Financial Capability A people-centered approach to rethink financial inclusion
Mr Umesh Behera
a coconut picker in a rural village in Odisha, lost his only source of income about 20 years back because of an accident that rendered him paraplegic. The absence of any insurance cover, lack of savings and recurring medical expenses worsened his family’s financial situation. Many years later, Umesh received a loan from a local NGO which gave him the opportunity to lease a few coconut trees. With the help of a wheelchair rickshaw gifted to him by another NGO and a laborer he managed to hire to harvest the coconuts, Umesh was able to sell the coconuts at a nearby village market. Together with his wife, he now generates additional income by producing and selling mats, baskets, fans and brooms made of palm leaves. With a monthly income of Rs. 4,500 and recurring medical expenses, the financial situation of the family is still very difficult but has improved compared to the past.
Mrs Mamta Devi, from the mountains high up in Uttarakhand, is not only a busy mother and housewife but also a teacher at a local Anganwadi, a government sponsored child-care and mothercare centre. Her husband could not find any job in the remote area they live in and wanted to migrate to an urban area to support his family. In order to help her husband stay with the family, Mamta took a loan from a local Microfinance Institution to invest into a small electronics supply store. Today her husband is managing this store, selling different kinds of electronic items and computer peripherals as well as offering a mobile phone account charging service. Since the income generated by this activity is constantly increasing, the family has planned to expand this business.
Closing the Gap between Financial Inclusion and Impact
definition
Financial inclusion strategies are based on the assumption that people who are financially included are able to improve their living situations, move out of poverty and with that, contribute to the growth of the economy they live in.
Understanding Financial Capability
The Local Financial Capability Study, conducted by the Rural Financial Institutions Programme (RFIP) at GIZ, puts forth an alternative framework that captures the conditions under which the rural poor make decisions pertaining to their financial health. The study probes which knowledge, skills, attitudes and experiences exist, to make informed choices regarding the use and management of money. It implies having access to appropriate financial products and services as well as the opportunity to use them effectively. In order to make this concept more tangible for stakeholders and guide them in incorporating it within traditional financial inclusion initiatives, RFIP has developed “USE: Tools for Financial Impact”. USE (an acronym for Understand- Support – Enable) is conceptualised as a toolbox targeting a variety of financial service providers and intermediaries and attempts to enhance this new understanding of financial capability through: Tools for creating general awareness Tools for developing a deeper understanding of financial capability Tools to apply the new approach in programs and outreach efforts The following brochure shares an outline of the Local Financial Capability Study and how it has been used to design “USE:Tools for Financial Impact”
Contents Definition: Understanding Financial Capability Methodology: Constructing a Local Financial Capability Concept Outcome: Key Abilities for Increasing Financial Capability Levels Introducing the toolbox – USE: Tools for Financial Impact
For long, financial inclusion strategies have primarily focused on the supply of financial services through formal institutions. Taking into consideration the overall objective of Financial Inclusion, which is to empower the excluded to improve their own wellbeing and consequently contribute to the economic growth of society as a whole, the pre-dominant approach assumes that people who have access to financial services and are financially literate will automatically also use these services to their own benefit. But, how do people make their decisions and what influences them? How do people use financial services and how does this impact their living conditions?
Capability is the ability to act
The financial capability concept investigates people’s ability to use financial services effectively at three levels:
Capability & Ability Definitions
Financial capability is the ensemble of abilities related to making informed financial choices, managing money effectively, and using financial services for one’s own benefit
• The knowledge, skills, and attitudes people have to make informed choices regarding the use and management of money • The effect that external factors, such as access to financial products, have on people’s choices
Ability to act is shaped by personal attributes and environment in which actions are performed
Focus is on action performed (or not performed but deemed important) by rural Focus is on action performed (or not households thedeemed important) by performedinbut ruralof households context money in the context of money management anduse use. management and
• Personal attributes and environmental factors and their influence on people’s ability to manage money and use financial services for their own benefit
Ability to act, if realised, can shape personal attributes and the environment
It is important to note that all these factors are highly context and culture specific - in other words, we can expect that the ability to manage money and to use financial services as well as households’ own perceptions of what shapes this ability would vary across regions. In the study, therefore, a “local financial capability concept” is advanced which is defined by people’s perceptions in their own local contexts, or the geographic area where a program is implemented.
methodology
Constructing a Local Financial Capability Concept Understanding local financial capability requires a research methodology that starts from understanding people’s own perspective and priorities when it comes to managing money and using financial services. Inspired and guided by the Financial Capability Index (FCI) methodology developed by Microfinance Opportunities (MFO) , the research collected qualitative data through 96 Focus Group Discussions (FGDs) with 524 low-income people in 8 districts of Odisha, Uttarakhand, Rajasthan, and Karnataka. These FGDs generated data which, through a coding and clustering process, resulted in identifying four focal areas of financial capability as articulated by the FGD participants. Salient points of this process and outcome at each stage are shared on the right:
Sampling and Conduct of Focus Group Discussions
The researchers guided the discussions around the following four situations:
The following key criteria was used for identifying participants:
1. Meeting day-to-day needs 2. Managing expenses at major life cycle events such as births, education, weddings, and deaths 3. Dealing with emergencies 4. Taking advantage of opportunities
• The participants consisted of lowincome households who have limited or no access to formal financial services and who live in areas where the population of villages and towns does not exceed 50,000 • The participants represented three groups (members of Self-Help Groups - SHGs, members of Primary Agricultural Credit Societies - PACS, and clients of Microfinance Institutions – MFIs), as well as a group of financially excluded people.
