Zeti Akhtar Aziz: Enhancing financial literacy for sustained economic prosperity Dinner address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the CitigroupINSEAD Financial Education Summit 2005: A Forum Promoting Financial Education in Asia Pacific, Kuala Lumpur, 12 December 2005. *  *  *  It is my great pleasure to be here tonight at this second Citigroup-INSEAD Financial Education Summit. Malaysia is particularly pleased to host this year's Summit here in Kuala Lumpur given that enhancing the levels of financial literacy is being accorded a high priority on our agenda. Effective participation in the economy essentially needs to be an informed participation. This is more so now than ever before. We are now living in an environment of rapid change. The advances in technology, product innovation, the removal of regulatory restrictions, deregulation and greater competition have dramatically transformed the financial system and the economy. The environment is marked by increased access to financial services, broader range of products and services, a far more competitive financial services industry and more complex financial transactions. It is the demands of this new environment that has created a greater need for financial literacy to not only ensure the efficient functioning of the financial system but also enhance the potential for the economy to prosper and thrive. This evening, I would like to focus on financial literacy from the perspective of the Central Bank, given that the function of the Central Bank has widespread implications on financial markets, businesses and the public as large.

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.