People in the Arab world can get into financial difficulties and this is often exacerbated by low levels of personal savings and high levels of personal debt, compared to other countries. What accounts for this worrying trend?
Consumption and saving decisions are complex phenomena, with many factors playing a role. When it comes to managing finances prudently, financial literacy is an important factor: people have to know how to construct a budget, how to pay bills, how to open a bank account, how to manage a credit card, and so on.
Financial illiteracy is a key reason why many famous professional athletes, such as footballer Diego Maradona or boxer Mike Tyson, have experienced major personal financial problems despite earning millions of dollars throughout their careers.
Like any skill, financial literacy can be acquired through structured teaching, a process that often starts in school. As a teenager growing up in the UK, I was made to attend mandatory classes with my fellow students that introduced me to important concepts such as the difference between a “debit” card and a “credit” card, or how to interpret the information that is presented in a bank statement.
However, there is a limit to the benefits that such programmes can deliver, because they are inevitably theoretical in nature. When my physical education teacher taught me the principles of football, I could then immediately deploy them during class time by playing football.
Yet, in the domain of personal financial issues, for the most part, the principles taught remain abstract concepts that you cannot put into action until you are a working adult. Children typically have no regular incomes and minimal financial responsibilities, as well as being denied access to many of the tools of modern finance, such as credit cards or personal loans.
In many countries, when young adults leave home, such as when they go to university, or start work after leaving school, they begin to learn the practical side of personal finance out of sheer necessity.
For example, in the US, approximately 50 per cent of undergraduate students work at least 27 weeks a year, in an effort to cover the costs of college.
Many countries have huge student loan programmes, involving contracts that affect a young adult’s finance for 30 years or longer. In Denmark, only 19 per cent of adults aged 18-34 live with their parents, exposing young adults to critical concepts such as mortgages and paying bills.
While direct experience does not guarantee improvements in personal financial skills - many students and job-market entrants struggle with debts due to mismanaging their personal finance - for the most part, it helps young adults to acquire the basics. Total student debt in the US reached an all-time high of about $1.5 trillion at the end of 2018.
In the Arab world as in many parts of the developing world, the widespread culture of continuing to live at home with one’s parents (in some cases even after marriage) denies young adults a key channel for acquiring financial literacy skills. This happens for two reasons.
First, the head of the household will continue to bear the most significant costs, including rent and in some cases mortgage payments as well. This relieves a lot of the financial pressure that might otherwise force a young adult to learn to be prudent with their finances.
Second, the family will operate as a financial backstop for the young adults in the family, assisting in emergencies such as extended periods of unemployment, unexpected health costs, or failed entrepreneurial projects. Such implicit guarantees undermine the incentives that young adults have to learn to manage their finances intelligently, and represent one of the key reasons that some households live paycheck to paycheck, with inadequate savings in the case of a crisis.
Why do some families maintain this culture, in spite of its adverse effects on financial literacy? Because that is only one of its consequences, with many of the others being generally positive. The closeness of family ties helps decrease homelessness rates for sure, it diminishes the incidence of the elderly living alone, and provides people with a healthy source of emotional support. In the Gulf, the origins of close-knit family ties are both related to the toughness of the desert climate, which means that people have to learn to stick together, and also the religion of Islam, which emphasises caring for one’s family as an important responsibility.
In light of the prevailing culture, what can some governments do to help their citizens better manage their finances?
The UAE Central Bank’s national loans scheme rolled out this month is a great initiative. Additional steps are welcome. One possibility is legally requiring all citizens to have their own bank accounts, and then requiring that bank account to be used for their salaries and for their expenses, such as mobile phone bills or driving license renewal fees.
While probably too extreme a measure, the spirit is correct, which is prodding people to take control of their finances more directly, while still allowing them to enjoy the fruits of a supportive family.
Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.