80767 Financial Capability Surveys Around the World Why Financial Capability is important and how surveys can help KEY MESSAGES ƒƒ Financial capability is the internal capacity to act in one’s best financial interest, given socioeconomic and environmental conditions. It encompasses the knowledge (literacy), attitudes, skills, and behavior of consumers with respect to understanding, selecting and using financial services, and the ability to access financial services that fit their needs.1 ƒƒ Financial capability can be measured by assessing people’s financial knowledge, skills, attitudes, and behaviors. Based on these measurements, meaningful indicators can be developed to effectively inform policy objectives. ƒƒ Policymakers are increasingly using surveys as diagnostic tools to inform the design of national strategies in order to improve people’s financial capabilities, inclusion, and consumer protection. ƒƒ Surveys can be used to identify areas of financial capability, inclusion, and consumer protection that need improvement; assess knowledge and actions linked to policies and regulations; and to target potential demographic groups. INTRODUCTION Improving financial capability has thus emerged as a Financial capability is increasingly becoming a priority strategic policy objective that complements governments’ for policymakers in both high income and emerging financial inclusion and consumer protection agendas. To economies, as it is recognized as contributing to financial this end, policymakers are increasingly using surveys as stability, financial inclusion, and to the effective functioning diagnostic tools to identify key problem areas and inform of financial markets. Today, people are required to take the design of national strategies. According to the OECD increasing responsibility for managing a variety of risks over (Grifoni and Messy 2012), at least 36 countries have the life cycle. People who make good financial decisions established or are in the process of designing a national and interact effectively with providers of financial services, strategy for financial education. Moreover, 80 percent of therefore, are more likely to achieve their financial goals, these countries have used a survey as a diagnostic method improve their household’s welfare, hedge against financial to identify the key priorities for their national strategies. In risks and negative shocks, and support economic growth. general, surveys of financial capability seek to achieve the following objectives: Financial capability is the internal capacity to act in ƒƒ Create a baseline assessment of weak areas of one’s best financial interest, given socio-economic capability/identify target populations environmental conditions. It encompasses the ƒƒ Identify potential channels for delivering information knowledge (literacy), attitudes, skills and behaviors and financial education of consumers with regard to managing their ƒƒ Understand the relationship between financial resources, and understanding, selecting, and knowledge/literacy and behavior making use of financial services that fit their needs. ƒƒ Understand individual behavior with respect to personal or household finances 1 The terms financial literacy and financial capability are often used interchangeably. The term financial literacy is often associated with financial knowledge. Financial capability is a broader term, also encompassing behavior and the interaction of knowledge, skills and attitudes. Financial Capability Surveys Around the World — August 2013 1 By identifying and analyzing existing surveys, this note of these concepts are measured in all surveys of financial outlines and compares key approaches to measuring capability. For instance, evidence from the World Bank’s financial capability and the external factors that may affect it, research initiatives supported by the Russia Financial offering policy makers a broad range of options to consider Literacy and Education Trust Fund (WB/Russia Trust Fund) when developing their research and policy objectives. The shows that knowledge of financial products is not as relevant topics reviewed here are covered in depth in Making Sense in indicating financial capability in developing countries as it of Financial Capability Surveys around the World: A Review is in more developed economies, which may be linked with of Existing Financial Capability and Literacy Measurement lower levels of access to financial services (Kempson et al Instruments.2 2013). HOW CAN FINANCIAL CAPABILITY BE Measuring Financial Literacy MEASURED? One aspect of financial capability that is often measured Financial capability encompasses the knowledge, attitudes, is financial literacy or knowledge. For surveys of financial skills, and behaviors of individuals with regard to managing knowledge, this means identifying specific knowledge their financial resources and understanding, selecting, and gaps and potential target population groups for financial making use of financial services that fit their needs. Surveys education programs. In general, studies of financial literacy of financial capability can measure some observable measure the following three concepts: aspects of this internal capacity, as well as the interaction 1. Knowledge of fundamental financial concepts; between internal capacity and the enabling environment. External factors that can affect how internal capacity 2. Awareness of products and services offered by different manifests itself into actual behaviors include financial financial service providers and an understanding of resources, access to finance, social norms and obligations, the risks associated with using these