Measuring Financial Capability
The New World Bank Instrument
and Results from Low- and MiddleIncome Countries
G20 Russia Presidency – OECD – World Bank Conference
Moscow, June 13-14 2013
The goal and the approach
• Goal:
To develop an instrument to measure levels of financial
capability
– in lower and middle income countries
– in a way that works across countries and across
subgroups within their population
• Approach:
Capability was defined using an empirical, not normative
approach
The overall research design
PHASE I – Qualitative
•
•
Qualitative research in low and middle-income countries
determined the concepts to be included (70 focus groups)
Cognitive interviews were used to test wording and structure of
questions (228 interviews in two waves)
PHASE II – Quantitative
•
•
•
Testing the quantitative instrument (100-200 pilot interviews in
each of eight countries)
Implementation of financial capability survey in seven countries,
~20,000 interviews in total
Statistical analysis to develop financial capability scores
Participant countries
Phase I: QUALITATIVE
(focus groups and cognitive interviews)
Countries involved:
–
–
–
–
–
–
–
–
Colombia
Malawi
Mexico
Namibia
Papua New Guinea
Tanzania
Uruguay
Zambia
Focus groups: aims and methods
• Focus groups are group discussions around a topic of interest,
facilitated by a neutral interviewer
• Participants from different demographic groups were asked to
describe a financially capable or incapable person
• Discussions were transcribed and analyzed
• Results were used to define the concept of financial capability
for low- and middle-income countries and determine topics to be
included in the survey
Focus groups: what we found
•
•
•
•
•
Remarkable level of consensus across countries
Financial capability is about behaviors
Financial literacy is something different
Financial capability is not necessarily linked to income,
But low income can prevent people from acting capably (e.g.
planning for the future), so
– attitudes and motivations are important to capture
– need to recognize how income will limit policy effectiveness
• Financial capability should be measured for individuals
– need to understand financial role played by individual
– and ask questions that are appropriate to that role
Focus groups: concepts identified
1. Money management: Planning income against expenditure
(budgeting), keeping track of expenses, prioritizing spending on
essentials.
2. Making provision for future needs: Planning ahead, making
provisions for unexpected events or old age expenses, saving
3. Choosing and using financial products: Not borrowing more
than affordable, checking terms before getting a product
4. Being informed: Seeking information before making decisions
Motivations: Self-discipline/not being impulsive, Taking a longterm view, Being enterprising
The overall research design
PHASE I – Qualitative
•
•
Qualitative research in low and middle-income countries
determined the concepts to be included (70 focus groups)
Cognitive interviews were used to test wording and structure of
questions (228 interviews in two waves)
PHASE II – Quantitative
•
•
•
Testing the quantitative instrument (100-200 pilot interviews in
each of eight countries)
Implementation of financial capability survey in seven countries,
~20,000 interviews in total
Statistical analysis to develop financial capability scores
Cognitive interviews: aims
• To develop and test a set of questions to allow us to measure
the key concepts identified in the focus groups
• Testing question wording and ways of capturing responses
• Questions needed to satisfy these criteria:
– be income neutral
– work across countries/be culturally neutral
– apply to the whole population
– be unambiguous
– discriminate between capable and less capable people
– permit use of alternative analytical methods
– avoid scales based on value judgments
Cognitive interviews: what we found
• Difficulty of ensuring income and cultural neutrality
• Importance of tailoring questions to financial responsibilities
• Questions need to be very concrete for people with low
education
• Questions with scales or multiple choice answers were difficult for
people with low education
– Needed to be broken down and drafted for dichotomous
replies (Yes/no; Agree/disagree)
• Translations need very careful checking
Phase II: QUANTITATIVE
Countries involved:
From Phase I:
– Colombia
– Mexico
– Papua New Guinea
– Uruguay
Plus 4 new countries:
– Armenia
– Lebanon
– Nigeria
– Turkey
Overview of the questionnaire
A.
B.
C.
D.
E.
F.
G.
Household information and selecting the respondent
Day to day money management
Longer-term financial planning
Financial products
Motivations
Individual and household characteristics
Getting information and advice
•
Optional modules (e.g. OECD financial knowledge questions)
+
Interviewer questionnaire & Location questionnaire
The pilot survey
• Pilot conducted in 8 countries, 100-200 interviews each
• Tested respondent selection, questionnaires, data entry
• Exploratory analysis conducted on pilot data
• Lessons learned:
– Respondent selection could be gamed, more training needed
– Fixed translation issues
– Questionnaire was still too long, was shortened
– Country specific questions added without problems
National survey: description
• A probability sample
• One randomly selected adult per household
– except in Nigeria, where all eligible members were interviewed
• 1000 to 2000 individuals per country (but more than 3000 in
Turkey and 8,000 in Nigeria)
• Direct informant, face-to-face interviews
• Eligible informants were 18 and older and managed household
or own finances and/or had decision-making role in household
finances
National survey: the sample
• Field work done in seven countries,
and suspended in one (PNG)
• Around 20,000 people interviewed
• Results from Nigeria still preliminary
Mexico
Lebanon
Uruguay
Turkey
Armenia
Colombia
Nigeria
2,022
1,214
1,401
3,009
2,000
1,526
*8,789
Total
19,961
*Subsample 18+
Characteristics of respondents
•
Sample of interviewees is not the same as sample of national
population of persons over 18
•
Represents those making some financial decisions (and some
sampling issues perhaps)
Armenia Colombia Lebanon
Mexico Nigeria*
Turkey
Uruguay
Male
34.5
36.6
45.5
47.1
49.1
50.2
47.0
Female
65.5
63.4
54.5
52.9
50.9
49.8
53.0
* Unweighted
Results: outline
1. Examples of descriptive results from key questions
2. Financial capability scores for the key components identified
through factor analysis
3. Testing validity of a single measure of financial capability
4. Using the scores to segment the population (cluster analysis)
Examples of descriptive results
• By country, Mexico, Nigeria and Uruguay have the fewest
people borrowing more than they can afford
• Those with lower education are more likely to regularly borrow
for food except in Mexico and Nigeria. Overall, a surprising
number of people borrow for food.
