• Is 58% financial literacy in Sri Lanka too good to be true?

Financial literacy – the ability to make informed financial decisions – is important in dealing with today’s complicated economy, particularly at a time of economic crisis, higher inflation, and rising cost of living. 

In Sri Lanka, financial inclusion has seen notable progress, thanks to expanded access to formal financial institutions. However, while access has improved, true financial literacy remains a key obstacle to fully leveraging financial services. 

The latest Financial Literacy Survey (2021) conducted by the Central Bank of Sri Lanka (CBSL) claims that 58% of the adult population in the country is financially literate. Yet, this figure warrants closer scrutiny. How accurate is this percentage and does it genuinely reflect the population’s understanding of financial concepts, when a large portion of the public seems to lack basic financial knowledge? Could it be that the parameters used to assess literacy paint an overly optimistic picture? 

The Sunday Morning will delve into the details of this survey, evaluating its methodology and providing an objective view on the state of financial literacy in Sri Lanka.

CBSL survey

The CBSL conducted the 2021 Financial Literacy Survey in collaboration with the International Finance Corporation (IFC), as part of Sri Lanka’s National Financial Inclusion Strategy (NFIS) 2021-2024. 

This survey followed a systematic approach, focusing on three key dimensions of financial literacy: knowledge, attitudes, and behaviour. These dimensions were assessed through a detailed questionnaire aimed at understanding various aspects of financial decision-making such as budgeting, financial planning, and the usage of financial products.

The survey employed a nationally representative sample of 4,800 individuals aged 18 and above, selected through a two-stage stratified random sampling method based on household data from Sri Lanka’s 2012 census. The data was collected via face-to-face interviews, where respondents were asked about their financial knowledge, attitudes, and behaviour.

Respondents were drawn from both urban and rural areas across the nine provinces, ensuring that the results provided an accurate reflection of the national demographic. The use of the Kish grid, a method designed to randomly select a household member for an interview, was mentioned in the report.

Any conclusion drawn subject to margin of error

Speaking to The Sunday Morning, former Deputy Governor of the CBSL Dr. W.A. Wijewardena stated that such surveys typically relied on multiple regression analysis. If the sample is selected objectively and randomly, it can serve as a fair representation of the country’s population. However, he added that it was important to scrutinise how the sample was chosen. 

“Unfortunately, the report doesn’t provide clear details on the sample selection process. Normally, surveys conducted by the Department of Census and Statistics include details on how samples are chosen, the sampling errors, and other relevant financials. In this survey, the sample size seems small. However, if the selection process follows objective and random methods, it can still offer a fair representation of the population’s characteristics.”

In such cases, the results from the sample can be projected to give a broader national picture. However, in any survey, the methodology section should offer insights into how this projection was calculated, Dr. Wijewardena added. 

He further stated, however, that as the CBSL report mentioned that the samples had been chosen randomly, it was reasonable to rely on it. 

“But bear in mind that every sample survey comes with a sampling error. Ideally, they would quantify that error to allow us to interpret the results with some caution, understanding that any conclusions drawn are subject to that margin of error.”

Therefore, while the literacy level projected for the entire country may be close to reality, it was always subject to a potential error margin, Dr. Wijewardena noted, adding that while a good indicator, it was not an exact number.

“Even individuals with high educational qualifications sometimes exhibit poor financial literacy. Take engineers or lawyers, for example – they can get caught up in trends like cryptocurrency and lose significant sums because they don’t assess the risks properly. Many have even invested heavily in informal schemes like the ones that have failed in the past.” 

According to Dr. Wijewardena, this highlights the fact that while some people may be considered financially literate, they may still struggle to accurately assess risks and make sound financial decisions. Unfortunately, surveys such as this one did not usually provide deeper insights into people’s risk assessment abilities and how well they adjusted their financial strategies accordingly, he noted.

Concepts used for the survey

According to the CBSL, the survey used a combination of fundamental financial concepts to gauge financial literacy, including:

• Numeracy (simple interest): The ability to calculate interest on savings or loans
• Compound interest: Understanding the concept of earning interest on both the initial principal and the accumulated interest
• Inflation: Knowledge of how inflation erodes purchasing power over time
• Risk diversification: Understanding the importance of spreading investments to reduce risk

To be classified as financially literate, respondents needed to correctly answer at least three out of four questions on these core concepts.

Should not have ‘ice cream-type’ questions

Speaking to The Sunday Morning, University of Colombo (UOC) Department of Economics Professor Priyanga Dunusinghe provided an example as to how this survey might have been conducted. 

“Typically, when conducting a literacy survey in other countries – for example, on English language literacy – they first ask whether the individual can read, write, and speak English. If the answer is yes, the rest of the survey continues in English to assess the depth of that literacy.”

Nevertheless, in Sri Lanka, when local authorities conduct surveys, they simply ask whether someone can read, write, and speak English without delving deeper, much like how this financial literacy survey seems to have been conducted, according to Prof. Dunusinghe.

However, he admitted that he might not know the exact method that had been used when asking the respondents to provide answers for this particular survey. He added that in other countries, individuals may be asked to perform simple tasks such as calculations or make decisions related to financing when assessing financial literacy. 

For example, participants could be presented with a situation where someone has a pre-financed savings product and be asked how they would manage it, allowing the respondent’s level of financial literacy to be evaluated. 

