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Over coffee in I met with Sabrina Sciama, corporate relations manager with Visa, Brazil and one of the organizers of its in-country financial education program. From her offices looking out over the city, Sciama explained exactly why the program of financial education is so important to building Brazil's future and the uphill battle she's had selling it.
"It was a concept that, about eight years ago, a lot of people didn't get and a lot of people didn't understand the importance of," she said.
Often, according to Sciama, people wonder why well funded groups like hers don't work on more traditional causes like nutrition or housing, or they assume that because of its connection to Visa "financial literacy
" is simply code for selling credit cards. Yet the importance of teaching people how to use their money is all about growth and survival, including making sure they understand how a credit card can help build or ruin their lives
"[Brazil's new middle class,] they're getting a lot of credit, but they don't know how to use it," Sciama said. "We see people that receive monthly salaries of $400... and they have credit to buy cars and an apartment and this and this and that and all the installments they need to pay are much higher than what they receive monthly."
This problem hits young adults hardest, who have taken to credit cards and consumer loans in huge numbers as an opportunity to share in the success of the growing economy. In many ways its worked. A country once known for explosive inflation and crushing poverty has expanded its middle class by 40 million people in the last few years. The downside, however, has become spiraling, often inescapable, debt to credit cards that can have annual rates between 238 and 323%.
Credit spending has created a boom in the economy, but one that's increasingly threatened as more and more people have to spend huge amounts of money just on making their debt payments.
Yet while the young adults of Brazil are struggling with the country's success, many of their parents are still trapped by its past failures. Today as much as 40% of Brazil's population remains "unbanked," or without access to financial services, according to an estimate by Maud Chalamet, Managing Director of PlaNet Finance, Brazil. While much of that remains an issue of infrastructure, it's also in part a hangover from the hyperinflation of the 80's and 90's and the Plano Collor.
"I remember when I was eight, nine, I couldn't understand it," Sciama said. "I would go to a supermarket and it was empty inside. I was like why, why is it empty? Where are the products? And my father would say it was the inflation."
In an attempt to stop this process the government at the time instituted, among other measures, the Plano Collor. Led by Finance Minister Zelia Cardoso, the plan froze or seized bank accounts across the country, emptying out the contents in an attempt to break the cycle of inflation.
"People would wake up one day and their accounts in banks, [Cardoso] would take every penny out of their accounts," Sciama said. "This is a way to stop you from buying, and then we wouldn't have inflation. It was the worst nightmare. For people in their 40's and 50's, I think many of them still don't trust banks, because they're afraid that's going to happen again."
The result is that while Brazil's young people might be lining up to get their plastic, many of the previous generations refuse to even walk through the door of a bank. They feel safer keeping their money at home where they can see it, and where they know it can't vanish into a computer. It also means that they get left behind.
Unbanked populations face increasing problems, both individually and as a group. According to a report by the World Bank, they find it much harder to save money and build up their finances, and of course there's no access to interest on anything that they've saved. Unbanked populations also can't get credit, either personal or professional. Although it's a double edged sword, credit in the form of a small business loan or smart purchasing can just as easily allow someone to build a life as ruin one.
Also see: Financial Football Tackles Financial Literacy
Brazil will continue growing, that isn't a question, but it has to do so in the right directions with the financial literacy programs like the National Stategy for Financial Education--something U.S. consumers and policy-makers can learn from, no doubt.
--Written by Eric Reed for MainStreet