In the atmosphere of the ongoing financial and economic crisis, which since 2008 has shaken not only the USA but also European countries and the EU, we should reflect on why, after decades of unprecedented economic growth, European countries are now in a situation where they are increasingly being battered by rising debts that have reached such a size that repayment appears unrealistic.
Current financial instability is a serious problem that, according to B. Lietaer (2004), humanity must deal with and solve. Repeated crises and collapses are not random events, but are signs of a systemic breakdown of the official financial system. Over several decades, the global monetary system has gained a level of power without historical precedent, and it has escaped control by any national or international authority. To this view also joins Pascal Canfin (2012), who argued that over the last thirty years, politicians removed rules that constrained financial activities. They thus allowed the emergence and growth of a “monster” that completely escaped their control. This question is therefore no longer only a political issue, because all citizens are affected, as the entire world is influenced by the way the financial system works—or, more precisely, does not work.
The debt spiral has therefore accelerated not only at the level of individual states but also at the household level. Market economy and democratic society provide citizens with many options for choice in both economic and financial areas, and thus in recent years we observe an accelerating pace of household indebtedness. Consumption is massively promoted as the engine of the ideal of a consumer society. However, this is dangerous behavior because, according to sociologists and psychologists, people’s appetite to consume is unlimited. A consumer way of life, without understanding the basic principles of household management, can become the beginning of a debt trap or debt spiral, which can then set off an endless cycle of problems. In addition to the consumer way of life, which has a direct impact on the indebtedness of the population, the already mentioned economic and financial crisis has also worsened the situation. Its perhaps most serious consequence, directly and painfully affecting people, is rising unemployment and the resulting decline in their purchasing power. If the population lacks resources to finance daily needs, it becomes indebted. This trend is worryingly observed in the EU, the USA and other countries. Rising debts on widely used credit cards, at installment companies, non-bank institutions, unpaid rent or utility and phone bills, unpaid social and health benefits, and other obligations (for example, irresponsible loan guarantees) all represent a threat and one of the most serious socio-economic problems—a vicious circle of the so-called debt spiral.
For almost twenty years in Slovakia we have observed rapid development and, especially, aggressive sales of financial products. Financial institutions, various non-banking companies offering loans and various installment companies, in the first place looked after and still look after their profit, while consumer safety and protection are secondary. The consequences are very negative, as confirmed by the many clients who believed unrealistic promises from various non-bank entities and lost lifelong savings. Consumer protection in finance worked only weakly, so non-bank entities could, without any state control or intervention, provide their “services” for a long time. Some financial institutions still offer citizens “favorable” financial and insurance products that, through a sales network, they present as a “unique and unrepeatable opportunity.” Yet in their contracts they set conditions that are complicated and, in substance, difficult to understand not only for lawyers and experts in this field, but especially, the contractual terms are unfavorable to consumers.
Compared with many countries and the rest of the EU, we are relatively “well off” in terms of loan sizes. The problem of Slovaks, however, is the gradually declining ability to repay these loans and credits, and also the relatively weak judiciary, which has not yet managed to protect consumers effectively. In our country, a wide public and professional discussion has broken out on the issue of population indebtedness, and stories of unfortunate people who lost their homes because of reckless borrowing are a hot topic even for politicians. According to information published in Hospodárske noviny 13/2014, debtors have borrowed more than one billion euros from companies that provide non-bank loans (hereafter referred to as “nebankovky”). Although this is an impressive number, banks are owed over 20 billion euros. Miroslav Antoňák (2014), in the article “Požičali miliardu, teraz berú aj domy,” reported by the Consumer Center, stated that those referred to as “non-banks” are used primarily by the most vulnerable consumers. The business of fast money is sustained mainly by people from weaker social strata, students, the unemployed, women on maternity leave, and pensioners. They would not obtain a loan from a bank because, for the institution, they are deemed risky and there is a chance they will not return the money due to insufficient creditworthiness. They thus have no choice but to use the services of roughly hundreds of companies in Slovakia offering “quick loans.” It is precisely the most vulnerable group in terms of income and education that is therefore dependent on excessively high loan rates, where APR in some cases reaches 75% p.a. and above.