products and financial infrastructure, and existing financial consumer services; and protection mechanisms. Given its multidimensional nature, 3. Understanding how to manage personal finances or it is difficult to measure financial capability with a single use financial services. indicator, and financial capability surveys usually measure the following broad concepts: Studies that assess people’s knowledge of financial concepts generally look at key economic concepts deemed Since the relative importance of the various aspects of important for navigating the formal economy, including capability may depend on the context being studied, not all inflation, interest rates, risk diversification, and taxation. Financial Capability Concepts Knowledge Skills Attitudes Behaviors n Knowledge of n Numeracy Skills n Reasons for or for not n Money management �nancial concepts saving, borrowing, (managing day-to-day n Literacy Skills (inflation, compound investing, etc. �nances). interest etc.) n Attitudes Towards the n Long-term planning n Awareness of future (preparing for emergen- �nancial products cies and retirement) n Con�dence in own and services plans for old age n Financial n Practical Know-how decision-making n Proclivity towards (how to make (ability to choose budgeting, saving, payments, how to appropriate �nancial lending etc. open a bank account products) etc. n Seeking �nancial advice. Available Online at: http://responsiblefinance.worldbank.org/~/media/GIAWB/FL/Documents/Misc/Financial-Capability-Review.pdf 2 2 Financial Capability Surveys Around the World — August 2013 For example, the 2004 U.S. Health and Retirement Study Literacy skills are usually measured at the beginning (HRS), asks respondents: of a survey in order to gauge whether respondents can understand official communications in the main language spoken in the country. These are usually followed by Imagine that the interest rate on your savings questions designed to test numeracy skills. Surveys test account was 1% per year and inflation was 2% per financial literacy by focusing on the ability to make simple year. After 1 year, how much would you be able to calculations connected to basic economic concepts. For buy with the money in this account? example, the Kenya FinAccess survey includes questions 1- More than today 2- Exactly the same 3- Less on numeracy skills: than today 4- Do not know 5- Refuse to Answer You have a lot of mangoes on your farm and your Given the number and complexity of financial products neighbor has lots of tomatoes. You make a bargain in the market today, measuring people’s awareness and he says he will give you three tomatoes for of financial services and products can help evaluate every mango you give him. If you give him fourteen their understanding of the functions of financial service mangoes, how many tomatoes do you expect him to providers and their knowledge of the risk and advantages give back to you? associated with financial products and services. The module on financial capability used in the US Survey of Consumers 2001 includes a number of true or false Measuring Attitudes questions that test respondents’ knowledge on the Personal views, beliefs, or psychological traits can affect functions of financial service providers. For instance, the people’s financial decision-making and consequently form module asks questions regarding whether the bank is a part of their internal financial capability. Accordingly, responsible for informing a consumer of an impending some financial capability surveys include questions overdraft and whether credit repair agencies can remove designed to measure psychological characteristics, such negative credit information. Similarly, the Financial Literacy as attitudes and motivations. Studies like the Singapore Survey conducted in Portugal asks respondents about the National Financial Literacy survey, FinAccess, the Special minimum deposit required to access bank services and it Eurobarometer 230, and the WB/Russia Trust Fund survey tests their knowledge of Internet banking. include examples of questions on attitudes. Studies can also measure consumers’ knowledge A number of studies focus on motivations for financial about the use of financial products and management behavior using scales developed in psychological research of personal resources, including how to save, borrow, or simply by inquiring about the reasons for adopting invest, and protect oneself against financial fraud. An certain kinds of behavior. These surveys ask about important concept that these surveys measure is whether reasons for saving, borrowing, long-term planning, and respondents know their consumer rights and know how to budgeting, among other indicators. The WB/Russia Trust seek recourse for unfair financial practices or fraud. Fund survey, for example, contains a set of questions that measure impulsiveness, attitudes toward the future, and Evaluating Skills achievement orientation. Other studies, like the Singapore Evaluating people’s cognitive skills, such as basic National Financial Literacy survey, FinAccess, and the numeracy and literacy skills, can also support the Special Eurobarometer 230 include questions about measurement of financial capability. The measurement of preferences toward or reasons for long-term planning, skills sheds light on the potential limitations to the proper lending, saving, and day-to-day money management. use of financial products and services. Accordingly, a Attitudes can also be measured by assessing people’s number of studies gather data on respondents’ skills in proclivity toward certain types of behavior. These studies addition to assessing levels of