69881 Consum er Protection and Financial Literacy Program Europe and Central Asia Region Comprehensive Report Prepa red For The World Ba nk Ana lysis of the Fina nc ia l Litera c y Survey in Ro m a nia a nd Rec om m end a tions Sociologist: Manuela Sofia Stă nculescu Institu te for the Stu d y of the Qu ality of Life Calea 13 Sep tem brie N o. 13 76154 BUCH AREST Telep hone: 40-1-4114808 Bucharest June 2010 CONTENT IN TROD UCTION ........................................................................................ 3 1 EXECUTIVE SUMMARY ....................................................................... 4 2 D ATA AN D METHOD .......................................................................... 6 2.1 Concepts ........................................................................................... 6 2.2 Data ................................................................................................... 8 2.3 Method ........................................................................................... 11 3 TYPOLOGY OF FIN AN CIAL LITERACY IN ROMAN IA ............ 12 3.1 Dim ensions of the typology ........................................................ 12 3.2 Types of financial literacy in Rom ania ...................................... 15 3.3 Profiles of the financial literacy types ........................................ 16 4 MAKIN G EN D S MEET ........................................................................ 20 4.1 Financial literacy and money m anagem en t .............................. 21 5 PLAN N IN G AHEAD ............................................................................ 23 5.1 Financial literacy and provisioning for the future ................... 26 6 MAKIN G CHOICES ............................................................................. 28 6.1 Use of financial services/ prod ucts ............................................. 28 6.2 Choosing a financial service/ prod uct ....................................... 31 6.2.1 Bank loans............................................................................... 31 6.2.2 Insurance policies .................................................................. 32 6.2.3 Managing unsatisfactory financial prod ucts ..................... 34 6.3 Choosing a financial institution .................................................. 35 6.4 Financial literacy and m aking financial choices ....................... 37 7 FIN AN CIAL ED UCATION N EED S .................................................. 39 7.1 Know led ge and understand ing of financial m atters ............... 39 7.2 Staying inform ed about financial issues .................................... 41 7.3 Financial ed ucation needs ........................................................... 42 7.4 Financial literacy an d staying inform ed about financial m atters 44 8 CON CLUSION S AN D RECOMMEN D ATION S ............................ 46 9 REFEREN CES ......................................................................................... 49 10 AN N EXES ................................................................................................ 50 10.1 Sam pling method ology ............................................................ 50 The findings and interpretation expressed in this paper are those of the author, and do not necessarily represent the views of the World Bank. 2 INTRODUCTIO N This final report inclu d es the analysis of the baseline survey on Financial Literacy in Rom ania. The survey is the follow -up of the Diagnostic Review on Consum er Protection and Financial Literacy cond ucted by the World Bank in 2008-2009. The Diagnostic Review in Rom ania w as the fourth in a World Bank- sponsored pilot program to assess consum er protection and financial literacy in d eveloping and m id d le-incom e countries.1 The objectives of this Review w ere three-fold to: (1) refine a set of good practices for assessing consum er protection and financial literacy, includ ing financial literacy; (2) cond uct a review of the existing rules and practices in Rom ania com pared to the good practices; and (3) provid e recom m end ations on w ays to im prove consum er protection and financial literacy in Rom ania. The Diagnostic Review w as prepared at the request of the N ational Authority for Consum ers' Protection (AN PC), w hose request w as end orsed by the Ministry of Econom y and Finance. Support w as provid ed by the N ational Bank of Rom ania (BN R), w hich su pervises banks and non -bank cred it institutions. Further assistance w as given by the supervisory com m issions for securities (CN VM), insurance (CSA) and private pensions (CSSPP). The Diagnostic Review found that the basic found ations need ed for consum er protection and financial literacy are in place in Rom ania but they benefit from further strengthening support. The Review proposes im provem ents in six areas: consum er aw areness, inform ation and d isclosure for consum ers, professional com petence, d ispute resolution, financial ed ucation and financial literacy surveys. Consequently, in 2010 the World Bank comm issioned a nation -w id e survey of the levels of financial literacy. A consultant (sociologist Manuela Sofia Stanculescu) d eveloped the survey m ethod ology (sam pling m ethod ology and questionnaire) in line w ith the Financial Literacy Survey in Russia (the World Bank, 2008) and the baseline survey Financial Capability in the UK (Financial Services Authority, 2005).2 The final form of the questionnaire w as agreed w ith representatives of the N ational Bank of Rom ania (BN R), the Rom anian Banking Institute (IBR), the N ational Authority for Consum ers' Protection (AN PC), and the Financial Com panies Association in Rom ania (ALB). The Institute for World Econom y (Rom anian Acad em y) collected the d ata in May 2010. The m ain objective of this w ork is the establishm ent (and later the evaluation) of a w ell targeted national program of financial ed ucation. 1 Other reviews of consumer protection and financial literacy have been prepared (in chronological order) for the Czech Republic, Slovakia, Azerbaijan, Croatia, the Russian Federation, Lithuania and Bulgaria. The set of published reviews can be downloaded at www.worldbank.org/eca/consumerprotection. 2 Prep ared by the Personal Finance Research Centre at Bristol University and BMRB. 3 1 EXECUTIVE SUMMARY The analysis presented below is based on the Financial Literacy Survey. Data collection w as cond ucted by the Institute for World Econom y (Rom anian Acad em y) in May 2010. Section 1 presents d ata and m ethod s, w ith a special em phasis on the conceptual und erpinning of the analysis. The report uses three concepts: (a) financial literacy, (b) financial ed ucation and (c) financial capability. The three concepts are related , but they are not sim ilar. The concepts of fin ancial literacy and financial ed ucation are narrow er as they focus m ore on know led ge and skills and lack the behavioural elem ent of financial capability (Dixon, 2006 apud O‟Donell, 2009). Financial literacy is u sed for d escribing (and analyzing) the level of know led ge and und erstand ing of financial issues of a population, w hereas financial ed u cation relates to ed ucational program m es offered (in or outsid e school) for increasing the level of financial literacy. Section 2 of this report puts forw ard a typology of financial literacy in Rom ania, built in line w ith the conceptual m od el of financial capability (Kem pson et al, 2005) presented in section 1.1. Unlike in the UK, how ever, an overall ind ex of financial literacy w as d eveloped . This financial literacy ind ex (FLI) allow s us to group the population in four types sharing sim ilar levels of financial capability across the four d om ains, w hich w ill be useful in d esigning w ell-targeted program s of financial ed ucation. In the next sections of the report d ata analysis is organized accord ing to the four d om ains – m oney m anagem ent, provisioning for the future, m aking financial choices, and staying inform ed about financial m atters - in w hich financial capability could be observed and m easured . The link betw een financial capability and financial literacy is explored in each d om ain. Section 3, Making Ends Meet, points out that m ost population struggle to keep up w ith their financial com m itm ents and m ake little use of financial prod ucts either to finance d eficit or to m anage spare m oney. Inform al consum er loans (from shops) and borrow ing from relatives and friend s are the m ain instrum ents used by household s in Rom ania. Spare m oney is m ost often kept cash at hom e. The m ain d eterm inants of the capability of m aking end s m eet are household incom e, ind ivid uals‟ level of financial literacy, ed ucation, age and location in urban areas. Ceteris paribus the higher the household incom e/ the financial literacy level/ the attained level of ed ucation/ age/ and the location in urban areas, the higher people capability of making end s m eet. Section 4, Planning Ahead, conclud es that only a half of the population saves spare m oney and household s‟ savings are rather sm all. The m ajority of people w ho save plan for the unexpected and less save for the long-term. Provision for retirem ent (ad d itional to the state pensions) is very rare. 4 Unexpected financial setbacks are quite com m on m ainly caused by red und ancies and w age cuts related to the current financial crisis. People m ake little use of financial prod ucts in facing unexpected incom e d rop. Inform al consum er loans (from shops) and borrow ing from relatives and friend s are the m ain instrum ents used by hou sehold s in Rom ania. Another relevant d om ain for financial capability is making (informed) choices, analysed in Section 5. The low aw areness of consu m er rights com bined w ith the low know led ge and confid ence in the existing system s of solving d isputes over financial transactions and w ith the low level of financial literacy result in passivity in d efend ing their rights. Data for Rom ania provid e ad d itional argum ents that experience in using financial prod ucts plays the m ost im portant role regard ing capability of m aking financial choices. Financial Education N eeds, presented in Section 6, show s that for Rom ania, the level of know led ge and und erstand ing of financial m atters at the level of general population is very low . Low level of financial und erstand ing is a com m on result of all surveys on financial literacy across the w orld , from United States, to Korea, Japan or Russia. N onetheless, the level of know led ge and und erstand ing of financial issues in Rom ania appears low er than in Russia or in the UK. As a conclu d ing rem ark, the analysis clearly show s that (1) in Rom ania, m ost people are unprepared for the u nexpected and (2) increasing financial literacy is a prerequisite of im provem ent of population capability to m ake ad equate financial provision for the future. People at all incom e levels should forem ost change attitud e, learn responsibility for their futur e and learn to organize their resources in m ore appropriate w ays. 5 A 2 DAT AND METHOD 2.1 CONCEPTS In this report w e use three concepts: (a) financial literacy, (b) financial ed ucation and (c) financial capability. The three concepts are related , but they are not sim ilar. The concepts of financial literacy and financial ed ucation are narrow er as they focus m ore on know led ge and skills and lack the behavioural elem ent of financial capability (Dixon, 2006 apu d O‟Donell, 2009). Financial literacy is used for d escr ibing (and analyzing) the level of know led ge and und erstand ing of financial issues of a popu lation, w hereas financial ed u cation relates to ed ucational program m es offered (in or outsid e school) for increasing the level of financial literacy. Financial literacy refers to „the ability to m ake inform ed jud gm ents and take effective d ecisions regard ing the use and m anagem ent of m oney. […] The financially capable people are able to m ake inform ed financial d ecisions. They are num erate and can bud get and m anage m on ey effectively. They und erstand how to m anage cred it and d ebt. They are able to assess need s for insurance and protection. They can assess the d ifferent risks and returns involved in d ifferent saving and investm ent options. They have an und erstand ing of the w id er ethical, social, political and environm ental d im ensions of finances‟.3 (N octor et al, 1992 apud Kem pson et al, 2005) Financial education „is the process by w hich financial consum ers/ investors im prove their und erstand ing of financial prod ucts and co ncepts and , through inform ation, instruction and / or objective ad vice, d evelop the skills and confid ence to becom e m ore aw are of financial risks and opportunities, to m ake inform ed choices, to know w here to go for help, and to take other effective actions to im prove their financial w ell-being. Where: information involve provid ing consum ers w ith facts, d ata, and specific know led ge to m ake them aw are of financial opportunities, choices and consequences; instruction involves ensuring ind ivid uals acquire the skills and ability to und erstand financial term s and concepts, through the provision of training and guid ance; and advice involve provid ing consum ers w ith counsel about generic financial issues and prod ucts so that they can m ake the best use of the financial inform ation and instruction they have received .‟ (OECD, 2005) The A dult Financial Capability Framework, d eveloped in UK in 2004 by the Basic Skills Agency and the FSA (Kem pson et al, 2005) id entifies three broad elements of financial capability: (1) Financial know led ge and und erstand ing, w hich allow s people to acquire the skills to deal w ith everyd ay financial m atters and m ake the right choices for their need s; (2) Financial skills and com petence, w hich allow s people to plan, m onitor, m anage and resolve an y financial problem s or opportunities both in 3 This d efinition is w id ely accep ted and in the UK has been bu ilt on in the context of p ersonal finance ed u cation in schools. 