sponsored retirement and pension plans. Guidolin & La Jeunesse, 2007; Helman, VanDerhei, & Copeland, 2007; and McVicker, 2007, agree that financial literacy devastated consumers welfare and compromised the financial institutions, however, most consumers are unable of making their decisions about their own financial matters They also claim that, financial knowledge has a direct correlation with self-beneficial behavior (Federal Reserve Bank of San Francisco, 2005).
However, numerous questions exist about the efficiency of financial literacy in enhancing financial literacy (Helman, VanDerhei, & Copeland, 2007). This absurdity exists occurs between the significance of education in enhancing financial literacy and the effect of education, or even the short-and long-term financial pattern. It is uncertain how education, which has a direct relationship with financial literacy enhance financial behavior without first improving the financial literacy. The influential work on the effect of financial education by McVicker (2007) affirmed that young people that took financial Management courses in high schools purposed save a high amount of income that their colleagues who concentrated in other courses. This was a research conducted and based on historical education records of whether it was necessary to take a personal financial management course at that state and level.
From the findings collected from various respondents, most, if not all, could not recall having taken such a course whilst in school. However, considering the effect of financial literary education of the respondents as young people on financial literacy, the impact of education on consequent behavior is ambiguous. In a related issue to the financial literacy in South Africa, United States has been dealing with deregulation of US financial service industry since 1970, and this has proliferated both opportunities and challenges for the American Consumers. The deregulations are positive in the sense that, those that own assets are capable of obtaining high interest rates and pay lower charges for services. Individuals have now improved in their decision-making for nearly every financial product.
However, the deregulations have also had a negative effect on the consumers in the sense that, they suffer increased costs on some significant products. In addition, financial institutions have scrapped off interest rate ceilings on debts, but increased charges on low-balance accounts. Over the recent years, the banking services institutions have become so intricate. The enactment of Financial Services Modernization Act in 1999 deregulated the banking industry. Consumers encountered lending options that were non-conventional, for instance, extended term and interest only loans. The new investment options with a high level of incomprehensible derived products and opt-out retirement programs have increased the significance of financial decision and intensified the understanding capability.
However, when deregulation and affiliated creation of financial products present huge opportunities for all the consumers, they also pose a great danger for consumers with low financial literacy. The latest growth of sub-prime loan markets restricted the number of consumers to include only the worthy consumers allowed to obtain a credit card. However, the rates fixed on the debt products have stimulated several consumers to engage into debts could not pay for. The current collapse of the subprime mortgage markets is accredited, in part, to deficiency of financial sophistication on borrowers who are unaware of the effect of blowing up monthly payments when rates consequently attuned to the market, (McVicker, 2007).
The Federal Reserve Board of San Francisco (2005) confirmed that most of the U.S households are less savings-based, but more consumption based. This trend never existed in the past. As Guidolin & La Jeunesse, (2007) reports Americans have a negative savings pattern, and Older Americans have inadequate savings for retirement. In addition, and based on the current research investigations by the Employee Benefits Research Institute (Helman, VanDerhei, & Copeland, 2007), employees that never saved for retirement had inadequate savings, reporting a 70%, and owning less than $10,000 in overall assets (Federal Reserve Board of San Francisco, 2005).
The concept of financial literacy is the ability to make an informed judgment and make effective decisions regarding the utilization of and management of cash. It also involves understanding and gaining of the power of compounding, the difference between stocks and bonds, and the involvement of a saving plan and superannuation fund involved. Studies show that financial literacy is irrelevant to many people since they do not have any money to save or invest, so they do not regard financial literacy as a priority in their day-to-day life. Financial literacy aims at molding confident managers of his or her affairs and critical thinkers about the impact of financial knowledge in a person’s life (lamdin, 2012, pg. 38). Lack of financial literacy in South Africa affects the lives of the people in all negative ways since people do not regard or consider financial knowledge as an important factor. Assessment of levels of financial literacy Based on US and European research, the professional view reveals that financial literacy is extremely low across their population, with a quite a number of both adults and young adults lacking the understanding and basic knowledge of crucial financial concepts. The research studies shows that a consumer`s knowledge of financial matters is directly proportional to his or her level of education, level of income, class, and ethnicity. People’s background, their level financial resources, and the challenges and opportunities in life also determine their financial knowledge (lamdin, 2012, pg. 49).
Employees, older people women, young people, and persons with a disability all require help when it comes to financial literacy according to research by the US treasury. The research also indicates that women are the excluded group when it comes to financial literacy education. Knowledge, attitude, and behaviors of South African consumers Information about the knowledge, attitude, and behaviors of the South African consumers in relation to financial literacy are fragmentary. Data obtained from studies on consumer knowledge of investing, saving, loans and superannuation show that their knowledge regarding to financial matters is fragmentary. In addition, consumer attitudes to banking, share market investment, investment strategies, and women’s superannuation. There is also data on consumer behavior in savings, budgeting and personal insurance, community banking, and e banking. Professional view on the South African financial consumer knowledge indicates that there is limited and scanty information on people’s awareness when it comes to financial literacy.
The research also indicates that people are quite knowledgeable when it comes to financial matters that affect their daily lives and their existing financial situations or possibilities. South Africans are aware of cash, fixed interest, property, the performance of banks, and the importance of investing in their own home, credit card loans, personal loans and their mortgage (Xiao, 2008, pg. 20). On the contrary, these people have less knowledge on investments, and superannuation. These areas according to the studies are complex, difficult to understand, and often lead to serious disagreements concerning the most effective investment strategies for people to follow. Who has the most valuable knowledge for consumers? There is a debate on who knows the best concerning the needs of the consumers. Groups involved in the debate involve financial professionals involved in the finance sector, regulatory and government agencies, ordinary people, and consumers and organizations, which represents their views (Rubin, 2007, pg. 199).
These organizations include non-government organizations, associations, and the society based organizations. One way of conceptualizing this is to consider what is required for a person to be an “educated” consumer and a provider to be a “socially responsible” provider. On the contrary, it maybe a consumer who has acquired all the knowledge and skills transferred from “experts” in the field, which in this context would be drawn from among financial services providers, financial planners, and advisers. Another view would recognize lay knowledge -the knowledge a person has acquired from their own life experiences – and accept that a person can effectively negotiate and develop their own understanding, knowledge, and skills from what is conveyable to them by experts. Social scientist and technology experts argue that social studies in science and technology can contribute to further understanding on the ways expert and lay knowledge ought to be negotiated to speed up the both educated and socially responsible financial services providers. This literature collection is useful since it aids in the clear understanding of the following areas, importance of recognizing fundamental knowledge and learning. The other area is cultures of the institution and experts, and perceptions of these by the lay public shape their trust of and dependence on expert knowledge (Serah, 2008, pg. 400).
Attributes of consumers and financial providers
The US research findings points out the following considerations for conceptualization of the educated consumer of financial services and their counterparts, the socially responsible financial providers. These two groups have linkage, and awareness on the consumer part and the social responsibility of the provider goes hand in hand. These include understanding the modes of structural modifications and their effects on distribution of risks and political education about the dynamics of the risks production in the financial market. The educated financial services consumer posses the following attribute while the illiterate posses the direct opposite of these attributes.
An awareness that financial decisions are about risk taking,
An awareness of their “normal” risk behavior and what are tolerable risks for them,
Confidence to seek advice from trusted financial advisers and to question the value of their advice in relation to their own knowledge,
Appreciation of the range of choices those are available to them and the level of control they have over them.
Ability and strategies to advocate their rights to be involved in making decisions about issues affecting their own lives or their community
Awareness of groups and organizations that can advocate on their behalf and mediate conflicts between them and the financial institutions and/or the government bodies concerned with financial matters.
The socially responsible financial providers according to the US research would have the following attributes and the social irresponsible have the direct opposite of these attributes:
Appreciation of the value of taking community or client concerns and their normal practices into account when proposing solutions,
Skills in eliciting community or client requirements before formulating advice or solutions to their financial problems,
Effectively consulting the range of stakeholders involved in their provision of financial services and involving them in ongoing consultations,
Monitoring and reporting on the effectiveness of proposals that are implemented, and
Transparency and openness in decision-making in all financial transactions they make.
Evidence of financial literacy in South Africa
Despite the overwhelming economic levels, South Africa has recorded the low levels of financial literacy. Research studies by the US based agency, the National Council of Economic Education (NCEE) on survey among high school students and adults indicated that adults in South Africa have deeper financial knowledge as compared to the high school students. The United States of America recorded similar results in a different research study. Lack of consumer financial literacy in South America is also evident from the study by Bernhein, who in his research confirmed that South Africans lack the basic consumer knowledge. The survey involved true/false questions administered to 1000 persons between the ages of 19 years to 97 years. These questions examined financial and economic knowledge. The survey consisted of the 20-item questionnaire on financial and economic questions such as money, interest rates, and inflation, and personal finance. It also involved personal consumer evaluation questions on his or her understanding of finance issues at a personal level. That the study found that respondents answer only two-thirds of the questions correctly hence confirming low literacy levels. Smaller samples among specific groups of the population recorded similar results.
Research findings by Jumpstart coalition for Personal Financial Literacy and consumer Sensitization show that most American and South African youths have low consumer financial knowledge. These students performance on credit and is poor. Both the students and adults do not have a good understanding of the terms and conditions of consumer loans and mortgages. This leads to poor and uninformed choices when it comes to financial decisions. Most employees interviewed showed that were not able to identify key factors of their company retirement programs, which included early/normal retirement ages and the level of their benefits would rise if they retired at later stage of employment. Lack of consumer knowledge leads to poor financial decisions among many people hence financial sensitizing is a vital factor in everyone’s life. This calls for free financial programs by the government and other concerned organizations since financial factors affect the economy of the country. Proper financial knowledge and decisions add up to stable economic standards and growth of not only the country but also to the individuals. The questions used to measure financial literacy include the following:
Given your savings accounts has $50 and the interest rate is 1% annually. After ten years, what is the total sum the person will have in the account? Will it be below or above $100?
Assume that the interests rate on the savings account is 2% annually and 1% inflation occurred per Annum. After two, years would be able to buy with more, less, or the same with the cash a person own currently?
What is your take on the following statement is it correct or false? `Buying a particular company stock normally gives a secure return as compared to a stock mutual fund.
Table 1: Financial literacy among early parents
Type of Question Correct % Incorrect % Unknown %
Calculation 80.5 15 4.5
Lottery division 60 34 7
Compound interest 17 79 4
The above table shows how old parents answered the administered questions. The tabled results are in percentage form. The answers are self-explanatory and are easy to interpret.
Poor financial literacy is not only common in South Africa financial literacy report by the Organization for Economic and Co-operative and Development discovered poor financial literacy in many countries. Most of the countries in the final research documents were developing countries from Africa and South America. Similar research findings by the Survey of Health, Aging, and Retirement in Europe (SHARE) indicated poor performance by the respondents in terms of financial literacy in specific areas. These areas include the following financial numeracy and literacy scales. The financial literacy levels among different social group/s.
Financial illiteracy is widespread and concentrated among certain demographic groups. Research shows that financial literacy declines with a decrease in the age of an individual. The more a person grows the less informed he, or she becomes financially. These findings result from the poor habit where consumers wait until late in their lifecycle to make financial decisions. Old women are the illiterate group when it comes to finance and financial decisions. The table below shows financial literacy between the male and the female gender. (Oecd, 2005, pg. 311).
The table summary shows that men are more financially literate as compared to women. Table 2
Financial Literacy among Early Parents in Terms of Gender
Question type Correct % Incorrect % Unknown %
Female male female male female male
Interest rate 61 75 25 18 11 7
Inflation 70 83 15 12 13 5
Risk diversification 47 60 12 15 39 25
Financial literacy among consumers also varies depending on the education level of the study groups. Consumers with higher education level are more enlightened when it comes to financial matters than those with low education level. Different ethnic groups also show different consumer knowledge when it comes to financial matters. Whites record greater level of financial literacy as compared to blacks and black-Americans. The whites are likely to give correct responses to the financial questions than the blacks. This leads to the assumption that the white consumers in South Africa are more financially enlightened as compared to the native South Africans. There is a positive correlation between financial literacy and gender, race, and education even among the younger generation. Economics and school exposure are also having a correlation to consumer financial literacy. Those who studied economics during their high school, college, or university are more likely to display a high level of consumer financial literacy in their later lives than those who never majored in the same. Those exposed to financial duties at work place also recorded a high number of consumer financial literacy than those in other departments. The research findings also reveal that people have a negative attitude towards financial trainings at work place since a few numbers of employees attend financial trainings at work (Porteous & Hazelhurst, 2004, PG. 435).
Financial Literacy and behavior
Research studies indicate that financial literacy has a positive relation to self-beneficial financial behavior. Research findings by Hogarth and Beverly in their 2003 financial report named behavioral patterns in terms of finance plans gave the results discussed below; they added financial and behavioral questions to the nationwide consumer financial survey and recorded certain results. These results depended on four variables, cash-flow management, credit-management, savings, and investment behavioral patterns. Comparisons from the results of this research study indicated that those with more financial knowledge had higher scores as compared to those with low consumer financial knowledge. In South Africa, the approximate number of those with a high level of consumer financial knowledge is low. The level of consumer knowledge in South Africa is relatively low with approximately below 30% of the total population having a considerable financial literacy level (Mitchell & lusardi, 2011, pg. 299).
Importance of consumer financial literacy
The demonstrated low levels of financial are troubling since the success of an individual depends on his or her financial consumer decisions. Despite low consumer financial knowledge, South Africa still has one of the best economies in Africa. This shows that financial developments of a nation depend on the national budget of the country rather the consumer financial knowledge and decisions. Financial literacy questions assist in research aid, in the research surveys, since it helps in assessing the influences of financial literacy in the decision-making process. Financial literacy is not a simple process to the low educated, race, or sex. The result from the previous studies as shown in this research work shows that women, minors, and those with low education level are less literate when it comes to financial matters. Further research studies shows that financial literacy plays a vital role in accounting and is a fundamental determinant in planning. Retirement plans plan is crucial when it comes to wealth accumulation with those who embrace the plan recording the quantity of wealth than those who do not embrace the same. Not all people agree with the idea of financial literacy some might argue that reverse casualty is an issue hence suggesting that financial planning enhances consumer financial knowledge (Birkenmaier et al, 2013, pg. 501).
