RBI – OECD – World Bank Regional Conference on Financial Education New Delhi, March 4 2013

1. Measuring financial capability in a low- and middle-income setting Elaine Kempson (Consultant) Valeria Perotti (World Bank) RBI – OECD – World Bank Regional Conference on Financial Education New Delhi, March 4 2013

2. Our goal 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

3. Our approach • Empirical not normative • content based on focus groups • design of questions informed by cognitive interviews

4. The overall research design PHASE I – identify key concepts and develop questions 70 focus groups across eight countries Colombia, Mexico, Uruguay, Malawi, Namibia, Tanzania, Zambia and Papua New Guinea 228 in-depth cognitive interviews in two waves In the same eight countries PHASE II – test, apply survey questionnaire, develop scores Pilot survey of 100-200 interviews in each of eight countries Colombia, Mexico, Uruguay, Papua New Guinea + Armenia, Lebanon, Turkey, Nigeria National survey of 1,000-2,000 interviews in each PNG not yet completed

5. Phase I: QUALITATIVE

6. Focus groups: aims To map concept of financial capability for low- and middle-income countries To identify key concepts that need to be covered in a survey to measure levels of financial capability

7. Focus groups: what we found Remarkable level of consensus across countries Financial capability is largely about behaviours Financial literacy is something different

8. Focus groups: what we found 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 Financial capability should be measured for individuals but family context is important need to understand financial role played by individual and ask questions that are appropriate to that role

9. Focus groups concepts 1. Money management Planning income against expenditure (budgeting) Keeping track of spending and money available for spending Disciplined money management Prioritising spending on essentials Living within ones means/not borrowing for essentials Economising Putting money aside for regular bills etc

10. Focus groups concepts 2. Making provision for future needs Planning ahead generally Making provision for unexpected events or emergencies Making provision for known/anticipated events Saving money (generally) whenever possible Making provision for children’s future Making provision for ones old age

11. Focus groups concepts 3. Choosing products Not borrowing more than can afford Proactively seeking information before buying Checking product features before buying 4. Being informed Seeking information before making financial decisions Motivations Self-discipline/ not being impulsive Taking a long-term view Being enterprising

12. Cognitive interviews: aim To develop and test a set of questions to allow us to measure the key concepts identified in the focus groups Questions need 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

13. Cognitive interviews: what we did Started with existing questions where possible Motivation questions taken from established scales Tested the wording of questions Tested various ways of capturing responses Aimed for 20-30 minutes for core questions measuring financial capability

14. Cognitive interviews: what we found out Importance of 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

15. Phase II: QUANTITATIVE

16. Overview of the questionnaire 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 module on financial literacy (country choices) Interviewer questionnaire & Location questionnaire

17. The pilot survey: aims Pilot test done in 8 countries To test the sampling and respondent selection To test the questionnaires, including in four new countries To assess issues related to data quality To have a trial run of data merging To undertake some exploratory analysis

18. Phase II: Pilot survey, lessons learned Selection of respondent using Kish table could be gamed Or was difficult- more training needed Translations still an issue Questionnaire length was of concern, some shortening occurred Country specific questions added without problems

19. National survey: description A probability sample two stage, first the household and then an individual within it 1000 to 2000 households per country (but more than 3000 in Armenia and 8,000 in Nigeria) One randomly selected adult per household except in Nigeria, where all eligible members were interviewed 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

20. National survey Field work done in seven countries, and suspended in one (PNG) Around 20,000 people interviewed Results from Nigeria still preliminary

21. 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)

22. Results Looking at individual questions Here just presenting a few examples to show: How results vary (or not) by country, education level Some of the issues that are illuminated by the data Obtaining valid scores for the key components of financial capability (FG concepts) – factor analysis Testing validity of a single indicator of financial capability Segmenting the population

23. By country, Mexico, Nigeria and Uruguay have the fewest people borrowing more than they can afford

24. 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.

25. Of concern, most persons, in all countries, could not cover an unexpected expense equal to one month of income.

26. Financial capability scores – key results 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: Budgeting Living within means Monitoring expenses Not overspending Using information Covering unexpected expenses Saving Attitude towards the future Not being impulsive Achievement orientation

27. 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: Controlled budgeting Making provisions for the future But there were differences across countries, which indicated that domain scores could not be used for international comparisons. Comparisons are possible using the scores calculated for the 10 components. Financial capability scores – key results

30. Component scores • 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 tended to have short time horizons, being more focused on the present rather than the future.

31. Component scores In the pooled sample, and all else equal: • Women tend to achieve higher scores than men for budgeting, using information, and saving.

32. Older people tend to achieve higher scores for living within means and not overspending. Component scores

33. 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. Component scores

34. Segmenting the population Based on the scores, it is possible to identify 5 subgroups of the population with similar within-group financial capability levels. For example, in Lebanon: • 17% is capable in most areas, but not good at monitoring expenses (older people, higher income) • 12% is not capable in most areas, but good at living within their means and achievement oriented (young people, self-employed) • 11% is not capable in many areas, but very good at not overspending (lower education and lower income) • 25% is capable in areas related with making provisions for the future, but not capable in budgeting and monitoring • 17% is opposite to 4): very capable in budgeting and monitoring but not in saving, covering unexpected expenses, etc.

35. Thank you! Questions or comments? vperotti@worldbank.org