6 pred ictable and unexpected situations; (3) Financial responsibility, w hich enables people to u nd erstand and appreciate their rights and responsibilities, to und erstand the various sources of ad vice and guid ance available and have the right skills and attitud es to plan, analyze, d ecid e, evaluate and m onitor financial d ecisions and choices. The sam e d ocum ent specifies three levels of financial capability: (i) basic u nd erstand ing and d eveloping confid ence: (ii) d eveloping com petence and confid ence and (iii) extend ing com petence and confid ence. The concept of financial capability w as further d eveloped by the Personal Finance Research Centre at University of Bristol, in 2005, w ithin a com plex research com m issioned by the Financial Services Authority (FSA). In this conceptual m od el, financial capability is seen as a relative and not an absolute concept. The conceptual m od el of financial capability is built around six factors interrelated as show n figure 1. Figure 1 The conceptual model of financial capability Experience and Personality circum stances Know led ge and Skills Confid ence und erstand ing and attitud es Behaviour Source: Kempson et al (2005:2). The sam e research show ed that financial capability is inextricably linked to the behaviour in four domains: (1) m anaging m oney; (2) planning ahead ; (3) m aking choices and (4) getting help. Thus, financially capable peop le are: (1) w ell organized , keep control over their financial resources, m ake end s m eet resisting pressure to spend or borrow m oney and bud get unexpected expend iture; (2) able to d eal w ith a large fall in incom e and unexpected events, m ake provision for long term (save m oney and plan for retirem ent), know how and w here to seek advice and help; (3) aw are, confid ent and able to choose betw een the available financial prod ucts; (4) able to find an d com pare inform ation for them selves and know w here and w hen to turn for ad vice and help from a third party. Financial capability is shaped and constrained by household’s income and by person’s life stage (age). Thus, for poor people, financial capability d oes not extend beyond d ay-to-d ay m oney m anagem ent and plan for the future is 7 lim ited by lack of sp are cash. In contrast, for better -off people m anaging m oney and planning ahead are not problem atic, w hereas choosing financial prod ucts and staying inform ed are m uch m ore im portant. In the sam e tim e, w hile the young focu s on d ay-to-d ay m oney m anagem ent, the m id d le-age persons (particularly those m arried w ith child ren) retain the high em phasize on m oney m anagem ent but also stress the need for planning (for pens ions in particular), and the old er people share a specific generational parsim onious attitud e tow ard s m oney, particularly, the use of cred it. The im portance of financial literacy, capability and ed u cation has consid erably increased in recent years d ue to the grow ing d iversity and com plexity of financial prod ucts, the baby boom from the „60s and increased life expectancy, changing pension system s (more of the risk in pension provisioning has shifted from the provid er to the w orker), and low levels of financial literacy (particularly for less-ed ucated , m inorities, and low incom e groups). (OECD, 2005) 2.2 DATA The analysis presented below is based on the Financial Literacy Survey. Data collection w as cond ucted by the Institute for World Econom y (Rom anian Acad em y) in May 2010. The sam ple of the survey is probabilistic, tw o-stage, stratified , representative at national level w ith an error of  3% at a 95% confid ence level. The sam ple is based on tw o stratification criteria: (i) historical region (8 regions) and (ii) type of locality (7 types d epend ing on the city size, in urban areas, and on the synthetic ind ex of com m unity d evelopm ent,4 in the rural ones; see Annex). Table 1 Sampling method by locality type (%) Random route Selected from Boost of youth Locality type electoral registers Population 16-18 years Total Poor commune 86,1 6,1 7,8 100 Medium developed commune 82,3 10,6 7,1 100 Developed commune 69,0 23,7 7,3 100 Town under 30 thou inh 87,1 7,8 5,1 100 Town under 30-99 thou inh 80,6 11,0 8,4 100 City 100-199 thou inh 81,8 10,5 7,7 100 City 200+ thou inh 30,8 59,8 9,3 100 Romania 70,0 22,4 7,6 100 Source: Institute for World Economy (2010). (N=2425, which is all applied questionnaires, valid or not). 4 Com m u nity d evelop m ent ind ex com p u ted by Du m itru Sand u – d ata and m ethod ology available at: http :/ / sites.google.com / site/ d u m itru sand u / . 8 5 The sam ple volum e is 2048, out of w hich 148 cases represent a boost of persons aged 16, 17 or those had their 18th birthd ay after N ovem ber 2009. 6 Respond ents w ere rand om ly selected from electoral registers correspond ing to 185 voting sections (rand om ly selected ), located in 141 localities (77 com m unes, 63 tow ns/ cities and the capital Bucharest). The overall response rate of the survey is 95.2%. Table 2 Response rates and quality of the sampling frame by sampling method (%) Selected Random route from Boost of Interview results electoral youth (RI variable) registers Population 16-18 years Total interview accepted 86,4 79,9 80,0 84,5 refusal 2,8 8,7 5,4 4,3 person is not in the locality the entire month 2,2 0,0 0,0 1,5 person is abroad 3,4 0,6 1,1 2,6 person could not be contacted after 3 visits 1,9 6,8 7,6 3,5 person is impossible to be contacted (ex. deceased) 1,8 0,4 0,5 1,4 dwelling empty, non-occupied, does not exist etc. 0,7 3,3 4,3 1,6 other situations 0,9 0,4 1,1 0,8 Total - % 100,0 100,0 100,0 100,0 Total - N 1698 542 185 2425 Response rate 96,9 90,2 93,7 95,2 Source: Institute for World Economy (2010). Note: Response rate = valid qq *100/(valid qq + refusal qq). The sam ple includ es a slight over-representation of m en, rural respond ents, and eld erly particularly d ue to the boost of young but also to the fact that people left abroad concentrate am ong the 25-44 age category. N evertheless, the sam ple fairly reprod uces the structure (by gend er, age categories and area of resid ence) of the country population 16+ years accord ing to the d ata for 2009 provid ed by the N ational Institute for Statistics. Socio-d em ographic structure of the sam ple is presented in table 3. Dem ographic d ata and d ata regard ing the use of financial services w ere collected for all m em bers of respond ents‟ household s. In the respond ents‟ household s live 5406 persons overall. This extend ed sam ple has also a slight over-representation of rural respond ents and an und er -representation of child ren (0-14 years) and persons 25-24 years (most probably young people w ho left abroad w ith child ren). Data used in this report are not w eighted . 5 Ou t of 2425 ap p lied qu estionnaires (selected ind ivid u als), 2048 w ere accep ted interview s. 6 Becau se the electoral registers inclu d e only p ersons 18 years or m ore and , in nearly all Rom anian localities, the electoral registers have been u p d ated for the p resid ential elections from N ovem ber 2009. One you ng 16-18 years w as selected in each voting section. 9 Table 3 Socio-demographic structure of the sample, Romania 2010 Total Urban Rural Count Col % Count Col % Count Col % TOTAL 2048 100,0% 1073 52,4% 975 47,6% Gender Male 1031 50,3% 549 26,8% 482 23,5% Female 1017 49,7% 524 25,6% 493 24,1% Age 16-24 306 14,9% 169 8,3% 137 6,7% 25-34 256 12,5% 127 6,2% 129 6,3% 35-44 350 17,1% 183 8,9% 167 8,2% 45-54 318 15,5% 194 9,5% 124 6,1% 55-64 347 16,9% 190 9,3% 157 7,7% 65+ 471 23,0% 210 10,3% 261 12,7% Education University or higher 164 8,0% 139 6,8% 25 1,2% College or post-secondary/ 151 7,4% 116 5,7% 35 1,7% technical school High school 466 22,8% 310 15,1% 156 7,6% First level of high school or vocational, apprentice/ 424 20,7% 203 9,9% 221 10,8% complementary school Gymnasium at most 843 41,2% 305 14,9% 538 26,3% Nationality Romanian 1834 89,6% 963 47,0% 871 42,5% Hungarian 137 6,7% 71 3,5% 66 3,2% Roma 59 2,9% 23 1,1% 36 1,8% Other 18 0,9% 16 0,8% 2 0,1% Historical Moldova 455 22,2% 193 9,4% 262 12,8% regions Muntenia 388 18,9% 156 7,6% 232 11,3% Oltenia 231 11,3% 106 5,2% 125 6,1% Dobrogea 90 4,4% 62 3,0% 28 1,4% Transilvania 424 20,7% 256 12,5% 168 8,2% Crisana Maramures 211 10,3% 112 5,5% 99 4,8% Banat 98 4,8% 58 2,8% 40 2,0% Bucuresti Ilfov 151 7,4% 130 6,3% 21 1,0% 10 Socio-demographic structure of the sample, Romania 2010 (continuation) Total Urban Rural Count Col % Count Col % Count Col % TOTAL 2048 100,0% 1073 52,4% 975 47,6% Main Employee 591 28,9% 412 20,1% 179 8,7% occupational Informal employed (daily 117 5,7% 34 1,7% 83 4,1% status in the worker, blackleg etc.) present Employer 16 0,8% 11 0,5% 5 0,2% Self-employed in non- 46 2,2% 29 1,4% 17 0,8% agricultural activities Farmer 125 6,1% 13 0,6% 112 5,5% Unemployed 98 4,8% 60 2,9% 38 1,9% Retired 736 35,9% 360 17,6% 376 18,4% Pupil, student 194 9,5% 119 5,8% 75 3,7% Houseperson 108 5,3% 28 1,4% 80 3,9% Person unable to work, 17 0,8% 7 0,3% 10 0,5% other innactive Per capita 1 351 17,1% 84 4,1% 267 13,0% monthly 2 360 17,6% 126 6,2% 234 11,4% hhd. income 3 367 17,9% 175 8,5% 192 9,4% quintiles 4 354 17,3% 228 11,1% 126 6,2% 5 359 17,5% 280 13,7% 79 3,9% No answer 257 12,5% 180 8,8% 77 3,8% Respondent' 1 385 18,8% 169 8,3% 216 10,5% monthly 2 331 16,2% 73 3,6% 258 12,6% income 3 449 21,9% 239 11,7% 210 10,3% quintiles 4 324 15,8% 191 9,3% 133 6,5% 5 398 19,4% 283 13,8% 115 5,6% No answer 161 7,9% 118 5,8% 43 2,1% 2.3 METHOD The analysis presented below is based on the d ata provid ed by the Financial Literacy Survey in Romania, carried out in May 2010. Section 2 of this report puts forw ard a typology of financial literacy in Rom ania, built in line w ith the conceptual m od el of financial capability (Kem pson et al, 2005) presented in section 1.1. Unlike in the UK, how ever, an overall ind ex of financial literacy w as d eveloped . This financial literacy ind ex (FLI) allow s us to group the population in four types sharing sim ilar levels of financial capability across the four d om ains, w hich w ill be useful in d esigning w ell-targeted program s of financial ed ucation . In the next sections of the report d ata analysis is organized accord ing to the four d om ains – m oney m anagem ent, provisioning for the future, m aking financial choices, and staying inform ed about financial m atters - in w hich financial capability could be observed and m easured . The link betw een financial cap ability and financial literacy is explored in each d om ain. 11 In this report, w e applied tw o m ethod s to com pute the scores (ind exes). Most often, factor analysis w as u sed to d erive scores (includ ing for the financial literacy ind ex FLI). Factor scores have an average value of zero, w ith values typically ranging from -3 to +3. The second m ethod refers to the d om inant opinion ind ex d eveloped by H ofsted e (1980) based on the form ula: (P-N ) * (T-N R)/ T*T, w here P – positive answ ers, N – negative, NR – neutral or non-response, and T – total num ber of variables. This type of ind ex varies betw een -1 (negative attitud e) and 1 (positive attitud e tow ard the issue). For ease of read ability all scores w ere sim ply rescaled to vary betw een 0 and 100, based on the form ula: 100 * (var-m invar)/ (maxvar – m invar). Generally speaking, m ost of the tables in the report have percentages that ad d up to 100 per cent. H ow ever, in som e cases the total m ay be slightly m ore or less, becau se of the w ay that num bers are round ed . 3 TYPOLOGY OF FINANCIAL LITERACY IN ROMANIA 3.1 DIMENSIONS OF THE TYPOLOGY Kem pson et al (2005) argued that for stud ying financial capability it is appropriate to d evelop separate scores for each of the four follow ing d om ains: (1) m anaging m oney; (2) planning ahead ; (3) m aking choices and (4) getting help, and not an overall score. In UK as w ell as in other w ell- d eveloped econom ies w ith w ell-established financial system s, m ost population participates in the financial system (hold at least a bank account) and the m ajority obtains very sim ilar levels of overall capability. Specifically d ue to this flat d istribution of answ ers to the questionnaire, the d ifferences betw een the m ass of people w ho are clustered together are far too sm all to assess som e as capable and others not capable. This is not the case in Rom ania (Bulgaria and probably other form er com m unist countries), w here the financial system d eveloped only after 1990, large rural areas are far aw ay from any provid er of financial services/ prod ucts, know led ge society is still und er-d eveloped , e-literacy is still low , the rural population holds a large share, the general population is far poorer and , consequently, a sm all part of the population particip ates in the financial system . In these circum stances, an overall financial literacy is appropriate. 12 Data for Rom ania sup ports this approach. The overall financial literacy ind ex (FLI) is built on four d im ensions in line w ith the UK m od el of financial capability, nam ely: (a) know led ge and und erstand ing, (b) skills, (c) attitu d es and confid ence, and (4) behaviour - participation in the financial system (u se of financial services/ prod ucts). 7 The FLI w as d eterm ined as factor score of five scores, w hich are significantly correlated: 1. Know led ge and und erstand ing financial issu es - score obtained to a quiz of eight questions that test applied financial literacy (CSF2-9, see section 6.1); it w as com puted based on H ofsted e‟s form ula;8 2. General inform ation – factor score of six questions on how frequ ently person uses to inform from various m ass m ed ia sources (P1-3a); 3. Financial inform ation – the share of financial ind icators people generally m onitor using a large range of sources (ISF1a-g); 4. Trust in financial institutions – score obtained using seven questions regard ing trust in financial institutions (T1-7); it w as com p uted based on H ofsted e‟s form ula;9 5. Participation in the financial system – nu m ber of d ifferent type of form al10 financial prod u cts people use. The average FLI score (31 on a scale betw een 0 and 100) indicates a low level of financial literacy at the level of general population. The FLI values w ere grouped in four clusters d eterm ined sim ply by ad d ing/ extracting stand ard d eviation from the m ean value (figure 2). In this w ay w e obtain four groups of population, w hich share sim ilar levels of financial literacy and are significantly d ifferent (figure 3). These represent the four types that w e w ill d iscuss further in this report w ith respect to m oney m anagem ent, forw ard planning, m aking choices of financial prod ucts and institutions and getting help and ad vice w hen necessary . 7 Total variance exp lained 42.2%, KMO=0.74 (p =.000). 8 grou p of variables w as tested w ith a factor analysis (one factor w as extracted ) bu t d u e The to the large nu m ber of m issing valu es w e chose to ap p ly the H ofsted e form u la, w hich u ses also m issing valu es. The ind ex varied betw een -76.56 to +100 and it w as rescaled to vary betw een 0 and 100. Peop le w ho d id not know to answ er any of the eight qu estion s obtained valu e zero, w hich w as kep t as su ch after rescaling. 