This shows that financial literacy is indigenous hence; individuals who plan to invest in a retirement plan have to seek further financial knowledge. Financial plans requires more than the basic knowledge one may poses since financial plans such as retirement plans requires a deeper understanding of financial planning knowledge. Further studies show that the positive association between financial knowledge and household financial decisions making. For examples, individuals who cannot correctly calculate the rate of interests in a given payment channel ended up with more borrowings and less wealth accumulation than who had knowledge on how to make the calculations. Those with low financial knowledge are unlikely to invest in the stock market and investment plans. This means that only consumers with deeper knowledge in financial matters invest in the stock market and investment plan packages. Those who undermine the strength of compound interests accumulation have a problem with debt matters since they are unlikely to agree with the interest rates and the calculation matters. The research findings also indicated that the young and the aged are likely to commit financial errors and mistakes as compared to the middle-aged persons (Lucy et al, 2012, pg. 89).
These two subgroups also recorded the lowest levels of financial behavior and informed ability. Financial knowledge and financial behavior show linkage in a number of ways. A number of investors always ignore paying their mortgages during falling interest rate periods. This results from poor financial literacy since those who boycotted the payments were individuals with less financial knowledge. The same investors have less knowledge on the terms and conditions of their mortgages and investment plan. Borrowers who took high cost mortgages also displayed limited knowledge on financial matters. From the literature review, lack of consumer knowledge affects the consumers more than it affects the economy of the country. South Africa has relatively low level of consumer knowledge, but its economy level is still one of the best in Africa. Lack of consumer financial knowledge affects how a person makes vital financial decisions in negative ways. From the studies, it is evident that this low level of financial knowledge recorded poor decisions in terms of financial plans and investment. This affects their lives more than it affects the economy of their respective countries (Durkin et al, 2002, pg. 402).
Those who possess a greater knowledge on financial matters recorded wise decisions when it came to making financial decisions. Financial knowledge also relied on other factors such as age, race, gender, and educational level. Men recorded a significant level of financial knowledge as compared to women. Older women recorded the poorest level of consumer financial knowledge. Youths and older people also had minimal financial knowledge as compared to the middle-aged who recorded a significant level of consumer financial knowledge. Financial knowledge comparisons between the whites and the black- Americans revealed that the white race is more enlightened when it comes to consumer financial matters than their black counterparts. Education level was another significant tool when it came to financial matters. Individuals who pursued financial studies in high school, college, and the university had greater financial knowledge in comparison to the ones who did not undertake the same courses. Exposure to financial duties at work also determines a person’s financial knowledge and decisions, since he or she has the required knowledge for making financial decisions.
Financial literacy is the ability to understand finances. In most countries, financial literacy is left to individuals who own companies and have studied finance or business. This means that despite the fact that many people use money for almost about everything, many of them have no skills of managing these finances. For example in the United Kingdom, the Financial Services Act 2010 included a provision for FSA to establish a Consumer Financial Education Body (CFEG). The aim of the organization was to ensure financial literacy in the average citizen. Financial literacy uses the strategies of bio-power and discipline. Arthur says “The strategies of discipline and bio-politics have different targets-discipline is aimed at the population while bio-politics is aimed at the population- but both are used to increase productivity and the individual’s capacity to act” (Arthur, 2012 p.93). This is to say that financial literacy is not only for individuals but also for the society in general. The task is, therefore, to empower both the society and individual. The overall benefit is that individuals are able to make better financial decisions and improve their living conditions. The society benefits in the sense of growth and development of infrastructure, transport, communication, and general standards of living.
South Africa is not the only country that struggles with financial illiteracy. The reality is that consumers around the world experience this situation since they use money on a daily basis. People use money for some of the most basic and at times unnecessary wants. Many people are also financially illiterate and simply live large. Indeed, Diamond and Virtanen emphasize that even in highly affluent nations, collectively, existing studies paint a rather bleak picture of economic and financial literacy. Hazlehurst explains “owing to the nature of the South African financial system, the country has been considered in product silos only, such as home buyer education or debt related education” (2004, p. 222). This means that the literacy levels are so low that production and development are still quite low. The greatest beneficiaries of financial literacy are the private sector providers. The people who own and run businesses are some of the most financially literate individuals and benefit most. This is because they have the information to make the most out of business. They are also able to play around with figures when dealing with people who are financially illiterate. It also costs financial institutions more to reach financially illiterate consumers than literate ones. This is because of the “high levels of dormant transaction accounts which often result in low levels of financial literacy” (2004, p. 222). This means that financially illiterate people rarely make investments or savings and thus they have bank accounts that simply lie idle and empty.
South Africa must have financially literate consumers to sustain financial services. This is because financial literacy is the best way to protect consumers and prevent abuse without over-regulation (Hazelhurst, 2002, p. 222). Unless consumers defend themselves by being empowered, financial institutions will continue to take advantage of them. It is also difficult for firms to provide financial education to consumers because of the risk that they will leave for firms that offer better products or services. It is, therefore, necessary that consumers be financially literate to know when something is not right. Hazelhusrst also informs, “One in every three South Africans was able to define inflation correctly, but fewer than one in ten knew roughly the correct range in 2002. This range is predictable in many ways (2004, p. AW22). For example, the wealthy or more educated people were likely to get the definition right as compared to the poor or less well-educated ones. “Even when offered a pre-coded answer list to choose from on both questions, so that guessing was possible, most people simply professed ignorance: 49% did not even guess the word “ inflation” and 82% had no ability to guess the rate at all” ( Hazelhurst 2004, p. 222). This means that many people are concerned with making and spending money without caring what affects this process. They take to working without an understanding of what affects the amount of money they make or how they spend it. The only time people realize there is a financial hitch is when their pay is late or the price of a commodity they really cannot do without goes up drastically. The issues of taxation, oil prices, changes in the stock exchange and their effect on the consumer are like two different issues. This is sad, since it means that majority of the population spend their lives making poor and uninformed financial decisions. It also means that the country is highly unlikely to achieve any development especially in terms of financial empowerment.
Financial literacy needs a framework that embraces individual product compartments like home loans and micro lending. This is where the consumer is able to access money and information about finance management. This is because every firm has to make sure the person receiving a loan is empowered on how to spend it correctly. That is one of the ways to ensure that the impact of financial education is felt in South Africa and the financial development of the country improves. It also needs an enabling environment where financial firms and business people commit to ensuring financial literacy in South Africa. A good place to begin would be introducing mandatory finance classes to schools then move to holding empowerment campaigns and trainings all over the country. For example, Beck et al says “In South Africa, the Banking Association of South Africa has made representatives to the parliamentary portfolio committee on basic education on reforms to the national curriculum on matters of economic management science, including an individual’s economic cycle, sustainable growth and development, and managerial, consumer, financial and entrepreneurial knowledge and skills ( 2011 p. 221).
Such reforms would ensure financial literacy in the young population. Children would therefore have basic information and this will ensure a generation of financially responsible people.To improves on South Africa’s low savings rate; the country has accepted financial literacy programs as part of the early formative years. As children study the curriculum, they also have an opportunity to be financially literate. It is also an element of empowering citizens in the nation. In 2008, the Teach Children to Save South Africa Program was launched to offer lessons to children between the fourth and seventh grade on savings (Beck et al, 2011 p.221). So far, the initiative has attracted the participation of thirteen banks and twenty-seven financial sector institutions. People all over the world tend to use poor financial planning methods that they borrow from their friends, peers, and family members. They also have a tendency to copy people whom they view as “rich” or “doing well,” in the hope that they will be like them.
Cultural factors and backgrounds also prevent consumers from seeking financial help from professionals. One of these factors is the misconception that financial literacy is only beneficial to people with a lot of money, business organizations, and governmental firms. The average consumer does not see the need to have this information because of the assumption that life is good as long as one can get by. In this regard, Diamond and Vartiainen report that, in principle, financially illiterate individuals could seek guidance from experts. In practice, somewhere in the neighborhood of 60% of virtually every population subgroup relies primarily on parents, relatives, friends, and personal judgment (2007, p. 25). Despite the fact that every consumer is unique, some factors imply that financial literacy is a challenge. For instance, Diamond and Vartiainen emphasize that, people with less education are actually more likely to rely on their own judgment. This means that many of the people have confidence in their own choices and judgment concerning their needs and financial decisions. Only a minority consult financial professionals or print media (2007, p. 25).
The tendencies not only impact financially illiterate consumers, but they also have a profound effect on the larger society in which they exist. This is to mean that the decisions made by the average consumer does not only affect the consumer but also affects the business industry, market, and trade in general. Diamond and Vartiainen (2007) point out that, financial literacy is strongly related to behavior. Those who are less financially literate also tend to save less. This profoundly affects the banking and micro-finance firms, which ensure there is currency flow in the country. Measures to improve financial literacy also affect the choices consumers make tremendously (p. 25). South Africa, is taking the initiative to improve the financial literacy of young. These initiatives can have some significant win-win outcomes.
Policies mandating financial education for high school students result in higher asset accumulation once exposed students reach adulthood. Likewise, financial education in the workplace increases participation in employee-directed pension plans and stimulates saving (Diamond and Vartiainen, 2007, p. 25). There are a number of other positive outcomes associated with improved financial literacy rates. For example, consumer protection helps consumers understand that their input in the financial market is valued and causes significant effect. Beck et al says, “In consumer protection, one size does not fit all. Middle-income countries such as South Africa can afford sophisticated institutional structures. Given the rapid increase in reliance on consumer credit, there is also a stronger need for protection mechanisms in these economies. In South Africa, this is seen in the context of the consumer credit boom the country experienced in the early 2000s” (2011, p. 222).
This means that South Africa is in a position to make a difference towards the financial literacy of its consumers. The country can be able to alleviate the negative impact of financial illiteracy by using these institutions to educate consumers. It is not possible to reach every single consumer but all out effort to educate as many people as possible will ensure that every family has an educated member. This ensures a certain shift in financial decisions that is likely to improve the financial situation of the country.
Financial institutions will also have provide “key fact statements” to consumers “with a summary of the most important terms and conditions” to ensure that consumers are well informed without burdening them with information that does not help their decision making (Beck et al 2011, p.223). It is also “essential to offer comparable, standardized information about the services provided by financial institutions” (2011, p.223). The aim of involving financial institutions is to ensure that consumers receive accurate information. The financial organs are best suited for this task because they have that information readily available. It is also impossible to separate the consumer from one financial institution or another. This means that at one point, the consumer has come to contact with a financial institution. The majority of South Africans have bank accounts through which they receive their monthly wages and this is an opportunity to affect them with the information on financial literacy and smart decision-making. The idea is to reduce the impact of financial literacy by first creating awareness then taking positive measures in the same direction.
According to World Bank, South Africa has a well-developed financial sector. In 2010, the banking sector contributed to 145% of the GDP for the country and these banks have grown and expanded throughout South Africa. As banks compete for relevance in the market and the highest number of clientele, advancements in consumer protection have become justified. World Bank proves that “providing better information to customers can lead to rising price and product competition among banking intermediaries (2012, p. 97). This is a chance for firms to position themselves strategically to benefit from a reliable relationship with consumers.
Lack of financial literacy also leaves consumers vulnerable to “pitfalls, possible abuse and redial opportunities” (Beck et al 2011 p. 221). This is to mean that lack of information makes consumers purchase unnecessary goods and services at exorbitant prices. It also makes consumers worry so much about surviving for the next day that they do not save any money. In many cases, lack of financial literacy leads to very poor spending habits and no savings. The consumer is also not interested in financial literacy because he is not in a position to put any money into the right investment since he has none to spare. When consumers lack financial literacy, they end up losing a lot of money to schemes that were claimed to “bring in triple the amount put in.” This is to mean that it is very easy for business people to take advantage of consumers. For example, it is very easy to purchase an item at double the price simply because of lack of knowledge. This financial illiteracy has seen many consumers purchase many things at such a high price when they could have got it for a cheaper price if they had the knowledge.
Remenyi also says, “Most research papers and articles on financial literacy deal with individuals and their financial and economic skills because they have the potential to induce favorable income distribution and better national health. This is to mean that if consumers would make informed financial decisions they would incur fewer losses and improve the society. This is because they will be able to cut on unnecessary expenses, save more money, take loans and make investments that will bring them more money. The financial institutions are also in line to benefit greatly from informed financial consumers. This is because savings and investments keep financial institutions running. When people save money, financial institutions like banks increase their stock exchange rates and bring in profits at the end of financial years. Such organizations are also able to expand and provide services to other regions in South Africa, which ensures overall growth and development in the country.
Some consumers have insurance like branded insurance but are not aware of it so they keep spending money. This is because lack of financial literacy ensures that consumers spend as much money as possible while making as little as possible. Most consumers hardly have enough money to meet all their basic needs because of poor financial decisions. For example, an individual will spend money to buy food instead of carrying packed lunch from the house. Another consumer would rather forget about a lawsuit if he or she must hire a lawyer rather than pursue the possibility of being well compensated. This is why some consumers are unaware of insurance benefits that they deserve and end up spending money when they have an insurance cover. The financial institutions will never approach consumers to inform them of their money that is lying somewhere. They will sit and hope that consumers never realize they have some money somewhere. The financial institutions are reluctant to offer accurate information as they are at risk of losing clients.
Thomas et al says, “Nested within the struggle for political, economic, and financial justice is a need for opportunities to tie together economic and financial literacy concepts with everyday experiences of underserved South African learners” (2012 p.28). It is interesting to note that financial literacy is actually an act towards ending apartheid in South Africa. By “providing South Africa’s underserved learners with educational experiences arms them with tools to better their personal lives and their country” ( Thomas et al 2012 p. 29). Communities that deny learners the chance to apply what they learn in outside the classroom undermine the idea of economics and financial literacy. As students leave the school curriculum, they deserve an opportunity to exercise the financial literacy they learned in class. They are the consumers who are in a position to catapult the economy of South Africa to greater levels. This is because by the time they are leaving school they are empowered with information and all they need is support to achieve economic empowerment. Some people have the ability to make correct financial decisions on instinct, but such people are very few. Everyone else has to take time to understand the financial world and learn basic skills like record keeping, saving and entrepreneurship. This means that the concept of financial literacy is a necessity for everyone who spends money for anything.
