Cyprus ranks among the lowest in Europe in terms of financial illiteracy, with a large percentage of the population lacking the basic financial knowledge necessary for managing their financial well-being.
Moreover, the lack of financial knowledge doesn’t help citizens make informed choices, especially regarding borrowing from banks.
The new research by the European Commission, titled “The state of financial knowledge in the European Union,” commented on by the Bruegel Institute, shows that Cyprus, along with Greece, Portugal, Romania, and Bulgaria, are the bottom five countries, with their populations unable to distinguish and understand basic financial concepts.
Those topping the list in financial literacy are the Finns, followed by Estonians, Danes, and Slovenians, and completing the top five are the Dutch.
As indicated by the data, populations in Northern Europe possess better financial knowledge than the rest of the EU. The top ten with good financial knowledge include Sweden, Luxembourg, Czech Republic, Germany, and Malta, the only southern country in the top ten.
Regarding online banking, data from Cyprus shows it is used by individuals with more financial knowledge.
Undoubtedly, electronic banking incorporates levels of complexity and therefore requires greater financial knowledge.
Similarly, preliminary data on the ownership of cryptocurrencies (essentially Bitcoin, dominant in the market) show that countries with higher levels of financial knowledge have more individuals holding cryptographic assets.
The research posed five questions to measure knowledge about inflation, compound interest, pricing of basic assets, the risk-return relationship, and risk diversification.
Just over 50% of respondents, on average across the EU, could correctly answer at least three of the five knowledge questions. Thus, it is confirmed that financial literacy remains low, given that the questions measure basic economic concepts used in everyday financial decision-making.
Of the five concepts, respondents better understood the risk-return relationship and inflation, with about 65% answering the related questions correctly. However, focusing solely on inflation also means that 35% of respondents do not understand that inflation reduces their purchasing power.
As inflation has been unusually high since 2022, these results show the difficulty many households face in adjusting consumption and savings behavior to such high price increases.
There are also some indications about the effects of financial knowledge on managing a household’s passive side, as individuals with low levels of financial knowledge tend to borrow on more expensive terms, especially young people.
Moreover, poor financial knowledge prevents people from preparing for the future. The research states that those with low levels of financial knowledge are less likely to plan for retirement.
It is noted that as societies age and people live longer after retirement, having adequate means will be crucial for the financial stability of households and the sustainability of public-funded pension systems.