9 The grou p of variables w as tested w ith a factor analysis (one factor w as extracted ) bu t d u e to the large nu m ber of m issing valu es w e chose to ap p ly the H ofsted e form u la, w hich u ses also m issing valu es. The ind ex varied betw een -100 to +100 and it w as rescaled to vary betw een 0 and 100. Peop le w ho d id not know any of the seven typ es of financial institu tions obtained valu e zero, w h ich w as kep t as su ch after rescaling. 10 Borrow ing from u su rers, from relatives and friend s, or from shop s are not cou nted . See also section 5.2.3. 13 Figure 2 Financial Literacy Index (FLI) in Romania and the financial literacy types Don't know 1.4% N=2048 200 Follower Outsider 14.2% 13.9% Reluctant Outsider Adopter 150 Follow er Reluctant Adopters 41.2% 29.4% No of cases 100 Mean = 31.3072 50 Std. Dev. = 15.21308 N = 2,020 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Data: Financial Literacy Survey in Romania (May 2010). Figure 3 Average scores of the financial literacy types for each dimension Financial outsiders Financial reluctants Financial adopters 76,0 Financial followers 67,2 60,4 61,6 48,8 47,4 38,2 34,6 29,0 29,3 29,8 22,2 22,3 13,8 15,5 16,9 11,5 3,8 4,1 0,6 Trust in financial Make use of financial Knowledge and Staying informed with Staying informed (in institutions services understanding of financial financial trends general) matters (objective measure) Data: Financial Literacy Survey in Romania (May 2010). Note: All indexes vary between 0 and 100. N=2020 (for 28 cases the types could not be determined due to insufficient data). National average scores are the following: general information – 53.7, financial information – 22.9, knowledge– 37.7, use of financial services – 11.7 and trust – 24.8. 14 3.2 TYPES OF FINANCIAL LITERACY IN ROMANIA Figures 2 and 3 show that the financial follow ers type cover about 14% of the population of 16 years or m ore from Rom ania, w hich is approxim ately 2.5 m illion persons.11 They use to inform d aily from various sources, am ong others follow ing a range of financial trend s (property m arket, interest rates, inflation rate etc.), have good know led ge and und erstand ing of financial issues, nearly all m ake use of various financial prod ucts and have the low est d istrust in the financial institutions. They are interested in the new trend s and d evelopm ents of the financial system . The financial adopter type inclu d es about 29% of the population aged 16 years or m ore, that represents approxim ately 5.2 m illion people. They use also to inform d aily from TV and few times a w eek from various other sources, but follow only few financial trend s, particularly interest rates, inflation rate, and changes in the level of p ublic pensions, benefits and tax exem ptions. Their know led ge and und erstand ing of financial issues is m ed ium . Their m ajority has started using form al financial prod ucts consum er loans, bank d ebit card (in m any cases im posed by their em ployers for w age paym ent), and insurance policies (mainly com pulsory car insurance) in particular. They have little trust in financial institutions; their trust level is low er in com parison w ith the trust level of follow ers, but higher than the levels of the other tw o types. The financial reluctant type is the best represented in Rom ania: about 41% of the population 16 years or over, w hich is m ore than 7.5 m illion persons. Their level of financial literacy is significantly low er than the average level of the ad opters and particularly of the follow ers. On average, the financial reluctant people use to inform d aily, but only from TV and ignoring other sources. The only financial trend to w hich they pay som e attention regard s changes in the level of public pensions, benefits and tax exem ptions. They have poor know led ge and und erstand ing of financial issues and only 20% of them use a form al financial prod uct. The financial reluctant people consid er financial institutions as ‚legal u surers‟ and , consequently have very low levels of confid ence or know nothing about them . Finally, the financial outsiders represent about 14% of the population of 16 years or m ore from Rom ania (nearly 2.5 m illion persons). The m ain characteristic of this type is lack of participation, lack of know led ge and lack of aw areness in relation to the financial system . Mere 3% of them use one form al financial prod uct. They „have never heard ‟ of financial institutions such as insurance com panies, securities com panies or leasing com panies. Their know led ge and und erstand ing in financial m atters is sim ply m issing som e are not num erate. On average, they inform few tim es a w eek only from TV and pay no attention to financial trend s. Practically they appear to be financial illiterate. 11 The total p op u lation 16 years and over in Rom ania w as in 2009 of m ore than 18.2 m illion p ersons (N ational Institu te for Statistics, Tempo Online Database). 15 In the follow ing sections of the report w e test the link betw een financial literacy and financial capability in each d om ain of activity; w e analyze if and to w hat extent the four types of financial literacy rem ain significantly d ifferent across d om ains. Before that how ever, the next section presents the socio-d em ographic profiles of the four financial literacy types (table 4). 3.3 PROFILES OF THE FINANCIAL LITERACY TYPES For d escribing the socio-d em ographic profiles of the financial literacy types, w e use pred ictors both at the ind ivid ual and at the locality level. The results are show n below . Table 4 Socio-demographic profiles of the financial literacy types in Romania, 2010 (%) Financial literacy types Follower Adopter Reluctant Outsider Total TOTAL – N 290 843 603 284 2020 TOTAL - % 14,4 41,7 29,9 14,1 100 Gender Male 12,1 40,1 32,6 15,2 100 Female 16,7 43,4 27,0 12,9 100 Age 16-24 12,5 52,8 28,4 6,3 100 25-34 12,2 29,0 33,7 25,1 100 35-44 7,8 30,1 39,1 22,9 100 45-54 14,1 32,9 34,8 18,2 100 55-64 12,0 42,5 30,5 15,0 100 65+ 23,5 55,5 17,9 3,0 100 Education University or higher * 10,5 37,7 51,2 100 College or post-secondary/ * 24,7 36,0 38,7 100 technical school High school 4,5 32,3 44,6 18,6 100 First level of high school or vocational, apprentice/ 12,3 43,4 34,9 9,4 100 complementary school Gymnasium at most 26,0 55,4 16,5 2,2 100 Nationality Romanian 13,8 41,0 30,5 14,7 100 Hungarian 11,9 48,5 29,9 9,7 100 Roma 40,7 44,1 11,9 * 100 Other * 55,6 27,8 * 100 Historical Moldova 21,5 40,1 26,0 12,3 100 regions Muntenia 19,3 42,7 25,8 12,2 100 Oltenia 18,2 39,4 33,8 8,7 100 Dobrogea 5,6 56,7 34,4 * 100 Transilvania 11,1 40,1 28,7 20,0 100 Crisana Maramures 6,3 48,1 35,6 10,1 100 Banat * 50,0 33,3 13,5 100 Bucuresti Ilfov 7,3 29,1 35,8 27,8 100 Residential Urban 4,2 37,6 38,0 20,1 100 areas Rural 25,6 46,3 20,8 7,3 100 16 Socio-demographic profiles of the financial literacy types in Romania, 2010 (%) (continuation) Financial literacy types Follower Adopter Reluctant Outsider Total TOTAL – N 290 843 603 284 2020 TOTAL - % 14,4 41,7 29,9 14,1 100 Locality Poor commune 34,9 42,6 18,0 4,4 100 Medium developed type 24,5 46,1 23,4 6,0 100 commune Developed commune 18,6 49,8 19,9 11,6 100 Town under 30 thou inh 6,1 48,0 34,4 11,5 100 Town 30-99 thou inh 3,4 39,0 41,1 16,5 100 City 100-199 thou inh 4,4 32,3 38,0 25,3 100 City 200+ thou inh 3,3 31,5 38,7 26,4 100 Main Employee 3,3 22,6 42,8 31,3 100 occupational Informal employed (daily 36,5 45,2 15,7 * 100 status in the worker, blackleg etc.) present Employer * * 43,8 50,0 100 Self-employed in non- * 11,4 40,9 47,7 100 agricultural activities Farmer 23,6 51,2 21,1 4,1 100 Unemployed 12,2 50,0 30,6 7,1 100 Retired 19,1 51,9 23,4 5,7 100 Pupil, student 6,2 58,5 29,0 6,2 100 Houseperson 30,8 42,1 24,3 * 100 Person unable to work, 29,4 47,1 * * 100 other inactive Per capita 1 30,4 47,6 18,9 3,2 100 monthly 2 23,4 45,5 25,4 5,6 100 hhd. income 3 12,9 50,1 27,8 9,1 100 quintiles 4 8,9 45,0 32,1 14,0 100 5 1,7 25,4 39,9 33,0 100 No answer 6,7 34,6 37,0 21,7 100 Respondent' 1 19,1 50,8 25,7 4,5 100 monthly 2 38,6 44,4 14,8 2,2 100 income 3 13,0 53,6 26,9 6,5 100 quintiles 4 6,0 41,8 37,7 14,6 100 5 2,0 23,9 38,4 35,6 100 No answer 4,4 25,2 42,1 28,3 100 Data: Financial Literacy Survey in Romania (May 2010). Notes: Colored cells indicate values significantly higher than average (adjusted residuals higher than two in absolute value). * Cells with less than five cases. The four types of financial literacy have significantly d ifferent socio - d em ographic portraits. Thus, financial outsid ers tend to be over -represented about w om en, persons 65 years or more, less ed ucated persons, Rom a m inority, subsistence farm ers, inform al w orkers, retired and housepersons, resid ents of poorer rural areas, particularly those located in the poorer 17 regions (Mold avia and Muntenia) and , accord ingly , am ong low incom es groups, The financial reluctant people are statistically over -represented am ong young (16-24 years) and eld erly (65 years or m ore), poorly ed ucated , farm ers, pupils and pensioners, low to m id d le incom e groups, based in villages and very sm all cities from Dobrogea (SE) and Crisana-Maram ures (N W) regions. The financial ad opter persons represent significantly larger shares am ong m en, persons 35-54 years, em ployees, w ith m ed ium to high ed ucation and incom e, located in cities w ith m ore than 30 thousand s inhabitants. The financial follow ers are w ell represented betw een (both m en and w om en) em ployees, em ployers and self-em ployed that attained a level of ed ucation above average (college or university) and high -incom e groups, being located in large cities (over 100 thousand s inhabitants) from the better -off regions of the country Transilvania and Bucharest. Consequently, in Rom ania financial illiteracy correlates w ith poverty, poor ed ucation, rural areas, em ploym ent in subsistence agriculture and und er- d evelopm ent, w hereas high levels of financial literacy correlates w ith good ed ucation, em ploym ent for m oney in non -agricultural sectors, and large urban areas. Few ad d itional argum ents: the percentage of persons w ho know at least one foreign language varies betw een 17% of the financial outsid ers and 56% of the financial follow ers (33% at the population level). In a sim ilar w ay, the share of persons w ho attend ed long-life learning courses varies betw een 2% of the financial outsid ers and 40% of the financial follow ers (15% at the population level). While only 7% of the financial outsid ers travelled abroad after the year 2000, the share bounces up to 49% of the financial follow ers (19% of total population). And those w ho w orked abroad represent 5% am ong the financially outsid ers and 12% am ong follow ers, w ith 6.5% national average. The share of car ow ners also increases from 7% of the outsid ers to 67% of the follow ers (w ith 27% the national average. The percentage of ind ivid uals that have a personal com p uter at hom e is only 9% am ong the financial outsid ers com pared to 74% of the financial follow ers (and 35% at the country level). The persons w ith Internet access at hom e account for only 6% of the financial outsid ers in com parison w ith 69% of the follow ers, and 30% of the w hole population. Regard ing all these aspects, both financial reluctant and the financial ad opter groups hold interm ed iary positions and alw ays the position of the form er is significantly low er than the one of the later. All in all, financial literacy is interrelated w ith the level of modernity of both the individuals and their environment. All socio-d em ographic pred ictors includ ed in table 4 are significantly associated w ith the financial literacy ind ex. For d eterm ining the m ost pow erful d eterm inants of financial literacy, w e d eveloped a multi-level regression m od el (table 5), w hich includ es as pred ictors: gend er, age, level of 18 ed ucation, respond ents‟ m onthly incom e, and , at the locality level, the ind ex 12 of social d evelopm ent (IDSL ind ex, Sand u, 2010).13 It is im portant to includ e in the m od el pred ictors at the locality level specifically d ue to the unbalanced territorial d istribution of the provid ers of financial services in Rom ania, w hich tend to be located in cities and m uch less in rural areas, particularly in the poor and rem ote ones. Table 5 The main determinants of financial literacy in Romania Unstandardized Standardized Collinearity Coefficients Coefficients Statistics Predictors B Std. Error Beta t Sig. Tolerance VIF (Constant) -1,784 0,106 -16,862 0,000 Education (years of school) 0,116 0,009 0,296 13,135 0,000 0,637 1,570 Personal income (lei) 0,000 0,000 0,289 12,962 0,000 0,650 1,538 IDSL index of locality level of 0,009 0,001 0,210 10,912 0,000 0,875 1,143 social development Age (years) -0,009 0,001 -0,177 -9,316 0,000 0,891 1,122 Gender (1=man) 0,035 0,035 0,018 0,995 0,320 0,968 1,033 Dependent Variable: Financial Literacy Index Data: Financial Literacy Survey in Romania (May 2010). Note: Linear regression model, enter method, R2 = 0.41. The m od el has a good pred ictive value and show s that ceteris paribus ed ucation, incom e, age and the locality level of social d evelopm ent pred ict the ind ivid ual‟s level of financial literacy. Rega rd less gend er of a person, the higher is his/ her education, the m ore money s/ he m akes, the m ore d eveloped is the locality w here s/ he lives and the younger s/ he is, the higher his/ her level of financial literacy. Consequently, increasing financial literacy in Romania is first of all a matter of improving education, economic and social development and generation. Ensuring an increase of financial literacy requires the d evelopm ent of financial ed ucational program m es (in and outsid e school), ad d ressed to young (16-24 years) and active population in particular, but also econom ic grow th and social d evelopm ent of the Rom anian localities. 12 Both for com m u nes and cities the ind ex is based on d ata regard ing: resid ential area (u rban/ ru ral), infant m ortality (2005-2008), average age of ad u lt inhabitants (2008), gross bu ild ing area (2008), d istan ce betw een the village and the ad m inistrative centre of com m u ne (1998), stock of ed u cation of ad u lt p op u lation (Censu s, 2002), share of arable land in total su rface of locality, rate of tem p orary em igration abroad (2002), share of eld erly 65+ years (2009). 