From the analysis of available materials and sources, we can conclude that in the Slovak Republic, until 2006 only very little attention was paid to financial education and public financial awareness. It is generally known that financial literacy in Slovakia is at a low level. Educational institutions prepared and shaped young people for a profession—that is, to “earn money,” yet few institutions taught them how to manage earned money and use it wisely. Our hypothesis was confirmed when processing our survey results: only 1% of respondents said they had gained the necessary knowledge for life in the money sphere at school.
Insufficient financial education and current low awareness of the population in the Slovak Republic is probably caused by historical inheritance. During the era of planned economy, economic education was provided mainly at specialized schools focused on economics, while in other tracks it was given little importance. A substantial part of important financial decisions was handled by the state on behalf of citizens, particularly through ensuring their pension, health and social insurance, or housing construction. At that time, only state financial institutions and banks operated on the market, so the risk of excessive debt on consumer loans from non-bank companies was almost nonexistent. In a market economy, however, the situation changed radically, and citizens now have much greater freedom and choice in making decisions. These options and freedoms, however, place much higher demands on the quality of their strategic financial decisions, for which they carry full responsibility. Qualified financial decisions, however, require at least basic knowledge of compound interest, the impact of inflation on returns, the effect of investment costs on lowering returns, and the rise of borrowing costs for loans or mortgages. Yet these knowledge and skills are lacking.
Weak knowledge in personal finance was also confirmed by our survey of respondents aged 20 to 35. If financial literacy is weak among young and economically active people, it is likely to be at a similar level in other population groups. For our target group, we are concerned that their lack of information may result in irresponsible financial behavior. The pressure exerted on a young person by consumer society, as well as the ongoing economic and financial crisis, is enormous today. As soon as a young person enters the labor market, they must contend with demands from all sides, and, as our survey results show, they are not perfectly prepared to manage or effectively respond to them. Their needs are in clear imbalance with their income. They face indebtedness that, if not regulated reasonably, can become a negative and burdensome factor of financial instability affecting their future. As a result of unsuitable loans and disproportionate indebtedness relative to disposable income, young people can become “lifelong victims of the debt trap.”
In the past, financial problems were discussed primarily within the family, and the family also helped resolve them. In today’s market-oriented society, individuals’ financial problems became so visible that these issues became the subject of broad public discussion. If our predecessors had reservations about open discussion in solving financial problems, today discussion is unavoidable, because without it it is impossible to find appropriate and, above all, effective solutions.
We believe that, given the absence of financial education in the past and the ongoing threat of unethical behavior by various intermediaries, it is necessary in today’s complex economic period for the state to regulate education. Considering the long-term absence of oversight by state authorities in providing financial services and in financial education, this kind of liberalism is unjustified.
The basic framework for financial education was adopted by the Government of the Slovak Republic on 2 July 2008 with resolution no. 447, approving the document “Návrh stratégie vzdelávania vo finančnej oblasti a manažment osobných financií” (Vláda SR, 2008). Subsequently, the National Standard of Financial Literacy, version 1.0, was prepared (MŠ SR, MF SR, 2008), approved at a meeting of the Government of the Slovak Republic on 13 March 2009, and since the 2009/2010 school year it has been integrated into state and school curricula of primary and secondary schools. In addition to schools, financial education is also provided by several financial institutions and third-sector organizations.
According to Vladimír Baláž (2011, pp. 26–29) from Prognostický ústav SAV, all these activities, while highly necessary, are insufficient. They mainly concern primary and secondary school students. In his view, starting financial education at the level of compulsory schooling is useful but not enough and will not have a large effect. The reason is that students acquire only theoretical knowledge at school, which they do not retain if they do not use it in practice. Dealing with money cannot be learned only theoretically. Therefore, we cannot expect more from financial education of secondary and primary school students than what it can actually provide. We agree with this author and support the view that we should give more attention and effort to popularizing financial matters and educating adults. After all, they provide the financial resources for the family and handle money. It must be understood, however, that for securing a stable household economy, knowing how to earn money is not enough; it is also crucial to be able to manage, protect, and use money so that it brings the greatest effect and benefit. This is one of the main goals of financial education: not only informing, but also educating and encouraging financial responsibility.
