CHAPTER ONE

INTRODUCTION

Background to the Study

The ability to manage personal finances has become increasingly important in today's world. People must plan for long-term investments for their retirement and children's education. They must also decide on short-term savings and borrowing for a vacation, education, emergency, a house, a car loan, and other items. Additionally, they must manage their own medical and life insurance needs (Chen and Volpe, 1998). Greenspan (2003) “today's financial world is highly complex when compared with that of a generation ago. Forty years ago, a simple understanding of how to maintain a current and savings account at local banks and savings institutions may have been sufficient. Now, consumers must be able to differentiate between a wide range of financial products and services, and providers of those products and services”.

Increasingly, individuals are in charge of their own financial security and are confronted with ever more complex financial instruments. However, there is evidence that many individuals are not well-equipped to make sound financial decisions (Lusardi, 2008). Studies in the United States of America have shown that people have inadequate knowledge of personal finances (KPMG, 1995; Oppenheimer Funds/Girls Inc (1997). They fail to make correct decisions because they have not received a sound personal finance education (Hira, 1993; O'Neill, 1993). This has resulted in the increasing new buzz around Financial Literacy through conscious education. The Economist refers to this as the global crusade which is under way to teach personal finance to the masses so as to make them literate in finance (Padoan, 2008). The need for financial literacy would continue to grow because individuals are expected to become more self-reliant (The Adult Financial Literacy Advisory Group, 2008).

Financial literacy is the ability to understand finance. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions through their understanding of finances. Financial literacy is more than a measure of knowledge, it also reflects competency in actively managing one’s own money from the point of accumulation to the point of consumption (Remund, 2010). Financial education can benefit consumers of all ages and income levels. For young adults who are just starting their working lives, it can provide basic tools for budgeting and saving so that expenses and debt can be kept under control. In a survey of 3,500 randomly selected Australian adults, Australia and New Zealand Banking Group (ANZ) (2008) emphasizes that most people overrate their financial capability and therefore financial education ensures that people have a realistic view of their own financial knowledge and accordingly approach investments and financial decisions with the caution that their particular level of understanding warrants. Financial education can help families acquire the discipline to save for a home of their own and/or for their children’s education. It can help older workers ensure that they have enough savings for a comfortable retirement by providing them with the information and skills to make wise investment choices with both their pension plans and any individual savings plans. Financial education can help those at lower income levels to make the most of what they are able to save and help them avoid the high cost charged for financial transactions by non-financial institutions. This means that one’s level of financial literacy may affect his/her quality of life profoundly. It shapes the ability of one to provide for self and the family; invest in his/her future and the future of his/her children and contribute to the community as a good citizen. Financial literacy can promote sound personal financial management practices among which will enable them manage effectively hectic financial times. Financial literacy also reinforces behaviours such as timely payment of bills and avoidance of over-indebtedness that help consumers to maintain their access to loans in tight credit markets.

Several organizations have demonstrated an interest and commitment in improving the financial literacy of consumers for which college students are part. One such commitment in Nigeria is the financial literacy week organised by the Ministry of Finance in conjunction with financial institutions. This is important for a number of reasons particularly when it comes to university students. Obviously, the financial decisions students make in university have an important influence on their financial situation after university. In addition, their financial situation in university can affect their academic performance. Lyons (2003) finds that one in three students reported his/her financial situation was “likely” or “somewhat likely” to affect the ability to complete a university degree. Bodvarsson  and Walker (2004) report that after controlling for a wide variety of factors that affect university performance, students receiving at least partial coverage from their parents for tuition and books were more likely to fail their courses, be placed on academic probation, and earn lower GPAs than self-financed students.

Students need financial skills perhaps more now than ever before. The reason being that the current developments in the financial market have focused renewed attention on the importance of people being both well informed about their financial option and discerning financial consumers-in short, being financially literate. Also, financial literacy can help to prepare consumers for tough financial times, by promoting strategies that mitigate risk such as accumulated savings, diversifying assets, and purchasing insurance. Research in financial literacy has typically related individuals‟ knowledge of economics and finance with their financial decisions related to savings, retirement planning, or portfolio choice. There is a cornerstone of economic theory: where you have well-informed consumers, you will find vigorous competition and efficient markets. In other words, financial literacy is essential for business, the economy, the country and in this age of globalization (Lusardi, 2013). Financial competence has become more essential as financial markets offer more complex choices and as the responsibility for saving and investing for the future (retirement) has shifted from government and employers onto individuals. As the credit crises of the recent past show, borrowing decisions are also critical (Lusardi and Tufano, 2009). Experts also generally agree that financial knowledge appears to be directly correlated with self-beneficial financial behaviour (Hilgert, Hogarth, and Beverly, 2003).

Understanding financial literacy among young people is essential for developing effective financial education programmes (Cameron, 2014). It is therefore crucial to research and find ways to improve the financial literacy competences of people especially students who are seen as the future generation of every country. For the purpose of this study, university students are used to represent students in tertiary institutions pursuing a programme to obtain a first degree or beyond.

