Financial literacy and investment behavior - relationships and dependencies

Assistant Professor, Doctor of Economics Vladimir Tsenkov

Assistant Professor, Doctor of Economics Elena Stavrova
PhD Student Stoyan Tanchev
Faculty of SWU "Neofit Rilski" in Blagoevgrad

Summary:
The global financial and economic crisis has prompted economic behavior and financial
decision-making with the projection in the future not only in economic subjects, but also in
significant social groups. The active participation of citizens and economic operators in the
real business exchanges in the context of financialisation of their participation in economic
processes (exchanges, investments and savings), their rights and imposes obligations of a
financial nature are in the process the redistribution of income, property management,
contracting transactions for purchases and investments. There is a tendency to increase the
transfer of responsibilities from the public to the personal and family finances.
The level of financial literacy determines individual consumers to make informed choices and
decisions to determine the stability of personal finance. This is especially important for
families with limited means; they may lose a lot as a result of poor financial decisions.
Purpose of this paper is to outline the relevance of the problem of financial literacy for the
individual users, to identify the main factors of the environment which determine ownership
of significant financial expertise, consult the link between the investment behavior of
households and economic growth through the role of savings and loan demand.

Keywords: Financial literacy, financial inclusion, informed choice, stable personal finances.

Hardly just violated the terms of the components of the formula of Black-Shoos caused the
collapse of the financial system, indispensable were also massive deregulation of the financial
industry, the uncontrolled use of techniques to hedge risk through securitization of mortgage
loans, the change in the structure of financial industry by breaking the link between creditor
banks and households-borrowers, several consecutive years of weather anomalies caused
growth of staple foods, restriction of credit, moral risks incurred by the bank employees.
These crises unsuspected cause damage not only to the public and corporate finance, but also
on financial wealth and household income. Given the significant share holdings in banks
borrow to individuals and loans to meet the needs of families; it is difficult to identify who
has suffered the greatest degree the effects of the global crisis.
Extreme events provoked rethinking the role of citizens and taxpayers to financial stability or
vulnerability of the financial system. Countries with highly developed financial industries
such as USA, Canada, Australia and other OECD countries have developed national policies
and documentation packages designed to expand and intensify actions to increase the level of
financial literacy of the population. OECD in 2003 carried out a project on financial education
in order to assess the extent necessary for establishing standards of financial literacy.
The European Union in 2005 convened experts in the field of financial competence in order to
prevent over-indebtedness. In Britain, the functions of enhancing financial literacy are
available to the Agency for Financial Stability, which besides providing stability to the
financial markets, but also the availability of information about the financial system, the
protection of consumers of financial services, including preventing financial crimes. Develop
strategies aimed to determine the level of financial literacy and to develop a program to
inform vulnerable consumers of financial services, primarily aimed at creating a stand at
secondary school graduates to make effective economic decisions, and the elderly - systematic
consultation and government programs media.
The U.S. has set up a committee of financial education and literacy to coordinate efforts on
financial literacy. A national strategy for financial education portal WEB-unite access to
national programs and subsidies to improve the financial literacy survey users opinions and
level of affordability.
As demonstrated by the current financial crisis, consumers can make informed decisions
about financial products and services not only best serve their own interests, but they can
contribute to broader economic stability of society as a whole.
Worldwide triad: financial inclusion, financial literacy and protect the rights of consumers of
financial services are seen as key to achieving financial stability. For any kind of stability,
whether financial, economic, political or social, inclusive growth of the individual is a
prerequisite for the success of a society is essential. Inclusive growth, in turn, is largely due to
the financial inclusion and involvement financial system of heterogeneous in income and
financial targets users of financial services.
In order to receive financial literacy rightful place in the system of rules of conduct of
individuals, it must be in close contact and depending on legal, regulatory and supervisory
framework reflecting the specific national conditions for investment behavior, but in the
context of rules global market. Protecting the rights of consumers of financial services should
be defined clearly and objectively defined responsibilities of the bodies of supervision with
adequate powers, resources and opportunities for the application of consistent regulatory
actions. Fair and honest treatment of customers in financial services at all stages of their use is
an integral part of good corporate practice area of competition between financial service
providers.
For financial literacy, there are many different definitions in content, all with the ambition to
cover basic understanding of the economy and how their economic decisions of households
are taken in the context of the changing economic environment.