For financial education to function, according to P. Szovics (2012, pp. 10–13), it is necessary, in addition to setting priorities (as set out in the Standard), to proceed in a coordinated way across state and public administration bodies, professional associations, social partners, non-profit educational institutions, consumer organizations, and the media. An action plan for financial education should be prepared that would unify and clarify activities of each actor, and an independent institution could also be created to oversee drafting and especially the subsequent implementation of a national strategy for financial education.
In recent times, the need to secure protection of consumers of financial products has increasingly resonated in Slovakia. The high number of Slovak court disputes, which are not only on the desks of domestic judges but also judges of the Court of Justice of the European Union, is so alarming that it has not gone unanswered even by the European Union itself. The General Secretariat of the European Commission delivered a warning letter to Slovak authorities, sharply criticizing judicial bodies for failing to provide consumers with adequate protection under EU consumer protection legal provisions. In Slovakia, there is apparently broad circumvention of consumer rights because Slovak authorities neither adopt nor apply consumer-protection rules set out in EU law. The content of the warning letter includes recommendations on how to remove concrete deficiencies and align with EU legal acts. At the same time, the European Union warns that if we do not change laws and the functioning of courts in the area of consumer protection, Slovakia will be fined.
Given this critical situation, competent authorities began drafting proposals for legislative amendments to address it. At present, a legislative process is under way to amend several legal acts, although it has not yet been completed. The Ministry of Finance of the Slovak Republic, in cooperation with Národná banka Slovenska, prepared the “Návrh Koncepcie ochrany spotrebiteľov na finančnom trhu,” which the Government of the Slovak Republic approved on 9.1.2014. Implementation of a comprehensive concept for consumer protection on the financial market consists of appropriate measures and changes that must be carried out simultaneously in several interconnected areas: improving consumer protection on the financial market through a single contact point and improving the quality of inspection activities, increasing financial literacy in society, resolving disputes arising from relationships between financial institutions and their clients, and improving the system of activities of consumer protection associations. As stated in this document, the Ministry of Finance of the Slovak Republic will support raising society’s financial literacy as a possible tool for eliminating material deprivation and poverty traps for the 2014–2020 programming period. In light of this, MF SR will cooperate in this area with other central state administration authorities, NBS, professional associations operating on the financial market, academia, and representatives of consumer-protection associations.
In relation to these steps by competent authorities, we submit the view that they come literally at the “twelfth hour.” This document arrives only after a long period of at least minimally regulated activity by various unserious entities whose only goal was to obtain as many trusting, often naive and uninformed clients and consumers as possible. In the context of legislative measures adopted only ex post, the need for continuous education in both the financial field and legislation becomes especially important so that clients can defend themselves against such attempts and do not have to wait for rescue from lengthy state administration. Prevention is always more beneficial than subsequent “treatment.” Thousands of deceived consumers, burdened by ongoing enforcement proceedings due to unpaid overpriced loans, who often also lose their homes, recover only slowly from the suffered financial losses.
Financial illiteracy poses a serious risk not only for personal finances but also for the country’s economy and public finances. Why? Because through ignorance and poor decisions, people without financial education more easily make bad decisions, whose consequences can be catastrophic both for them and then for society. Poor financial decisions can cause psychological stress, then family breakdown and employment problems, which can lead to loss of the ability to meet basic living needs. These people often end up in the social safety net, which is funded from public finances. This confirms the words: “You think education is costly. Try ignorance” (Dolf de Roos).
The more financially educated we are, the faster and more easily we recognize situations that may bring us advantage, as well as those that could throw us into collapse. Many firms and financial predators have built a thriving business on insufficient financial literacy, and their creativity in circumventing legislation knows no limits. Yet, the more financially educated we are, the better we can separate grain from chaff and distinguish bad ideas from good ones.