Statement of the Problem

Savings and investment as well as insurance and money management are key ingredients that promote economic growth. In every economy, accumulated savings is the main source of capital stock which plays a crucial role in creating investment, production, and employment which eventually enhance economic growth. Every nation seeks to achieve high economic growth where the citizenry lives more comfortably, have better standard of living than ever before and holding a better welfare supported by sound insurance policies and proper money management by the populace. To achieve the aim of economic growth, governments must implement programmes and policies to encourage savings so as to stimulate investment and production in their countries and the citizenry must have better understanding of these key ingredients that promote economic growth. What do university students know about saving, borrowing, investing, insurance or managing money? To promote economic growth in Nigeria, this is a critical question that needs to be answered comprehensively, hence, the need for a financial literacy study.

Studies in the US have shown that university students are in danger of beginning a downward financial spiral of debt that they will not easily repay while in university or after they have gained fulltime entry into the workplace Henry, (2001); Joo , (2003). As a result of this debt phenomenon, stakeholders have argued that they do not see the importance of the loans granted to student since in their view most students misuse the money. Genuinely, some students need the loan for their sustenance and academic progression in school. The question here is: do students have the relevant knowledge in personal finance so as to make informed decisions regarding monies that come into their hand? Providing a vivid answer to this question makes this research vital.

Enhancing financial literacy is even essential in developing countries with low levels of formal education. Ironically, a search through literature suggests that there has been little research on this topic in developing countries for which Nigeria is part. A search through literature revealed that studies and programmes on personal finance are very rare in Nigeria. The only programme or activity on it is the annual financial literacy week organized by the ministry of finance and the banking industry. There is the need to help the youth, specifically, students at the university level to improve their financial literacy level so as to have positive money management attitudes before they enter the job market. This will propel them to practice sound personal financial management as working adults. The realisation of good financial behaviour is achieved through the development of knowledge and skills, which provides the basis for making informed decisions Chen and Volpe, (1998). The financial habits students have while in university tend to carry on to their adult life. Consumers of which students are part must confront complicated financial decisions at a younger age in today’s demanding financial environment, and financial mistakes made early in life can be costly. The better their financial literacy is when they leave university, the fewer financial hardships they may have in life (Grable and Joo, 1998). In this regard, to aid younger consumers, it is critical for researchers to explore how financially knowledgeable young adults are. Understanding the factors that contribute to students‟ acquisition of financial knowledge can help policy makers design effective interventions targeted at the young population, hence the need for this research.

Objectives of the Study

The purpose of this study is to provide evidence of finance literacy among university students in Nigeria. To achieve this, the research is conducted around the following sub objectives:

1. To examine students understanding of and knowledge in money management, savings and borrowing, investment and insurance.

2. To examine whether some group of students are relatively more knowledgeable than others.

3. To examine how a student's knowledge influences his/her personal opinions and decisions on issues in finance.

4. To determine the avenues or channels through which students expect to learn or improve their financial knowledge.

 Research Questions

Based on the above research problem and objectives, the following questions have been developed for the study:

1. How well do students understand general finance issues, savings and borrowing, insurance and investment?

2. What are the determinants of financial literacy among students?

3. What impact does financial literacy have on students' opinions, decisions and practices?

4. What avenues or channels do students expect to learn or improve their financial knowledge?

Significance of the Study

Financial literacy is very important to the growth and development of every nation. The importance of personal finance decisions cannot be overemphasized because they have a direct impact on people's quality of life. literacy considering the various economic and financial developments like: economic recovery programme and structural adjustment programme; the proliferation of financial institution and complex financial products; the oil discovery that is expected to move Nigeria into a middle income country; etc. that have taken place in Nigeria since independence. In the face of all these developments, it is important to empower the younger generation, especially students who are seen as the future leaders, movers and transformers of the economy with financial knowledge. The old adage goes “knowledge is power”. How can we give them the right financial knowledge? It is very crucial to ascertain students‟ level of financial knowledge now so that we can design courses that will help close the financial knowledge gap. The university environment provides a perfect and conducive atmosphere for the young and the old who are pursuing different degrees on campus to receive sound financial education. Thus the intended final outcomes of the research will provide evidence of students‟ knowledge in personal finance for the development of guidelines for implementing an effective financial literacy programme so as to improve the quality of life of the people in Nigeria. To the best of my knowledge, this is the first comprehensive study on financial literacy of university students in Nigeria. Results would provide baseline data from which further progress can be assessed.

It also adds to the available literature in the field and helps create the necessary atmosphere for future studies in Nigeria as well as other developing countries. This research could also be a source of useful information for curriculum development on personal finance by Universities in Nigeria. The useful recommendations that are provided below can be adopted to improve students' personal finance capabilities of which in the long-run will affect the economy at large.