This is the impact of financial illiteracy in South Africa and it calls for further research into the matter to decide the best way to curb this effect and ensure South Africa develops. This literature review forms the basis for the research to be carried out in this research paper. It also gives a basis for developing the thesis of South Africa’s perspective on financial literacy. The review has looked at the work of a number of authors who have taken time to research on this matter. Many of the authors have looked at the definition of financial literacy and the effect of the same on South Africa and other countries. The authors have not captured the impact of lack of financial literacy on the people of South Africa, hence the reason for this research.
The overall financial literacy score for South Africa is 54 percent a figure that is not only low but also covers up the gross inequalities the country’s level of financial literacy. This is in accordance with the national survey results on South Africa’s level of financial literacy. The results indicated that those individuals with a low standard of living experience an extensively lower financial literacy level that those individuals with a medium standard of living. It further showed that, the financial literacy level increases significantly with the increase in the level of education. This means that the wealth and educated individuals in South Africa tend to score higher than the poor do and uneducated people do. The financial Services Board commissioned this survey, which aimed at evaluating the financial level literacy along with the knowledge and understanding of South Africa’s financial systems. The Human Service Resource council carried out the research in September and October 2013. The survey involved a representative sample of approximately 3 000 South Africans.
The overall score of the survey entailed the scores that measure financial planning, product choice, financial control and financial knowledge. The financial control sector covered both an individual’s involvement in the management of finances at the household level and the individual’s capability of staying within the budget. The results of the survey showed that less than half the correspondents reported that they had a household budget with 43 percent of them indicating that they sometimes mange to stay within the budget. Half of the correspondents reported that they always pay their bills in time unlike 44 percent of them who indicated that their earnings did not cover for their living expenses in the past one year. Majority of the correspondents argued that, in order to make ends meet, they would borrow money from their friends and families. A third of them said that they would cut down on their expenses or forego certain items.
According to the survey, financial planning involved the ability of an individual to make provisions for retirement and emergencies. The survey reported that two-thirds of the correspondents said that they could afford to cover up for three months expenditure in case an emergency occurred. From this, it was evident that the majority of the population in South Africa have small reserves, which they could use in order to fund their living expenses through a period of prolonged income loss. The report on retirement planning showed that approximately half the respondents incorporated in their retirement plan state old age pensions. Merely 33 percent of them included the employer retirement fund in their plan. The financial knowledge measured an individual’s proficiency and familiarity with the fundamental financial concepts. The survey required the correspondents to identify the issues that they were well versed in and the most important issues that they identified involved budgets, insurance and savings.
The product choice assessed the awareness s of the respondents regarding financial products. From the survey results, it was evident that many people have more knowledge in insurance products than loan and credit products, or products that involved savings and investment. Most of them about 55 percent reported that they did not have any of the investment or savings products mentioned despite their high awareness level of stokes and pension funds. The chief director for the financial development sector at the National Treasury Ingrid Goodspeed said that the National Consumer Financial Education board, which the treasury oversees, is in the process of developing a plan that will improve the financial literacy level. The board plans to achieve this through focusing programmes in areas that mainly require them. In 2004, the South Africa’s the state of play regarding the financial literacy of the consumer revealed that financial education programmes underserved south Africans particularly in the rural areas and communities with low income.
This report follows the up to date international practice, which aims at developing various set of values to guide in the process of financial literacy programmes implementation in South Africa. These principles include; coming up with a national objective that gears towards attaining the financial literacy results at diverse levels using different medium from the private to the public sector. Providing an extensive network through which potential and existing stakeholders can improve all levels of South African’s consumer financial literary. This is achievable through partnership approaches, individual organisations using broad based, and more focused programmes. It is also possible through ensuring that there is an outreach to all the population segments with particular emphasis on the poor. The other standard entails involving key stakeholders in order to identify the opportunities and gaps in the market such as the underserved market segments or knowledge on components that require more attention.
Addressing the gaps within the market through the coordinating the financial education activities and the current along with potential financial education suppliers. The other principle involves developing and maintaining an information-clearing house, which the providers can use in the financial education sector. There should be a close working correlation with the government in order to ensure that there is consistency in the marketplace information from the school to the adult level. In addition, encouraging the certification and standardization of program that are classroom based along with facilitating and encouraging financial education providers to attend courses such as ‘train-the-trainer’ course. Assessing and monitoring of the financial literacy level in the population of South Africa. An undertaking of a national study will be essential in benchmarking the financial level literacy and ascertaining the needs of the financial education within the various population segments.
Lastly, the national policy should aim at coordinating, supporting, and complementing the individual initiatives through the implementation of a collaborative approach. A statutory body should play the role of coordinator and national facilitator. The South Africa’s financial service chatter requires that all the companies that offering financial services should put aside 0.2 percent of the yearly net profits for the education of the consumer. One of South Africa’s largest service providers Old Mutual currently offers a program on financial literacy to approximately 15,000 people in the urban and rural areas. The company is interested in evaluating the impact that their financial education program has on the people. Due to this, the company has decided to include a new video-based element to their way of teaching. South Africa has been at the forefront in the production of numeracy skill and low literacy levels out of the education system. This has resulted to public debates on the way in which the country can change the trend positively.
Similarly, the economic crisis has led the financially vulnerable people into terrible financial situations, where currently 66 000 people in South Africa go into debt counseling every month. It is evident that numeracy and literacy are essential skills for each individual but there is a need to include financial literacy in critical skills. Over the past years, the financial institutes in South Africa have been attending to some issues regarding financial literacy through organizing workshops on financial education. In order for these institutions to meet the financial service charter terms, they have spent on the education projects 0.2 percent of the net profit. For example in 2008, South Africa spent R88.26 million on financial literacy education in workplaces, schools, and communities. This education initiatives targeted individuals in the income bracket of LSM-1-5, which means that they were earning approximately R3 500 and below.
The new proposed charter requires that the spend increases in future to 0.4 percent and that the profile target limit should include all individuals earning on or below the tax entry. For now, this estimates to those individuals with an income of up to around R5 000 monthly. Many financial institutions are committed to spending funds on financial literacy education that does not depend on product pushing or marketing. This has a unique opportunity to company bosses in that they can take advantage of the money spent. The South African consumer should take advantage of the financial literacy education in order to achieve knowledge on the way to organize their income. In order for economic development to occur, there should be adequate financial insight among the population that advantage of the increased innovations and international trade in technology.
CHAPTER 3: METHODOLOGY
Description of the Study Approach
Methodology is a body of practices, procedures, and rules used by those working in a discipline or engage in an inquiry. It could also mean a set of working procedures or methods. Every study has a methodology that clearly shows the procedures and rules that are essential for an inquiry (Dunbar 2007 p. 34). The outcome of the lack of financial education amongst consumers can be dire, as many consumers will never realize the significance of controlled spending. Many consumers would end up spending hefty sums of money on items they do not require at the expense of the essentials. In essence, impulse buying is rampant amongst consumers who lack financial education. Apparently, the adequate knowledge that a consumer has in other discipline or disciplines does not necessarily influence their capacity to spend wisely in purchasing other necessities (Dunbar 2007 p. 34). According to South African perspective, consumers are likely to get swayed by the luxuries and forget to invest their income in purchasing the essential items that are necessary for living. In addition, the cost of living would technically go up considering that most consumers would not be in a position to afford even the basic commodities after spending almost the whole amount of income in purchasing unimportant items that they might have otherwise bought later. Societies have a role to play in providing financial advisory services to people with no ability to determine their own priorities once they get their incomes (Dunbar 2007).
Figure 1: Study Diagram of the techniques for the study process
The study process:
The overall process of identifying and predicting change comprises for main steps:
Definition of the problem
Scope of the approach
Implementing work program
Synthesizing and reporting the results
Problem Definition
Lack of financial literary is a major issue amongst consumers in South Africa. Despite the hefty amounts that employees earn, they lack essential knowledge about financials. Effectively, impulse buying has become the order of the day which means consumers have persistently continued to spend on items that are neither a necessity nor important in the moment (Dunbar 2007). It is high time government invested considerably in financial education for all consumers. On the contrary of all expectations, even those consumers having adequate knowledge in certain disciplines still lack the courage and aptitude to channel their spending on courses that would guarantee them financial safety and security in future. Proper financial knowledge would render economic threats such as the Greatest Recession of 2008 very minute setback. The bottom line is the consumers’ ability to meet all their daily needs throughout a given period before they could earn another pay. A number of South Africans serving in various organizations find the income they obtain from formal employment unable to sustain their needs even for a month. Some resort to borrowing from friends and relatives towards the end of the month, as they have to operate o a constrained budget (Dunbar 2007).
Although the amount of wages and salaries that people earn may also be a contributing factor to this kind of situation, it is clear that even those with hefty paychecks still find it difficult to sustain themselves and their families during the entire month (Dunbar 2007 p. 34). Financial experts or advisors working for public institutions as well as those in the banking sector would provide advisory services to willing consumers in a bid to ensure they reduce the burden of relying on borrowed money from friends, relatives or organizations for which they work as it only adds to the already an enormous burden. Through such services, consumers will learn about things they should largely spend on, those ones in which they put little spending, and those products they can do without. This is the essence of financial literacy in the South African context (Dunbar 2007 p. 34).
Scope of the Approach
This approach intends to uncover the widespread tendency among consumers in the South African market to spend on products and services that do not constitute a necessity. In addition, the study seeks to evaluate the role of financial institutions in the public and private arena in making sure consumers’ expenditure only goes to important items (Ogden 2005 p. 25). In addition, the approach seeks to assess possible solution to escalating cases of artificial constraints that have put most consumers below poverty line despite huge returns they earn either as formally employed or self-employed. The fundamental aspect of the whole debate is how to provide financial education to consumers without them feeling pushed to the limit in terms of how they should spend their incomes (Ogden 2005 p. 25).
The country has had significant growth in its economy and occupies position eighteen among the world’s most advanced economies in terms of scientific invention. The methodology would provide a workable and practical solution to the problem that has hampered South African consumers from fully accomplishing their wants (Ogden 2005 p. 25). Large business enterprises too have mechanisms by which employees acquire relevant training on how to manage their spending with a view to realize true value for their earnings. South Africa has an emerging market economy that has continued to enjoy significant natural resources. This economy has achieved tremendous success due to courtesy of investments by the local individuals and organizations and foreign companies. South Africa is one of the world’s leading producers of Gold. This resource has boosted the economy as it provides revenue to the government. A vibrant market economy like the South African case is a convincing assurance to the citizens as well as people within the neighborhoods of South Africa that employment opportunities are a guarantee (Ogden 2005 p. 25). Stiff competition and increase in research and development in various sectors of economy has prompted the government and the private sector to focus on employee young and educated people. Researchers have conducted studies in the fields of agriculture, telecommunication, banking, insurance, and finance, which is a pointer to the need of most industries to employ people with relevant skills and knowledge in given fields or professions. In effect, most South African citizens have forced their way to the institutions of higher learning to acquire relevant skills to match the market demands (Ogden 2005 p. 25).
General emphasis of skilled labor is in itself an inspiration to industries that were on the verge of collapsing due to lack of professionals that could steer such industries or sectors to accomplishing goals and objectives despite stiff completion in the local markets. Today, business organizations are hopeful of achieving the projected gains annually due to massive labor force comprises people with sufficient knowledge and skills that meet industrial demands and expectations (Ogden 2005 p. 25). A well-developed financial, legal, communication infrastructure, and modern energy sector has characterized the South African economy for several decade. This has been sure proposition of the achievements of the country amid social and economic challenges. Although South Africa attained political independence about two decades ago, it gives credit to its powerful institutions and sectors that spurred development (Ogden 2005 p. 25). Economic growth has always been on the upward trend as industries strived to provide more employment opportunities to accommodate the increase in the number of young and educated people. Conventionally, an economy that fail to provide for its human resource base risks losing a lot to criminal activities which then become order of the day. Many people unsuccessful in their quest to find good jobs that probably satisfy the necessities given their academic qualification will engage in criminal acts to sustain their lives (Ogden 2005 p. 25).
The South African government together with the private sector has succeeded in their attempt to create more jobs for the youth. This not only ensure a significant reduction in the employment rates but also an assurance to the young graduates that they have achieved their dream of applying their knowledge and skills to the relevant activities. Governments and industries that are insensitive to the needs of the economy are only sitting on a time bomb. In the end, they might even lose the little achievements already made in the past. The country’s modern transportation infrastructure that facilitates efficient distribution of goods and services to major regions is a clear pointer to government’s commitment to facilitate movement of people as well as commodities. Major urban centers have modernized road and railway networks that have boosted the realization of the goals and objectives of the vibrant market economy. The country has continued to experience healthy economic performance until 2008 when domestic constraints and downturns in the global economy took a toll on its economy (Ogden 2005 p. 25). The global economic downturn that was characteristic of the Great Recession of 2008 was a major setback that forced South Africa to cut down its expenditure budget on production among production expenses.
The economy faced massive decline on amount of exports to foreign countries since few countries were willing to tamper with their balance of payments during the entire period of Great Recession. Employment opportunities declined tremendously as local industries cut down on levels of production as goods and services did not receive good returns in the local as well as global market. Despite the huge human labor force, companies continued to cut down their production levels that in effect meant laying-off considerable number of employees. This wave of retrenchment became order of the day as business organization continued with downward trend in terms of sales and ultimate revenues. Since many people lost their jobs and at the same time young graduates with relevant skills, in particular fields could not secure employment opportunities, the wave of crime was inevitable. Most people irrespective of social, political, or cultural backgrounds resorted to weird means to earn a living as harsh economy began to bite. Performance of the stock exchange market was all time low with most foreign investors reducing or quitting trading in the South African Stock Exchange Market. However, South Africa’s economic performance rebounded at the end of the great Recession. Unemployment would remain one of the greatest challenges as companies were on a recovering process with restructuring becoming order of the day. Public Corporation had to seek government intervention to meet their production needs as they were now on operating on constraint budget. The methodology seeks to analyze the economic policy, inflation rate, budget surplus, and goals of the country in pursuit of a vibrant economy in the region.