In our view, financial education should be long-term and continuous and should target broad segments of the population—that is, starting with children in schools, youth, parents, all citizens of working age, and seniors. We maintain, however, that blanket educational programs should be replaced with specialized programs for specific socio-demographic groups. These groups not only have different levels of financial literacy but also specific financial goals and needs. Young people, who primarily need to deal with housing, have different expectations and needs than older generations. In our view, specialized courses for those population groups that need them most and who face explicitly practical personal-finance issues may be most valuable.
It is likely that despite these efforts and improved quality financial education, a substantial part of the population will remain financially illiterate or irresponsible because limited cognitive abilities and motivational deficits will lead them to make wrong financial decisions with potential effects on public resources. This problem will continue to worsen due to demographic influences, especially population aging (Baláž, 2011, p. 693). This is where social prevention could help, as it should account for an individual’s social status and their specific life situation.
For social workers to carry out their duties as effectively as possible—preventing negative phenomena, identifying causes, helping to overcome social difficulties, supporting education, developing clients’ capacities to participate in resolving their adverse situation, and cooperating with other professionals—and to face the new challenges of our time, continuous education across many interdisciplinary areas is indispensably necessary for their qualification development.
We therefore emphasize the need to supplement and develop their qualifications also in personal finance, because this knowledge could be very useful in social prevention and could help prevent or eliminate many socio-economic problems and pathological phenomena linked to excessive indebtedness before they arise or become unmanageable. If a social worker had the necessary knowledge and experience in household financial management, they could effectively assist in resolving family and individual indebtedness, for example by trying through education or outreach to prevent the creation of new debts, assisting with practical financial management, and being helpful in supporting families’ social ties.
It is precisely field workers, who are closest to clients and know their situations, who could, if they had sufficient financial literacy and awareness, act preventively and could also be helpful in guiding their clients’ financial decisions. We consider such preventive action to be key, because it would help prevent the exploitation of clients’ lack of information, ignorance, naivety, or distress for immoral enrichment. Demographically, these are methods of social work with adult populations, taking into account specific needs of the unemployed, the homeless, migrants, emigrants, ethnic minorities, or isolated and abandoned persons. According to the type of social work performed, this is a space in social prevention and social counseling. According to the place of activity, it is directly in the field, in home visits, ambulatory social work, or also in community centers. Prevention can be ensured through education as well as public awareness or direct counseling.
For improving social prevention in the field of counseling on personal-finance management, we propose developing activities in the following areas:
- primary prevention: sensitizing the public and broad public education on excessive indebtedness through lectures, advertising, leaflets, educational TV programs, and educational programs, as well as short films describing specific real-life cases, and experiential simulations during educational processes, plus field visits to at-risk families,
- secondary prevention: determining the client’s current situation, identifying threats, halting the deterioration process, solving it with the help of experts and mediators, especially preventing further debt growth, avoiding the creation of new debts, and working toward stabilization with proposed solutions,
- tertiary prevention: preventing the situation from recurring, especially through monitoring clients whose situations we managed to stabilize, supporting continuous education, and spreading awareness, where the clients themselves can act and show positively how the situation can be resolved. Such a concrete positive example can be a strong source of encouragement for others.
To achieve this goal, it is therefore necessary to strengthen education for social workers in the area of personal finance. We therefore propose including this issue in the content focus of their education programs and in lifelong learning programs.
Conclusion
It is likely that despite these efforts and improved financial education, a substantial part of the population will remain financially illiterate or irresponsible because limited cognitive capacities and motivational deficits will lead them to make wrong financial decisions with potential effects on public resources. Therefore, it is also necessary to strengthen activities in consumer protection for financial products and to develop activities in the area of social prevention. It is necessary to strengthen the education of social workers in personal finance and to include this issue in the content focus of their educational programs and in lifelong learning programs.
Author: Ing. Marcela Paulovičová
Used literature:
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