“In this case, however, we are unsure of how the survey was conducted. This brings us to the idea of ‘ice cream-type’ questions. If you simply ask whether someone likes ice cream, they will say yes. But a more revealing question would be how many ice creams they have eaten in the past week. This type of questioning allows you to measure behaviour more accurately. We should avoid those simple ‘ice cream-type’ questions that don’t give a true measure of the respondent’s knowledge.”

However, he added that without seeing the actual survey instrument, such as the questionnaire, it was hard to comment definitively. 

“We know that financial literacy issues arise frequently, especially given the prevalence of scams and pyramid schemes. This raises doubts about whether people truly have the level of financial literacy suggested by the survey. While I may sound sceptical, it’s difficult to give an informed opinion without knowing exactly how the survey was conducted.

“Without understanding whether they used an internationally comparable questionnaire, we can’t make a clear judgement. The CBSL, of course, usually operates at a high professional standard, so I wouldn’t question its methods without seeing the documentation,” he continued. 

When asked whether 58% was an acceptable figure for Sri Lanka or whether it should be higher, Prof. Dunusinghe stated that it definitely did not need to be higher. 

He further noted that financial literacy went beyond understanding basic interest rates or financial decisions. It includes the ability to compare interest rates, understand investments in stock markets, and other complex financial matters. 

“Based on my experiences with students and discussions with others, 58% seems quite generous and should not be any higher. In fact, I’m certain it shouldn’t be.”

The intention behind the survey appears to be identifying areas where policy interventions are needed to improve financial literacy. Prof. Dunusinghe further pointed out that given the poor decisions made by individuals and the country’s financial challenges, it was clear that much work was needed.

“If the goal is to identify policy measures, then we need to give them a fair assessment,” he said.

Findings and analysis

The CBSL survey found that 57.9% of the Sri Lankan adult population could be considered financially literate. This is a considerable increase from the 35% reported by the Global Financial Literacy Survey (GFLS) in 2014, indicating an upward trend in financial knowledge.

However, this statistic primarily measures knowledge, leaving out critical behavioural and attitudinal aspects. When these dimensions are considered, the picture becomes less optimistic. The CBSL survey’s broader approach revealed an average overall financial literacy score of 12.12 out of a possible 21, falling short of the target score of 14 that would denote adequate financial literacy.

‘Depends on how financial literacy is defined’

Speaking to The Sunday Morning, Advocata Institute Chief Executive Officer (CEO) Dhananath Fernando stated that in modern times, literacy was not just about reading and writing but included other parameters as well. 

“I am uncertain about their exact definition of financial literacy. Based on my understanding, the figure seems somewhat inflated, but again, it depends on how they define financial literacy.”

However, he added that it was crucial for the public to have a better understanding of both financial and economic literacy. Financial literacy primarily involves managing one’s income, understanding expenditure, knowing how interest rates work, and being able to manage personal finances. This was extremely important on the financial side, he explained. 

On the economic side, people also need to know what happens when inflation rises, what it means when inflation is higher than interest rates, or what occurs when the government prints money. An average citizen should be aware of basic economic principles like demand and supply and the impact of policies. This is essential for improving their standard of living, according to Fernando. 

“As for measuring financial literacy, I’m not sure how it should be done through a survey. It’s difficult to determine whether people truly understand concepts like inflation or interest rates just by asking if they know them. Someone may say ‘yes’ without fully grasping the concept. I’m not an expert in survey design, but those are definitely areas that the public should be knowledgeable about.”

Understanding the scores

• Financial knowledge score: The average score was 5.03 out of 7, which meets the minimum target for financial knowledge. Numeracy and compound interest were the most commonly understood concepts, with more than 82% of respondents answering these questions correctly. Conversely, only 33.3% demonstrated an understanding of risk diversification, indicating a serious gap in knowledge concerning risk management.
• Financial attitude score: The average score was 2.65 out of 5, falling below the target score of 3. This suggests that many Sri Lankans exhibit attitudes that may hinder sound financial decision-making, such as living for the present without planning for the future.
• Financial behaviour score: With an average score of 4.44 out of 9, the financial behaviour of Sri Lankans also leaves room for improvement. Key behaviours such as saving regularly, planning for long-term financial goals, and keeping track of expenditure were identified as areas where many individuals struggled.

Vulnerable groups

The survey highlighted significant disparities in financial literacy across demographic groups:

• Gender: Men were found to be more financially literate than women, with a gender gap of 5.9 percentage points. Men outscored women in both financial knowledge and behaviour, although women had slightly more positive financial attitudes.
• Age: Young adults (aged 18-29) had the highest financial literacy scores, while individuals aged 60 and above showed notably lower scores, especially in financial behaviour. 
• Education level: There is a clear positive correlation between education and financial literacy. Those with graduate and postgraduate qualifications scored the highest, while individuals with only primary education or no schooling scored significantly lower.
• Urban vs. rural: Urban respondents exhibited marginally higher financial literacy than their rural counterparts, with a notable difference in the financial knowledge and behaviour dimensions.
• Digital usage: Digital financial services users, such as those using mobile banking or QR code payments, scored higher in financial literacy, further emphasising the growing role of digital financial tools in improving literacy.

The findings of the CBSL survey suggest that while Sri Lanka has made strides in improving financial literacy, notable gaps remain, particularly in financial attitudes and behaviours. These gaps can impede financial inclusion and economic resilience, especially in vulnerable populations.

Although the CBSL was not available for comment, the survey results highlight the need for tailored financial education programmes, particularly targeted at women, older adults, and rural populations.