Fifty Per Cent of Bahamians Can’t Make Ends Meet

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From The Nassau Guardian

The Central Bank of The Bahamas (CBOB) has released the results of its Financial Literacy survey, which found that overall, less than half (42.3 percent) of the respondents were able to provide answers to basic questions about financial computations and concepts around interest rates, including the compounding effects of interest rates.

Additionally the CBOB said that, overwhelmingly, the knowledge of financial products and concepts among Bahamians did not translate to the same level of positive changes in personal behaviour.

Local market research company Public Domain polled 1,000 residents and weighted the results to reflect the demographic distribution of the latest population census.

When asked to reflect on the last 12 months and indicate whether their income was generally sufficient to “make ends meet” each month, 47 percent of respondents said that their earnings were usually insufficient to cover their living expenses.

“This reinforces the likelihood that a residual approach may not produce effective savings outcomes… When average earnings were considered instead, those with a household income of less than $30,000 per year, felt that they fell short of what they needed to meet all their financial demands. This percentage declined to 44 percent for medium income households ($30,000–$60,000 per annum), and to 35 percent for those in the highest income bracket (over $60,000 per annum),” according to a report released by the CBOB on Wednesday.

“When income was insufficient to cover household expenses, 40 percent of respondents saw reducing spending as the solution to covering their expenditures, followed by working a second/third job (17 percent) and borrowing money from family and friends (10 percent). Each of the other means of coping garnered less than 10 percent of responses.”

In terms of the amount of savings they had stored for a “rainy day”, the largest percentage of persons who responded (48 percent) stated that they would be able to cover costs for more than six months if they lost their main income.

A smaller group (16 percent) indicated that their savings would cover three to six months of expenses; for 15 percent, the coverage was one to three months; and 13 percent of individuals had less than a month’s coverage.

“Taking six months as a comfortable mark, men and women were evenly matched with this question. However, not surprisingly, a higher proportion of older respondents appeared to have greater financial security than younger ones (56 percent vs. 36 percent), and those with higher incomes were better off than lower income earners (59 percent vs. 37 percent),” the report notes.

CBOB announced plans to implement a financial literacy program in July aimed at making financial services more accessible and to ensure that consumers are equipped to act in their best financial interests.

The survey found that at least four of five respondents had some knowledge of basic banking products, such as loans and credit cards; savings and checking accounts; and debit cards. However, fewer than one in three persons admitted to utilizing those product offerings.

Additionally there was less familiarity with financial instruments, such as stocks and shares, mutual funds, bonds and mobile banking.

The CBOB was guided by the Organisation for Economic Co-operation and Development’s (OECD) report on financial literacy among residents of its member countries in implementing its literacy program.

The OECD’s report grouped financial behaviours into two major categories: financial control and financial resilience. Financial control is gauged from behaviours such as budgeting, responsibility for financial decisions, making considered purchases, punctual payment of obligations and monitoring financial affairs. Behaviours indicative of financial resilience include saving, ability to face external shocks, long-term goal setting and making informed choices of financial products.

“As it relates to either control or financial discipline, respondents were asked if their households had a budget. The majority (57 percent) responded ‘yes’, with a higher affirmative rate for men (62 percent) than women (53 percent). A breakdown by average age showed that 56 percent of respondents ages 16 to 34 said ‘yes’, while 58 percent of respondents in both higher age groups also replied in the affirmative. There was stronger variation by income, with two-thirds of persons in the two higher income groupings likely to have a household budget, compared to just above half of those in the lowest income group,” the CBOB’s report states.

Respondents were also asked if, over the course of a year, an inflation rate of 10 percent would reduce the purchasing power of funds invested at an interest rate of eight percent.

The CBOB said this question was designed to test whether they understood the cost of living’s effect on the real value of an investment. Only 45 percent of persons answered correctly: that the spending power of money would have been reduced.

“The ability to assess the impact of the cost of living, or inflation, on purchasing power was also measured. Only 36 percent of respondents understood that their spending power would remain the same if their incomes increased at the same rate as inflation,” the report notes.

“A final skills test was whether individuals could calculate the interest rate being charged on a loan if they were given the dollar amount of interest paid. Only 14 percent of the responses answered correctly; men were correct 18 percent of the time versus 10 percent for women. This time, the middle-age grouping had the most correct responses, while the highest income grouping fared best overall (25 percent).

“Roughly one-third (34 percent) of the respondents were able to understand the compounding effect of interest rates on funds deposited in a bank account for multiple years. Some 44 percent of persons admitted not knowing the answer, and the remainder answered incorrectly.”