Understood as "Financial Education", "financial literacy", "economic literacy" all combine
meaning of "need possession of knowledge, skills and behavior of individuals' ability to make
informed decisions about banking, lending and investment to take daily decisions on
managing and making competent and accurate decisions. "Economic literacy" is a much
broader interpretation by including in it the knowledge of knowing the elements of
macroeconomic determinants such as inflation, labor productivity, cost of capital and more.
Are complementary alternative suggestions for proper interpretation of the term, including the
behavior of budgeting, saving, investing and insurance investments (Worthington, 2006, p. 4)
..
Special attention to the importance of access to financial services for individual experts from
the World Bank (Ashli Demirguk-Kunt, Leora Klapper, 2) by formulating it as a policy to
improve living standards and defining its crucial role in economic growth and income
inequality. The basis of the calculation of the index of financial inclusion, they put their
savings and opportunities for service credits and private health insurance, the use of bank
accounts and payment systems.
Tulkkio Jappelli and Mario Padula (2011) in their study reached the conclusion that a
significant proportion of the adult population, despite very limited role of the social security
system is not aware of basic economic concepts such as risk diversification, inflation and
compound interest and establish strong link between the accumulation of wealth, consumer
behavior, income and expenses. They understand financial literacy as a specific form of
investment, accumulation of human capital, which is invested by increasing the financial
knowledge. Integrated investments in financial literacy model to find a correlation with the
savings they establish their positive correlation and its role in the growth of aggregate wealth.
Financial inclusion and financial literacy are complementary processes. For emerging
economies, ensuring adequate access to financial products and services is important at this
stage, but financial literacy is a prerequisite for the construction and improvement of crop
demand for these products / services and for inclusion in the system of financial services to all
members society. So this is a global problem with global dimensions.
At no other stage of human evolution was not so obvious need for holding financial
knowledge. Achieving an adequate level of financial education is the goal of national
documents - strategies for improving financial education and literacy of citizens. This
necessity is defined by different factors of society, formulated in the following order:
1. The development of information technology and the possibility for customers to gain
access to financial services through information infrastructure have changed the nature of the
important industries such as banking. Intensive movement of information flows for the
financial services offered, the variety of loans enable consumers to choose products with
specific characteristics - term, interest rate, yield. These conditions have usually complex and
difficult to understand for people without primary economic knowledge
2. The processes of deregulation of the financial industry globally, enable financial
institutions to leave important decisions under the influence of market forces ignoring (often)
the occurrence of threats from moral hazard.
3. Deterioration of the age structure of the working population and the increase in the
proportion of people of retirement age to those of working. The increased number of people
on the pension system and declining birth rates and hence bodied young people of working
age threat to cause collapse of pension systems in countries with long-acting pay-go pension
system, which in turn provokes increasing the retirement age. Increased life expectancy,
including working, the necessity of long-term options for investing the contributions to
pension and insurance schemes - products arising from the need to ensure the intangibility of
the contributions made by the insured.
4. The current global economic and financial crisis caused announced or bankruptcies of
companies requires the possession of basic financial knowledge of citizens in making long
term investment decisions under the threat of bankruptcy to financial intermediaries and
companies in the real sector.
5. Despite the turmoil caused by the global financial and economic crisis, citizens participate
as investors in financial markets, as well as in transactions in currencies, stocks and bonds.
 6. Increasing number of financial institutions offering small loans to people, usually with
vague terms and overly complicated ways of calculating the cost of service.
Financial literacy as a process for the establishment of a system of knowledge and skills
required for managing personal finances. It does not refer to formal education for professional
development in the various departments of the financial system by obtaining a bachelor's or
master's degree. Instead, it is an understanding of how to use borrowed funds responsibly
manage money, minimize financial risks and reap long-term benefits from accumulated
savings.
What does financial literacy:
Financial literacy encompasses all aspects of financial planning for the future. It includes:
• Formulation of vital financial targets;
• Create a personal and family budget;
• System of expenditure;
• Planning for long-term spending, including the cost of buying a home;
• Relationships with banks - kind banks and interest rate levels, credit cards, money transfer,
safe for valuables;
• Basics of investing in financial markets: stocks, bonds and mutual funds;
• Pension planning;
• Insurance of movable and immovable property and property, health and life insurance;
• Interaction with tax authorities and obligations of the municipal and central budget;
• understand the impact of inflation and interest rates on cash and investments.