The central question around which the FGDs were moderated was: When you think about a household in your community, whether it is rich or poor, that uses and manages money well, what comes to your mind? Now, what comes to mind when you think about a household that does not manage its money well?
Furthermore, the participants were asked to classify the financial capability level of the households they described according to the following scale 1. very low 2. rather low 3. medium 4. rather high 5. very high
Finally, the participants were asked to explain their choice of households representing the different capability levels.
Synthesis of Key Focal Areas of Financial Capability 3,399 statements were collected from the study participants which were then, through a rigorous coding and clustering process, distilled into four focal areas that underpin the proposed financial capability concept. The first three areas relate to financial functions - how do people manage money, how do they plan for the future, and how do they use financial services, while the fourth focal area is comprised of statements that describe both personal attributes (education, skills and assets) and social relations in the family and community.
Generating, Managing and Using Money
Planning for the Future
How households generate income
How households invest
How households handle money
How households plan for the future
How households spend money
FINANCIAL CAPABILITY Using Financial Services How households use loans How households save How households use bank accounts How households use insurance
Using Social Capital, Assets and Competencies How people interact within family and community How households use assets How households gain knowledge and skills
Salient Characteristics of the Financial Capability Concept
37%
Generating, managing and using money
8%
37%
Planning for the future
26%
Generating, managing and using money
8% Planning for the future
Using financial services
37%
Cognitive Using financial services
Using social capital, assets and competencies
8%
Relative Importance of Local Nature of 29% Planning for the future Focal Areas Financial Capability
40%
The frequency distribution As indicated earlier, the relative of statements made by FGD importance of the four focal areas participants across the four focal varies across regions, thereby Using social capital, 26% areas indicates that people’s reinforcing the local nature of the assets and competencies thoughts are mostly directed financial capability concept. For towards income generation and example, the importance of using spending patterns as well as family financial services is decidedly higher Using financial services and community relations when it in Rajasthan and Uttarakhand while comes to describing household’s in Odisha and Karnataka there is financial capability. It could be more emphasis on social relations, construed that these are the most assets and competencies. salient concerns 29% people have when thinking about financial capability.
35%
Using Financial Services
Is able to calculate, is able to prepare a budget, is a hard worker
Knows about different investment schemes, knows how to invest
Knows about different loan products, is able to calculate interest rates
Cognitive, Behavioural and Environmental Characteristics Additional information that can be derived from the statements is the relevance of cognitive, behavioural and environmental aspects in the definition of local financial capability: Do the statements describe the knowledge, skills and attitude people have? Do they refer to how people act by drawing on their financial knowledge, skills, and attitudes? Or, do they describe a specific environment in which people act?
30%
25%
20%
15%
10% Using social capital, assets and competencies
Planning for the Future
29%
26%
Generating, managing and using money
Generating, Managing and Using Money
Karnataka
Odisha
Rajasthan
uttarakhand
Behavioural
Environmental
Follows a budget, spends too much on alcohol, spends responsibly
Invests well, plans and saves for lifecycle events and emergencies, saves for the future of children and own retirement
Uses a bank account actively, makes use of insurance, does not borrow, repays on time, uses loans for business, saves regularly
Has no access to land, there are not enough employment opportunities available
Is exposed to weather and health risks
Has access to loans from bank, gets loans only by pledging jewellery or labour
Family and community and relations
5%
0%
General education
Generating, Managing and Using Money
Planning for the Future
Using Financial Services
Using Social Capital, Assets, and Competencies
Table illustrating some cognitive, behavioral and environmental characteristics of financial capability for a typical household Guy stuart (2012) MFO,financial education in rural uganda: insights from financial diaries and in-depth interviews, http://www. Finlitedu.Org/team-downloads/evaluation/ugandadiaries.Pdf
outcome
Ability to save Ability to use loans
The ‘ability to use loans’ refers to access to loans from diverse sources such as banks and PACS, to be able to repay on time, and to use loans for business development.
The ‘ability to save’ has been mainly associated with households that deposit money in a bank, save regularly, save for emergencies and retirement, and for building assets.
Ability to use bank accounts
The ‘ability to use bank accounts’ has been associated with households which have access to saving or loan accounts, and actually make use of banking services.
Ability to invest
The ‘ability to invest’ refers to the identification and use of investment opportunities.
