Financial Education Module for Youth and MSME

FOR THE YOUTH AND MSMES FINANCIAL EDUCATION MODULE May 2024 nbe.gov.et

List of Tables ....................................................................................................................VI List of Figures .....................................................................................................................VI Acronyms/Abbreviations....................................................................................................VII Preface ................................................................................................................................. IX Introduction - Setting the Scene.......................................................................................X Aims of the Module ...........................................................................................................XI Scope of the Module ........................................................................................................XI Training Delivery Approach..............................................................................................XI Training Evaluation .......................................................................................................... XIII Module One: Introduction to Business and Entrepreneurship....................................1 1.1. Introduction to Business............................................................................................. 3 1.2. The Business Plan ......................................................................................................4 1.3. Contents of a Business Plan ..................................................................................... 5 1.4. Story: The Coffee Hub ..............................................................................................6 1.5. Business Model Canvas (BMC) ..................................................................................7 1.6 Summary........................................................................................................................9 1.7 Retrospective Questions on Business and Entrepreneurship................................10 Module Two: Goal Setting ..............................................................................................11 2.1. Understanding Goals..................................................................................................13 2.2 Understanding Financial Goal Setting .......................................................................14 2.3. Timeframes in Goal Setting......................................................................................16 2.4. Personal Financial Management (PFM) ..................................................................17 2.5. Why do Some People Fail to Reach Their Financial Goals? .................................20 2.6. Financial Goals Setting Formula .............................................................................21 2.7. Steps in Setting Financial Goals .............................................................................. 22 2.8. Summary.....................................................................................................................25 2.9. Retrospective Questions on Goal Setting ..............................................................26

Module Three: Budgeting ............................................................................................... 27 3.1. The Concept of Budget.............................................................................................29 3.2. Characteristics of Budget..........................................................................................30 3.3. Benefits of Having a Budget ...................................................................................30 3.4. Essentials of Effective Budgeting............................................................................31 3.5. Why is a Budget So Critical to the Success of a Business? ................................. 32 3.6. Types of Budgets ......................................................................................................33 3.7. Steps to Develop a Budget .......................................................................................35 3.8. Things to Keep in Mind While Creating a Budget .................................................36 3.9. Best Practices and Properties of Budgeting ..........................................................36 3.10. Stay Within Your Budget .........................................................................................42 3.11. Summary...................................................................................................................43 3.12. Retrospective Questions on Budgeting .................................................................44

Module Four: Basics of Bookkeeping ............................................................................45 4.1. The Concept of Bookkeeping .................................................................................. 47 4.2. Advantages of Bookkeeping...................................................................................... 47 4.3. Basic Bookkeeping Concepts and Principles ........................................................48 4.4. Key Steps for Effective Bookkeeping.......................................................................49 4.5. The Objective and the Users of Financial Reporting ..............................................56 4.6. The accounting equation .......................................................................................... 57 4.7. Nature and Advantages of Tax ................................................................................59 4.8. How to Manage Taxe Payments ..............................................................................61 4.9. Summary.....................................................................................................................61 4.10. Retrospective Questions on Basics of Bookkeeping/Accounting.........................62

Module Five: Savings ...................................................................................................... 63 5.1. What are Savings?.....................................................................................................65 5.2. Reasons for Savings .................................................................................................65 5.3. Savings Goals............................................................................................................. 67 5.4. Ways of Saving Your Money.....................................................................................68 5.5. Important Factors for Deciding Where to Save .....................................................69 5.6. Making a Savings Plan ..............................................................................................70 5.7. Summary..................................................................................................................... 71 5.8. Retrospective Questions on Saving ......................................................................... 72

Module Six: Investment ................................................................................................ 73 6.1. Definition of ‘Investment’ ......................................................................................... 75 6.2. Some Factors to Consider in Making Investment Decisions ................................. 76 6.3. Diversification............................................................................................................. 77 6.4. Summary..................................................................................................................... 78 6.5. Retrospective Questions on Investment ................................................................. 79

