Empowering Zambians through Financial Literacy: Understanding the Benefits of Saving and Loans

This week is Financial Literacy Week, and in this article, we will explore what financial literacy is and its importance to developing countries like Zambia. We will also look at the benefits of saving and loans for individuals.

According to the World Bank, only 30% of Zambians have access to formal financial services, and many lack the basic knowledge and skills to manage their finances effectively. A survey conducted by the Bank of Zambia found that only 24% of Zambians could correctly answer basic financial literacy questions.

The lack of financial literacy has been identified as a major barrier to economic growth and poverty reduction in Zambia. The Zambia Institute of Banking and Financial Services states that "Low levels of financial literacy have contributed to low savings rates, limited access to credit, and a high incidence of financial fraud and scams."

Financial literacy refers to the ability to understand and manage personal finances effectively. It involves having the knowledge, skills, and confidence to make informed financial decisions, such as budgeting, saving, investing, borrowing, and planning for retirement.

Financial literacy is crucial because it enables individuals to make informed decisions about their finances and improve their financial well-being. By understanding basic financial concepts and how to apply them, people can better manage their money, avoid financial pitfalls, and achieve their financial goals.

Financial literacy is particularly important for women in Zambia, who often face greater financial challenges than men. The World Bank reports that "Improving financial literacy and access to financial services for women could contribute to reducing gender disparities in economic opportunities and outcomes."

According to Financial Sector Deepening Zambia, "Financial literacy is a vital tool for empowering individuals and communities to manage their financial resources, thereby contributing to economic growth and poverty reduction."

In Zambia, only 15% of adults have formal savings accounts, and just 2% have a pension or retirement savings plan, according to the Bank of Zambia. Meanwhile, 18% of adults have taken out a loan in the past year.

So, which is better for an individual in a developing country like Zambia to improve their livelihood: saving or getting a loan? Let's compare:

Saving:

Advantages:

Savings provide a buffer against unexpected expenses, such as medical bills or household repairs. 38% of Zambians save money for emergencies, according to a 2018 survey by the Zambia Institute of Banking and Financial Services.

Saving regularly over time can build up a significant amount of money that can be used for larger expenses, such as starting a business or buying a house.

Saving can help individuals achieve long-term financial goals, such as retirement.

Disadvantages:

Saving may require discipline and sacrifice, as individuals have to set aside a portion of their income and avoid spending it on other things.

Saving alone may not be enough to meet immediate needs, such as paying for education or starting a business.

Saving can be affected by inflation and currency fluctuations, which may reduce the value of savings over time.

Getting a loan:

Advantages:

Loans can provide immediate access to funds that can be used for a variety of purposes, such as starting a business or investing in education.

Loans can be structured to meet specific needs, such as long-term loans for buying a house or short-term loans for paying for education.

Loans can be used to leverage other investments, such as buying equipment or hiring employees for a business.

Disadvantages:

Loans often come with interest and fees that can increase the overall cost of borrowing. The average interest rate on loans in Zambia is around 26%, according to the Bank of Zambia.

Loans require repayment, which can put a strain on an individual's budget if the payments are too high or the loan terms are too short. 30% of adults in Zambia report having trouble paying back loans, according to the World Bank.

Loans may require collateral or a good credit history, which may be difficult to obtain for some individuals in Zambia.

Loans require a lot of understanding as may people do not know all the costs and the impact they have on finances for individuals involved in getting loans especially from banks and other lending institutions.

Loans can be complex financial products that require a thorough understanding of the associated costs and their impact on an individual's finances. Unfortunately, many people in Zambia may not be fully aware of the terms and conditions involved in taking out a loan, particularly from banks and other lending institutions. It is important to seek guidance and do thorough research before taking out a loan to ensure that it is a financially sound decision.

?

In summary, in Zambia, both saving and getting a loan can be effective strategies to improve livelihoods, but many individuals lack access to these financial services or are not using them effectively. To address this, it's crucial to improve financial literacy and access to financial services, particularly for women who face greater financial challenges. The emergence of village banking has helped reduce financial illiteracy, especially in rural areas, by encouraging participation and educating people on the benefits of saving and borrowing. By improving financial literacy and access to financial services, individuals in Zambia can make informed decisions and better manage their finances, contributing to economic growth and poverty reduction.