13 N otew orthy, for avoid ing the m u lticollinearity effect w e ran a nu m ber of linear regression m od els w ith variou s com binations of p red ictors inclu d ed in table 4. The m od el p resented in the text is the one w ith the highest good ness-of-fit and the low est collinearity. So the selected p red ictors are the m ost influ ent ones in relation to financial literacy. 19 4 MAKING ENDS MEET Money m anagem ent involves bud geting and control of one‟s financial resources (monitoring incom e, keeping record of expend itures), being aw are of one‟s financial com m itm ents and being able to m eet those, and resisting the pressure to spend and the tem ptation to borrow . Almost 65% of population struggle to manage day-to-day needs and commitments w ith an average household income per capita low er than 150 euro. A first question from the m anaging m oney d om ain is the self- assessm ent of the household incom e. A quarter of the population (w ith an average household incom e per capita of 90 euro) has d ifficulties in coverin g bare necessities. Another 40% (average incom e per capita of 140 euro) succeed only to cover basic need s; 25% (average incom e per capita of 200 euro) can afford food and keep up w ith bills but have d ifficulties in purchasing d urable good s. Only 5% (average incom e per capita 250 euro) can afford also d urable good s and only 2% (average incom e per capita of 320 euro) have enough m oney for anything. Less than a quarter (23%) of population keep s record of expend itures. N onetheless, the large m ajority (more than 66%), although d oes not keep record of expend itures know s, fairly accurately how m uch m oney is available to cover future expend iture and (70%) has a plan to d eal w ith current m onthly expend itures. Those w ith the low est incom e tend to plan and to keep record of their expend itures in a significantly sm aller proportion than the m id d le-incom e groups because low -incom e is associated w ith irregular incom e from casual inform al w ork . One need s som e regular m oney in ord er to plan and to track them . Over half (61%) of population live paycheck to paycheck: 26% run out of m oney before payd ay „alw ays‟ or „very often‟ and 35% „som etim es‟.14 The sam e proportion is 62% of population in Bulgaria,15 60% in Russia,16 and less than a third in UK and Ireland (O‟Donnel, 2009). Only 11% of those living paycheck to paycheck use financial prod ucts (such as consum er cred its or cred it card s) to m anage this situation. Instead , t hree m ain strategies are used to m anaging running short of money:  Cut d ow n expend itures (75% of those living paycheck to paycheck)  Borrow m oney (w ith no interest) from relatives and friend s (62%) and  Buy inform ally on cred it („on the notebook‟) from shops (42%). 14 For the low est incom e grou p , this p rop ortion increases to abou t 50%. N onetheless, 8% of the highest incom e grou p ru n ou t of m oney before p ayd ay „alw ays‟ or „very often‟. 15 Data for Bu lgaria from Alp ha Research (2010). 16 Data for Ru ssia from Ru tled ge (2009). 20 During the last year, 39% of population had to borrow to pay back other d ebts, either regularly or from tim e to tim e, com pared w ith 35% in Russia and 31% in Bulgaria. H ow ever, the am ount of m ost d ebts d oes not exceed d ouble their m onthly incom e. More than 40% of the population su cceed s regularly to spend exactly as m uch as they earn. The level of incom e d oes not influence this situation . H ow ever, it is m ore frequent am ong eld erly (65 years or m ore) and am ong those w ho m ake a m onthly financial plan. Around 35% of population rem ains w ith unspent m oney from m onth to m onth: 8% regularly and 27% from tim e to tim e.17 These persons are better represented am ong well-organized people w ith m id d le to high incom e w ho keep strict record s entering all incom es and all expend itures. The large m ajority (75%) of them keep the spare money in cash at hom e, w hereas 25% d eposit them in a bank account. Only 7% invest their spare money in a business and less than 2% invest in capital m arkets. Instead , they spend spare m oney on consum er good s or lend it to relatives and friend s. In conclusion, most population struggle to keep up w ith their financial commitments and make little use of financial products either to finance deficit or to manage spare money. Informal consumer loans (from shops) and borrow ing from relatives and friends are the main instruments used by households in Romania. Spare money is most often kept cash at home. 4.1 FINANCIAL LITERACY AND MONEY MANAGEMENT A financially capable person in the d om ain of m oney m anagem ent: „(a) Keeps up w ith his/ her financial com m itm ents w ithout any d ifficulty and never struggles; (b) Agrees that s/ he is m ore of a saver than a spend er, preferring to save up to buy som ething rather than use cred it; (c) N ever runs out of m oney at the end of the w eek/ m onth; (d ) H as not been in financial d ifficulties in the last five years.‟ (FSA, 2006: 10) 600 Mean = 55.7943 Figure 4 Overall score of money management in Romania Std. Dev. = 27.05102 N = 2,048 500 The general capacity to make ends 400 meet is rather low in Romania as the Frequency d istribution of the m oney 300 m anagem ent overall score show s in figure 4. 200 Also, a significant proportion of 100 population (about 12% of population found at the far left of the 0 0.00 20.00 40.00 60.00 80.00 100.00 Money management score In Bu lgaria, d ata ind icate a sim ilar situ ation 30% of p op u lation: 8% frequ ently and 22% 17 occasionally. 21 d istribution) are clearly experiencing significant d ifficu lties. Data: Financial Literacy Survey in Romania (May 2010). For Rom ania w e d eterm ined an overall score 18 of m oney m anagem ent w hich is higher w hen the person: (1) d oes not struggle to cover basic d ay -to-d ay need s, (2) know s how m uch m oney is available to cover future expend iture (irrespective if they keep record or not), (3) has a plan to d eal w ith current m onthly expend itures, (4) „never‟ or „very rarely‟ runs out of m oney before payd ay, (5) d oes not borrow to pay back other d ebts, and (6) m anage d ay -to- d ay incom e at least trying to save som e m oney (regard less they succeed to save or not). The higher the income, the more capable the persons at making ends meet.19 Thus, the general low capability to m anage m oney is linked to the low levels of cash incom e earned by the population. There is a general recognition that inad equate or low incom es m ake the process of m oney m anagem ent m ore d ifficult. In Rom ania, the large m ajority of population earn sm all to m ed iu m m onthly incom es and a consid erable part of rural population lives w ith in -kind incom es from subsistence agriculture and various low level social benefits (farm er pensions, child allow a nce, social aid etc.). Table 6 Average monthly income per capita of the households in Romania Monthly household total income per capita (EURO) N Mean Std. Deviation Minimum Maximum Urban 893 181 110 ,00 1509 Rural 898 114 104 ,00 1700 Total 1791 147 112 ,00 1700 Data: Financial Literacy Survey in Romania (May 2010). Notes: Income data for April 2010; Exchange rate 1 euro=4.1186 lei for April 2010 (National Bank of Romania). Significantly less capable at making ends meet are the young (16-24 years), people poorly ed ucated (the higher the level of ed ucation , m ore capable at m aking end s m eet the person), Rom a m inority, and rural resid ents, particularly those located in less d eveloped and rem ote com m unes. Financial literacy is another pow erful predictor of the capability to make ends meet. The higher the level of financial literacy, the higher the overall score of m oney m anagem ent. Thus, the average score of m oney m anagem ent varies from 39 for the financial outsid er group, to 52 for the financially reluctant people, 61 for the financial ad opters and 73 for the financial follow ers. 18 The score is com p u ted as the share of asp ects fu lfilled by the p erson ou t of the six listed in the text. The score w as rescaled to take valu es betw een 0 and 100. 19 The average scores of m oney m anagem ent increases from 39 for hou sehold s in the low est incom e qu intile to 49 in the second qu intile, 55 in the third , 62 in the fou rth and 72 in the highest incom e qu intile resp ectively. 22 In conclusion, the main determinants of the capability of making ends meet are household income, individuals’ level of financial literacy, education, age and location in urban areas (in this ord er as table 7 show s). Ceteris paribus the higher the household incom e/ the financial literacy level/ the attained level of ed ucation/ age/ and the location in urban areas, the higher people capability of making end s m eet. Table 7 The main determinants of money management in Romania Unstandardized Standardized Collinearity Coefficients Coefficients Statistics Predictors B Std. Error Beta t Sig. Tolerance VIF (Constant) 24,105 3,773 6,389 ,000 Household income per capita ,014 ,001 ,236 9,414 ,000 ,711 1,407 (lei) Financial Literacy Index 6,319 ,719 ,233 8,795 ,000 ,633 1,579 Education (years of school) 1,349 ,290 ,126 4,656 ,000 ,612 1,635 Age (years) ,138 ,030 ,100 4,549 ,000 ,916 1,091 Residential area (urban=1) 1,431 ,612 ,054 2,338 ,020 ,836 1,196 Dependent Variable: Overall score of money management Data: Financial Literacy Survey in Romania (May 2010). Note: Linear regression model, enter method, R2 = 0.22. These d ata show that in ord er to increase financial capability of m aking end s m eet are necessary econom ic grow th and the d evelopm ent of non - agricultural labour m arket in rural areas but also financial ed ucation program m es targeted to the young (16-24 years) from rural areas. 5 PLANNING AHEAD Planning ahead refers to m aking financial provisions for the future both for expected com m itm ents (such as pensions) and for unexpected events (su ch as a sud d en d rop of incom e). The ability to save is strongly associated w ith planning ahead . About half (51%) of p opulation d o not save any fund s from their m onthly incom e. This proportion is sim ilar w ith the one from the UK, it is higher than in Russia (36%) but low er than in Bulgaria (61%).20 Saving behaviour clearly d iffers w ith incom e. For people on low incom es, saving is d ifficu lt if not just w ishful thinking. In the survey, nearly all those w ho d o not save m entioned an unique reason – lack of spare m oney d ue to low incom e. The proportion of people w ho d o not save d ecreases as household incom e (per capita) increases from 73% of the low est quintile to 29% of the highest incom e quintile. Correspond ingly, the proportion of those Data for Ru ssia from Ru tled ge (2009), for the UK from FSA (2006), and for Bu lgaria from 20 Alp ha Research (2010). 23 w ho save is significantly low er am ong poorly ed ucated people, Rom a m inorities, people based in rural areas (particularly in poor com m une) and in und erd eveloped regions Mold ova and Muntenia. The household s‟ savings in Rom ania are quite low as 75% of these are less than tw o m onthly incom e. The large m ajority (78%) of those w ho save are planning for the unexpected , w hile about a half (48%) of them plan for the long-term : increasing quality of life in the future (by buying a car, a d w elling etc.), leaving inheritance to child ren, for retirem ent or for financial ind epend ence. Finally, 21% of them prefer saving rather than spend ing or follow their fam ily trad ition (figure 5). Figure 5 Reasons for saving What are your household reasons to have made savings? (%) Multiple response For a rainy day, for unexpected expenses 78,0 To increase my living standards in the future 29,0 To leave something for children to inherit 18,9 I like saving rather than spending money 17,5 For retirement 11,4 No particular reason, this is a family tradition 4,4 To get income in the form of interest, increased market value of 1,7 assets, etc. For financial independence 0,6 Other 1,7 Don't know 3,6 Yes Data: Financial Literacy Survey in Romania (May 2010). Note: N=968 persons who use to save. Saving for the long-term is significantly higher am ong people w ith higher incom es, persons 35-54 years, and persons w ith m ed iu m to high ed ucation. People 65 years or m ore save for the long -term significantly less as, for them , the long term have arrived . Only about 6% of all pre-retired m ake som e provision for retirement. Thus, the large m ajority of population in relation to retirem ent tend s to leave things to the governm ent, in sp ite of the general low level of trust in the governm ent and in pension provid ers (see section 5.3). Saving for retirem ent is not associated w ith incom e. N otew orth y, only a very sm all share of population save for the long-term by investing in stocks and shares as an alternative to conventional pensions. Interestingly, if people w ould get 12,500 euro tom orrow , m ore likely they w ould save „for the rainy d ays‟ (58% of the population 16 years or over) or for buying a car, a dw elling or other expensive things (27%), but only 2% w ould purchase an insurance or a voluntary pension. 24 Unexpected financial setbacks are quite com m on in Rom ania as w ell as in Bulgaria. In the last three years, 35% of population experienced a large unexpected d rop in incom e (36% in Bulgaria), in m ost cases caused by red und ancies and w age cuts related to the current financial crisis.21 This problem have affected to a significantly larger extent low incom e groups, active generations (25-54 years), Rom a m inority, people w ith vocational ed ucation, resid ents of urban areas, from very sm all cities (w ith less than 30 thou inhabitants) in particular. Only 15% of those w ho experienced unexpected incom e d rop use financial prod u cts to m anage this situation and other 15% rely on previous savings. Instead , three m ain strategies are used for d ealing w ith unexpected incom e d rop :  Cut d ow n expend itures  Borrow m oney (w ith no interest) from relatives and friend s and  Buy inform ally on cred it („on the notebook‟) from shops. Furtherm ore, the strategies envisaged in the hypothesis of an unexpected incom e d rop (w ith one quarter for a period of three m onths or m ore) are strikingly sim ilar w ith those already used by people w ho experienced an unexpected d rop in incom e in the last three years. Figure 6 Strategies used for dealing with an unexpected drop of income (% of each group) Cut down expenses and save 86,0 88,6 Borrow money from relatives, friends and acquaintances 41,2 51,0 Buy on credit („pe caiet�) from shops 24,0 33,0 Spend our savings in lei 12,4 12,7 Work extra hours/ additional jobs 10,1 9,7 Take a bank loan 6,3 6,6 Use a credit card 5,0 7,1 Borrow from non-banking financial institutions (CAR, Provident etc.) 4,0 4,4 Exchange in lei our savings in foreign currency 2,9 2,4 Pawn jewellery or other goods 2,9 3,7 Apply for social benefits 2,8 6,6 Strategies foreseen in the hypothesis of an Spend from investment income 0,1 0,0 unexpected income drop for 3 months or more Borrow money, with interest, from relatives, friends and acquaintances 0,0 0,0 Strategies for dealing with unexpected income Other 1,4 drop in the last 3 years 0,9 Nothing special because our household has sufficient savings and incomes 3,0 0 10 20 30 40 50 60 70 80 90 100 Data: Financial Literacy Survey in Romania (May 2010). 