Module Seven: Sources of Finance.................................................................................80 7.1. Why Finance?.............................................................................................................82 7.2. Source of finance ......................................................................................................82 7.3. Sharia-Compliant Financing.....................................................................................83 7.4. Why debt financing? .................................................................................................85 7.5. Responsible Loan and Loan Management .............................................................86 7.6. The nature and advantage of lease financing ....................................................... 87 7.7. Potential Sources of Business Expansion .................................................................88 7.8. Summary ....................................................................................................................88 7.9. Retrospective Questions on Sources of Finance ...................................................89

Module Eight: Financial Services....................................................................................90 8.1. The Meaning of Financial Service ............................................................................92 8.2. Formal Financial Service Providers ..........................................................................92 8.3. Formal Financial Services..........................................................................................94 8.4 Account Opening Procedure ......................................................................................95 8.5. Advantages of Formal Financial Service .................................................................96 8.6. Disadvantages of Formal Financial Services.......................................................... 97 8.7. Informal Financial Service Providers and Services ................................................98 8.8. Advantages of Informal Financial Service...............................................................98 8.9. Disadvantages of Informal Financial Service ..........................................................99 8.10. Summary ...................................................................................................................99 8.11. Retrospective Questions on Financial Services ..................................................100

V Financial Education for the Youth and MSMEs Module Nine: Digital Financial Services ....................................................................101 9.1. Definitions .................................................................................................................104 9.2. Digital Finance ..........................................................................................................104 9.3. Digital Financial Services (DFS)..............................................................................104 9.4. Channel ..................................................................................................................... 105 9.5. Financial Technologies (Fintech) ............................................................................. 106 9.6. Types of Digital Financial Services (DFS) ............................................................. 106 9.7. Steps to Withdraw Money from ATM ....................................................................109 9.8. Benefits of Using POS for MSMEs..........................................................................110 9.9. Benefits of Digital Financial Services ....................................................................110 9.10. Challenges of Digital Finance ...............................................................................111 9.11. Overcoming the Challenges of Digital Financial Services ..................................113 9.12. Summary.................................................................................................................115 9.13. Retrospective questions on digital finance...........................................................116

Module Ten: Risk Management and Insurance .........................................................117 10.1. What Is Risk and What Do You Know About Risk Management?......................119 10.2. Understanding ‘Risk’................................................................................................119 10.3. Types of risk ...........................................................................................................119 10.4. Risk Management Process ....................................................................................122 10.5. Insurance: How Does It Work?...............................................................................124 10.6. Types of Insurance .................................................................................................125 10.7. Steps in Acquiring an Insurance Policy .................................................................126 10.8. Retirement Plan......................................................................................................127 10.9. Summary .................................................................................................................127 10.10. Retrospective Questions on Risk Management and Insurance.........................128 References ........................................................................................................................129 Annex...............................................................................................................................130 Annex 1: Glossary .......................................................................................................... 130

Table 1. The Nine Principles and Practices of Adult Education ................................. XII Table 2. Types of financial goals ....................................................................................16 Table 3. Budget Classifications ......................................................................................34 Table 4. Income budgeting template (money coming in) ............................................. 40 Table 5. Expenses budgeting template (money going out) .......................................... 40 Table 6. Savings budgeting template (money set aside for later use) ......................... 40 Table 7. Balancing your budget ......................................................................................41 List of Tables List of Figures Figure 1. Kirkpatrick’s Four-Level Model of Training Evaluation .............................. XIII Figure 2. Areas of Personal Financial Management ....................................................18 Figure 3. Benefits of having a budget............................................................................31 Figure 4. Some classifications of budget .......................................................................33 Figure 5. Steps to develop a budget .............................................................................35 Figure 6. Best Practices and Properties of Budgeting ................................................. 37 Figure 7. The budgeting cycles ......................................................................................39 Figure 8. Tips to stay within your budget ....................................................................42 Figure 9. The extended accounting equation ............................................................... 57 Figure 10. Some of the common digital financial services .........................................107 Figure 11. Benefits of digital financial services...........................................................111 Figure 12. Mechanisms of how to overcome the challenges of digital financial services 114