financial knowledge. Financial Capability Surveys Around the World — August 2013 3 look at people’s tendencies to choose between financial of an unexpected drop in income, and whether they have products, prepare for emergencies and manage risk, made any pension provisions or other plans for old age and save, invest, and borrow. A financial capability study and other types of insurance. conducted in Fiji, the “Financial Capability, Financial The Financial Diaries study presents a unique approach Competence, and Wellbeing in Rural Fijian Households� to measuring financial behavior by assessing poor study, includes a number of questions regarding people’s households’ money management and long-term planning attitudes towards the future and money management (e.g. decisions on a daily basis over an extended period of time. impulse purchases, saving versus spending). For instance, The study gathers information on how families living on the survey asks respondents: less than $2 US dollars a day in South Africa, Bangladesh, and India manage their cash flow, plan ahead, borrow and I will now read out a number of statements. I would lend money, and manage emergencies. like you to tell me how much you agree or disagree Likewise, but on a less detailed level, studies like the World with the following statements: Bank Financial Capability and Consumer Protection survey “I do not worry about the future and let tomorrow (WB FCCP), the UK FSA study, the WB/Russia Trust Fund take care of itself.� survey3, and the Portugal Financial literacy survey measure dimensions of money management and long-term “It is hard for me to pass up a bargain.� planning. The U.K. “Measuring Financial Capability: An “I find it more satisfying to spend money than to Exploratory Study,� for example, is concerned with more save it for the long term.� general aspects of financial behavior, such as making a budget, planning ahead, or dealing with unexpected expenses (Kempson et al., 2005). The survey asks: Measuring Financial Behavior Often financial capability is expressed and measured When you receive money, do you plan how it will in terms of behaviors that result from the interaction of be used? internal capabilities and external factors. In surveys that 1. Yes measure financial behavior, the objective is to identify weak areas of behavior and the least capable subgroups 2. No of the population. The types of financial behavior that are measured by surveys can usually be classified into four main areas: money management (managing day-to-day In addition, this and other studies gathered important data finances), long-term planning (preparing for emergencies on what products respondents purchased, how they made and retirement), selecting financial products (ability to financial decisions, and how they stayed informed on choose appropriate financial products), and seeking financial matters. advice. Survey questions about money management generally MEASURING EXTERNAL FACTORS THAT focus on people’s ability to budget and spend within their AFFECT FINANCIAL CAPABILITY disposable income, pay bills, borrow within affordable Financial capability means that individuals have the limits, and use and manage their bank accounts. In order internal capacity to act in their best financial interest, to measure people’s long-term planning behavior, surveys given socioeconomic and environmental conditions, which ask respondents about their savings behavior, including can play an important role in constraining or facilitating the frequency of savings, how they would adjust in case individual financial capability. Policy makers have The WB FCCP Survey is essentially the same as the WB/Russia Trust Fund survey, but with questions added on financial inclusion and 3 financial consumer protection in order to ensure a better understanding of the importance of external factors on financial capability. 4 Financial Capability Surveys Around the World — August 2013 FIGURE 1: EXTERNAL ENVIRONMENT AND FINANCIAL CAPABILITY Financial Resources Environmental Factors Societal Factors n Access to Finance Financial n Social Norms n Financial Capability n Family Obligations Infastructure n Social Networks n Consumer protection mechanisms Financial Behavior increasingly used surveys to understand the importance of external factors on financial capability. External factors MORE INFORMATION & RESOURCES may include societal factors, like family demands or social networks, and environmental factors, like access to World Bank. 2013. “Making Sense of Financial financial products, financial infrastructure, and consumer Capability Surveys around the World: A Review protection mechanisms. In Papua New Guinea, for of Existing Financial Capability and Literacy example, the wantok system is an unwritten social contract Measurement Instruments.� World Bank, that serves as a safety net, in which people of the same Washington, DC. Available at: village or town are obligated to help those who are in poor http://responsiblefinance.worldbank.org/~/media/ financial condition. GIAWB/FL/Documents/Misc/Financial-Capability- Financial inclusion surveys can assess both access and Review.pdf usage of financial services. They typically include an Yoong, Joanne, Mihaly, Kata, Bauhoff, Sebastian, assessment of barriers to access and usage. Constraints to Rabinovich, Lila, and Hung, Angela. 2013. “A accessing financial services can include: documentation Toolkit for Evaluation of Financial Capability requirements, physical distance of providers’ premises, Programs in Low and Middle Income countries.