21 Corresp ond ing p rop ortion for the UK is low er – 28%, bu t it refers to 2005 so d oes not reflect the effect of the cu rrent international financial crisis. 25 Provisioning for financial setbacks is very low . When asked how long they expect to be able to m ake end s m eet if faced w ith an unexpected d rop in incom e, 67% say they w ould m anage less than three m onths. Only 7% w ould m anage for 12 m onths or over. A sm all share of population use insurance policies for m anaging future risks. Only 16% of people hold at least one voluntary insurance policy. 22 In conclusion, only a half of the population saves spare money and households’ savings are rather small. The majority of people w ho save plan for the unexpected and less save for the long -term. Provision for retirement (additional to the state pensions) is very rare. Unexpected financial setbacks are quite common mainly caused by redundancies and w age cuts related to the current financial crisis. People make little use of financial products in facing unexpected income drop. Informal consumer loans (from shops) and borrow ing from relatives and friends are the main instruments used by households in Romania. 5.1 FINANCIAL LITERACY AND PROVISIONING FOR THE FUTURE A financially capable p erson in the d om ain of planning ahead : „(a) H as m ad e sufficient provision for an unexpected m ajor expense or significant d rop in incom e; (b) Would be able to m ake end s m eet for tw elve m onths or m ore if incom e d ropped unexpected ly; (c) H old s som e general insurance; (d ) H as m ad e provision for his/ her retirem ent; (e) Takes the attitud e, “I m ake sure I have m oney saved for a rainy d ay� and is w illing to consid er trad e -off in current stand ard of living in ord er to plan for retirem ent.‟ (FSA, 2006: 15) 23 For Rom ania w e d eterm ined an overall score of planning ahead w hich is higher w hen the person: (1) have savings equal to six m onths incom e or m ore, (2) w ould be able to m ake end s m eet for six months or m ore if incom e d rops unexpected ly, (3) hold s at least a voluntary insurance, (4) saves for the long-term . 22 Com p u lsory car insu rance (RCA) is not taken into accou nt. 23 The score is com p u ted as the share of asp ects fu lfilled by the p erson o u t of the fou r listed in the text. The score w as rescaled to take valu es betw een 0 and 100. 26 1,400 Figure 7 Overall score of financial planning in Romania 1,200 Mean = 12.8296 Std. Dev. = 19.8434 N = 2,048 The general capability of 1,000 planning ahead one’s financial resources is very low in Frequency 800 Romania. 600 The m ajority (m ore than 60% of 400 population found at the far left of the d istribution) are highly 200 vulnerable. Data: Financial Literacy Survey in Romania (May 0 0.00 20.00 40.00 60.00 80.00 100.00 2010). Planning ahead score The higher the income, the more capable the persons at planning ahead.24 Thus, the general low capability to m ake ad equate provision for the future is constrained by the low levels of cash incom e earned by the population. Significantly less capable to develop effective financial plans are the young (16-24 years). Old er people (65 years or over) have less incentives to plan for long-term . Less capable are also people w ith vocational ed ucation at m ost, Rom a m inority, and rural resid ents. Financial literacy is a pow erful predictor of the capability to make adequate financial provision for the future. The higher the level of financial literacy, the higher the overall score of planning ahead . Thus, the average score of planning ahead varies from 3 for the financial outsid er group, to 7 for financially relu ctant people, 16 for financial ad opters and 34 for financial follow ers. Table 8 The main determinants of planning finances ahead in Romania Unstandardized Standardized Collinearity Coefficients Coefficients Statistics Predictors B Std. Error Beta t Sig. Tolerance VIF (Constant) -3,114 2,643 -1,178 ,239 Financial Literacy Index 9,020 ,503 ,449 17,918 ,000 ,633 1,579 Household income per capita ,007 ,001 ,162 6,860 ,000 ,711 1,407 (lei) Residential area (urban=1) 2,180 ,429 ,111 5,081 ,000 ,836 1,196 Education (years of school) ,587 ,203 ,074 2,891 ,004 ,612 1,635 Age (years) ,030 ,021 ,030 1,428 ,153 ,916 1,091 Dependent Variable: Overall score of planning ahead Data: Financial Literacy Survey in Romania (May 2010). Note: Linear regression model, enter method, R2 = 0.30. 24 The average scores of m oney m anagem ent increases from 5 for hou sehold s in the low est incom e qu intile to 26 in the highest incom e qu intile. 27 In conclusion, the main determinants of the capability of planning ahead are individuals’ level of financial literacy, household income, location in urban areas, and education (in this ord er as table 8 show s). In Rom ania, unlike for instance in the UK, age is not a significant d eterm inant. These d ata show that (1) in Rom ania, m ost people are unprepared for the unexpected and (2) increasing financial literacy is a prerequisite of im provem ent of population capability to m ake ad equate financial provision for the future. People at all incom e levels should forem ost change attitud e, learn responsibility for their future and learn to organize their resources in m ore appropriate w ays. 6 MAKING CHOICES The third d om ain relevant for financial capability is m aking (inform ed ) choices: „People need an und erstand ing of risk: both w hat risks they face, and the trad e-off betw een risk and rew ard . This need s to be com p lem ented by a good general aw areness of the types of financial prod ucts that can help them achieve their goals, for exam ple how protection prod ucts can m itigate setbacks and how exposure to d ifferent asset classes can help to spread risk.‟(FSA, 2006: 17) Regard ing this d om ain w e need to take into account the consid erably caveat betw een the UK and Rom ania w ith respect to financial services. In Rom ania , the financial system has continuously d eveloped and the num ber and com plexity of financial services/ prod ucts has consid erably increased after 1990. N onetheless, the system is neither so d eveloped nor so sophisticated as the w ell-established financial system from the UK. Furtherm ore, w hereas in the UK, for generations alread y, people learn about financial prod ucts from early child hood , in Rom ania still are som e th at have never seen, for instance, a cred it card . Precisely for this reasons w e extend this d om ain by includ ing use of financial prod ucts and choosing a financial institution besid es choosing a financial prod uct. In the Rom anian context, the first choice to be m ad e refers to participation in the system that is to m ake use of financial prod ucts. 6.1 USE OF FINANCIAL SERVICES/ PRODUCTS The questionnaire includ ed a num ber 18 types of financial services of w hich people reported up to 6 types of services that they use. The list of financial services includ e both form al services, w hich ind icate participation in the financial system , and inform al services such as borrow s from relative and friend s, from usurers or inform al cred it from shops. Participation of population in the financial system is low . Over half (52%) of population 16 years or m ore d oes not use any financial service be it form al or inform al. Only 35% use one or m ore form al financial service, 8% use only inform al ones, and 4% com bine form al and inform al services (figure 8). 28 H ow ever, there are large d iscrepancies betw een various groups of population:  higher the household incom e, m ore form al financial services u sed  w om en and m en u se form al financial services to the sam e extent  young (16-24 years) and old er people (65 years or m ore) use significantly less financial services and prod ucts than people 45-64 years, w ho use significantly less than people 25-44 years  higher the level of ed ucation, m ore form al financial services u sed  Rom a people as w ell as rural resid en ts u se significantly less form al financial services. Figure 8 Use of financial services and products (% of population 16 years or more) No financial service either formal or informal 52,40 Bank debit card 16,50 Insurance policies 15,60 C onsumer loan 9,60 Loans from relatives, friends, acquaintances 8,20 Bank deposit 7,90 C urrent account 6,10 Buying on credit (informally - „pe caiet�) from food shops 5,80 Bank credit card 4,90 Private pensions 3,60 Loans from Mutual Help Associations 2,30 Mortgage loan 2,10 Buying on credit from the electrical appliances shops 1,70 C ar/terrain loans 0,60 Pawning goods 0,50 Loans from Provident, Fingroup C redit or other non-banking financial 0,20 institutions Investments in shares 0,20 Loans from usurers 0,05 Investment funds 0,00 Data: Financial Literacy Survey in Romania (May 2010). 29 Figure 9 Use of financial services by financial literacy types (% of each group) 90,5 Outsider Reluctant 74,5 70,9 Adopter 59,2 Follower 53 39 Total 37,0 23,8 20,3 11,9 13 9,5 9,5 8,1 3,1 Formal financial services Informal financial services None Data: Financial Literacy Survey in Romania (May 2010). Sum of values per group exceeds 100% because some people use both formal and informal financial services. The form al financial prod ucts used by the largest shares of population are:  Bank d ebit card s (in m any cases im posed by em ployers, particularly the state, for w age paym ent),  Insurance policies (com pulsory car insurance RCA in particular)  Consum er loans Interestingly, if people w ould get 12,500 euro tom orrow , only 15% of them say that m ore likely they w ould u se som e financial service (insurance, private pension, bank d eposit, stock and shares). In the next tw o years, the proportion of people using form al financial services is expected to increase to from 35% (in May 2010) to 45%. Table 9 Use of the formal financial services in 2010 and in the next two years (%) Intention to use formal financial services in the next two years Current use of formal financial services Plans to Does not Not Total use plan to use answered Uses financial services at the moment 74,8 17,0 8,2 100 Does not use financial services at the moment 25,1 51,9 23,0 100 Total 44,7 38,1 17,2 100 Data: Financial Literacy Survey in Romania (May 2010). 30 Figure 10 Use of financial services in 2010 and in the next two years (% of group) No financial service Bank debit card Insurance policies Consumer loan Loans from relatives, friends, acquaintances Bank deposit Current account Buying on credit (informally - „pe caiet�) from food shops Bank credit card Private pensions In the next two years Loans from Mutual Help Associations May 2010 Mortgage loan Buying on credit from the electrical appliances shops Car/terrain loans Paw ning goods Investments in shares Loans from Provident, Fingroup Credit or other non- banking financial institutions Loans from usurers Investment funds Don't know 0 10 20 30 40 50 60 Data: Financial Literacy Survey in Romania (May 2010). Note: Data for the next two years represent intentions. In the next tw o years, am ong form al financial services, larger proportions of population intend to use loans from Mutual H elp Associations, cred it card s and bank d eposits. 6.2 CHOOSING A FINANCIAL SERVICE/ PRODUCT 6.2.1 BANK LOANS In 2010, 11% of the population 16 years or m ore have a consum er and / or a m ortgage loan. In the next tw o years, 14% intend to use bank loans. There is a clear preference for consum er loans in favour of m ortgages, m ost probably because the form er have m uch higher accessibility com pared to the later. Most consum er loans w ere aim ed at buying various d urable good s or 31 d w elling repairing/ renovating. The large majority of cred its are in lei and , m ore generally, people prefer loans in lei. Also 68% of bank loans have a fixed interest rate. Worrisom e, 40% of people w ith bank loan face d ifficulties paying the loan rates. N onetheless, the proportion of people w ho reported d elays in loan paym ent d ecreases to 13%. When m aking a cred it from a bank, people tend to give more im portance in the sam e tim e to the com m ission charged by the bank and to the cred it interest rate. The profile of people w ho borrow from banks, expected ly, correspond s to the general eligibility cond itions im posed by banks – people w ith incom e above a certain threshold . Accord ingly, d ata show that m ore m oney people earn, the higher their probability to hold a consum er loan. N evertheless, 5% of people from the low est incom e quintile have a consum er loan , w hich as how ever taken before they w ere m ad e red und ant or suffered w age cuts. Persons aged 25-54 years tend significantly m ore than young and old er people to use consum er loans for im proving their living standard or for solving various problem s. People w ho com pleted at least high school use consum er loans in significantly larger shares than the poorly educated ones. H old ers of consum er loans are significantly better represented in u rban areas (12%) com pared to rural areas (7%). Higher a person’s level of financial literacy, higher his/her probability to hold at least a consumer loan: 30% of financial follow ers (have access to and ) m ake use of consum er loans, w hereas the proportion d ecreases to virtually zero am ong the financial outsid ers (w hich m ost probably have no access to consum er loans from a bank). 6.2.2 INSURANCE POLICIES In 2010, 16% of the population 16 years or m ore have at least one insurance policy. 25 In the next two years, m ere 5% intend to use insurance policies. The m ost num erous are policies of life insurance (9% of population). Follow car insurance CASCO (8%), d w elling insurance (6%), m ed ical insur ance (2%), and land / crop insurance (less than 1%). Most of these insurance policies are bought on one‟s ow n w ill, only 25% being im posed w ith another financial service (such as bank loan). Assessm ent of life and d w elling insurance policies are strikingly sim ilar. The largest group of about a third of population is aw are of the need for insurance but lack the financial resources to buy it. 25 Also 19% of p op u lation hold s a com p u lsory car insu rance (RCA), w hich is not inclu d ed in the follow ing analysis. 