VII Financial Education for the Youth and MSMEs Acronyms/Abbreviations ATM Automatic Tailor Machine BMC Business Model Canvas CFPB Consumer Financial Protection Bureau DFS Digital Financial Services EM Electronic money GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit ILO International Labor Organization MFS Mobile Financial Service MMS Mobile Money Service MSMEs Micro, Small and Medium Enterprises OECD Organization for European Economic Cooperation and Development PFM Personal Financial Management PLC Private Limited Company POS Point of Sale WB World Bank

VIII Introduction

IX Financial Education for the Youth and MSMEs Preface The National Bank of Ethiopia, in collaboration with the Mastercard Foundation and First Consult under the BRIDGES program, has undertaken a groundbreaking initiative to develop and standardize a comprehensive national financial education module. This module aims to equip youth and Micro, Small, and Medium Enterprises (MSMEs) with the necessary knowledge, skills, and confidence to make informed financial decisions and improve their financial well-being. We are delighted to present the “Financial Education Module for Youth, Women, and MSMEs,” a comprehensive module developed in collaboration between the National Bank of Ethiopia and the Financial Education Working Group. Acknowledging the significance of financial education in promoting financial inclusion, the National Bank of Ethiopia (NBE) has formulated the Financial Education Strategy (2021-2025) to ensure that 75% of adults in the country possess knowledge about financial products and services by 2025. The lack of nationally coordinated financial education programs, fragmented modules, and ineffective delivery channels have contributed to Ethiopia’s low financial education and literacy levels. To address this issue, the strategy emphasizes the necessity of developing and standardizing national financial education materials, modules, and delivery channels. The National Bank of Ethiopia, as a key regulatory institution, provided valuable insights and guidance to ensure the module’s alignment with national financial education strategies and objectives. The Mastercard Foundation, in partnership with First Consult under the BRIDGES program, brought expertise in inclusive finance and sustainable development, contributing to the module’s comprehensive approach. The Financial Education Working Group was pivotal in this collaborative effort, bringing diverse perspectives, experiences, and expertise together. The contributions of the working group members, including financial experts and representatives from various organizations, enriched the module’s content and ensured its practicality and effectiveness. Drawing on international best practices, local insights, and research-based methodologies, the financial education module seeks to provide accessible and practical information on a wide range of financial topics. The module aims to cater to diverse audiences, including youth, women, MSMEs, and entrepreneurs, through interactive learning materials, workshops, and innovative delivery mechanisms. This module aspires to foster a culture of responsible financial behavior, promote savings habits, encourage entrepreneurship, and facilitate access to financial services by equipping individuals with financial literacy skills. Ultimately, the module’s goal is to contribute to building a financially inclusive society where individuals have the knowledge and tools to navigate the financial landscape effectively. Most importantly, it increases the financial inclusion target set by NBE to achieve 75% of adults to report on their awareness about financial products and services by 2025. Let us embark on this journey towards financial empowerment and inclusive growth together. H.E. Mamo Mihretu Governor, National Bank of Ethiopia Samuel Yalew Ethiopia Country Director, Mastercard Foundation Nebil Kellow Managing Director, First Consult

X Introduction Introduction - Setting the Scene Financial literacy is the ability to understand finance. It refers to the set of skills and knowledge that allows an individual to understand the available financial services and make informed and timely financial decisions. Financial literacy is not automatically achieved with access to finance; deliberate financial education measures are needed to improve it. Financial education is a way to increase financial literacy. Financial education teaches the knowledge, skills, and attitudes required to adopt good money management practices for earning, spending, budgeting, borrowing, saving, and using other financial services such as insurance, money, and transfers. Participants in financial education are equipped with the information and tools to make better financial choices and work towards their financial goals to enhance their economic well-being. Because of this, the importance of financial education programs has been an area of interest to both developing and developed countries. Given the cost of education programs, taking financial education measures with target segments of especially low financial literacy may be cost-effective. As a result, many countries have taken comprehensive national initiatives and programs that differ