� and cost. Usage can be measured by assessing the World Bank. Washington, DC. Available at: regularity, frequency, and duration of use of financial http://responsiblefinance.worldbank.org/ products and services. Surveys such as the World Publications Bank’s Global Findex, FinScope, and FinAccess provide internationally comparable data on financial inclusion. Grifoni, Andrea and Messy, Flore-Anne. 2012. “Current Status of National Strategies for Financial consumer protection complements financial Financial Education: A Comparative Analysis and inclusion and financial capability, in ensuring that financial Relevant Practices.� OECD Working Papers on markets are both inclusive and stable. Financial consumer Finance, Insurance and Private Pensions, No. 16, protection is a particular priority when users (or potential OECD Publishing. users) of financial products do not have the necessary knowledge, skills, or attitudes to protect themselves Financial Capability Surveys Around the World — August 2013 5 from the risks derived from interaction with providers of financial services. Surveys of financial consumer SURVEYS protection, therefore, can also seek to measure awareness and knowledge of consumer protection mechanisms, World Bank. 2013. “Paving the road to better use of dispute resolution mechanisms and actions in financial decision-making in Tajikistan: Financial reporting fraud or conflict with providers, and perceptions Capability and Consumer Protection Survey of government regulatory bodies and financial service Report.� World Bank. Washington, DC. Available at: providers. Assessing consumer experiences with financial http://responsiblefinance.worldbank.org/eLibrary crime is another important, though less common, purpose Kempson, Elaine, Perotti, Valeria, and Scott, for some financial consumer protection surveys. The Kinnon. 2013. “Measuring Financial Capability: World Bank’s FCCP survey, for example, captures specific A New Instrument and Results from Low- information on the level of people’s satisfaction with and Middle-Income Countries.� World Bank. services offered by financial institutions and government Washington, DC. Available at: institutions. The FCCP survey collects data on the level of http://responsiblefinance.worldbank.org/ trust people have in regulatory and supervisory institutions Publications and their confidence in resolving conflicts with financial service providers. Atkinson, Adele and Messy, Flore-Anne. 2012. “Measuring Financial Literacy: Results of HOW TO DEVELOP MEANINGFUL the OECD/International Network on Financial INDICATORS THAT CAN INFORM POLICY? Education (INFE) Pilot Study.� OECD Working Papers on Finance, Insurance, and Private In order to effectively inform policy objectives, data Pensions, No. 15, OECD Publishing. collected through surveys must be properly analyzed and interpreted. A good starting point for developing indicators Kempson, Elaine, Atkinson, Adele, McKay, is to report frequencies and proportions of people who Stephen, and Collard, Sharon. 2006. “Levels answer individual questions in a specific way. The main of Financial Capability in the UK: Results of a advantage of this approach is that no specific statistical baseline survey.� UK: Financial Services Authority. knowledge is needed to either analyze data or understand Lusardi, Annamaria, and Olivia S. Mitchell. 2011. the results. “Financial Literacy and Planning: Implications Single questions alone, however, cannot provide a for Retirement Wellbeing.� In Olivia S. Mitchell complete picture of the topics that interest policy makers. and Annamaria Lusardi (eds.), Financial Literacy: Therefore, it is necessary to develop composite scores Implications for Retirement Security and the or indices. For instance, if policy makers want to assess Financial Marketplace. Oxford: Oxford University people’s financial knowledge, they could create a simple Press, pp. 17–49. score which sums up the number of correct answers Demirguc-Kunt, Asli and Klapper, Leora. 2012. to quiz-like financial knowledge questions. Due to the “Measuring Financial Inclusion: The Global Findex multifaceted nature of some topics, it might not always Database.� The World Bank Policy Research be meaningful to construct a single composite score or Working Paper, No. 6025. index though. This is particularly relevant for studying financial capability data not only in terms of financial knowledge, but also as a combination of behaviors, skills, attitudes. Information at the level of specific indicators can also be more useful for formulating actionable policy recommendations. For instance, a single financial capability score could provide a general assessment of the level of capability, but it would not help to inform the 6 Financial Capability Surveys Around the World — August 2013 design of specific policies to improve people’s financial relationship between socio-demographic characteristics capabilities. Having scores for different aspects of financial and financial capability indicators. Segmenting the capability, such as budgeting, saving, or planning for old population is another approach that can be used to age expenses, allows policy makers to specifically address identify target groups. The simplest way to do so is to rank weak areas by designing targeted programs. people according to their scores and to build equally sized groups. Cluster analysis is a more sophisticated statistical Table 1 lists indicators generated by the World Bank technique that can be used to segment populations across and OECD/INFE surveys, that can inform and guide multiple scores and to identify groups that show similarities policymakers. These survey models can be used and in their scores.4 tailored by individual countries and agencies. Selecting the most