Apparently, South Africa’s economic policy is fiscally conservative. The government has put so much emphasis on balancing the budget as well as controlling the rate of inflation. By investing in infrastructural development initiatives, the government of South Africa has a long-term goal of ensuring the economy meet the growing demand for better services. Modern transportation network, sophisticated communication system, and refurbishing as well as building new social amenities would put the country on track towards realizing the economic projections. In addition, it would put the country in a better place to emerge as the leading economy in the region and the continent at large. Economy continued on its recovery drift the pressure from across the country on government to use state-owned enterprises to deliver basic services to rural dwellers and low-income regions became clear. Interestingly, the country still brag of well-developed economy in Africa despite the social and financial difficulties it experienced during and even after the Greatest Recession of 2008. Apart from the advanced transport network, South Africa is proud of a well-established legal and banking system and a cadre of skilled professionals. The country is indeed the jewel of Sub-Saharan Africa. It is against this backdrop that millions of South African citizens continue to hold fair share of the country’s resources.
Paucity of financial literacy among many consumers has constrained the financial resources. Although a considerable percentage of the country’s population comprises people employed in companies and earns good wages, lack of financial literacy has continued to haunt their ambition and government’s ambition to accomplish future goals and objectives as far as financial spending is concerned. Spending in items that do not constitute a necessity in the South African and global context is an implication of the huge difficulty ahead even as state-owned institutions, investment banks, and commercial banks continue with their education to people on wise spending. First, majority of South Africans are reluctant to disclose their paychecks to anybody including financial institutions. Hence, the illiteracy tendency on the side of consumers is a pointer to slow pace of growth and development in investments among consumers. Consumers spend much of their time and effort investing on certain ventures that in most cases are viable only on the short term. It is incumbent upon the state and accredited private financial services corporations to issue relevant advisory services to consumers with a view to ensure they invest in various sectors. Such services will also encourage an upward trend in which consumers tend to save their revenues for future endeavors.
In effect, a slump in the economy including the Greatest Recession of 2008 would not pose any threats to average consumers. Through such initiatives, spendthrifts find a chance to reexamine their spending power relevant to ability of the income to satisfy potential constraints in the near future. It is the responsibility of every consumer to familiarize with financial institutions on how to improve or change altogether their expenditure trend. The institutions do not have to coerce consumers into accepting their services. Apart from these institutions, consumers should also register for a course on financial or investment economics, as this would help them with necessary knowledge hence able to control spending on their own.
Data-gathering Method and Database of Study
In this research, it is evident that the degree of illiteracy amongst consumers has had an impact on the financial state of the country thus causing negative effects on the economy from a general perspective. To give quality material that has proper evidence proving the impact that consumer illiteracy has on the financial status of a middle class country like South Africa, there are certain methods for data collection renowned for the process. These data collection methods are important for the presentation of quality material that tables the evidence on the impact illiteracy amongst consumers (Dantzker, & Hunter, 2006, p. 140). Having various areas that professional researchers get to dig for appropriate information it is important that they have proper knowledge and skills on the data acquisition methods present.
To get significant and reliable information about the numerous factors that consumer illiteracy brings upon a nation, a researcher has to consider the methods of data collection to come up with proper material for the database study. In such a case study, the researcher has to develop a research question upon which he or she will build up a research plan that entails the most appropriate methods that will be efficient in the process of collecting information (Dantzker, & Hunter, 2006, p. 140). The purpose of having proper skills on the data collection methods is to enable one with the ability to distinguish the available methods present for collection of information.
The sources to acquire the information needed is apparently wide thus, demanding that the research be keen on the precise areas that he or she will acquire the most reliable information. In addition, there being a variety of data source, a researcher must ensure proper strategies with techniques for the search process. Information retrieval is likely to be from either a primary source or a secondary source. Some of the commonly known types of data collection include survey, observation, lab experiments among others (Kirby & Reid, 2005, p. 169). However, one has to bear in mind that each method of data collection tends to have its advantages and disadvantages in the proceeding of data acquisition.
In cases where the researcher is dealing with large numbers in terms of population, it is unnecessary to cover every individual since it stands a chance of delaying the entire process. Therefore, the research has the mandate to consider section of the population to have the required information hence speeding up the entire process. Keeping these few aspects in mind lessen the workload for the individuals conducting the research plus, the costs incurred will definitely be cheaper. The data collection design is consequently a determinant to ensuring that researchers present precise data at the end of a collection course. Because of proper data collection methods, a researcher faces confinement from factors such as time, funds alongside the objectives presented for the research (Kirby & Reid, 2005, p. 169).
Considering that this case study requires one to collect information from a wide range of sources, it is efficient that some of the basic methods of data collection get consideration. Consumers being the individuals acquiring products and services from retailers and other business organizations, they are subjects to literacy on finance. This is appropriate to assist them in the purchase process as well as price comparison of both goods and services that they are planning to acquire. Here, the areas to target for the data collection are precisely businesses premises, financial institutions, and the consumers among others. These areas are significant for proper information for the study and the objectives presented for the research process.
Observation
Observation is one of the commonly known methods for primary data collection and one of this methods characteristic is that it does not entail direct contact. It is one of the efficient methods when carrying out such a research on the impacts that illiteracy has on a nation. The things to observe in this method are numerous starting from the financial results presented by the country’s financial ministry. This method requires the researcher to ensure that he or she is attentive at all times and on every aspect, dealing with to collect whatever data collected. The attention is in two dimensions, listening as well as looking (Anderson, 2012, p. 122). The essence of focusing maximum attention is to ensure that the researcher acquires reliable information that he or she chooses.
When carrying out a field research, observation as a data collection method is significant considering that it is the major source of data. There are requirements that an observer has to guarantee to have the method successful such as making a physical appearance on the field and putting down information on the current state. It is important that one note the various types of observing in the process of collecting data (Ferrante-Wallace, 2008, p. 44). First, there is direct or indirect observation in addition to obstructive or non-obstructive type among others. It is significant that the researcher make appropriate observations monitor the authentic behavior instead of listening to sentiments on previous experiences.
It is inappropriate for the researcher to try seeking insights by the people he or she is observing in addition to figuring out their thoughts on the objectives related to the research. For proper and efficient results, a researcher has to make sure that all basic aspects of the method for data collection are in place throughout the research. Failure to put the aspects to practice will definitely jeopardize the entire research process despite providing inaccurate information. Some of the types of observation method that a researcher has to consider for this research include; obtrusive and unobtrusive, with participative or non-participative (Ferrante-Wallace, 2008, p. 45).
Obtrusive and Unobtrusive
Since this case is dealing with illiteracy of consumer, the researcher sets out to look for any sort of evidence that proves the degree in which illiteracy in finance costs a nation. A country like South Africa is highly populated and the researcher has to be considerate on the various areas that he or she is going put this precise method to practice. Obtrusive refers to material that is visible or evident in the field of research, which the researcher has to look for when applying observation as a method to collect data (Anderson, 2012, p. 136). This type of observation requires the researcher to look and listening without engaging him or herself with the population.
Some of the thrusting information to seek for this case study includes the pricing rate of various products. The researcher inspects on various product pricing in different areas of the country to distinguish if it is similar or differs as well as determine the difference to suggest if the rates are correspondent. The researcher also has to make certain that the unobtrusive information, which are the hidden ones are determinable on conducting the research. It is against the regulations of the data collection method for the researcher to intrude with the normal routine in the sense of getting information (Anderson, 2012, p. 137). Another area that this type of observation is applicable is around the counters of supermarkets where there is a practical evidence for data collection.
Participative or Non-participative
This type of observation requires that the observer becomes part of the program that is under observation and adopt the current way of life. This type of observation is challenging in that the observer is likely to take time in the process of adapting to the culture as well as the context under observation. The reason why this type of observation has the likelihood of consuming time is that the observer has to ensure acceptance to the community before starting the data collection process. Given the fact that in South Africa there are numerous communities with a diverse way of life, it might be difficult for an observer who is not familiar with communities to adopt therefore, it is advisable to get someone with knowledge on a precise community’s way of life (Ferrante-Wallace, 2008, p. 44).
Non-participative observation entails the process whereby the researcher gets a close with the subjects that are part of the research process to acquire appropriate information. This method of observation also does not permit the observer to engage with the subject on acquisition of information. The observer can only watch from a distance and try getting reliable information on the content of the research. There are skills that are necessary in the process of observation and every researcher applying this method has to ensure that he or she considers them. In cases such as this, that entails a second-class state, the observation method for data collection is efficient only if the researcher considers the appropriate steps in relation to the procedure (Ferrante-Wallace, 2008, p. 45).
In-depth Techniques
This is another method that I applicable for the process of collecting data and is significant for conducting a research such as this case study on the impact of financial illiteracy by consumers. The effects that contribute to unstable financial state by a country such as South Africa are determinable through in-depth technique methods of data collection. In this method of data collection, there is verbal communication whereby the researcher asks the consumers questions to find out there sentiments on various issues (Jupp & Sapsdorf, 2006, p. 93). This way, the researcher gets a better shot of finding the opinions by the consumers as well as being in a position to determine the degree literacy on the case study, which is the impact of financial illiteracy by consumers.
In-depth techniques are applicable in areas where the researcher has interests in acquiring vital information for the study. It is challenging given the fact that most respondents tend to share their queries depending on their mood. A current survey confirms that the response by the individuals on a research process appear to give opinions depending on their current emotional state. If by any chance a respondent is unhappy with the current state such as the pricing of consumer products then it is definite that the reaction when approached by a researcher will be negative. This differs to a situation where a respondent is comfortable with the current trend in financial rating of consumer products. For efficient response that may result to reliable information for projects database, it is advisable that there be lengthy interviews to get resourceful data from the correspondents (Jupp & Sapsdorf, 2006, p. 93).
To ensure that the method of data collection is sufficient for this case study, the researcher has to consider some factors such as developing a group of approximately eight to ten individuals. The selected individuals have to be from different areas of interest for a diversified aspect of opinions from the correspondents. Since the research requires evidence on the impacts of financial illiteracy by consumers, the researcher has to be keen about the individuals that he or she acquires to be part of the group to conduct an interview (Jupp & Sapsdorf, 2006, p. 93). Chances are that if the group contains two or more persons from the same location or areas of interest, they will end up giving the same information. Therefore, the information will be unreliable considering the fact that the source is the same.
Ones the researcher establishes an appropriate group, he, or she can present questions concerning the individuals’ degree of knowledge on finance. It is necessary that the sequence in which the researcher presents the questions to the group be in a manner that the group members have the freedom to interact within themselves and produce there sentiments. The researcher can also act as the moderator of the group to control the rate of time that the members take to respond to each question aired. Another role that the researcher can play in the group is observing the reactions by the members to the questions presented and take note of every individual response (Anderson, 2012, p. 127). Some of the things that the researcher has to look out for include facial expression by the members as well as the body language since that is a more appropriate way to determine the reactions by group members.
This method tends to have a number of unavoidable situations for the researcher in that he or she has limited control of the group, which means that there is the likelihood of irrelevant discussions by the group. It might end up wasting time hence delaying the entire research process. In addition to this, the group members may conform to a single opinion that comes due to influence by majority whereby the results may be irrelevant. This method may have various disadvantages especially when the moderator does not sustain the objectives to discuss. The method has had certain step ups with the current advancement in technology whereby there is formation of online groups (Heldman, 2007, p. 204). These online groups can hold forums in which they are able to share any sort of material that will be necessary for the discussion.
Apart from forming focus groups as a method to retrieve data, it is advisable that the researcher consider other types of the in-depth technique such as creating panels, which are more or less similar to a focus group. The slight dissimilarity between the panels with a focus group is that the panels are for long-term purpose unlike focus groups that serve a single purpose and the moment the discussion is over then the group dissolves. The advantage that makes these panels appropriate for the collection of data is the idea that they can meet frequently to discuss different objectives presented. The panels comprises of consumers who are the major subjects to this study in addition to persons who own businesses (Heldman, 2007, p. 204).
Another characteristic of the panels over the focus group is that the members could be static, alternatively, dynamic. This means that the group could always have the same members as the ones on its formation or have members who frequent on their presence during discussions. Panels’ formation requires the grouping of individuals with a common criterion that could be schooling, exposure, along with personal interests (Heldman, 2007, p. 204). There is a possibility of unique panels that entail open invitations to individuals with interest of being part of the forum. The open invitations give people with a common interest to come together not forgetting that the information they present is easily identifiable.
In-depth technique has a third type to conduct a research, which is through interviews commonly referenced as one-on-one interview. This type of data collection method is significant though it turns out to be more expensive and time consuming. The interview has only one person on the interview yet the cost of setting up such a method is slightly expensive. The information sourced from this type of data collection method is first hand thus making it valuable (Connaway &Powell, 2010, p. 145). The person conducting the interview has the opportunity to explore and outsource reliable information from the interviewee. The interview is always face to face and the one conducting the interview has a closer chance to getting genuine response from the person interviewed.
Given an example of this case study, the right person to interview would be a consumer in that it will be easy for the researcher to determine whether the consumer is literate with financial knowledge. To add on that, the researcher can determine whether the subject is being genuine considering that they are one-on-one. Technology has influences on this type of data collection since the interviews can take place through telecommunication, or with the availability of the internet, the researcher can save more time by reaching out individuals through the internet. This method is quicker though it lacks a significant aspect of observation when acquiring information. However, the people interviewed communicate to the researcher in the present time (Connaway &Powell, 2010, p. 145).
Survey
Survey is one of the methods that are applicable for data collection that also entails conduction of an interview. On conducting a survey interview, one has a few factors to consider on the interview. It is not compulsory that the interview on a survey method be face to face, though the researcher can also carry out an alternative interview through a phone call. The questions that the researcher will ask on the interview are set to be brief and most precise way to shorten the duration of the interview for a single individual (Wendy, 2012, p. 31). The method is efficient since there are numerous methods to conduct it including the idea that one can use the internet.
Technology has been helpful in the process of communication thus easing other aspects of collecting data. Given the population of a country like South Africa, it is time consuming to start carrying out a survey by physical appearance. Technical appearance on each client’s location by the researcher seems difficult since it is likely going to consume more time (Wendy, 2012, p. 31). Therefore, to manage time the researcher can employ the diverse types of survey to collect efficient data that is reliable for this case study. The primary methods of data gathering are the most appropriate methods for collecting information in a country like South Africa. The researchers have to ensure that they consider all the relevant factors on the data collection methods to get the most resourceful information at the end of the exercise (Wendy, 2012, p. 31).
