Beyond financial inclusion: Financial health framework

• Context
• The study
• Key findings
• Points to consider

Context

Financial inclusion in the United States has evolved significantly in recent years, shifting from its former emphasis on financial literacy and education towards a focus on encouraging behavioural change by improving the financial capability of individual consumers. The Center for Financial Services Innovation (CFSI) introduced a framework for financial health in 2015, taking the discourse beyond knowledge and behaviour towards longer term improved financial outcomes. CFSI define financial health as when an individual’s daily routines and behaviours help to build the financial resilience to absorb financial shocks, as well as the opportunity to set financial targets and goals.

The study

This 2017 report from CFSI was commissioned to explore the possibility of a global financial health framework, and whether such a framework would be useful to the international community. This study aimed to move beyond the US-focused framework with its rigid parameters, focussing instead on the ultimate financial success of individuals, and testing the validity of financial health as a core concept in an international setting. Accordingly, fieldwork was commissioned in Kenya and India to explore whether these ideas could have an influence on the ‘global financial inclusion conversation’.

The fieldwork was conducted in June and July 2016. A total of 89 qualitative interviews were conducted across the countries, across a mix of 18 rural and urban communities within the two countries. A 55-question quantitative survey resulted in more than 1,000 responses. In addition to this fieldwork, more than 20 interviews were conducted with key stakeholders, as well as two in-person focus groups involving development practitioners and academics. The questionnaires were refined from CFSI’s existing US financial health framework, to make them culturally sensitive and appropriate throughout the two countries.

Key findings

The research identified six primary indicators for the global financial health framework, used to measure consumer financial health.

A consumer in the ‘developing world ’ is financially healthy when he or she:

1. Balances income and expenses, shaping income and expenditure to meet daily needs and obligations.
2. Builds and maintains reserves, including steady saving and replenishing savings reserves.
3. Manages existing debts and has access to potential resources and knows what resources they can use to help them manage their debt.
4. Plans and prioritises accordingly, setting goals with associated action steps to achieve them.
5. Manages and recovers from financial shocks, using financial resources to absorb and recover from unexpected changes in their financial situation.
6. Uses an effective range of financial tools, that are suitable and relevant to the individual’s situation.

The report also identified four key contextual factors in understanding financial health in the ‘developing world’.

A consumer’s financial health is significantly influenced by his or her:

1. Absolute income level, with respondents in ‘deep poverty’ having limited scope to achieve financial health.
2. Income and expense volatility, and the extent and timing of variations in income and expenditure.
3. Social network, including the range of family, friends and contacts within the local community that are available to help with both formal and informal arrangements.
4. Financial role, such as their status within the household (for example, whether a dependent, income contributor, key financial decision maker, etc).
5. As a concept, financial health has developed momentum in the United States, which is beginning to be mirrored globally. Such frameworks can push the financial inclusion conversation forward, helping shape policy, direct donor and government resources, and contribute to the high-quality design of financial services.
6. More work is needed to create instruments for the accurate measurement of financial health. There are roles for researchers, financial services providers and policymakers in supporting the development of a more practical framework.
7. However, preliminary research suggests a deep connection between the financial lives of consumers in the United States and in other countries.
8. The report concludes that financial health is a powerful and actionable framework for consumers globally, and not just in the United States.

Points to consider

• Methodological strengths/weaknesses: While the methodology appears robust and diligent, the authors acknowledge that due to the relatively small sample size and limited geography of the participants, the data and findings are not nationally representative. Therefore, further research is needed before using this as a basis to scale-up the framework.
• Generalisability/ transferability: This report is of significant interest to policymakers, stakeholders and other parties interested in establishing universal financial health frameworks, particularly those focusing on financial capability in lower-income economies.
• Relevance: While these findings are based on questions from a US survey and conducted in Kenya and India, some of the learning outcomes may be transferrable to those in the UK who are exploring the idea of universal financial capability interventions/financial health frameworks.