Consumer behavior has a spiral character. When one dreams of a car, he imagines he could
have Ford or Mercedes. A large percentage of people who use credit to improve their
lifestyles pose significant costs beyond their means. Easy access to credit fueled this
phenomenon. The difference between needs and wants becomes invisible. These trends lead
to a significant increase in debt.
If we analyze the results of the banking system of the Republic of Bulgaria to retail exposures,
claims by individuals will surely impress the following facts:

In million

Exposure Year Deviation

12.2007 3.2012

sums % sums % +/-

Retail exposures, total 12972 100 18414 100

Residential mortgage loans 232 1,9 951 4,8 +252%

to individuals, under the
supervision and
nonperforming
Residential mortgage loans 367 2,8 369 2 -71%
to individuals, non-
performing

Consumer Loans-supervised 140 1 349 1,8 +55%

Consumer Loans- 264 2 139 0,7 -35%

nonperforming

Tab. № 1 Source: BNB and authors calculations

Citizens are active users of the services of the units of the financial system. As of 01.07.2012
year Bulgarian banks have provided their customers or make the following operations for the
first half of the year:

№ Type of services Quantity or

scope
1. Issued bank cards 7 518 086
2. Operations in ATM- BGl - numbers 53 338 684
3. Operations in ATM - sums 7 749 498 294
4. Number of АТМ 5 352
5. Numbers of terminals POS 65 155

For comparison, in 2006 the number of ATMs in the country was 3 436r at POS terminals and
23,899 were carried 26,193,190 for the number of draws 2391927293 Levs.
From the data can make several conclusions - reduce non-performing residential mortgages
and consumer loans (by 71 and 35%) but significant gains noted irregular and supervised
residential mortgage and consumer loans. This is a group of the most sensitive claims, which
are under the direct influence of temporary disability, unemployment, structural asymmetries,
etc. If Whereas procedure regarding bad debt is a public sale and this is a relatively regulated
process in time for the lender, the process of managing exposures in monitoring and service
are very irregular and difficult and costs and out of such procedures is associated with
additional annexes and negotiation with the borrowers. In this case, the proper behavior and
implement the full range of options for the successful completion of the contractual
relationship until their completion.
Financial literacy can not only protect bank customers from falling into a financial collapse,
but also to contribute to their well-being, which cannot be achieved by a special effort on their
part. If their behavior built on the basis of rational management and system cost savings with
even small amounts, it is possible to achieve financial well-being by setting financial goals,
moving them in series and through observance of financial discipline. You do not need much
wealth to achieve financial stability. Sufficient knowledge of the rights and obligations of
taking credit obligations and the desire of both sides to respect the opposite bank of a
successful profitable business and achieve personal goals and intentions.
The need for financial literacy of households stems from the following factors conditions:
• awareness of the importance of protecting your money;
• Need to plan for retirement;
• understanding complex financial products that may offer higher salaries, but may be
associated with high risks;
• Prudent investments so as to maximize revenue by reducing exposure to risk.
Lack of personal bankruptcies Act subject has long-term extra-parliamentary discussions, the
relatively slow introduction of routine banking practices generally accepted in other EU
countries in terms of transparency of pricing of bank resources and quality of the
implementation of these operations continue to put credit institutions in a privileged position
regarding settlement of complex deferred credit relationships over time. If a bank customer or
borrower knows and is aware of the degree of its commitments, it would not only facilitate
them, but would have a direct impact on the risk profile of the banking market and the cost of
services it offers.
After all - most influential reason why people should strive to become more financially
literate is to help them achieve their personal financial goals. No matter how specific they are,
the result of improved financial literacy will be an improved standard of living.