• Of concern, most persons, in all countries, could not cover an
unexpected expense equal to one month of income.
Financial capability scores
•
We can construct valid and comparable scores for 12 components of
financial capability across countries, reflecting concepts most cited in
FGs
•
10 of these components apply to the entire population:
1. Budgeting
2. Living within means
3. Monitoring expenses
4. Not overspending
5. Using information
6. Covering unexpected expenses
7. Saving
8. Attitude towards the future
9. Not being impulsive
10. Achievement orientation
Overall strengths and weaknesses
• Across all countries, people are better at living within their
means and not overspending than they are at budgeting,
monitoring expenses, or saving.
• They also tend to have short time horizons, being more focused
on the present rather than the future.
Testing the validity of a single measure
•
It was not possible to construct a single domain combining the ten
components  a meaningful single score for financial capability cannot
be calculated.
•
For the pooled data it was however possible to identify two underlying
domains:
1. Controlled budgeting
2. Making provisions for the future
•
But there were differences across countries, which indicated that domain
scores could not be used for international comparisons.
Difference in capability score associated with key demographic variables
(baseline: male, aged 41-50, with secondary education and middle -low income)
10
8
6
4
2
0
-2
-4
-6
-8
-10
BUDGETING
MONITOR
USING
NOT
ACHIEVEMENT LIVING WITHIN
INFORMATION OVERSPENDING
ORIENT.
MEANS
Female
Age 18-30
Primary education at most
COVERING
UNEXP. EXP.
Lowest income group
SAVING
ATTITUDE TW. NOT IMPULSIVE
FUTURE
Has financial products
Differences in capability scores across
groups
• Women tend to achieve higher scores than men for budgeting,
using information, and saving.
• Older people tend to achieve higher scores for living within
means and not overspending.
• People with higher education tend to have higher scores in
budgeting, living within means, attitude toward the future and
not being impulsive.
• Higher household income is associated with higher scores in
most areas, but it does not seem to matter for budgeting or
impulsiveness, and it is also associated with overspending.
Segmenting the population by capability
scores: Lebanon
Budgeting
100
90
80
70
60
50
40
30
20
10
0
Achievement orientation
Not impulsive
Living within means
Monitoring
Attitude toward the
future
Using information
Saving
Not overspending
Covering unexpected
expenses
Cluster 1
Cluster 2
Cluster 3
Cluster 4
Cluster 5
Lebanon
Cluster 5
Budgeting
Achievement orientation
Not impulsive
100
90
80
70
60
50
40
30
20
10
0
Living within means
Monitoring
Attitude toward the
future
Using information
Saving
Not overspending
Covering unexpected
expenses
Cluster 5: good money managers, but with a tendency to overspend
(well educated, high-income young women)
Lebanon
Cluster 2
Budgeting
Achievement orientation
Not impulsive
100
90
80
70
60
50
40
30
20
10
0
Living within means
Monitoring
Attitude toward the
future
Using information
Saving
Not overspending
Covering unexpected
expenses
Cluster 2: Not capable in most areas, but good at living within their
means and achievement oriented (young men)
Lebanon
Cluster 3
Budgeting
Achievement orientation
Not impulsive
90
80
70
60
50
40
30
20
10
0
Living within means
Monitoring
Attitude toward the
future
Using information
Saving
Not overspending
Covering unexpected
expenses
Cluster 3: careful money managers with short-term horizons
(women, over 40, living in rural areas)
Speaking of data…
• Micro data from 7 countries now available on TF site:
www.finlitedu.org
• Also available: full survey report, questionnaires,
guidance for survey implementation
Open issues
• Measuring financial capability over time
• Understanding who are the financially inactive
• Explore causality links between capability and
responsibility for financial decisions
• More research needed to understand links between
financial literacy and financial capability
• Conduct panel surveys to determine causal link
between capability and welfare
Thank you!
Comments or questions?
kscott1@worldbank.org
vperotti@worldbank.org
COMPONENTS
VARIABLES
Planning expenses against income – frequency
Budgeting
Planning expenses against income - accuracy
Keeping to the plan - frequency
Living within means
Monitoring expenses
Not overspending
Using information
Worrying about unexpected expenses
Saving
Attitude towards the future
Not being impulsive
Reasons for running short of money
Borrowing to pay for food
Borrowing to repay debt
Borrowing within affordable limits
Knowing how much money has spent
Knowing how much money has available
Spending on unnecessary things before covering for necessary items
Spending on unnecessary things that can't afford
Getting information or advice
Learning from others
Being disciplined
Being able/worried to cover unexpected expenses
Trying to save for the future
Trying to save regularly
Trying to have provisions for emergencies
Focusing on the short term
Living more for today than for tomorrow
The future will take care of itself'
Doing things without thinking them through
‘I am impulsive'
Saying things without thinking them through
Always looking for opportunities
Achievement oriented
Having aspirations
Working hard to be the best