South Africa’s current population requires that in the process of carrying out a research one has to be conscious in the selection process to come up with methods that are reliable to yield appropriate data. This might require that the research strategies before conducting the actual research. The methods of data gathering are numerous hence in such a case study there is necessity of considering methods that are appropriate to outsource reliable information. The process of selecting data gathering methods is rather demanding in terms of time and requirements but it assists in the efficiency of the entire process (Wendy, 2012, p. 93). It is better that a researcher settles down and consider appropriate methods that will be resourceful other than deciding to put to practice the methods of data gathering that are not necessary of insufficient.
The process of data gathering has to be in line with the kind of data that a researcher is aiming to achieve. It is important that the researcher consider methods such as survey that have the likelihood of covering a wider range in the process of data acquisition. The aim of conducting a data gathering process is to retrieve information that is going to be helpful in the case study that one is currently addressing. For most subjects of a research, they prefer that their identity remains anonymous to from the public. In an example of such a case study on the illiteracy of consumers, some of the people that a researcher will target include entrepreneurs who would prefer that their identity remains anonymous to avoid business suicide (Wendy, 2012, p. 93).
There is need to conduct a background study on South Africa given the fact that it is the research environment to this study. Sources confirm that approximately twenty percent of the adult populations have the ability to establish whether they get the correct change in numerous transactions (Kervin, 2009, p. 84). For this reasons, the economic status of the country is at jeopardy since it risk intense levels of financial literacy that stands a great deal on an economic crisis. The country’s background check acts as a determinant for the methodology in data gathering. Without the background analysis then there is a great probability of employing inappropriate methods for data gathering. The availability of scholarly literature simplifies the process of conducting a background review of the country with an inclusion of previous financial material.
Data gathering for such a case that concerns the South African consumers is retrievable from opinions by expert as well as other materialistic evidence (Kervin, 2009, p. 84). The opinions by experts are reliable since they give the various critics both from a negative aspect to a positive criterion. Critics assist in the evaluation of the data that a researcher achieves to determine whether it is reliable or unreliable for the study of the case study. It is important that when using information from experts to compare with the acquired information from the actual field, there should be minimal difference. The marginal difference is a factor that a researcher can consider in the willpower of the salvaged data. It is a guarantee that an accomplishment of a similar project has been in place before and it is not certain that the outcome will be similar. Time and change are factors that facilitate the difference in outcome of such a case study. Therefore, a researcher is unauthorized to use previous projects to make the final remark of the project (Kervin, 2009, p. 84).
Database of Study
After gathering, the required information there is creation of a single database that will avail the necessary information whenever one needs to refer. There is a purpose of having a single database for the entire research process to simplify the case study. The information on the database of this study is vital since it is the one to use in the various areas for the entire project. Storage is one of the basic segments of a database. There are numerous modes of storing the data collected and it has to be in a design that any individual part of the project can get maximum access to this information. Networking of a database system is the best option when dealing with numerous persons as part of the study (Basta & Zgola, 2011, p. 7).
The database for this study on the impact of consumer financial illiteracy requires that one have information on the environment for the case study. This is the actual area that the researcher is going to acquire data and for this case study, it is South Africa. The purpose of this kind of information on the database is to equip a researcher with prior knowledge for developing a strategy that will be in accordance to the environment. Information on the data collection methods is also appropriate to help in design the research process and approximation of the likely costs that the researcher will incur in the process of the study. Time is another valuable when carrying out a research since it determines the duration that the process will take (Singh, 2009, p. 469). There are obstacles that can contribute to poor timing of the process such as designing the process of data gathering.
The sequence in which a researcher stores the data that he or she collects from the field will also determine the level of efficiency when trying to access it in future. The database of the study happens to be the most significant segment of the case study that may immensely affect the study. Failure to ensure that the database is secure may lead to loss of data by the team that is conducting the whole operation that correlates in data gathering, storage, along with presentation. There is a variety of material present in this case study’s database starting from charts, recordings, questionnaires among others. This requires arrangement in groups with similarities (Connaway &Powell, 2010, p. 145). The design mechanism of the database is vital for future reference and it has to be in a sufficient manner.
The data that a researcher acquires from the study might be original from the field but it is definite that similar content of data exists. It is important that the research seek an analysis of such existing information and use it to compare with the ones that he or she acquires on the research. It is however inappropriate for a researcher to put previous data in use instead of getting fresh material from the present time. Existing data is disadvantageous to this kind of research since it may be out of date. Outdated data stands a greater chance of ruining an entire case study because the material might not contain information that is similar to actual state in the present time (Nelson, 2011, p. 17).
For such cases, a researcher can equip the database of the study with material that is similar to the case study for comparison purpose. The need of equipping the database with information from the past is to diversify the study in areas where the researcher needs to make comparisons with information from the past. In this case, study, the environment for the study is a country that is using recent information technology system that makes the compilation of data rather simple as compared to developing countries that may be out of date in terms of technology (Preston, 2009, p. 59). In the database provided for the study, material applicable as evidence for the data is necessary and should be separate from the actual material to avoid mixture in context.
The database of the study requires a security system that will be essential in the protection of the content within the system. If the researchers choose to setup software that will ensure the security of the data then they will be safe from loss of information. For any database, there are risks of loosing information due to breakdown or having unauthorized personnel getting access to the database (Preston, 2009, p. 59). The information present in the database faces greater risk if the researchers do not ensure that they consider installing security systems. The security systems could be software that is available in the internet. Ones the database is secure, the team can ensure that only authorized personnel get access to the database to avoid theft cases.
The methodology of a research undertaking refers to the system of collecting data for given research project. The collected data could be useful in conducting theoretical or practical research. The case study involves application of a more practical approach. Lack of financial education among consumers is a critical problem that the research attempts to assess and find its solution. Several forms of research parameters the study would apply to unearth the fundamental causes and ways of solving the impasse (Singh 2002). However, a number of factors the researchers must take into consideration to fond solution to the financial illiteracy impasse. The fundamental factors of a research methodology include ethics, research data, and reliability of measures. The validity of the research data would widely depend on ability of the study to meet the required threshold for investigations and analysis. In addition, validity would also depend on the reliability and acceptability of the sources of study data. The study would rely upon both primary data and secondary data. Since it is a research essay, the primary information or data is fundamental to the entire process (Singh 2002). This involves collection, analysis, and evaluation of data obtained from individual consumers and corporate organizations. Formulation of research questions together with the sampling would precede the process of taking measurements, which includes scaling, as well as surveys. A research design would then follow and may be either experimental or quasi-experimental. The final stages of the entire research study would be the analysis of the already collected data and final drafting of the paper. Proper organization of the essay into graphs and tables to reflect only the relevant information or data would be necessary (Singh 2002).
There are four major types of research methods namely qualitative, quantitative, mixed, and critical or action oriented research methods.
Data Collection
Research design would be the primary determinant of the data collection especially for the case of qualitative and quantitative designs. Data collection methods include online and face-to-face collection processes. In particular, the researchers sent questionnaires to relevant organizations as well as individuals via electronic mails (Mallin 2009). They would then fill in the required information in the questionnaires before sending them back to the researchers through the same system. This system of transmitting information between the researchers and the respondents assured both parties of confidentiality of the information or data. Since the individual respondents working for various organizations received the questionnaires via their email accounts, they already felt safe and confident while giving out information. Part of the information given would directly touch on the individual’s (consumer) paycheck detailing a comprehensible analysis of how they spend their income in meeting various goals. Incidentally, those who lacked financial education showed several discrepancies in the manner in which they spent their income considering that most of them were vulnerable to impulse purchases and misplaced priorities (Mallin 2009).
The resulting outcome was lack of ambition to accomplish goals beyond the regular pay and in most instances failing to honor the projected short term and long-term goals and objectives. The respondents would in return send back the completed questionnaires via the same procedure considering they had to meet certain set deadline for submission (Mallin 2009). This ensured the data collection process did not derail the process of completing the entire exercise within the set period. Apart from questionnaires, the process employed face-to-face interviews. The researchers interviewed such consumers in their places of work, for instance, employees of both public and private corporations and recorded their responses. In addition, the researchers interviewed an assortment of consumers of various household goods as well as services walking on streets and those who were on their way in or out of shopping malls and supermarkets. Although data collection process faced a lot of challenges, the researchers were determine to diverse methods of gathering information to ensure a failure or difficulty of a single process did not hamper the organization’s objective to achieve results that are beyond reproach (Mallin 2009).
Most interviewees were skeptical about revealing confidential information in public. Hence, they would either give inaccurate information (give false information) or shy away from such interviews. False information mainly informed by the reality that most consumers would be reluctant to disclose their earnings to their own spouses, friends or relatives on how they spent it in meeting the day-to-day needs even (Mallin 2009). In attempt to solve the problem emanating from confidentiality uncertainties, the interviewers resorted to holding closed-door interviews and still assured the respondents they would never display or reveal such information anywhere. To augment the data/information that researchers collected through primary means, it was necessary to use secondary sources of data collection. These were mainly books, journals, and articles from bookshops, libraries, and institutions of higher learning.
A considerable number of authors wrote books and articles about the menace (Mallin 2009). Such authors were well conversant with the South Africa and spending habit among consumers for the past few decades hence were able to give a more compressive outlook of the reality. Suitability of the selected statistical tools would largely depend on the sample size and the study design. Some of the statistical tools the researchers employed include but not limited to the following:
Linear regression/regression analysis
Chi-Square
Quartile regression
Factor analysis
Multidimensional scaling
Forecasting
Neutral network
Cluster analysis
The most common qualitative research methodology includes focus group discussion and interview techniques. This study mainly focused interviews and questionnaires as the most reliable means of gathering data or information based on qualitative approach. Apparently, the qualitative approach mainly took into account the attributes or characteristics rather than the actual data as the basis of evidence or authenticity of the undertaking. Similarly, the study also capitalized on quantitative approach/data. The earnings of various consumers whether serving in formal employment or in the informal sector represent an actual data/numbers. These numerical representations showed the reality as it should be as far as revenue and corresponding expenditure habits are concerned. In this study, a considerable number of consumers showed ignorance or lack of information about financial education. Thus, they exhibited the tendency to spend carelessly on items that were never a necessity in the first place (Kothari 2005).
The purpose of the research is discovery of answers to questions that have been emanating from the research world about importance of financial education to individuals in an economy. Financial education is a form of induction that helps consumers in an economy to spend wisely on items that area necessity to them. In addition, it acknowledges the significance of informed spending rather than spending for the sake of it. Lack of financial literacy has negative influences on the economy of a country (Kothari 2005). Careless spending habit is arguably one of the contributing factors to the rising levels of poverty in South Africa despite the country’s richness in mineral resources, robust economy, among other resources. The methodology seeks to help in the realization of the following objectives of the study:
To gain familiarity with the phenomenon or help achieve insights into it: Apparently, the research undertaking plays critical role of making sure policy makers and the public have a better understanding of the fundamental issue which is lack of financial education. The study also seeks to assess and evaluate possible solutions to this issue, which many believe to have contributed immensely to the escalating poverty levels and poor investments among consumers (Kothari 2005).
To portray in a more accurate way the features or characteristics of particular individual, group or situation: Through the study of the reality on the ground as to problems emanating from lack of financial education, the researchers as well as policy makers would therefore be in a better position to understand the affected individuals or group much better. Despite many employees in South Africa earning good pay, a considerable number lack a tangible investment or worth for it. Understanding of the situation and tribulations that such individual experience, the remedy is this study as it provides the reliable and effective information. In essence, the essay provides an accurate portrait of the actual problem on the ground as regards the various challenges facing consumers due to lack of financial literacy (Kothari 2005).
To help in determination of the frequency with which a given phenomenon occurs or with which it is related or associated with something else: This is a diagnostic approach and is instrumental in the assessment of the frequency of such incidents. Through accredited data collection procedures, the research finds an opportunity to determine the spread of the menace and coming up with probable solutions (Kothari 2005). The frequency with which lack of financial education among South Africans is reported clearly demonstrates the gravity of the whole issue and if there is, need to provide such services to all citizens or just the willing.
To test the hypothesis of a casual relationship between variables: Under hypothesis testing, it would be incumbent upon researchers to determine the soundness and relevance of the study in relation to the process of finding lasting solution to lack of financial education among consumers. The possible hypothesis could be a simple suggestion as to whether or not consumers across South Africa should embrace financial education. Apparently, many consumers would welcome such services if given chance. However, a few others would be reluctant to adopt such services arguing that it is an infringement into their fundamental right to control their own expenditures (Kothari 2005).
The study approach would also take into account the fundamental rights and freedom of consumers even as the researchers sought to find a lasting solution to various challenges facing the average South African consumers due to uniformed and careless spending. Incidentally, many people, educated and uneducated face same challenges which has emerged as a major setback. It is high time the policy makers and the government took a bold step to ensure they provide financial education to all consumers across the country. Alternatively, financial literacy education could be introduced as compulsory course in the school curricula so that all citizens get a chance to pursue it (Singh 2002).
CHAPTER 4: DATA ANALYSIS
The following data analysis follows a classic inverted pyramid technique, commencing with general summary of the implications of lack of financial education, followed by detailed analysis of various phenomena and their relationship with financial literacy. The data analysis process will follow the dictum from Noblit and Hare (1988) that each study read and analyzed by researchers helps them to understand and interpret the next studies reviewed, as well as to reanalyze what was previously read and discussed in a process they term reciprocal translation (Noblit and Hare, 1988, Pg. 37).
Noblit and Hare (1988) gives current and comprehensive snapshots of the exceptional behaviors, approaches, and expenditure trends of consumers in South Africa. Besides covering significant core subjects like household disposable incomes, consumer outflows, savings and credit and housing and home ownership. In addition, this analysis also includes statistics on more specific consumer-based topics, for instance, topics like eating and drinking patterns, shopping trends, favorite types of stores and trade revenues, apparel and fashion patterns and illustrations of how customers spend their leisure time (Noblit and Hare, 1988, Pg. 37).
Consumer segmentation section in this analysis divides South Africa’s consumers into various segments, for instance, predetermined age groups, which range from young people to adults receiving pensions, describing the factors that influence buying decisions and products in highest demand for every section. In an environment where the decisions of the consumers regarding financial issues are of greater significance to their success, financial literacy becomes significant to understanding the value of money. This was a statement made by the E.S.B.G Managing Director Chris De Noose. He emphasized on the significance of giving power to consumers and households because this results to effective and successful working of financial system. Both the E.S.B.G and its associates identify the significance of advocating for financial literacy at European level (Noblit and Hare, 1988, Pg. 37).