Empirical study

In support of the thesis of utmost importance to the behavior of households and their
investment behavior as a factor in the recovery of the economy from the global financial and
economic crisis we have accomplished econometric study projects economic growth,
measured by the increase in gross domestic product growth rate of savings and growth rates of
consumption loans of citizens.
If we examine the relationship between the level of the dynamics of three key variables: the
growth rate of the Gross Domestic Product (GDP) growth in the share of household deposits
in total deposits in the banking system (D01) and the growth in the share of loans to citizens
in total issued by the banking system credit (CRED) using a VAR-model in the context of
different periods of manifestation using dependency expressed through the equality:

yt  A1 yt 1  ...  Ap y y  p  Bxt   t

Where

yt - Vector of internal variables

xt - Vector of variables external to the model

A1... Ap and B - calculating the coefficients of the matrix

 t - Vector of residuals

For the purpose of econometric modeling includes quarterly data for the period studied
variables 2007 - 2012 year through the time series of macroeconomic variables GDP, bank
deposits of households and total loans. In order to detect the presence of a relatively long-term
trend in the dynamics and interactions of the studied variables applied VAR-models were
tested with one and two lags.

Vector Auto regression Estimates

Date: 10/15/12 Time: 14:16
Sample (adjusted): 3 22
Included observations: 20 after adjustments
Standard errors in ( ) & t-statistics in [ ]

GDP D01 CRED

GDP(-1) -5.26E-15 5.62E-14 9.31E-16

(7.3E-15) (2.1E-13) (1.8E-15)
[-0.71738] [ 0.26665] [ 0.51237]

GDP(-2) -1.36E-14 3.96E-13 -2.26E-15

(1.0E-14) (3.0E-13) (2.6E-15)
[-1.32238] [ 1.33489] [-0.88392]

D01(-1) -4.55E-13 9.54E-12 8.88E-15

(1.6E-13) (4.6E-12) (3.9E-14)
[-2.86157] [ 2.08299] [ 0.22513]

D01(-2) 1.15E-13 -2.64E-12 -2.05E-14

(1.1E-13) (3.1E-12) (2.7E-14)
[ 1.06755] [-0.85246] [-0.76736]

CRED(-1) -3.10E-14 -6.83E-13 1.50E-14

(4.9E-14) (1.4E-12) (1.2E-14)
[-0.62882] [-0.48163] [ 1.23049]

CRED(-2) -3.07E-15 -2.07E-12 2.52E-14

(5.0E-14) (1.5E-12) (1.3E-14)
[-0.06082] [-1.42353] [ 2.01159]

C 1.01E-13 3.64E-10 -4.90E-12

(6.3E-12) (1.8E-10) (1.6E-12)
[ 0.01604] [ 2.00495] [-3.13031]

GDP 1.000000 1.47E-14 7.16E-16

(1.0E-14) (3.0E-13) (2.6E-15)
[ 9.6e+13] [ 0.04937] [ 0.27822]

D01 3.39E-13 1.000000 8.27E-14

(1.5E-13) (4.2E-12) (3.7E-14)
[ 2.30266] [ 2.4e+11] [ 2.26323]

CRED 3.69E-14 -1.57E-12 1.000000

(5.5E-14) (1.6E-12) (1.4E-14)
[ 0.67607] [-0.99949] [ 7.4e+13]
R-squared 1.000000 1.000000 1.000000
Adj. R-squared 1.000000 1.000000 1.000000
Sum sq. resids 1.01E-24 8.37E-22 6.21E-26
S.E. equation 3.18E-13 9.15E-12 7.88E-14
F-statistic 2.84E+27 4.00E+23 7.12E+27
Log likelihood 486.9064
Akaike AIC -47.69064
Schwarz SC -47.19277
Mean dependent 5.682500 65.55500 3.161500
S.D. dependent 11.65257 3.981599 4.577966

Determinant resid covariance (dof

adj.) 2.52E-75
Determinant resid covariance 3.16E-76
Log likelihood 1653.335
Akaike information criterion -162.3335
Schwarz criterion -160.8399