32 Figure 11 Assessment of life insurance and dwelling insurance (%) 27,7 Don't know 26,9 21,3 Don't need insurance 22,9 Need insurace but I do 11,0 not trust the providers 10,1 Need insurance but this is 33,7 too expensive 31,6 Insured but for an 2,0 amount lower than 2,4 required Dwelling insurance Insured for the proper 4,2 Life insurance amount 6,1 Data: Financial Literacy Survey in Romania (May 2010). Use of insurance to mitigate risks is strongly correlated w ith income level, education, age and area of residence. H igh-incom e people use insurance policies in significantly larger share than the low -incom e population. While 55% of people from highest incom e quintile hold at least one voluntary insurance, the proportion d ecreases steeply w ith incom e reaching 6% in the low est incom e quintile. The higher the level the ed ucation attained , the higher the probability to hold insurance. The proportion of insurance hold ers d eclines abruptly from 54% of university grad uates to 34% of post-high school, 21% of high school grad uates, 12% of people w ith vocational training and less than 5% of those w ith gym nasium at m ost. Wom en, on average, m ake less use of insurance policies then m en. People aged 25-54 years tend to m ake m ore use of voluntary insurance policies com pared to young (16-24 years) and old er persons (65 years or m ore), am ong w hich only 6-7% hold an insurance. Rom a d o not hold insurance policies. Am ong regions, Transilvania and Bucharest-Ilfov have significantly larger proportions of resid ents w ith at least one volu ntary insurance (19% and 29% respectively). Urban resid ents m ake m uch m ore use of insurance than rural people (22% com pared to 9%). Higher a person’s level of financial literacy, higher his/her probability to hold at least a voluntary insurance: 53% of financial follow ers m ake use of insurance, w hereas the proportion d ecreases to virtually zero am ong the financial outsid ers. 33 6.2.3 MANAGING UNSATISFACTORY FINANCIAL PRODUCTS In the last five years, about 12% of people w ho use financial services (that account for 6% of the w hole population) have had to d eal w ith unsatisfactory financial prod ucts. Alm ost half of these cases refer to consu m er loans. N evertheless, the rate of d issatisfaction w ith consum er loans is low er that those of loans from usurers (expected ly), cred it from electrical appliances shops („cred ite cu buletinul‟), and car/ terrain loans. Figure 12 Rate of dissatisfaction with financial services (% of each group) Loans from usurers 100,0 Buying on credit from the electrical appliances shops 35,3 Buying on credit (informally - „pe caiet�) from food shops 10,1 Informal Loans from relatives, friends, acquaintances 8,9 financial services Car/ terrain loans 33,3 Consumer loan 28,9 Mortgage loan 25,6 Pawning goods 18,2 Bank credit card 13,0 Current account 4,0 Bank deposit 3,7 Formal financial Bank debit card 3,0 services Insurance policies 1,9 Private pensions 1,4 Loans from Mutual Help Associations 0,0 Data: Financial Literacy Survey in Romania (May 2010). Notes: Share of dissatisfied people of total who use that specific service. Investment funds, investments in stock and shares and loans from non-banking financial institutions excluded due to insufficient number of cases. Less than 2% of dissatisfied customers pressed their claims w ith the financial supervisory agencies; 66% took no action and 26% stopped using the service before contract expired . Romania’s population has very low aw areness of their rights as financial consumers. Only 12% of the population know s the correct level of bank d eposits guaranteed per d eponent through law , 6% believes that all d eposits in their full am ount are covered by insurance, and only 22% know that governm ent d oes not protect from personal losses in investm ent fu nd s. At the same time, most population is not prepared to take any risk w ith their savings/investments, but has high expectation of government support. More than half of the population consid ers that the Governm ent should com pensate them for losses in the case of a bank‟s bankruptcy. Another 15% believes that the governm ent should com pensate ind ivid uals from losses in the cases w here the m arket value of shares in investm ent fund s d rop, and 9% expects governm ent to com pensate for any d ecrease in prices of resid ential real estate. 34 Und erstand ing of risk w ith savings/ investm ents is significantly correlated w ith the ind ivid ual‟s level of financial literacy, but not w ith the level of incom e. Com pared to the other groups, the financial follow ers u nd erstand better the risks they face and expect less p rotection from the governm ent, w hereas m ost financial outsid ers d o not know to answ er the qu estion. There is little confidence in the existing systems of solving problems . About a quarter of the population have no know led ge in this respect and only 13-15% are „sure‟ or „rather sure‟ that they can resolve d isputes over financial transactions „fairly‟ and / or „in short tim e‟. In conclusion, the low aw areness of consumer rights combined w ith the low know ledge and confidence in the existing systems of solving disputes over financial transactions and w ith the low level of financial literacy result in passivity in defending rights. 6.3 CHOOSING A FINANCIAL INSTITUTION Trust in institutions, p articularly in financial institutions, is a prerequisite of participation in the financial system . Thus, the little use of financial services/ prod ucts is correlated w ith d istrust in financial institutions, besid es the low levels of incom e and the poor know led ge and und erstand ing of financial issues (Table 10). For instance, about 10% of population consid er s that they need life or d w elling insurance policies, bu t d o not buy them because they „d o not believe that the insurance com panies w ill pay the claim s‟. Table 10 Correlation of trust in financial institutions, participation in the financial system, and knowledge and understanding of financial issues Score of knowledge Score of trust in Score of participation and understanding financial institutions in the financial system Score of Pearson 1 ,203(**) ,323(**) knowledge and Correlation understanding Sig. (2-tailed) . ,000 ,000 N 2048 2048 2048 Score of trust in Pearson ,203(**) 1 ,162(**) financial Correlation institutions Sig. (2-tailed) ,000 . ,000 N 2048 2048 2048 Score of Pearson ,323(**) ,162(**) 1 participation in Correlation the financial Sig. (2-tailed) ,000 ,000 . system N 2048 2048 2048 ** Correlation is significant at the 0.01 level (2-tailed). Data: Financial Literacy Survey in Romania (May 2010). See description of scores in section 2.1. 35 26 Trust in financial entities is rather w eak (figure 13). The N ational Bank of Rom ania and the N ational H ouse of Pensions, am ong the state regulatory structures, as w ell as com m ercial banks and m utual help associations, am ong financial institutions, are trusted by 40% of population or m ore. The other financial entities are either not know n or little trusted by m ore than 60% of the population. With respect to trust in financial bod ies, Rom ania and Bulgaria are very sim ilar. Quality of services provided by financial institutions is assessed, on average, as ‘fair’. Perceived quality of services is correlated w ith trust in institutions and w ith use of form al financial services. More form al financial services a person uses, better his/ her assessm ent of the quality of services provid ed by banks, m utual help associations and insurance co m panies. About 45% of population actively shops around before buying financial products. Most of these (27% of population) „rarely‟ com pare the term s and cond itions of a financial prod uct before purchasing it ; only 6% d o so „alw ays‟. The main factor in choosing a bank for borrow ing is cost of credit, w hich is m entioned by 70% of population. The second factor is bank reputation (mentioned by 10%). Gifts and ad vertising cam paigns are m entioned by less than 1% of population. The sam e criteria are used for ch oosing a non- banking institution (51% m ention cost of cred it and 12% reputation). People not alw ays choose the financial institution: 26% of those who use at least a financial service w ork w ith a bank im posed by the em ployer and 4% have no other options d u e to lack of access. More than half of population (54%) uses advice w hen buying financial products. Most of them use tw o-three sources of inform ation , only 3% of population search in four sources of inform ation or m ore. The other 46% either d o not use financial prod ucts or buy prod ucts w ithout consid ering any other option. People how ever d o not necessarily seek ad vice from an appropriate professional ad viser: 28% turn first to the ad vice of fam ily and friend s, 17% rely on prod uct inform ation, 15% turn to sale staff, 15% m ake their financial d ecision based on ad vertisem ents, and 9% u se Internet. Only 4% consult a professional ad viser and 14% look to analytical m aterials pu blished in m ass m ed ia. Lack of tru st is com m on to all institu tions (financial or not), w ith the excep tions of the 26 Orthod ox Chu rch and the Arm y. 36 Figure 13 Trust in financial entities (%) Leul, the national currency 5 19 9 41 20 Regulatory and Supervisory Structures The National Bank of Romania 10 12 10 34 24 The National House of Pensions 17 16 13 33 15 The National Authority for the C onsumer 29 19 19 22 8 Protection The Insurance Supervisory C ommission 38 19 19 18 4 Private Pension System Supervisory 38 19 21 18 3 C ommission The C ompetition C ouncil 46 15 20 15 3 Romanian National Securities C ommission 47 17 21 13 2 Financial institutions C ommercial banks operating in Romania 13 21 16 37 10 Mutual Help Associations 29 15 17 25 11 Insurance companies 21 23 22 26 6 Securities companies 38 21 24 15 2 Leasing companies 41 17 23 16 3 Other, non-banking financial institutions 47 14 28 91 Pawn shops 42 16 31 92 -100 -80 -60 -40 -20 0 20 40 60 80 very little trust little trust average trust much trust very much trust don't know the institution Data: Financial Literacy Survey in Romania (May 2010). 6.4 FINANCIAL LITERACY AND MAKING FINANCIAL CHOICES A financially capable person in the d om ain of m aking financial choices: „(a) Seeks ad vice from an appropriate professional ad viser before buying financial prod ucts or actively shops around ; (b) Doesn‟t just rely on the inform ation that accom panies the prod uct to inform his/ her purchasing d ecision; (c) Com pares prod ucts from m ultiple provid ers either personally or through an appropriate professional ad viser; (d ) Com pares prod ucts on features and price rather than m aking a choice based on brand im age ; (e) Read s term s and cond itions in d etail.27‟ (FSA, 2006: 18) 27 Qu estion not asked in Rom ania. 37 28 For Rom ania w e d eterm ined an overall score of m aking financial choices w hich is higher w hen the person: (1) und erstand s the risks they face w ith savings/ investm ents and d o not have unrealistic expectations of governm ent support, (2) actively shops around before buying financial prod ucts, (3) uses ad vice w hen buying financial prod ucts either from m any sources or from an appropriate professional ad viser, (4) choosing a bank for borrow ing d epend ing on cost of cred it and not on reputation . 29 Figure 14 Overall score of making 800 Mean = 36.3525 financial choices in Romania Std. Dev. = 25.667 N = 2,048 The general capability of 600 making financial choices is relatively small in Romania. Frequency 400 200 Data: Financial Literacy Survey in Romania (May 2010). 0 0.00 20.00 40.00 60.00 80.00 100.00 Making financial choices score The capability of m aking inform ed financial choices is correlated w ith incom e: the higher the incom e, the m ore capable the person . Making informed choices is strongly linked w ith age, education and residential area. Old er people (65 years or over) perform w orse than young und er 24 years w ho perform w orse than 25-64s. People w ho com pleted gym nasium at m ost d o w orse than those w ith vocational training w ho d o w orse than those w ith high school and so on. Rural resid ents score, on average, significantly less than urban resid ents. Financial literacy is a pow erful correlate of the capability of making informed choices. The higher the level of financial literacy, better the perform ances in this area. Thus, the average score of m aking choices increases abruptly from 20 for the financial outsid er group, to 28 for the financially reluctant, 45 for financial ad opters and 60 for financial follow ers. The main determinants of the capability of making choices are the level of financial literacy, education, location in urban areas, and age (in this ord er as table 11 show s). 28 The score is com p u ted as the share of asp ects fu lfilled by the p erson ou t of the fou r listed in the text. The score w as rescaled to take valu es betw een 0 and 100. 29 Use of financial services and tru st in financial institu tions are not inclu d ed in the overall score of m aking choices becau se they are p art of the financial literacy ind ex. 38 Table 11 The main determinants of making financial choices in Romania Unstandardized Standardized Collinearity Coefficients Coefficients Statistics Predictors B Std. Error Beta t Sig. Tolerance VIF (Constant) 19,360 3,287 5,889 ,000 Financial Literacy Index 11,370 ,652 ,435 17,438 ,000 ,609 1,643 Education (years of school) 1,669 ,263 ,162 6,358 ,000 ,584 1,713 Residential area (urban=1) 1,778 ,531 ,070 3,351 ,001 ,866 1,154 Age (years) -,088 ,027 -,068 -3,234 ,001 ,861 1,162 Household income per capita ,001 ,001 ,022 ,883 ,377 ,605 1,652 (lei) Dependent Variable: Overall score of making financial choices Data: Financial Literacy Survey in Romania (May 2010). Note: Linear regression model, enter method, R2 = 0.30. The stud y cond ucted in 2005 in the UK (FSA, 2006) show ed that experience is by far the best ind icator of capability of m aking choices, m uch stronger than incom e. Experience refers to the num ber of d ifferent types of financial prod ucts people have bought. In this stud y, „experience‟ is called „use of financial prod ucts‟30 or „participation in the financial system ‟ and it is incorporated in the financial literacy ind ex. In conclusion, d ata for Rom ania provid e ad d itional arguments that experience plays a very im portant role regard ing capability of m aking financial choices. Thu s, it is reasonable to say that im proving capability in this area requires tim e, so that m ore and m ore people experience the role of financial consum er. H ow ever, ed ucation is the second im portant pred ictor. Therefore, the process of learning by d oing could be boosted up through program m es of financial ed ucation ad d ressed to the young fro m rural areas in particular. 