As asserted from the literature review, it is also very significant to integrate financial education course into education curricula in order to avoid the risks associated with inadequate financial knowledge. Financial education is also essential at every stage in life in order to improve the capability of people to make savings and make assets, and avail them to life’s future events. Every person regardless of the social status, work status should embrace financial education, as long as they fall under the category of either consumer s or providers (Noblit and Hare, 1988, Pg. 37).
Financial education is part of the consumer’s wider mutual social responsibility. In addition, financial education is essential in contributing towards the enhancement of consumer’s living standards, endorsing local and economic improvement, and creating social cohesion at the local level. The new MBD Credit Solutions and the Bureau of Market Research’s Consumer Financial Vulnerability Index (CFVI) for the third quarter of 2012 illustrates that there is an increase in consumer’s cash flow due to the pressure influence. The pressure the consumers experiences is weighty than the one felt in the economic recession in 2009. The data analysis conducted herein reports on the incidences of consumers miners viewed in the upheaval of the current strikes (Noblit and Hare, 1988, Pg. 37).
Figures fail to recover
The figures failed to recuperate in Q3 2012, and this occurred following a sharp decline in Q2 2012. Subsequent to the decline from 58.9 points in Q1 2012 to 48.6 points in Q2 2012, the CFVI deteriorated further to 47.9 points in Q3 2012. As indicated in the following Table,
CFVI is now lower than in Q2 2009, which is indicated in the last quarter of the financial decline (Noblit and Hare, 1988, Pg.37).
Table 1: CFVI over time
Date
Savings
Expenditure
Debt servicing
Income
Overall CFVI
Q2 2009
42.6
44.6
56.3
43.6
48.4
Q1 2012
58.8
60.1
56.6
57.6
58.9
Q2 2012
47.5
53.8
47.8
44.8
48.6
Q3 2012
42.1
54.4
48.1
46.8
47.9
This CFVI-reading illustrates that consumers felt much exposed about their cash flow, as there was a high increase in risks for the consumers to become financially susceptible (Noblit and Hare, 1988, Pg.37).
Figure 1: Categories of the CFVI
Financially vulnerable
Financially exposed
Financially secure
0 – 20
20 – 39.9
40 – 49.9
50 – 59.9
60 – 79.9
80 – 100
Extremely vulnerable
Very vulnerable
Very exposed
Mildly exposed
Very secure
Extremely secure
Table 1 indicates that in comparison to Q2 2009, the greatest changes happened in the expenditure and debt services classification.
As indicated, consumers moved from very exposed areas in terms of expenses to little exposed areas. This is contradictory to the occurrences illustrated in terms of debt serving, whereby, consumers highly exposed conditions in comparison to the mildly exposed in the duration Q2 2009. This is regardless of the decreased interest from 11% through Q2 2009 to 2.5% (Noblit and Hare, 1988, Pg.37).
The changes indicated above have a consistency and explainable by CFC transmissions path. For the consumers to sustain their expenditure, which is increased by high interest mortgage rates, low saving but high expenditure, interest on bank loans, they must incur some debts. However, they borrow at an expensive rate because they are given unsecured loans. The cost of unsecured loans with debt servicing costs is 2.2 times, which is higher that secured loans obtained in Q2 2009. The outcome of the Q3 2012 CFVI was from the current Finscope analysis amongst consumers. This facilitated a more comprehensive evaluation by the income group, education level, employment condition, and age group. The following conclusion is deductible from the analysis (Noblit and Hare, 1988, Pg. 37).
Income clusters that earns up to R300 000 yearly (95.5% of consumers) suffered from being fiscally exposed based on the cash flow. As well those that earn upto R500 000 yearly are under exposure considering their debt servicing.
Consumers holding at least degree/diploma felt secure in terms of their financial matters.
The self-employed persons and those with full time occupations attained the highest degree based on CFV scores.
However, they formed part of the financially exposed classification.
The young generation, especially those below 25 years are very fragile together with the older group
The youth (younger than 25 years) was the most fragile together with the 55 – 59 year category.
Figure 2: CFVI by income group
Figure 3: CFVI of the R60 000 – R150 000-income group
The fragility illustrated by the debt servicing is explainable by the adjustments of credit incurred. As illustrated by Table 2, 41.1% of the new credit was unsecured in Q2 2009, it deteriorated to 21.4% in Q2 2012. In distinction, the unsecured credit that was expensive in doubled from 28.3% to 54.2% in Q2 2009 to Q2 2012 respectively. The increase in interest rate of the unsecured credit increased by over 2.2 times that of the debt servicing susceptibility. Similarly, there was also an increase in debt serving prevalence but at a lower rate, and this prevented any increases in income (Noblit and Hare, 1988, Pg.37).
Table 2: composition of new credit incurred by R66 000-R180 000 income group Q2 2009 to Q2 2012
2009 Q2
2012 Q2
Mortgages
10.00
5.30
Secured
41.12
21.42
Credit facilities
16.19
15.77
Unsecured
28.25
54.24
Short term
4.43
3.27
Even though, most workers laid down their tools in order to compel the management to increase their wages, it was very clear from their educational profiles, that they never deserved any increase because their inadequate skills disallowed them from any increases in wages. In addition, considering the AMPS statistics, it appears that in the course of 2011, a high number of workers from almost every department within the organization had a low level of education. The statistics indicated that 85% of drill operators, 57% of general mineworkers, and about 50% of the supervisors held A-level education, meaning that their low financial ground denied them an opportunity to enjoy the benefits provided by their employment (Noblit and Hare, 1988, Pg.37).
This indicates that the level of education has direct relationship with the level of employment status and financial management. This is because this worker suffers from financial management issues and continues suffering from poor living standards. They are unable to manage for the low incomes they receive. As Noblit and Hare (1988) indicates that, this reflects a worrying impression emerging from South Africa, because one can achieve material prosperity without having any education or expertise. He explained that mining workers demands an increase of R12 500 on their wages, which means they will be receiving a higher wage than even a teacher that holds a degree and a diploma in teaching. However, records details that even after the increases, they are still incapable of improving their livelihoods (Noblit and Hare, 1988, Pg. 37).
In this study, the analysis of data will be beneficial in inspecting, transforming, cleaning, and data modeling with the objective of highlighting any useful information, conclusion suggestion, supporting decision-making processes. In this case, data analysis will encompass diverse techniques, approaches and multiple facets. As part of the analysis of data, data mining will be beneficial in focusing on the modeling and knowledge discovery.
CHAPTER 5: SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS
Summary
Financial education is part of the consumer’s wider mutual social responsibility. In addition, financial education is essential in contributing towards the enhancement of consumer’s living standards, endorsing local and economic improvement, and creating social cohesion at the local level. Consumer segmentation section in this analysis divides South Africa’s consumers into various segments, for instance, predetermined age groups, which range from young people to adults receiving pensions, describing the factors that influence buying decisions and products in highest demand for every section. In an environment where the decisions of the consumers regarding financial issues are of greater significance to their success, financial literacy becomes significant to understanding the value of money. This was a statement made by the E.S.B.G Managing Director Chris De Noose. He emphasized on the significance of giving power to consumers and households because this results to effective and successful working of financial system. Both the E.S.B.G and its associates identify the significance of advocating for financial literacy at European level.
Financial stress occurs when an individual or a system is undergoing some strain. Financial stress has a negative impact on the employee performance. Many South Africans face economic hardships brought about by the lack of financial literacy. In South Africa, including some other countries in the world, many people go through hardships because of the lack of financial education. It is important to fix the problem of financial illiteracy because of a number of reasons. The main reason would be to change the attitude of people towards how they handle their finances. This attitudinal change focuses on directing people towards making wise financial decisions, consequently reducing their stress levels, and enhancing their productivity in the workplace. The lessons should not only focus on the benefits of making wise financial decisions in their daily lives but also on the need to have a plan for the retirement years. The education does not only make the people aware of the financial opportunities and the risks, but it also improves their financial decision-making ability (OECD, 2005, p. 26).
South Africa is a middle-income country with a marketing economy, which enjoys considerable natural resources. The country has proper financials, with one of the largest stock exchanges around the world. The country also boosts of proper communication and energy systems around the continent. However, in 2011, the country’s economic performance rebounded. Despite the country’s good economy performances in 2011, the unemployment levels in the country remained a big challenge in both the private and public sectors. Despite some of these constraints, the country boosts of the most developed economies in the entire continent. The country’s telecommunication systems, paved roads, skilled professionals, and banking systems are among the best in the Africa. South Africa is globally viewable as a commercial jewel among the sub-Saharan nations and Africa in general.
One of the confusing aspects involved in financial literacy rates improvement in any nation is the general tendency of individuals to make use of the seat-of-the-pants financial planning designs which various families and friends use. There are various demographic factors, which indicate that financial literacy is a challenging prospect. Financial literacy is closely related to behavior. Individuals who have poor financial literate levels tend to save minimum finances. Similarly, financial education in a workplace can increase employee participation in employee-directed retirement fund plans and motivate savings. The financial literacy questions will also be beneficial in research surveys since it helps in evaluating the financial literacy influences especially during decision-making process. Despite the positive aspects of financial literacy, some people disagree with the whole idea of financial literacy. A person seeking financial plan will require various aspects and not just the basic knowledge.
The increasing roles and complexities in financial markets in South Africa at all development stages have been beneficial in reinforcing the needs to improve consumer’s capacity to efficiently manage and access different interactions with such services especially among the middle and low income countries which have financial inclusions that have poor and educational accomplishments which are low. It is also essential to offer comparable, standardized information about the services provided by financial institutions. The majority of South Africans have bank accounts through which they receive their monthly wages and this is an opportunity to affect them with the information on financial literacy and smart decision-making. Large business enterprises too have mechanisms by which employees acquire relevant training on how to manage their spending with a view to realize true value for their earnings. South Africa has an emerging market economy that has continued to enjoy significant natural resources.
The study aims at analyzing the current levels of financial education among the consumers in South Africa. Once their productivity improves, the entire output of the country might also improve. The analysis will also make it easy for the identification of the strengths. Improving in the strengths is necessary not only for the individual but also for the entire country. Apart from these investment programs, there are pension schemes that individuals could use to ensure that their life after retirement will be comfortable. Living in debt is also a problem that the people go through which contributes to the crisis. To prevent this crisis, the only appropriate thing to do would be to offer financial education to the people. Consumer protection helps consumers understand that their input in the financial market is valued and causes significant effect. Financial institutions will also have provide “key fact statements” to consumers “with a summary of the most important terms and conditions” to ensure that consumers are well informed without burdening them with information that does not help their decision-making.
The issue on financial literacy extensive as it touches on various elements in terms of finances and human issues such as credit and consumerism. A country requires 25% domestic savings in order to boost its economic growth but South Africa has only 16%. This suggests the country puts more emphasis on investment inflows rather than domestic savings. This is evident that the government considers direct foreign investment as a solution to the development of the economy and creation of jobs. The farmer’s inaccessibility to proper roads limits their ability to transport produce, inputs and access information. Poor infrastructure results to lack of markets for their agricultural inputs and outputs thus becoming unreliable for these farmers. High cost of transaction is among the key factors constraining the growth of agriculture in African countries as this cost relates to poor infrastructure. The government of South Africa has collaborated with other non-governmental organizations to come up with initiatives that will improve the quantity and quality of infrastructure in these areas.
Market reforms are essential in lifting egregious barriers for smallholder farmer’s market participation but they always fail when it comes to addressing the crucial hidden reasons for market non-participation. The economy of South Africa had undergone extensive changes to the trade policy and industrial structure by 1994. During this integration process into the international economy, the banking sector was at the forefront of revolution, where leading aspect was capital mobility liberalization. This aspect modified the economy in two ways in that; it attracted the foreign capital in to the economy of the nation and led to the emergence of new banks in the market. The financial system development including access to financial services plays an essential role in developing a country. Consumers have mixed reactions regarding the technological advances that are ever changing. A study conducted in South Africa showed that the adult population does not like the rapid shifting technological advances.
Despite the benefits that come with technological innovation in banking, various challenges may arise among them economic and social problems. In communication and information technology, technical innovation has led to globalization of business operations. Advancement in technology denotes that consumers have to learn the way to apply such technologies. Financial literacy also affects the young people in various ways.
Conclusion
South Africa is a middle-income country with a marketing economy, which enjoys considerable natural resources. The South African citizens believed that the state-owned enterprises would be beneficial in delivering basic services to low low-income regions and rural areas. Financial literacy is closely related to behavior. Individuals who have poor financial literate levels tend to save minimum finances. These financial illiteracies have various significant effects on the choices the people make. In the South African, various initiatives are in place to help in the improvement of financial literacy for the young consumers. Despite the positive aspects of financial literacy, some people disagree with the whole idea of financial literacy. Most of these individuals will commit financial errors and mistakes unlike the middle-aged individuals.
The increasing roles and complexities in financial markets in South Africa at all development stages have been beneficial in reinforcing the needs to improve consumer’s capacity to efficiently manage and access different interactions with such services especially among the middle and low income countries which have financial inclusions that have poor and educational accomplishments which are low. Some of these problems have been effective in trying to bring marginalized South African consumers into the conventional economy. Financial plan allocates future income in to different types of expenses including utilities and rent. It also preserves a little income for long-term and short-term savings. Financial plans are also investment plans. Considering the resources necessary for the success of financial literacy training, millions of typical South African consumers will smile again and enjoy a fare share of their country’s resource without any limitations. The influential work on the effect of financial education affirmed that young people that took financial Management courses in high schools purposed save a high amount of income that their colleagues who concentrated in other courses.
The new investment options with a high level of incomprehensible derived products and opt-out retirement programs have increased the significance of financial decision and intensified the understanding capability. In addition, and based on the current research investigations by the Employee Benefits Research Institute, employees that never saved for retirement had inadequate savings, reporting a 70%, and owning less than $10,000 in overall assets. Employees, older people women, young people, and persons with a disability all require help when it comes to financial literacy according to research by the US treasury. The US research findings points out the following considerations for conceptualization of the educated consumer of financial services and their counterparts, the socially responsible financial providers. Lack of consumer financial literacy in South America is also evident from the study by Bernhein, who in his research confirmed that South Africans lack the basic consumer knowledge.