Sources: BNB

Analyzing the results, we can identify some major trends on the behavior of the studied
variables:
On GDP: the dynamics of the underlying variable GDP direct impact on its growth rate of the
studied variables have a deposit. Available statistically significant proportional relationship at
a time (t) by a factor of 3.39 weight-13, which shows the strong influence of the deposit as a
factor shaping economic growth. This is confirmed by the trend of sustainable positive impact
of that variable that tends to follow the pace of its own dynamics, which is directly
proportional relationship expressed positive factor weighing 9.54 E-12. The analyzed results
show a strong relationship of deposit to GDP and lag (t-1) with a weight ratio - 4.55 E-13.
Statistically significant variable here already has an inverse relationship. In conclusion we can
say that at time (t) deposit has a beneficial effect on GDP growth, but at time (t-1) has an
inverse relationship, which gives reason to believe that the effect is short-lived.
We note the positive impact that it has on deposit another study variable, namely credit.
Available statistically significant positive value weight ratio 8.27 E-14 at a time (t). This gives
us reason to believe that the deposits of the banking sector transform as credit. We cannot fail
to note, however, no statistically significant association between the experience of the banks
resources, namely to CRED rate dynamics of GDP.

Conclusions:
We have proposed a simple temporal model to explore the relationship between the level of
citizens' savings, a larger proportion of their use of consumer and mortgage loans and growth
in gross domestic product as a measure for the study of economic growth.
The results of the econometric study is confirmed by analyzing the trends of the relationship
between these three variables explaining the role and importance of the behavior of
households leaving the country out of the crisis.
We found that the trend in the deposit base, expressed through growth DEP has no direct
impact on aggregate credit growth CRED, which in turn affect notes GDP, if in this interval
citizens borrow limited.
The next link that states have found that the increase in deposits DEP affect the growth of
loans to individuals CRED, with no real impact on GDP, provided that:
1. Availing loans without actual purchases of goods and services, ie new borrowings used to
restructure and renegotiate the loan portfolio of the old loan commitments;
2. Banks develop enhanced marketing activities and improve the conditions of supply of
credit products in a limited market demand.
It is assumed that the current conditions are a result of the high cost of financing and the
increased risk profile of the credit market in terms of economic and financial crisis.
Our research is intended to contribute to understanding the role and importance of financial
literacy by examining the effect of the behavior of individual users of banking services to both
financial and real behavior in a comparative context with the period before the experienced
financial and economic crisis. We argue that financial literacy is largely justified by a greater
participation of individual users in formal financial markets and the negative aspect - the use
of alternative forms of financing. Our results indicate that greater financial literacy can help
people when they are faced with an unexpected decline in the development of macroeconomic
stability and incur significantly lighter shocks decrease incomes.
It seems clear that financial literacy should not be taken for granted, especially in countries
with developing financial markets. When taking individual responsibility and decision making
savings, investments and debt management is important for consumers of financial services
are the necessary instruments to be made good financial decisions. As shown in this
development, financial literacy may not only contribute to the effectiveness of financial
decisions, but individual users may also be better able to protect themselves from shocks.
Improving financial literacy can help people, but can also help to stimulate the market and
macroeconomic stability.

SOURCES:

1. OECD (Organization for Economic Co-operation and Development). 2005b.

Improving
Financial Literacy: Analysis of Issues and Policies. OECD.
2. European Conference of Experts. 2005. Improving Financial Literacy as a Way to
Prevent Over indebtedness. Salzburg. June 2005.
3. Promoting Public Understanding of Financial Services: A Strategy for Consumer
Education (2000).
4. Thrifty Scots? Steps to Improve Financial Literacy dealt with the similar but
somewhat unique Situation in Scotland (McCormick, Chapman and Elrick, (2005).
5. Worthington, А.С., (2006) , Predicting financial literacy in Australia, Faculty of
Commerce, University of Wollongong, Wollongong, pp.6.
6. Ashli Demirguk-Kunt, Leora Klapper, (2012), Measuring Financial Inclusion, The
World Bank Development Research Group and Bill&Melinda Gates Foundation.
7. Tulkkio Jappelli and Mario Padula (2011), Investment in Financial Literacy and
Saving Decisions, CSEF, WP 272, pp. 1-46.