Empowering Borrowers: Harnessing Financial Education for Responsible Borrowing and Effective Debt Management. (Case Study: Nigeria).

Introduction:

Paul, a 37-year-old entrepreneur from Lagos, Nigeria, secured a loan to expand his promising tech startup. Despite holding a degree in engineering, Paul's lack of financial education soon became a significant hurdle. Without a solid understanding of budgeting, interest rates, and debt management, he struggled to repay the loan. His inability to keep up with payments severely damaged his credit score and hindered his access to future loans.

Paul's story illustrates a common yet critical issue: the gap between academic education and practical financial literacy. Had Paul familiarised himself with financial literacy, he could have better managed his loan, maintained his credit score, and ensured his business's growth.

This narrative is part of a larger global trend where credit is essential for many households. However, the lack of financial education leads to widespread challenges in responsible borrowing and debt management. We embarked on comprehensive research to understand and address the challenges surrounding responsible borrowing and effective debt management, with Nigeria serving as our primary focus. The insights presented in this article are derived from our research findings, offering a nuanced understanding of the borrowing landscape in Nigeria and its implications for borrowers worldwide.

The Current Borrowing Landscape in Nigeria:

In Nigeria, the rise in borrowing and informal lending mirrors global trends. According to a recent report from TechCabal, there has been a significant increase in the number of digital and consumer lending products available in the Nigerian market. From 2017 to 2021, the number of digital lending products has grown substantially, with 211 licensed digital lenders now operating nationwide.

The trend towards digital lending in Nigeria, marked by increased product offerings and customer adoption, underscores the need for better financial education to help borrowers make informed decisions and manage debt effectively.

Survey Insights:

Recent surveys conducted across multiple countries have revealed insights into borrowers' financial habits and awareness levels. Like Paul's case study in Nigeria, many borrowers worldwide face challenges in understanding loan terms and managing debt effectively. The lack of financial education is a common denominator, with a substantial portion of respondents needing to be aware of basic financial management concepts. According to our survey in Nigeria, more than 87% of the respondents have borrowed money for various reasons, but a concerning 25.5% admitted to being unaware of their loan terms and conditions.?

Another significant finding was the lack of understanding of financial management concepts among the participants. Only 12% of respondents rated their knowledge as "very strong." Surprisingly, 64.7% of respondents had never participated in any formal financial management courses or training programs. These findings emphasise the universal need for accessible and comprehensive financial education tailored to diverse cultural contexts.

The Crux: Responsible Borrowing and Debt Management?

Financial education plays a pivotal role in shaping borrowing behaviour globally. It empowers individuals to understand loan terms, assess repayment capacity, and manage debts effectively. Despite the prevalence of borrowing, many individuals struggle to evaluate their repayment capacity, leading to challenges in debt management. Results from our survey show that while 67% of people calculate their income against expenses, 28.1% either seek financial advice or rely on their lender’s assessment, and a concerning 4.9% do not assess their capacity to repay before borrowing.

Positively, 59% of the respondents surveyed have negotiated with lenders for debt restructuring, and 49.1% have implemented debt repayment plans. These actions show a willingness to navigate debt responsibly if equipped with adequate knowledge and tools.

Role of Financial Education:

Financial education is crucial for fostering responsible borrowing practices globally. It involves teaching individuals how to manage their finances, including budgeting, understanding interest rates, maintaining credit scores, and handling debt. Unlike formal education, financial education can be accessed through online courses, community workshops, financial advisors, and self-study resources.

Formal financial education provides structured and comprehensive knowledge, helping individuals grasp complex financial concepts and apply them in real-life scenarios. It covers detailed aspects of interest rates and credit scoring, which are vital for making informed borrowing decisions.

Our survey revealed that 87.1% of respondents recognize the importance of financial education, and 79.9% are willing to participate in such programs if available. However, only 35.3% have undertaken formal financial education, highlighting a significant gap. This discrepancy indicates a need for more accessible and tailored financial education initiatives.

Creating and promoting accessible financial education initiatives can bridge the gap between awareness and implementation, empowering borrowers to make informed decisions, manage debts effectively, and improve their financial health. Comprehensive financial education can improve financial outcomes globally by enhancing financial literacy and responsible borrowing practices.?

Impact of Financial Education:

Studies have consistently demonstrated the positive correlation between financial education and responsible borrowing behaviour across diverse regions. Enhancing financial literacy has the potential to lift millions out of poverty and contribute to economic growth, as evidenced by global research findings.?

According to the Global Financial Literacy Excellence Center (GFLEC), individuals who undergo financial education programs are likely to exhibit cautious borrowing behaviour and repay their debts on time.

Further studies have highlighted the importance of tailored financial education. The World Bank's Global Findex Database revealed that in Nigeria, 64% of adults lack basic financial literacy, which hinders their ability to make sound financial decisions. The World Bank also emphasized that enhancing financial literacy could lift millions out of poverty and contribute to economic growth.

Jane D'Arista, a renowned financial expert, advocates for targeted financial education, stating that empowering individuals with financial knowledge is essential for fortifying economic resilience and fostering sustainable growth.

Empowering Borrowers: The Way Forward

Addressing the challenges of increasing borrowing trends requires a collaborative approach involving governments, financial institutions, regulatory bodies, educational institutions, and private organizations. By implementing comprehensive financial education programs, such as interactive workshops, online courses, and community outreach initiatives, these stakeholders can disseminate essential financial knowledge globally. As the borrowing landscape expands, equipping borrowers with the necessary tools and understanding is crucial. This collective effort to prioritize financial literacy will foster financially resilient and empowered communities, leading to sustainable economic growth and prosperity for all.