7 FINANCIAL EDUCATION NEEDS 7.1 KNOWLEDGE AND UNDERSTANDING OF FINANCIAL MATTERS The questionnaire includ ed a section on consum er know led ge and und erstand ing of financial calculation. This section includ es both the self- assessm ent and an objective m easure of know led ge and skills in financial issues. Thu s, the level of know led ge and und erstand ing is, on the one hand , self-reported and , on the other hand , d eterm in ed based on a sim ple quiz of eight questions on basic issues need ed to m anage household finances. They related to: (1) aw areness about consum er financial d isclosure (e.g. effective annual interest rate, deposit insurance coverage); (2) und erstand ing of bas ic financial concepts (e.g. inflation, interest on loans and d eposits); (3) financial 30 Pearson coefficient of correlation of overall score of m aking financial choices and u se of financial services (exp erience) is 0.41 (p =.000). 39 m athem atics skills (e.g. percentages); and (4) aw areness of rights as financial consum ers. The level of know ledge and understanding of financial matters at the level of general population is very low . First of all, 28% of population 16 years or m ore d id not know to answ er any of the eight questions. Second ly, 51% answ ered few er than 60 percent of questions 31 correctly, 21% gave five correct answ ers or m ore, and only one person answ ered correctly all eight questions. Low level of financial und erstand ing is a com m on result of all surveys on financial literacy across the w orld , from United States, to Korea, Japan or Russia (OECD, 2005). N onetheless, the level of know led ge and und erstand ing of financial issues in Rom ania appears low er than in Russia 32 or in the UK. People from higher incom e household s, m en, age groups 25-44 years, and urban resid ents perform significantly better to the quiz. Financial know ledge and understanding is strongly correlated w ith education. The num ber of average correct answ ers increases sharply from one for those w ho com pleted at m ost gymnasium and 4 for grad uates of university. Figure 15 Self-assessment versus number of correct answers to the quiz of knowledge and skills in financial issues (% of sample) 7 1 6 2 4 5 1 3 6 Number of 4 1 4 6 correct answers to 3 4 4 4 the quiz of 8 2 questions 1 4 4 3 1 2 5 3 1 0 10 13 4 1 -15 -10 -5 0 5 10 15 20 Self-assessment: don't very weak weak middle good very good Data: Financial Literacy Survey in Romania (May 2010). People self-assess their levels of know ledge and skills in financial issues as ‘w eak’. Self-assessm ent is correlated w ith the score obtained to the quiz (figure 12). People often feel they know m ore about financial m atters than is 31 Less than five qu estions. 32 In Ru ssia the 2008 su rvey inclu d ed a qu iz of six qu estions. 19% of p op u lation gave at least five correct answ ers to the six qu estions. Abou t 25% cou ld not p rovid e m ore than one correct answ er. (Ru tled ge, 2009) 40 actually the case (OECD, 2005). This happens in Rom ania only for a sm all share of population. The m ajority is aw are of their low capability of und erstand ing financial issues. 7.2 STAYING INFORMED ABOUT FINANCIAL ISSUES In the current rapid ly changing environm ent, planning ahead and m aking appropriate choices is alm ost im possible w ithout k eeping abreast w ith financial d evelopm ents. The majority of population uses to keep informed w ith financial trends. Alm ost tw o third s of population (63%) use to m onitor at least one financial ind icator but 37% m onitor none. The com parative shares for the UK are 78% and 22% respectively (FSA, 2006). There is a strong correlation betw een keeping w ell informed about financial matters and both income and general levels of education . While m ore than 90% of university grad uates keep inform ed w ith financial m atters, less than a half of peop le w ho com pleted at m ost gym nasium d o so. In ad d ition, m en outperform w om en. Young (16-24 years) and eld erly (65 years or m ore) outperform population 25-64 years. Urban resid ents perform significantly better than rural ones. Most people keep up w ith three financial ind icators at m ost. The highest proportion, 40% keep up w ith interest rates; 36%, m onitor changes in the public pensions, benefits and tax exem ptions; 29% m onitor the inflation rate; 16% keep up w ith changes in the housing m arket; 19% follow price fluctuations for oil or gold and 6% keep up w ith trend s on capital m arket. N ew spapers and television or rad io (34%), friend s (25%), and ad vertising (20%) represent the m ain sources people use to keep informed about financial m atters. Keeping informed w ith regulations and activities of the regulatory and supervisory structures is rather low . Only regulations issued by the N ational H ouse of Pensions and the N ational Authority of the Consum er Protection are monitored by larger proportions of population (nam ely 40% and 24% respectively). For keeping inform ed w ith financial m atters 26% of population con sults (once a m onth or less m ost often) bank officers or bankers and about 10% seeks ad vice to representatives of insurance com panies/ private pension fund . All other professional ad viser s are consulted by less than 3% of population. Financial institutions and financial services represent a topic of conversation w ith fam ily and friend s for about 60% of population. 41 7.3 FINANCIAL EDUCATION NEEDS As w e have alread y show n, the large m ajority of population is aw are of their poor know led ge and und erstand ing of financial issues. At the same time, there is a major interest for financial training courses (figure 16); 22% of pop ulation 16 years or m ore believe that financial training is need ed on all fourteen item s includ ed in the questionnaire and 19% think that financial ed u cation is not need ed at all. Over 65% of population is interested in learning how to avoid over- indebtedness. This topic is recom m end ed in significantly larger shares by people w ith high incom e and w ith high level of ed ucation located in urban areas. . More than half of population (57%) thinks that pension planning should necessarily be part of a financial training course. They are over-represented am ong high-incom e groups, population 35-64 years, urban resid ents. With respect to ed ucation, only people w ho com p leted at m ost gym nasium show significantly low er interest in this topic, the others unanim ously agree. More than half of population (57%) considers necessary courses about consumer protection issues: (a) w hat law s p rotect financial consu m ers and w hat proced ures should be follow ed w hen consum ers feel that their rights have been violated and / or (2) und erstand ing of w hat parts of the contract agreem ents w ith financial institutions should be thoroughly stud ied in order to red uce a risk of future fraud or unfair business practices. These people account for significantly larger shares am ong high -incom e groups, 16-44 years age group, grad uates of high school or higher ed ucation, people based in urban areas, particularly from large and very large cities. Around a half of population w ant to learn more about:  various financial prod ucts: (a) banking services – current accounts, d eposits and plastic card s, (b) insurance p olicies and (c) consu m er loans  planning for the future: (a) how to d efine targets and to d raft a financial plan and (b) how to plan buying of d urables. 42 Figure 16 Needs of financial education (%) What to do not to get up to ones neck in debt when using 65,3 credits How does the pension scheme work and what methods 57,0 are available to secure ones old age income What consumer rights protection laws are available and what one needs to do when ones consumer rights are 51,2 violated What information should a user pay attention to when signing a contract with a bank or another financial 50,9 company Banking services – current accounts, saving deposits, and 50,1 plastic cards How to form ones own financial targets and draw a 49,7 personal current financial plan Insurance and insurance products 47,7 How to plan purchases of durables (car, apartment, 46,6 dacha) and evaluate ones abilities to implement them C onsumer credits to purchase goods and services 46,0 Private pension funds 43,0 What parameters are used to compare the services 39,2 offered by banks and other financial companies Mortgage loans 38,2 Sources of information on financial services, how to interpret the information and how to differentiate the 36,7 advertising information from the objective one C apital markets, stock and unit fund shares 29,7 0,0 10,0 20,0 30,0 40,0 50,0 60,0 70,0 Data: Financial Literacy Survey in Romania (May 2010). Figure 17 Preferences for providers of financial education programmes (%) Government entities regulating these markets 34,5 Mass media (journalists and TV presenters) 29,7 A commercial bank 24,3 Non-government organizations or public organizations 23,7 involved in consumer rights protection Higher education institutions of economic and financial 23,6 profile Pension fund and/or insurance companies 11,7 Independent financial consultants 11,2 Unit investment funds (management companies) 4,6 Other institutions 0,8 Don't know 22,3 0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0 40,0 Data: Financial Literacy Survey in Romania (May 2010). 43 Most people consid er governm ent financial regulators to be the m ost appropriate provid ers of financial ed u cation program m es to the public. In the preferences hierarchy follow s m ass m ed ia and then, w ith very sim ilar shares, bank, N GOs and universities w ith econom ic or financial profile (figure 17). Accuracy 7.4 FINANCIAL LITERACY AND STAYING INFORMED ABOUT FINANCIAL MATTERS A financially capable person in the d om ain of staying inform : „(a) Monitors m any financial ind icators such as changes in the hou sing m arket, stock 33 m arket and interest rates; (b) Checks these financial ind icators frequently ; (c) H as a good level of applied financial literacy (good score to the „m oney quiz‟); (d ) Thinks it is reasonably im portant to keep up to d ate w ith financial m atters.34‟ (FSA, 2006: 18) For Rom ania w e d eterm ined an overall score 35 of staying inform ed about financial issues, w hich is higher w hen the person: (1) know s the m ain activities and regulations issued by the financial regulatory and supervisory structures, (2) cond ucts an active search for inform ation by consulting professionals, (3) w ants to learn m ore about sources of inform ation on financial issues and how to interpret the inform ation , (4) is interested to learn how to com pare financial services, (5) consid ers that consum er protection issues should necessarily be consid ered by any financial ed ucation program m e. 36 Figure 18 Overall score of staying informed about financial issues in 500 Mean = 41.5527 Romania Std. Dev. = 32.95763 N = 2,048 400 Data: Financial Literacy Survey in Romania (May 2010). Frequency 300 200 100 0 0.00 20.00 40.00 60.00 80.00 100.00 Staying informed score 33 Qu estion not asked in Rom ania. 34 Qu estion not asked in Rom ania. 35 The score is com p u ted as the share of asp ects fu lfilled by the p erson o u t of the fou r listed in the text. The score w as rescaled to take valu es betw een 0 and 100. 36 Know led ge and u nd erstand ing of financial m atters (score of the m oney qu iz) and financial inform ation (m onitoring of financial trend s) are not inclu d ed in the overall score of staying inform ed becau se they are p art of the financial literacy ind ex. 44 The capability of staying informed about financial matters is rather diverse in Romania. While a num ber of people are clearly w illing and taking efforts to stay inform it is ju st as com m on for people to be com pletely ind ifferent. The capability of m aking inform ed financial choices is correlated w ith incom e, age, ed ucation, level of financial literacy and area of resid ence. Old er people, on average, have few er relevant inform ation and are not w illing to learn new things. Urban resid ents, again, outperform the rural ones. People from higher incom e groups perform ed better in staying info rm about financial issues than people from low incom e groups. University grad uates perform better than post-high school w ho perform better than those w ho com pleted high school and so on. How ever, only financial literacy and education are significant determinants of staying informed about financial matters, all other things being equal or held constant. It is not surprisingly taking into consid eration the high w eight of the inform ation related com ponents w ithin the financial literacy ind ex. Table 12 The main determinants of staying informed about financial matters in Romania Unstandardized Standardized Collinearity Coefficients Coefficients Statistics Predictors B Std. Error Beta t Sig. Tolerance VIF (Constant) 33,942 4,536 7,482 ,000 Financial Literacy Index 15,814 ,864 ,471 18,303 ,000 ,633 1,579 Education (years of school) ,837 ,348 ,063 2,404 ,016 ,612 1,635 Residential area (urban=1) -,087 ,736 -,003 -,118 ,906 ,836 1,196 Age (years) -,020 ,036 -,011 -,537 ,591 ,916 1,091 Household income per capita ,000 ,002 -,001 -,022 ,982 ,711 1,407 (lei) Dependent Variable: Overall score of staying informed about financial matters Data: Financial Literacy Survey in Romania (May 2010). Notes: Linear regression model, enter method, R2 = 0.25. We did not improve the model for keeping comparability with the other three domains of activity. In conclu sion, financial ed ucation w ould be a very effective instrum ent to im prove people skills to seek, und erstand and use financial inform at ion for their w ell-being. 