Using Financial
The ‘ability to handle money’ depends on how households are able to balance income and expenditure, and the knowledge to use budget planning instruments.
Ability to spend money responsibly / wisely
The ‘ability to spend money wisely’ has been associated with households which spend money for items that generate a benefit for the whole household and help the family to improve its living conditions.
Ability to generate sufficient income
The ‘ability to generate sufficient income’ is affected by the number of income sources, the type of income sources, the number of earners who contribute to income generation, the regularity of income and the way time is managed.
Ability to use insurance
The ‘ability to use insurance’ has been mainly associated with life insurance for all family members, while life insurance cover for only one family member was seen as low financial capability.
Serv ices
Ability to coordinate within the family
re tu u eF
Pla nn ing
The ability to coordinate within the family has been associated with families in which all members have a voice, and decisions are made by taking into account the responsibilities and needs of all members.
The local financial capability study identified 13 abilities that the research participants deemed necessary in order to manage money and use financial services effectively. As discussed earlier, these can be grouped under the four focal areas.
ital, Assets and Com al Cap pe t Soci e nci ing es Us
Ability to handle money on daily basis
ing & Using Mone y Manag , g n ti a r ne Ge
The ‘ability to plan for the future’ requires taking into account longer-term aspects of income and expenditure.
fo rt h
Ability to plan for the future
Key Abilities for Increasing Financial Capability Levels
Ability to participate in community life
The ‘ability to take part in community life’ has been associated with the reputation, respect and dignity households enjoy.
Ability to use assets
The ‘ability to use assets’ has been associated with the ownership of houses, land, farming assets and household items. The focus is on ownership and usage.
Ability to gain knowledge and skills
Levels of knowledge and skills are outcomes of investments into education and an environment conducive to learning.
case in point
Developing abilities of least financially capable households Comparing financially capable households with those that are on the lowest rung shows that the latter is constrained in all its abilities – it cannot save, spend for its benefit, use insurance or plan ahead. For such households the use of physical, social and human capital is also often restricted. They are typically excluded from many social relations in the community, can lack harmony in the family, often have no assets at all and are largely illiterate. Stakeholder interventions must concentrate on these core issues while creating the environment in which households can take their own decisions regarding their financial capability.
A few possible interventions are described as follows: 1. Increasing their social capital and ability to participate in community life by supporting the self-organisation of low-income people into Self Help Groups, cooperatives and other forms of mutual organisation. This is likely to increase their ability to access certain financial and non-financial services as well 2. Supporting the empowerment of women through self-organisation and other means thereby improving coordination and decision making within the family as well as promoting responsible money management of lowincome households 3. Supporting low-income households in acquiring specific knowledge and skills required for managing household budgets, and for making longer-term plans aimed at improving their social and economic stability 4. Supporting the development of livelihood opportunities which are in line with market demand and the local potential of the communities. This could help households access stable income streams through salaried jobs 5. Catering to wide range of financial needs of the poor rather than focusing on credit alone. Expanding access to need based and demand oriented financial services needs to be accompanied by programs to improve financial awareness and literacy
the toolbox
poster
FinanCIAL SERVICE PROVIDER GUIDE
Movie
Brochure
- Research Methodology(FDGs and Data Analysis) - Heuristics for minor amendments
COMMUNITY POSTER
the households
Local adaptation of the concept
PARTICIPANT DIARY
Enable
- Guiding Questions
ready reckoner
the local adaptation of the concept
Local verification of the concept
FACILITATOR GUIDE
Support
ready reckoner
the financial capability concept
ABILITY GAME
Understand
research report
USE: Tools for Financial Impact
RFIP
The Logo
The Rural Financial Institutions Programme (RFIP) is jointly implemented by the GIZ, on behalf of the German Government, and the National Bank for Agriculture and Rural Development (NABARD), on behalf of the Indian Government. It aims at increasing access to sustainable and demand-oriented financial services through the institutions of the rural cooperative credit system, microfinance organizations and banks and their business correspondents.
The rendering of the USE logo emphasises the importance of various abilities in maintaining harmony and progress in a household’s economic status. The human form in the centre juggling various pieces attempts to reinforce the message that it isn’t any one aspect that will drive financial wellbeing – but a combination of various factors, shaped by knowledge, skills, attitude, social and environmental variables, that must work in unison, to have any meaningful impact.
P ub l i s he d B y Deutsche Gesellschaft F端r Internationale Zusammenarbeit (GIZ) Gmbh Rural Financial Institutions Programme C o n tact Dr. Detlev Holloh, GIZ Programme Director A-2/18, 4th Floor, Safdarjung Enclave, New Delhi 110029 India T : +91 11 49495353 F : +91 11 49495393 E : Detlev.Holloh@Giz.De W : Giz.De P h o t o g r aph s
Enrico Fabian C o n cept a n d La y o ut Quicksand and Design Route Re s p o n s ib l e Dr. Detlev Holloh New Delhi, March 2014