BIS Review 85/2005  1  The environment we are operating in is becoming increasingly challenging. Individuals may not know where to seek information or do comparative shopping. The aggressive marketing by financial institutions may lure naÃƒÂ¯ve borrowers into financial transactions that cannot be sustained in the longer term. A number of regional economies have seen aggressive marketing of credit cards, that have led to situations where financial institutions were eventually compelled to write-off many bad loans. The observation from surveys is that many consumers do not fully understand relatively simple financial calculations, and hence do not realise the risks involved. For some countries, the cost of borrowing may increase substantially depending on the prevailing conditions. This may result in difficulties in servicing the debt. Also this would depend on the extent of the household gearing. For Asia Pacific economies, this ratio of debt servicing to total income ranges from a low of two percent for economies that do not have sophisticated financial systems, to 74 percent at the high-end, where consumerism is well entrenched. While there is no magic number to determine prudent gearing, this ratio can be used to assess whether the financial risk is increasing. Over time, it could provide an indication of the level of debt that is manageable. Basic financial literacy would be necessary for such self-assessment. A further risk, which is linked closely to the high cost of borrowing, is the reliance for financing from the informal financial sector.

This in turn enhances the potential for the industry to provide financing to households and enterprises thus contributing to the economic growth process. Another instance where efficiency and potential of the industry can be enhanced is migration from paper-based payments to electronic payments. This would provide significant benefits to all parties as it provides a more efficient and reliable payment instrument and it attracts lower costs, increased convenience and a higher level of security. In promoting financial literacy, several issues need to be addressed. One of the most critical issues is the apathy towards information. Irrational behavior, the inability to comprehend complex information, the perception that information is unreliable, or more often than not the reluctance to invest the time to study the information, are all reasons that increase such apathy. In addressing financial literacy, the information provided to consumers needs to be simple, brief, contextualised to the needs of the consumer and delivered at the right time. An example is providing special, inclusive programmes for financially excluded groups that are at different levels of development and that face different challenges in managing their financial affairs. The emerging best practices in enhancing financial literacy clearly suggest that an integrated and coordinated delivery of financial literacy initiatives is needed to address the issues highlighted above. This requires a comprehensive approach involving central banks, government ministries, NGOs and corporations to work collaboratively to promote financial literacy. Attention needs to be given to greater strategic focus on the outcomes to be achieved by the financial literacy programs.