There is a positive correlation between financial literacy and gender, race, and education even among the younger generation. Those exposed to financial duties at work place also recorded a high number of consumer financial literacy than those in other departments. Those who undermine the strength of compound interests accumulation have a problem with debt matters since they are unlikely to agree with the interest rates and the calculation matters. Lack of consumer financial knowledge affects how a person makes vital financial decisions in negative ways. Those who possess a greater knowledge on financial matters recorded wise decisions when it came to making financial decisions. Financial knowledge also relied on other factors such as age, race, gender, and educational level. Financial literacy is the ability to understand finances. In most countries, financial literacy is left to individuals who own companies and have studied finance or business. South Africa is not the only country that struggles with financial illiteracy. The reality is that consumers around the world experience this situation since they use money on a daily basis.
Financial literacy needs a framework that embraces individual product compartments like home loans and micro lending. It also needs an enabling environment where financial firms and business people commit to ensuring financial literacy in South Africa. So far, the initiative has attracted the participation of thirteen banks and twenty-seven financial sector institutions. The tendencies not only impact financially illiterate consumers, but they also have a profound effect on the larger society in which they exist. Policies mandating financial education for high school students result in higher asset accumulation once exposed students reach adulthood. This means that South Africa is in a position to make a difference towards the financial literacy of its consumers. It is also “essential to offer comparable, standardized information about the services provided by financial institutions.” The aim of involving financial institutions is to ensure that consumers receive accurate information. The financial organs are best suited for this task because they have that information readily available. It is also impossible to separate the consumer from one financial institution or another. This means that at one point, the consumer has come to contact with a financial institution. The majority of South Africans have bank accounts through which they receive their monthly wages and this is an opportunity to affect them with the information on financial literacy and smart decision-making. The idea is to reduce the impact of financial literacy by first creating awareness then taking positive measures in the same direction.
Lack of financial literacy also leaves consumers vulnerable to pitfalls, possible abuse and redials opportunities. This is to mean that lack of information makes consumers purchase unnecessary goods and services at exorbitant prices. It also makes consumers worry so much about surviving for the next day that they do not save any money. In many cases, lack of financial literacy leads to very poor spending habits and no savings. The consumer is also not interested in financial literacy because he is not in a position to put any money into the right investment since he has none to spare. When people save money, financial institutions like banks increase their stock exchange rates and bring in profits at the end of financial years. Such organizations are also able to expand and provide services to other regions in South Africa, which ensures overall growth and development in the country. Some people have the ability to make correct financial decisions on instinct, but such people are very few. The outcome of the lack of financial education amongst consumers can be dire, as many consumers will never realize the significance of controlled spending.
In addition, the cost of living would technically go up considering that most consumers would not be in a position to afford even the basic commodities after spending almost the whole amount of income in purchasing unimportant items that they might have otherwise bought later. Societies have a role to play in providing financial advisory services to people with no ability to determine their own priorities once they get their incomes. It is high time government invested considerably in financial education for all consumers. The bottom line is the consumers’ ability to meet all their daily needs throughout a given period before they could earn another pay. The fundamental aspect of the whole debate is how to provide financial education to consumers without them feeling pushed to the limit in terms of how they should spend their incomes. Economic growth has always been on the upward trend as industries strived to provide more employment opportunities to accommodate the increase in the number of young and educated people. Major urban centers have modernized road and railway networks that have boosted the realization of the goals and objectives of the vibrant market economy.
Apparently, South Africa’s economic policy is fiscally conservative. Paucity of financial literacy among many consumers will only constrain the financial resources. To give quality material that has proper evidence proving the impact that consumer illiteracy has on the financial status of a middle class country like South Africa, the specified methods renowned for the process of economic revival and boosting should be considered. The sources to acquire the information needed is apparently wide thus, demanding that the research be keen on the precise areas that he or she will acquire the most reliable information.
This study aims at analyzing the current levels of financial education among the consumers in South Africa. Once their productivity improves, the entire output of the country might also improve. The analysis will also make it easy for the identification of the strengths. Improving in the strengths is necessary not only for the individual but also for the entire country. Apart from these investment programs, there are pension schemes that individuals could use to ensure that their life after retirement will be comfortable. Living in debt is also a problem that the people go through which contributes to the crisis. To prevent this crisis, the only appropriate thing to do would be to offer financial education to the people. Consumer protection helps consumers understand that their input in the financial market is valued and causes significant effect. Financial institutions will also have provide “key fact statements” to consumers “with a summary of the most important terms and conditions” to ensure that consumers are well informed without burdening them with information that does not help their decision-making.
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Organisation For Economic Co-Operation And Development. (2003). Attracting international investment for development. Paris, OECD.
Organisation For Economic Co-Operation And Development. (2005). Improving financial literacy analysis of issues and policies. Paris, OECD.
Piramanayagam, S. N., & Chong, T. C. (2012). Developments in data storage: materials perspective. Hoboken, N.J., Wiley.
Porteous, D., & Hazelhurst, E. (2004). Banking on change: democratising finance in South Africa 1994-2004. Cape Town, Double Storey.
Porteous, D., & Hazelhurst, E. (2004). Banking on change: democratising finance in South Africa 1994-2004. Cape Town, Double Storey.
Tytell, I., Elekdag, S., Balakrishnan. R. & Danninger, S. (2009). The Transmission of Financial Stress from Advanced To Emerging Economies. International Monetary Fund.
Wendy Olsen. (2012). Data Collection: Key Debates and Methods in Social Research
World Bank. (2012). Rethinking the role of the state in finance. Washington, D.C., World Bank.
Xiao, J. J. (2008). Handbook of consumer finance research. New York, Springer.
Ivatury, G., Pickens, M., 2006 “Mobile Phone Banking and Low-Income Costumers”. CGAP.
FinMark Trust. 2006. Finscope South Africa 2006. Johannesburg: FinMark Trust.
Bhorat, H. 2000: “The impact of trade and structural changes on sectoral employment in
South Africa”, Development Southern Africa, 17, 3: 437
Cosser, M. & du Toit, j. 2002: “From school to higher education: Factors affecting the choices of Grader 12 learners,” HSRC Press, Cape Town
Kraak, A. 2005: “Human resources development and the skills crisis in South Africa: the need for a multi-pronged strategy”, in Journal of Education and Work, vol. 18(1), pp.57-83
Jayamaha, R, 2008. Impact of IT in the Banking Sector [On-line]. Available: www.bis.org [accessed February 7, 2008].
Porteous, D. and Hazelhurst, E. 2004. Banking on Change: Democratizing Finance in South Africa, 1994-2004 and beyond, Cape Town: Double Story Books
Reixach, A., 2001. The effect of information and Communication technologies on the Banking Sector and Payment System, University de Girona
Bhorat, H. and Lundall, P. 2002: “Employment, Wages and Skills development: Firm specific effects-Evidence from two firm surveys in South Africa,” Development Policy Research Unit: Working Paper No. 02/68, Cape Town.
Piprek,G., P. Dlamini and G. Coetzee, 2004 “Financial Literacy Scoping Study & Strategy Project”. FinMark Trust. March
Penguin. Joe Dominguez & Vicki Robin, 2000. Your Money or Your Life: Transforming Your Relationship With Money and Achieving Financial Independence. Penguin.
Kotze L, Smit A, 2008. Personal Financial Literacy and Personal Debt Management: The Potential Relationship With New Venture Creation. SAJESBM, 1(1): 35-50.
Vink N & Kirsten J (2003). Agriculture in the national economy. In Nieuwoudt L & Groenewald J (eds), The challenge of change: agriculture, land and the South
African economy. Pietermaritzburg, South Africa: Natal University Press: 1-19.
Lucey, T. A., & Laney, J. D. 2012. Reframing financial literacy: exploring the value of social currency. Charlotte, N.C., Information Age Pub.
Beck, T. (2011). Financing Africa: through the crisis and beyond. Washington DC, World Bank.
HOFFMANN, E. C. (2007). Operations & management principles for contact centres. Cape Town, South Africa, Juta.
INFORMATION RESOURCES MANAGEMENT ASSOCIATION, & KHOSROWPOUR, M. (2006). Emerging trends and challenges in information technology management. Hershey, Penn, Idea Group. http://www.books24x7.com/marc.asp?bookid=13270.
KELLY-LOUW, M., NEHF, J. P., & ROTT, P. (2008). The future of consumer credit regulation: creative approaches to emerging problems. Aldershot, England, Ashgate Pub.
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Discuss in view of historical perspective and current laws. What does it mean to be “disabled”? What are employers’ obligations towards new hires?
In “normal times”, what is the process for a nurse (RN/LPN/LVN) to leave Texas and be obtain permanent work in Florida?
A nursing unit in Wise-Town nursing home has many staff and patients infected with Covid-19. The company hired “outside nurses” to provide adequate staffing for the unit. Analyze the situation where the managing team of Wise-Town may be held liable for mistake made by those “agency” nurses.
A nurse is asked to float to a new unit to cover for loss of staff due to recent infections of Covid-19. Patients and staff are turning positive for the new infection. What are the nurse’s options, how about the law, how about the ethics?
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Critical thinking is an important skill to develop as you seek to become a more skilled consumer of knowledge. While some of what you read in the news or online may be true, most of us approach information such as this with a healthy dose of skepticism. We read it, think about it, consider the source(s) of the information and may even compare different versions before we are willing to accept it as truth. What many students do not realize is that academic sources should also be approached with a degree of skepticism as textbooks and academic journal articles may contain inaccuracies or hidden bias.
As Biblical worldview thinkers it is important to examine everything in light of the truth we know to be ultimately authoritative. If something we read appears to contradict what we know to be true (based on Scripture) we should examine it closely and critically.
The two examples provided below are in our textbook. In both cases, the content would seem to indicate that a position supported by Biblical truth is incorrect. We will examine each idea to determine if the message communicated can hold up to a critical analysis based on empirical evidence and our Christian worldview.
Instructions
For each of the topics listed below you will:
1. Examine a statement from our textbook in light of scholarly literature, and a Biblical perspective.
2. Write a brief reaction essay (with a minimum of 500 words) describing your critical analysis and conclusions.
3. After completing analysis, you will create an APA-formatted document with the title page, your reaction essay, and a reference list identifying any source cited in your essay. You should cite the textbook, the Bible, and any other scholarly source used.
Topics
Topic 1 (Module 5)
Comparing Outcomes Related to Close Relationships
(You may discuss one or both items listed below)
Cavanaugh & Blanchard
Scholarly Source
Scripture
From the section on cohabitation: “Longitudinal studies find few differences in couples’ behavior after living together for many years regardless of whether they married without cohabiting, cohabited then married, or simply cohabited” (Stafford, Kline, & Rankin, 2004).
Choose at least one of the following to include in your discussion: Stafford, L., Kline, S. L., & Rankin, C. T. (2004). Married individuals, cohabiters, and cohabiters who marry: A longitudinal study of relational and individual well-being. Journal of Social and Personal Relationships, 21(2), 231-248. https://doi.org/10.1177/0265407504041385
From the section on LGBTQ Relationships: “Research indicates committed gay and lesbian couples have most of the same characteristics as committed heterosexual couples.”
Choose at least one of the following to include in your discussion: Veldhuis, C. B., Hughes, T. L., Drabble, L., Wilsnack, S. C., Riggle, E. D. B., & Rostosky, S. S. (2019). Relationship status and drinking-related outcomes in a community sample of lesbian and bisexual women. Journal of Social and Personal Relationships, 36(1), 244-268. https://doi.org/10.1177/0265407517726183 Kolk, M., Andersson, G. Two Decades of Same-Sex Marriage in Sweden: A Demographic Account of Developments in Marriage, Childbearing, and Divorce. Demography 57, 147–169 (2020). https://doi.org/10.1007/s13524-019-00847-6 Kelley, M. L., Milletich, R. J., Lewis, R. J., Winstead, B. A., Barraco, C. L., Padilla, M. A., & Lynn, C. (2014). Predictors of perpetration of men’s same-sex partner violence. Violence and Victims, 29(5), 784-796. https://doi.org/10.1891/0886-6708.VV-D-13-00096 Rollè, L., Giardina, G., Caldarera, A. M., Gerino, E., & Brustia, P. (2018). When intimate partner violence meets same sex couples: A review of same sex intimate partner violence. Frontiers in Psychology, 9, 1506-1506. https://doi.org/10.3389/fpsyg.2018.01506
Topic 2 (Module 7)
Comparing Perspectives Related to End of Life Issues
Cavanaugh & Blanchard
Alternative Perspective
Scripture
From the section on Euthanasia: In the arena of death and dying, the most important bioethical issue is euthanasia—the practice of ending life for reasons of mercy.
Part A: A psychologist understands how biology can affect psychological activities and disorders. In your interview, you are asked about your understanding of the causes and treatment(s) of schizophrenia. In your reply, discuss the following: · Areas of the brain affected · Causal factors · Associated symptoms · The neural basis · Appropriate drug therapies Part B: Part B of the interview consists of interpreting some case studies from a biopsychologists perspective. You are given four different case studies of disorders and have the option of choosing two out of the four case studies to analyze. · Write a 1,750- to 2,100-word paper in APA format containing the following: Introduction Part A of the interview process. Part B of the interview process: * Choose two of the four case studies presented in Appendix A. * Discuss your understanding of the problem presented in each of the two case studies from the perspective of a biopsychologist. * Include each problems relation to the nature-nurture issue and any relevant portions of the Basics to Biopsychology text. * Use a minimum of five outside resources, including at least 3 peerreviewed articles. * Apply any helpful drug interventions or solutions. PSY 240 The Brain, the Body, and the Mind Course Syllabus Page 8 PSY 240 * Discuss the positive or negative aspects of these drug interventions or solutions. * Conclusion
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Explain how genetics provides a new perspective on the nature versus nurture debate.
Epigenetics is the study of changes in gene activity that do not involve direct alterations to the actual genetic code. There is a relationship between genes and traits, and the bridge between the gene or genes underlying a trait is a protein. Genes are the code for building proteins, and once built, proteins carry about many functions in the body and they are ultimately responsible for behavioral traits. How is it decided what specific genes get turned on or off? The patterns oepi-f gene expression (protein manufacture) are governed by the cellular material—the epigenome—that sits on top of the genome, just outside it (hence the prefix , which means “above”). It is these epigenetic “marks” that tell certain genes to switch on or off. It is through epigenetic marks that environmental factors like diet, stress, and prenatal nutrition can make an imprint on genes, and this imprint can be passed on over generations. With epigenetic changes, the DNA itself does not change, but the way individual genes within the sequence are expressed (or turned on or off) does change.