effective Policies and Identifying Target Groups Interventions The simplest way to identify vulnerable groups of the Baseline survey data can help to identify potentially useful population for which targeted interventions can be areas of interventions and to select the type of intervention designed is to use cross-tabulations, in which indicators to implement. To properly address the question of which are calculated by key demographic variables (such as type of intervention works best, rigorous impact evaluations age, gender, education, employment status, and income). are ideally required. For example, if policymakers want Regression techniques can improve understanding of the to determine whether school-based financial education BOX 2: PRESENTING INDICATORS AND IDENTIFYING TARGET GROUPS Cross tabulations are usually presented in a table. Charts and graphical representations such as maps are widely used and effective tools to present indicators and to identify target groups. For instance, the bar chart below shows the average financial capability score for saving for different income groups in Tajikistan. As can be seen, income matters, and low income groups seem to struggle more with building savings cushions than those who live on the highest incomes. The map below illustrates spatial differences in the savings score with residents living in eastern parts of Tajikistan being more inclined to put money aside than those who live in any other regions of the country. AVERAGE FINANCIAL CAPABILITY SCORE ‘SAVING’, AVERAGE FINANCIAL CAPABILITY SCORE ‘SAVING’, BY MONTHLY HOUSEHOLD INCOME. IN DIFFERENT REGIONS. 80 90 − 100 80 − 90 70 − 80 60 − 70 50 − 60 40 − 50 0 − 40 60 Average Score ’Saving’ 40 20 60 67 71 0 TJS 1,500, n=264 n=557 n=162 Source: World Bank 2013 For more guidance, see Everitt, S. Brian, Landau, Sabine, Leese, Morven, and Daniel Stahl. 2011. “Cluster Analysis.� 5th Edition. John 4 Wiley & Sons, Ltd, Chichester, UK. Financial Capability Surveys Around the World — August 2013 7 or comic books would be an effective way to deliver ACKNOWLEDGEMENTS financial messages on money management to younger populations, an impact assessment would be necessary. This knowledge brief was prepared by a team led by Robust evidence on which approaches are the most Siegfried Zottel (Economist) from the World Bank’s effective in delivering financial education or supporting Financial Inclusion and Consumer Protection Service beneficial financial inclusion is still limited. The WB/Russia Line, with contributions from Valeria Perotti (Private Trust Fund has therefore supported a comprehensive set Sector Development Specialist, World Bank), and of impact evaluation studies to assess the efficacy of a Adedayo Bolaji-Adio (Consultant). wide range of financial capability programs in different Peer review comments were received from Margaret settings. Insights and findings for these projects, as well as Miller (Senior Economist) and Bilal Zia (Economist). an Evaluation Toolkit focusing on the specific challenges Douglas Pearce (Manager, Global Practice) provided of evaluating financial capability interventions in low- and valuable overall guidance. middle-income environments, are available on the World The authors are grateful to the funding support of the Bank Group website on Financial Consumer Protection State Secretariat for Economic Affairs (SECO) for this and Financial Capability (http://responsiblefinance. report, through the Global Consumer Protection and worldbank.org). Financial Literacy Program. TABLE 1: INDICATORS FOR FINANCIAL CAPABILITY CATEGORY DESCRIPTION SURVEY FINANCIAL KNOWLEDGE 1. Financial knowledge score (based on knowledge of basic financial concepts such as inflation, WB FCCP, OECD/ AND SKILLS simple interest, compound interest, money illusion, risk diversification, and main purpose of INFE Financial insurance policies) Literacy Survey FINANCIAL BEHAVIOR 1. Budgeting score (based on whether adults plan how to use money they receive, in terms of WB FCCP, WB/ frequency, accuracy and regularity with which they stick to the plan) Russia Trust Fund survey 2. Not overspending score (based on spending money on unnecessary things before buying food and essentials, and spending on non-essentials adults cannot afford) 3. Living within means score (based on whether adults run short of money after buying essentials and why, their level of borrowing, and if they borrow to buy food and other essentials) 4. Monitoring expenses score (based on whether adults know how much money they spent in the last week, and how much they have available to spend) 5. Savings score (based on whether adults try to save for the future, try to save for emergencies, and try to save even if a small amount) 6. Planning for old age expenses score (based on whether adults have strategies in place which allow to cover expenses in old age) 7. Planning for unexpected expenses score (based on whether adults could cover an unexpected expense equivalent to a month’s income, and if not whether they worry about it) ATTITUDES 1. Attitudes towards the future score (based on agreement with statements about living more for WB FCCP, WB/ the present day than for tomorrow, the future will take care of itself, focus on the short term) Russia Trust Fund survey 2. Non-impulsiveness score (based on agreement with statements about being impulsive, saying things without giving them too much thought, doing things without thinking them through)
 3. Achievement orientation score (based on agreement with statements about having inspira- tions, working hard to be the best, always looking for opportunities to improve one’s own situation) www.worldbank.org/fpd 8