G20 Russia Presidency – OECD – World Bank Conference

Moscow, June 13-14 2013

Measuring Financial Capability

The New World Bank Instrument and Results from Low- and Middle-

Income Countries

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

Countries involved:

–Colombia–Malawi–Mexico–Namibia–Papua New Guinea–Tanzania–Uruguay–Zambia

(focus groups and cognitive interviews)

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 long-term 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. Household information and selecting the respondentB. Day to day money managementC. Longer-term financial planningD. Financial productsE. MotivationsF. Individual and household characteristicsG. 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 2,022Lebanon 1,214Uruguay 1,401Turkey 3,009Armenia 2,000Colombia 1,526Nigeria *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

• 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.

Overall strengths and weaknesses

• 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.

Testing the validity of a single measure

• 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.

Differences in capability scores across groups

Cluster 5: good money managers, but with a tendency to overspend

(well educated, high-income young women)

Cluster 2: Not capable in most areas, but good at living within their

means and achievement oriented (young men)

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

Budgeting

Planning expenses against income – frequency

Planning expenses against income - accuracy

Keeping to the plan - frequency

Living within means

Reasons for running short of money

Borrowing to pay for food

Borrowing to repay debt Borrowing within affordable limits

Monitoring expenses Knowing how much money has spent

Knowing how much money has available

Not overspending Spending on unnecessary things before covering for necessary items

Spending on unnecessary things that can't afford

Using information

Getting information or advice

Learning from others

Being disciplined

Worrying about unexpected expenses Being able/worried to cover unexpected expenses

Saving Trying to save for the future Trying to save regularly Trying to have provisions for emergencies

Attitude towards the future Focusing on the short term Living more for today than for tomorrow The future will take care of itself'

Not being impulsive

Doing things without thinking them through

‘I am impulsive'

Saying things without thinking them through

Achievement oriented

Always looking for opportunities

Having aspirations

Working hard to be the best