To prepare:
Read about gene-by-environment effects (also called gene x environment or G X E) in the Champagne and Mashoodh (2009) article. The particular example you will examine is epigenetic programming due to variations in maternal care. Specifically, in rodent models, it was found that maternal behavior such as carefully licking and grooming the pups was tied to a decreased stress response and lower levels of exploration fear in the pups. Mothers that displayed low levels of pup licking and grooming had adult offspring with a heightened stress response. This study provided evidence that epigenetic changes can underlie the long-term impact of early life experiences.
For this Discussion, consider the personal and social implications of gene x environment interactions. Also consider other gene x environment interactions future research will be most likely to discover based on your introduction to this new topic.
With these thoughts in mind:
Post by Day 3, your response to the following:
Explain how genetics provides a new perspective on the nature versus nurture debate. Also, reference the Champagne and Mashoodh (2009) article, and provide an explanation of how the rat-nurturing example can further explain human parental behavior. In addition, explain the broader social implications of this type of research. Finally, share your prediction of and rationale for what other gene x environment interactions future research may discover.
Respond by Day 5 to a colleague’s post by providing two additional ways that epigenetics offers a new perspective on the nature versus nurture debate.
Note: You are required to complete your initial post before you will be able to view and respond to your colleagues’ postings. After clicking on the Post to Discussion Question link, select Create Thread to create your initial post.
Resources to use:
Week 4 Learning Resources
Print Page
This page contains the Learning Resources for this week. Be sure to scroll down the page to see all of this week’s assigned Learning Resources.
Required Resources
Note: To access this week’s required library resources, please click on the link to the Course Readings List, found in the Course Materials section of your Syllabus.
Readings
Callahan, D., Wilson, E., Birdsall, I., Estabrook-Fishinghawk, B., Carson, G., Ford, S., Yob, I. (2012). Expanding our understanding of social change: A report from the definition task force of the HLC special emphasis project. Minneapolis, MN: Walden University.
Champagne, F. A., & Mashoodh, R. (2009). Genes in context: Gene-environment interplay and the origins of individual differences in behavior. Current Directions in Psychological Science, 18(3), 127–131.
Retrieved from the Walden Library databases.
Roth, T. L., & Sweatt, J. D. (2011). Annual research review: Epigenetic mechanisms and environmental shaping of the brain during sensitive periods of development. Journal of Child Psychology and Psychiatry, 52(4), 398–408.
Retrieved from the Walden Library databases.
Media
TED Conferences, LLC (Producer). (2012). Epigenetics makes you unique [Video file]. Retrieved from http://tedxtalks.ted.com/video/TEDxOU-Courtney-Griffin-Epigene
Note: The approximate length of this media piece is 18 minutes.
With these Learning Resources in mind, please proceed to the Discussion.
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You will need to find 4 articles located in scholarly journals. What cannot be used for this assignment are web pages, magazines, newspapers, text books, and other books. Finally, current research for our purposes is an article that was published within the last 5 to 6 years.
Remember this is a course on human development so when looking for articles make sure that it is related to the subject matter covered in the course. To help in your search here are some of the major areas we covered in this course (these are meant as a guide, not specific topics to find).
Major developmental theories across the lifespan Nature of geographic, gender, social, cognitive, emotional, and developmental factors during each period of development Developmental factors that impact one another. Historical and current trends in development Current trends which may differentially impact the future development of populations in the United States Social, and diversity issues related to developmental psychology With the major areas above in mind, focus on at least two of the following age groups:
Childhood Adolescence Adulthood Older Adults First, give an overview of each article, including:
Write a 2 paragraph summary for each article. Write a 1-2 paragraph analysis and evaluation for each article found. Make sure to integrate what you learned in your other course readings in that analysis Then, write a summary (1-2 pages) integrating what was leaned from the articles reviewed on the chosen age groups as seen from the life-span perspective. Cover the following in that summary:
What similarities did you find in the types of research and what was being studied? What differences did you find? Based on your course readings, what developmental theories did you find that were applicable? Explain how the life-span perspective may provide a way of better understanding the research reviewed.
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You will need to find 4 articles located in scholarly journals. What cannot be used for this assignment are web pages, magazines, newspapers, text books, and other books. Finally, current research for our purposes is an article that was published within the last 5 to 6 years.
Remember this is a course on human development so when looking for articles make sure that it is related to the subject matter covered in the course. To help in your search here are some of the major areas we covered in this course (these are meant as a guide, not specific topics to find).
Major developmental theories across the lifespan Nature of geographic, gender, social, cognitive, emotional, and developmental factors during each period of development Developmental factors that impact one another. Historical and current trends in development Current trends which may differentially impact the future development of populations in the United States Social, and diversity issues related to developmental psychology With the major areas above in mind, focus on at least two of the following age groups:
Childhood Adolescence Adulthood Older Adults First, give an overview of each article, including:
Write a 2 paragraph summary for each article. Write a 1-2 paragraph analysis and evaluation for each article found. Make sure to integrate what you learned in your other course readings in that analysis Then, write a summary (1-2 pages) integrating what was leaned from the articles reviewed on the chosen age groups as seen from the life-span perspective. Cover the following in that summary:
What similarities did you find in the types of research and what was being studied? What differences did you find? Based on your course readings, what developmental theories did you find that were applicable? Explain how the life-span perspective may provide a way of better understanding the research reviewed.
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Q. Does the Biological perspective in abnormal psychology make other perspectives obsolete? Answer with reference to one mental disorder of your choice. (35% of total module marks). Psychologists have been trying to understand mental illnesses, and many years ago, the biological perspective was the most popular due to its scientific nature. Schizophrenia – a chronic condition whereby patients lose touch with reality – was best explained by the Dopamine Hypothesis for example.
However, recent progression in Schizophrenia research emphasizes the importance of non-biological factors as well, such as environmental stressors. Thus a Diathesis-Stress model is generally accepted by many today. Schizophrenia is seen as a disease caused by the over-activity of dopamine receptors in the mesolimbic pathway i. e. the Dopamine Hypothesis (Richard Hall, 1998). This consequently increases the levels of dopamine in our brains, said to cause hallucinations and delusions in patients.
To prove this, amphetamines (drugs that increase dopamine levels in the brain) were administered to rats in small dosages Randrup et al. (1966), which produced rotational behaviour – said to be associated with hallucinations. PET brain scans further showed that dopamine levels had infact increased. The main critism facing the conclusions of such studies is that humans and animals have different physiology. This thus limits generalisability. However, similar investigations have been carried out on humans, despite ethical concerns, but yielding consistent results.
Anti-psychotic drugs – most effective being Clozapine – were created, so as to reduce dopamine levels. These have shown to be highly effective in calming patients down and helping them cope with the illness, especially concerning hallucinations and delusions. However, there is a lot more to the disorder i. e. social withdrawal, apathy, alogia and inability to communicate emotion through voice and facial expressions – all of which are symptoms that are not affected by the drug in any way. This suggests that there is more to the disease than just increased levels of dopamine.
Before disregarding the Biological perspective however, it is essential to consider that glutamate, serotonin and GABA (Gamma – Amino Butyric Acid) , other neurotransmitters found in the brain, have been suggested to also have an affect in the development of mental illnesses, but evidence is limited. The Biological perspective also takes into consideration the view that there could be a predisposition to schizophrenia. In fact, Alastair (2000) provides evidence for this idea via his meta-analysis of twin studies conducted in the UK and Japan since 1995.
He found that the concordance rate (CR) for schizophrenia between Monozygotic (MZ) twins is 41-65%, whereas, that for Dizygotic (DZ) twins is 0-28%. Similar research has been conducted globally, ensuring that these conclusions are generalisable. However, some Psychologists argue against this saying that because twins share the same pre-natal and (sometimes) post-natal environments; this is what is really causing schizophrenia, not genes. Furthermore, it is often questioned that if MZ twins share 100% of the same genes, then they should have a much higher CR than 65%.
Despite, these arguments, a predisposition to schizophrenia is still evident. Most Psychologists do believe that there is a predisposition to schizophrenia and that environmental stressors trigger its development. This is known as the Diathesis Stress Model, whereby both perspectives are seen to equally contribute in understanding schizophrenia and other mental health issues. Environmental stressors come in many forms, for example poverty, racial discrimination, communication with families, stereotyping by individuals in society and the use of drugs – all of which are expanded on in the following few paragraphs.
Firstly, the Sociogenic Hypothesis explains how poor socio-economic conditions create stress that may trigger schizophrenia in people. Usually such individuals have to deal with poverty at a daily basis and they live in urban areas – known for the high levels of pollution and noise. Alternatively, the “downward drift” theory contradicts this, stating that individuals with schizophrenia move lower down in the socio-economic scale. Dohrenwend et al. (1994) investigated both opposing theories. The rates of schizophrenia were examined in 3 ethnic minorities in Israel – European, North African and Middle Eastern.
They experienced a considerable amount of discrimination and social prejudice – a form of stress – that should lead to the movement of these individuals down the social ladder. However, this was not the case. More accepted today is the “social drift” theory, but the influence of the social environment should not be ignored. For example, the prevalence of Schizophrenia in Africans from the Caribbean, which is their native country, was much lower compared to those who had immigrated to London (Hutchinson et al. 1996). This may well have been caused by the difficulties of assimilating into a new culture.
Furthermore, family related factors can also be significant in the development of Schizophrenia. Bateson et al. (1956) claimed that children who receive contradictory messages from their parents may develop schizophrenia in the future, due to the stress it causes – known as the Double Bind Theory. If for example, a mother tells her son that she loves him, yet at the same time turns her head away in disgust, a child may become confused i. e. verbal and non-verbal communication doesn’t match. To support this theory, Bateson carried out a study in 1965, which involved asking questions to schizophrenic patients.
This was so as to encourage recall of double-bind statements by their mothers. Schizophrenics scored higher in this recall test compared to participants in the control group, showing that indeed this may be a contributing factor in the development of the disease. It however, lacked validity because patient’s memory could have been affected by their schizophrenia. Therefore, the Double Bind theory is not exactly seen as plausible in psychological literature. Despite this, it should not be entirely neglected, as Bowlby’s research shows its significance.
Popular research such as Bowlby’s maternal deprivation hypothesis emphasizes on the importance of a loving, sustainable attachment between mother and child during the critical stage (i. e. the first 2 years of a child’s life). This is so as to avoid a lower intelligence, increased aggressive behaviour, affectionless psychopathology, delinquency and depression in adulthood. His theories are not only well known today, but also have gained a vast amount of support by research conducted on this issue – Bowlby’s (1994) study on 44 juvenile thieves is an example of this.
Hence, in general, parent-child relationship must be maintained in a positive manner, so as to avoid any chance of mental illnesses developing especially depression and schizophrenia. In addition, the “Expressed Emotion” (EE) theory illustrates how relapse of schizophrenia may occur once patients are dismissed from hospitals and integrated into family. The use of critical comments, hostility and overemotional involvement when interacting with the schizophrenic patient in the family may cause stress. Brown et al. (1966) conducted a 9-month follow-up longitudinal study of schizophrenic patients.
He found that 10% of patients returning to low-EE homes relapsed compared to 58% of those returning to high- EE homes. This once again emphasizes the importance of positive family relationships. The use of drugs such as Cannabis allows individuals to experience short-term hallucinations and paranoia i. e. psychosis. A widely publicized review in 2007 stated that there is a 40% risk of developing schizophrenia with prolonged use. Although this may be quite low, to avoid any chances of getting mentally ill, such drugs should be avoided at all costs.
Perspectives of Behaviourists such as Scheff (1966) have argued that Schizophrenia is as a result of the self-fulfilling prophecy. Basically, when a child shows some form of deviant behaviour i. e. not considered “normal”, society may label them as Schizophrenic, including Psychiatrists if taken to them for analysis. According to Corrigan (2007), they eventually begin to self-stigmatize, as soon as they believe that they are sick. They categorise themselves negatively as “us” the mentally ill and “them” normal people.
Over time, these individuals may in fact develop the illness. It has been an on-going debate whether psychologists should tell potential patients that they have Schizophrenia or keep it a secret, just so as to increase their chances for recovery. However, this encourages unethical practise and is avoided. Instead, elimination of self-stigmatisation is included in psychotherapy (Kroska and Harkness, 2006), which proves its significance in schizophrenia development – despite the limited available support for these theories.
Although, Rosenhan’s (1973) study does show how easily individuals in society can be labelled despite portraying only limited deviant behaviours. Plus, the distress caused to the pseudo-patients proved that if they stayed any longer perhaps mental health issues could have arose. Moving on to the views of Cognitive psychologists; Firth’s (1979) attention deficit theory evolves around the idea that Schizophrenia is as a result of the inability to filter out irrelevant information – individuals basically focus on everything that is going on around them.
This may cause confusion and as result lead to disordered speech, delusions and auditory hallucinations – all symptoms of Schizophrenia. Bentall (1994) goes on to say that such individuals are biased towards paying attention to and processing threatening stimuli, which leads to paranoid delusions – most common form of delusions amongst Schizophrenics. Goldberg’s (1993) study involved twins, whereby one of them was affected by schizophrenia and the other was not. Those who weren’t schizophrenic scored 80-95% higher on cognitive tests than their twin.
This means that schizophrenics possess weak cognitive abilities, hence indirectly supporting Firth’s theory. Many however have argued that it is unclear whether schizophrenia could have caused this lack of attention rather than the other way around. In addition, he did not explain how these defects occur, hence bringing out strength in the Biological causes, as it offers a more clear explanation to the reasons why positive symptoms emerge i. e. due to increase in dopamine levels.
To conclude, it is evident that there are several perspectives of mental health issues, all of which are equally important as discussed in this essay. This means that the Biological perspective does not make other ones obsolete. Schizophrenia research is on-going and many more views of the illness may come about in the future. Society has to be open-minded and be able to be accepting of them all, so as to give all suffering patients today, the best shot at recovery from any mental illness.
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