45 8 CONCLUSIONS AND RECOMMENDATIONS This report includ es the analysis of the baseline survey on Financial Literacy in Romania, cond ucted in May 2010, w ith a survey m ethod ology (sam pling and questionnaire) in line w ith the Financial Literacy Survey in Russia (the World Bank, 2008) and the baseline survey Financial Capability in the UK (Financial Services Authority, 2005). From the methodological point of view , the analysis u ses three concepts: (a) financial literacy, (b) financial ed ucation and (c) financial capability. The three concepts are related , but they are not sim ilar. The concepts of financial literacy and financial ed ucation are narrow er as they focus m ore on know led ge and skills and lack the behavioral elem ent of fina ncial capability. The research carried out in UK show ed that financial cap ability is inextricably linked to the behavior in four d om ains: (1) m anaging m oney; (2) planning ahead ; (3) m aking choices and (4) getting help. Kempson et al (2005) argued that for stud ying financial capability it is appropriate to d evelop separate scores for each d om ain , and not an overall score. In the UK as w ell as in other w ell-d eveloped econom ies w ith w ell-established financial system s, m ost population participates in the finan cial system (hold at least a bank account) and the m ajority obtains very sim ilar levels of overall capability. This is not the case in Rom ania (Bulgaria and probably other form er com m unist countries), w here the financial system has d eveloped only after 1990, large rural areas are far aw ay from any provid er of financial services/ prod ucts, know led ge society is still und er -d eveloped , e-literacy is still low , the rural population hold s a large share, the general population is far poorer and , consequently, a sm all part of the population particip ates in the financial system . Und er these circum stances, an overall financial literacy is appropriate. Data for Rom ania sup ports this approach. The overall financial literacy ind ex (FLI) is built on four d im ensions in line w ith the UK m od el of financial capability, nam ely: (a) know led ge and und erstand ing, (b) skills, (c) attitud es and confid ence, and (4) behaviour - participation in the financial system (u se of financial services/ prod ucts). As key findings, the report id entifies the m ajor challenges that any financial literacy program w ill have to face the low level of financial literacy at the level of general population (w ith a value of 31 on a scale betw een 0 and 100). 46 The FLI values w as grouped in four financial literacy types:  Financial followers type cover about 14% of the population of 16 years or m ore from Rom ania, w hich is approxim ately 2.5 m illion persons. They use to inform d aily from various sources, m onitor a w id e range of financial trends (property m arket, interest rates, inflation rate etc.), have good know led ge and und erstand ing of financial issues, nearly all m ake use of various financial prod ucts and have the low est d istrust in the financial institutions.  Financial adopter type includ es about 29% of the population aged 16 years or m ore, w hich represents approxim ately 5.2 million people. They use also to inform d aily from TV and few tim es a w eek from various other sources, but m onitor only few financial ind icators, particularly interest rates, inflation rate, and changes in the level of public pensions, benefits and tax exem ptions. Their know led ge and und erstand ing of financial issues is m ed ium .  Financial reluctant type is the best represented in Rom ania: about 41% of the population 16 years or over, w h ich is m ore than 7.5 m illion persons. Their level of financial literacy is significantly low er than the average level of the ad opters and particularly of the follow ers. They have poor knowled ge and und erstand ing of financial issues and only 20% of them use a form al financial prod uct.  Financially outsiders represent about 14% of the population of 16 years or m ore from Rom ania (nearly 2.5 m illion persons). The m ain characteristic of this type is lack of participation, lack of know led ge and lack of aw areness in relation to the financial system . Mere 3% of them use one form al financial prod uct. Practically they appear to be financial illiterate.  The four types of financial literacy have significantly d ifferent socio - d em ographic portraits. Thus, financial outsid ers tend to be over-represented about w om en, persons 65 years or more, less ed ucated persons, Rom a m inority, subsistence farm ers, inform al w orkers, retired and house -persons, resid ents of poorer rural areas, particularly those located in the poorer regions (Mold avia and Muntenia) and , accord ingly, am ong low incom es groups. In contrast, the financial follow ers are w ell represented betw een (both m en and w om en) em ployees, em ployers and self-em ployed that attained a level of ed ucation above average (college or university) and high - incom e groups, being located in large cities (over 100 thousand s inhabitants) from the better-off regions of the country Transilvania and Bu charest.  Financial literacy is interrelated w ith the level of m od ernity of both the ind ivid u als and their environm ent.  The m ain d eterm inants of the capability of planning ahead are ind ivid uals‟ level of financial literacy, household incom e, location in urban areas, and ed ucation. In Rom ania, unlike for instance in the UK, age is not a significan t d eterm inant. Also, regard less gend er of a person, the higher is his/ her ed ucation, the m ore m oney s/ he m akes, the m ore d eveloped is the locality w here s/ he lives and the younger s/ he is, the higher his/ her level of financial literacy. 47 On the sid e of policy recommendations, the analysis clearly show s that (1) in Rom ania, m ost people are unprepared for the unexpected and (2) increasing financial literacy is a p rerequisite of im provem ent of population capability to m ake ad equate financial provision for the future. People at all incom e levels should forem ost change attitud e, learn responsibility for their future and learn to organize their resources in m ore appropriate w ays. Data for Rom ania provid e ad d itional argum ents that experience plays a very im portant role regard ing capability of m aking financial choices. Thus, it is reasonable to say that im proving capability in this area requires tim e, so that m ore and m ore people experience the role of financial consum er. H ow ever, ed ucation is the second im portant pr ed ictor. Therefore, the process of learning by d oing could be boosted up through program m es of financial ed ucation ad d ressed to the young from rural areas in particular. The survey com m issioned by the World Bank provid es the ground for further in-d epth analyses, at regional level, w ith a d ifferen tiation of the inform ation need ed for the consum ers‟ segm entation. These next steps w ill better contribute to the overall objective of the establishm ent (and later the evaluation) of a w ell-targeted national program of financial ed ucation. 48 9 REFERENCES 1. Alpha Research (2010) Financial Literacy Survey in Bulgaria. Report on the Key Findings of the Survey, The World Bank. 2. Atkinson, A. McKay, S., Kem p son, E. and Collard , S. (2006) Levels of Financial Capability in the UK: Results of a Baseline Survey, Financial Services Authority, Consum er Research Report N o. 47. 3. Financial Services Authority (2006) Financial Capability in the UK: Establishing a Baseline, http:/ / w w w .fsa.gov.uk/ pubs/ other/ fincap_baseline.pd f 4. H ofsted e, G. (1980) Culture' s Consequences: International differences in work related values, Sage Publications, Lond on. 5. Institute for World Econom y (2010) Financial Literacy Survey in Romania. Technical Report, The World Bank. 6. Kem pson E., Collard S. and Moore N . (2005) M easuring financial capability: an exploratory study, Financial Services Authority, Consum er Research Report No. 37. 7. O‟Donnell, N . (2009) Consumer Financial Capability: A Comparison of the UK and Ireland, Research Technical Paper, 4/ RT/ 09, Central Bank and Financial Services Authority of Ireland . 8. OECD (2005) Improving Financial Literacy: A nalysis of Issues and Policies, Organisation for Econom ic Co-operation and Developm ent. 9. Rutled ge, S. (2009) Diagnostic Review of Consumer Protection in Financial Services, Russian Federation, „Volum e I. Key Find ings and Recom m end ations‟, Revised Draft, The World Bank. 10. Sand u, D. (2010) Disparităţ i socioteritoriale, Presid ential Com m ission for the Analysis of Social and Dem ographic Risks, forthcom ing. 49 10 ANNEXES 10.1 SAMPLING METHODOLOGY Sampling methodology for the Financial Literacy Survey in Romania Sample volume: 2,200 non-institutionalized persons aged 18 or old er. In ad d ition, the sam ple w ill be boosted w ith 180 persons aged 16-18 years old. Overall, at least 2,000 valid questionnaires should be com pleted d uring field w ork. Type of the sample: Probabilistic, tw o-stage, stratified , representative at national level, w ith an error of  2.8% at a 95% confid ence level. Stratification criteria: The sam pling schem e is based on tw o stratification criteria (a) H istorical region (8 regions) (b) Type of locality, w ith 7 theoretical strata i. Urban areas – 4 strata 1. very sm all tow ns und er 30 thou inhabitants 2. sm all tow ns 30,001-100 thou inhabitants 3. m ed ium cities 100,001–199 thou inhabitants 4. large cities 200 thou inhabitants or m ore ii. Rural areas – 3 strata d eterm ined based on the synthetic ind ex of com m unity d evelopm ent 37 1. poor com m unes (the 30% com m unes w ith the low est level of d evelopm ent w ithin the country) 2. m ed ium d eveloped com m unes 3. d eveloped com m unes (the 30% com m unes w ith the highest level of d evelopm ent w ithin the country). Sampling stages: The sam pling schem e inclu d es tw o stages. Sampling units: There are tw o sam plin g u nits correspond ing to the tw o sam pling stages. In the first sam pling stage, voting sections are selected and in the second stage, non-institutionalized persons aged 18 years or m ore. Selection: Rand om selection in all sam pling stages. Sampling scheme: In the first stage the sam ple is d istributed proportionally w ith the volum e of p opulation for each of the 56(= 8 x 7) theoretical strata d ifferent from zero. 37 Com m unity d evelopm ent ind ex com puted by Dum itru Sand u – d ata and m ethod ology available at: http:/ / sites.google.com / site/ d um itrusand u/ . 50 Table 1. Population structure by historical regions and type of localities, data for 2008 (%) Type of locality RURAL URBAN Medium Town Town City City Poor developed Developed under of 30 - 100 - 200+ Historical region commune commune commune 30 thou 99 thou 199 thou thou Romania Moldova 6.3 4.6 1.3 2.3 2.4 2.4 2.8 22.0 Muntenia 3.1 4.7 3.0 2.2 2.7 1.4 2.1 19.2 Oltenia 1.9 2.6 1.0 1.7 1.0 1.0 1.4 10.6 Dobrogea 0.2 0.8 0.6 0.5 1.0 0.0 1.4 4.5 Transilvania 0.4 2.8 4.7 3.9 3.8 1.4 2.7 19.7 Crisana-Maramures 0.6 1.9 1.7 1.7 0.2 2.0 1.0 9.0 Banat 0.1 0.5 1.3 0.8 0.6 0.0 1.5 4.6 Bucuresti-Ilfov 0.0 0.1 0.7 0.4 0.1 0.0 9.0 10.4 Total 12.6 17.9 14.3 13.4 11.8 8.1 21.8 100.0 Data: Population data from the Locality Database (National Institute for Statistics, 2010). The correspond ing num ber of voting sections for each strata (Table 2) is d eterm ined taking into account on the one hand , the volum e of each strata sub-sam ple (= sam ple size x share of total population in that strata as show n in Table 1) and , on the other hand , a m inim um level of 10 questionnaires for each sam pling point. The voting sections w hich w ill represent sam pling points are then rand om ly selected based on the exhaustive national list of voting sections (the latest available from the Perm anent Electoral Authority ). Table 2. N umber of sampling points by historical regions and type of localities Type of locality RURAL URBAN Medium Town Town City City Poor developed Developed under of 30 - 100 - 200+ Historical region commune commune commune 30 thou 99 thou 199 thou thou Romania Moldova 12 8 2 4 4 4 5 39 Muntenia 6 9 5 4 5 3 4 36 Oltenia 4 5 2 3 2 2 3 21 Dobrogea 1 1 1 1 2 0 3 9 Transilvania 1 5 9 7 7 3 5 37 Crisana-Maramures 1 4 3 3 1 4 2 18 Banat 0 1 2 1 1 0 3 8 Bucuresti-Ilfov 0 1 1 1 0 0 17 20 Total 25 34 25 24 22 16 42 188 51 The sam ple has 188 sam pling points (voting sections) of w hich 104 are in urban areas, and 84 are in rural localities, includ ing the capital city. For each sam pling point is com puted the num ber of correspond ing questionnaires by d ivid ing the strata sub-sam ple by the num ber of sam plin g points of that strata. In the second sam pling stage, the electoral registers correspond ing to the voting sections (selected as sam pling points) are used as sam pling fram e. N on-institutionalized persons aged 18 or m ore are rand om ly selected from the electoral registers based on the m echanical step m ethod . 38 In those localities w here the electoral registers are not available (or the m unicipality d o not grant access), the rand om route m ethod w ill be used . All these cases w ill be specified and explained in th e field w ork report, except for Bucharest, w here the rand om route m ethod w ill be used for all voting sections, as the rate of replacem ent from electoral registers is high in all national representative surveys. The electoral registers includ e only persons 18 years or m ore. Accord ingly, the sam ple w ill includ e a boost of persons aged 16, 17 or persons that had their 18th birthd ay after N ovem ber 2009.39 For each voting section, one person aged 16-18 years w ill be ad d ed . They w ill be selected based on the rand om route m ethod . Ensuring data quality - the consultant com pany w ill train the field interview ers regard ing the sam pling rules, w ith special attention paid to the ind ivid uals‟ selection and replacem ent. - for each person selected in the sam ple w ill be com pleted the first page of the questionnaire, w hich includ es id entification variables need ed for com puting the error. - replacem ent of persons is allow ed only in the follow ing cases: o The person d oes not live at the ad d ress m entioned in the electoral register or s/ he is absent for the entire period of d ata collection o Interview refusal – for red ucing the refusal rate, training and constant m onitoring of the field interview ers is need ed , particularly given the com plexity of the questionnaire 38 The m echanical step per sam pling point is com pu ted by d ivid ing the total num ber of persons includ ed in the electoral register by the num ber of correspond ing questionnaires per sam pling point (specified in the attached excel file). Then the persons are selected by ad d ing the step, starting w ith the fifth position of the register. Thus, in each sam pling point (voting section) there w ill be selected the persons from positions 5, 5+step, 5+2*step, …, 5+n*step. 39 In nearly all Rom anian localities, the electoral registers have been u pd ated for the presid ential elections from N ovem ber 2009. 52 o Use the “three visits rule�: a selected person can be replaced only after three visits at d ifferent hours and d ays, w ith at least one w eekend d ay. 53