The Status of Financial Inclusion and Financial Literacy in Latin America

One of the most relevant lessons that can be drawn from recent crises is the lack of knowledge and misinformation among much of the population on basic issues of economy and finance, which limits their ability to make responsible, conscious and competent decisions. In this sense, economic and financial literacy not only helps people become more informed and gain a firmer grasp on the economic and financial issues that impact them directly and indirectly, but also gives them the power to discern and assume a position regarding social and economic policies implemented in their countries.

Citizens who are better informed on economic and financial issues can not only help the economy perform better, but also make public policies more effective. By empowering people to make more informed decisions, these choices are more likely to be better, and to help people control their financial future, which has a clear positive impact on their well-being.

For CAF—development bank of Latin America—financial literacy is critical to inclusion, not only facilitating the effective use of financial products, but also helping people develop the skills to compare and select the best products for their needs and empowering them to exercise their rights and responsibilities.

Therefore, since 2013, we have been conducting financial capacity measurement surveys in eight countries in the region: Argentina (2017), Bolivia (2013), Brazil (2020), Chile (2016), Colombia (2013 and 2019), Ecuador (2013 and 2020), Paraguay (2017) and Peru (2013 and 2019). These nationwide surveys measure the financial knowledge, skills, attitudes and behaviors of individuals in relation to financial issues.

Financial resilience and goals

The most recent surveys conducted by CAF were in Colombia and Peru in 2019, and Brazil and Ecuador in 2020. Below are the main comparative results of these surveys related to savings and financial resilience, financial goals, retirement plans, financial vulnerability, product ownership and financial knowledge.

As we can see in the graph below, on average for the four countries, 61% of people do not save, and those who do save mainly informally by keeping cash in their homes under the mattress or in piggy banks (61% on average), with the exception of Brazil, where 72% of the population who save money do so through savings accounts.

With regard to financial resilience, as shown in the graph below, on average for the four countries, 57% of the population is unable to cover unforeseen expenses equivalent to their personal monthly income.

Also, with regard to financial goals, noteworthy is that three out of five people, on average in the four countries, do not have a financial goal. Among those who do, home ownership is the most important goal. In order to achieve their financial goals, the main action taken by the population surveyed (73% on average) is to cut spending. In Ecuador, finding additional sources of income is more common, while most Brazilians do not usually prepare an action plan or try to find additional sources of income.

Pension or retirement plans

In terms of pension plans, survey results show that Brazil has more people with a retirement plan, as well as more people who feel very confident about having a good retirement plan. In fact, 34% of Brazilians feel confident or very confident about their retirement plans, compared to 25% of Peruvians, 31% of Ecuadorians and 32% of Colombians. Also, only 7% of Brazilians claim they do not have a retirement plan, in sharp contrast with 23% of Ecuadorians, 22% of Peruvians and 9% of Colombians.

When asked how they will obtain the funds for their pension, most respondents noted that they will continue to work, with around 85% in the case of Ecuador, 61% in the case of Brazil, 42% for Colombia and 35% for Peru.  In addition, a lower percentage of respondents in the four countries said they use a pension plan (61% in Brazil, 33% in Ecuador, 30% in Colombia and 27% in Peru). Furthermore, 35% of respondents in Ecuador stated that they expect to rely on their spouse for support after retirement, compared with 15% in Brazil, 13% in Colombia and 6% in Peru.

As shown in the graph below, 62% of the population in the four countries surveyed, on average, spend their monthly income before the end of the month. We see, however, significant differences between countries: In Brazil there are fewer people facing problems to cover their monthly expenses, with 47% of people claiming that in the past year their salary did not last until the end of the month. The opposite is observed in Ecuador, where 4 out of 5 people report having this problem. When we compare these results with the surveys conducted in 2013 we find that the number of people in Colombia and Peru whose income is not sufficient to reach the end of the month has been slightly reduced.

Financial Vulnerability

With regard to financial vulnerability, the percentage of people who were able to cover their expenses for six months or more without borrowing is much higher than in 2013. In Colombia, Peru and Ecuador, one in three citizens could cover their expenses for at least one month, but not for three months (see Chart).

In addition, leading the category of financial products held is savings accounts (56% in Brazil, 54% in Ecuador, 36% in Peru and 35% in Colombia). Ranking second is credit cards, with most users in Brazil (32%), followed by Colombia (17%) Ecuador (15%) Peru (15%).

Similarly, money deposits, debit card purchases, and transfers between online accounts are made more frequently in Brazil than in the other countries surveyed. Also, credit card purchases and payment for services via cell phones or computers are also more common in Brazil. However, sending or receiving remittances is rare in the four countries.

Lastly, financial capacity surveys also measure the level of financial knowledge of the population of the respective countries. In this sense, we find that one in two Colombians and Peruvians is aware that money loses value with inflation. In Ecuador and Brazil, however, the percentage of people aware of the effect of inflation is only one in three.

Similarly, survey results show that a small portion of the population in the four countries is able to calculate a simple interest rate (22% in Peru, 19% in Ecuador, 13% in Brazil and 10% in Colombia).  It should be noted that results Peru, unlike other countries, have improved since 2013. Also, Brazil has the highest percentage of people who fail to answer that question correctly.

In conclusion, financial skills surveys aim to make a diagnosis or draw a baseline to identify individuals’ knowledge, skills, attitudes and behaviors in relation to financial issues. As these are on-demand surveys, the results are very useful for the design of national inclusion and financial literacy strategies that take into account the differences between the different segments of the population.