November 9th, 2017

Open a report on – or read the mandate of an organization working in – financial inclusion and chances are that in the introductory paragraph you’ll read a variation of a single sentence that motivates the whole endeavor: “Worldwide, more than 2 billion adults do not have access to an account at a formal financial institution”.

The population measures of financial inclusion that have become standard – such as “banked” adults, “active” mobile money users or uptake of “prudentially” regulated services direct attention to the fact that people lack access to a predefined type of financial service (or aren’t using it frequently enough) and often assume a positive link between that service and well-being if access can be secured or usage encouraged: “Being included in the formal financial system… helps people improve their overall welfare”[1]. Implicitly these measures incentivize the provision of a presumed solution, without clearly identifying what problem that solution solves. Imagine a minister of health setting the goal that all adults should have access to a hospital bed. Laudable perhaps, but motivating the provision of a single health sector input is unlikely to lead to better population health outcomes.

If people constitute the true wealth of nations, and if development is about creating the enabling environment and institutions to help people flourish, it follows that financial inclusion needs measures that focus on people and their well-being, in addition to those that track uptake and usage of financial service types, who provides them and the degree to which they are regulated. The argument that financial inclusion needs a measurement framework that is allied with people’s own perspectives, goals and struggles isn’t new. Indeed, many others have clearly articulated how financial inclusion is at its best when it is in service of development issues that people care about, such as education, health and livelihood development[2] and described how financial services are “roads not destinations”[3]. To expand on that metaphor, at their best, financial services are bridges to worthy destinations that are otherwise out of reach: think of a loan that unlocks access to a university education for a student with ambitions to become a doctor, a payments platform that helps a migrant worker send money home in seconds, investment capital that enables an entrepreneur to start the business they’ve been dreaming of or a savings group that empowers a casual worker to take greater control of her financial life.

Several initiatives are underway to change the measurement paradigm. For example, i2i has developed a needs-based measurement framework that outlines ways of more precisely measuring usage of financial devices in relation to how they meet – or fail to meet – needs across a variety of use-cases[4]. And in the United States, the Center for Financial Services Innovation (CFSI) and the Consumer Financial Protection Bureau (CFPB) are developing the concepts of financial health and well-being that focus on measuring the state of people’s financial lives[5]. FSD Kenya is exploring adapting Amartya Sen’s capabilities framework to finance, which is focused on understanding and measuring people’s ability to be and do all the things they have reason to value.

In that we might want to know how people are doing in their financial lives independent of the financial services they use, standard measures of financial inclusion are not adequate. And although poverty measures based on aggregate household income or consumption do give us an critical snapshot of the material well-being of a population, they mask the liquidity challenges facing households that must deal with turbulent incomes or large expense shocks and focus on just one dimension of people’s financial lives[6]. Conceptually, there are three areas of life where financial tools are instrumental: managing day to day needs, dealing with risk and investing for the future (Table 1).

However, since it is possible to improve outcomes in any one of these dimensions in the short-run while creating risks to consumers and economies in the long-run, a measurement framework should also track signs of risk and harm. Mortgages funded by new securities enabled lenders to rapidly expand credit to higher-risk borrowers in the lead up to the 2008 financial crisis – arguably improving people’s ability to invest in the short run (the number of first-time homeowners and homeownership rose), but in doing so, created systemic risks that threatened and ultimately harmed people’s well-being in the longer run. Certainly, in Kenya, the proliferation of easy, high interest, digital credit is raising worries of a looming credit crisis[7], even as there is significant evidence that solutions like M-Shwari help individuals manage expenses and cope with small, unexpected shocks[8]. In 2016 three banks were placed in receivership by the Central Bank of Kenya, additionally highlighting how poor governance can be a source of instability, threaten depositors’ savings and erode trust in the financial system.

Table 1. Financial health: What can financial services help people do?
Ability to manage the everyday Being able to trade with others, meet basic day to day expenditure needs for oneself and the family, such as food, energy and shelter (for example, not going hungry or falling back on necessary payments for shelter or energy)
Ability to cope with risk Being protected from the financial risk of a range of shocks. Being able to cope with the aftermath of both minor and major unexpected shocks without impoverishment or significant erosion of assets.
Ability to invest in livelihoods, living conditions and the future Being able to pursue and invest in personal and family goals that require large and discrete financial resources, such as a financing a new business, purchasing or building a house, connecting to an electricity grid, financing assets, and financing education.
Risk factors: How can financial services harm people?
Debt stress and indebtedness
Negative customer experience (fraud, hidden charges, inadequate recourse mechanisms)
Poor governance and financial instability

So, if we were to restate financial inclusion’s objective, we might move away from a version which implicitly tries to maximize population access to formal accounts to one which, leveraging on the health analogy, tries to maximize population financial health (Table 2). A long-term view of population-level financial health would also entail a focus on the norms, provisions and regulations that protect consumers and limit the accumulation of risk that can cause systemic harm. Short-term improvements in population financial health that are fueled for example by unscrupulous practices, unproven technologies or opaque and poorly understood financial instruments, will not yield long-term positive outcomes.

Further, a focus on financial health might help crowd in effort by stakeholders who do not offer financial services, but who can nonetheless play a fundamental role in improving financial well-being. For example, through solutions that improve the organization of agricultural markets so that farmers can secure better prices or faster payments, through policies that encourage the growth of industries or sectors that offer stable wage earning opportunities for lower skilled labor or through efforts to improve the functioning of health systems so that low income families, for example, can more reliably access medicines at community clinics, rather than being faced with a drug-stock out and an unexpected expense at a private chemist[9].

Table 2. A spectrum of targets for financial inclusion
Objective…	Maximize population access to formal accounts	Maximize population usage of formal accounts	Maximize population financial health, subject to consumer protection
Incentivizes effort in…	Provision & distribution (e.g. efficiency, cost, channels, marketing)	<——————->	Design, customer engagement & relations  (e.g. relevance, impact, safety, trust, value)
Size of tent…	Small: Account providers or lenders (Banks, MFIs, MNOs)	<——————->	Large: Banks, MFIs, MNOs + Regulators + Value chains + Industry & private sector

If we can robustly measure a population’s financial health four use-cases come into focus:

• Exploring the link between financial services, context and financial well-being. Which financial services or providers, in isolation or in combination, most strongly contribute to financial health? Which demographic, economic, educational or contextual factors are negatively associated with financial health?

• Comparing financial well-being across population groups for priority-setting. Which dimension of financial health are most deficient in a population? Which dimensions of financial health should innovators or policy-makers focus on for any given population group?

• Tracking changes in financial well-being over time. How is financial health, including financial risk factors, for a population changing over time, and how are those changes associated with new innovations, government programs, policies or business models?  What is behind declines in financial well-being if they are identified for certain population groups?

• Designing better products and policies. Innovators and entrepreneurs might develop and refine new products and services by tracking their target-market’s financial health, to complement standard metrics such as new subscriptions, registrations, usage or revenues.

The obvious follow-up question is: how exactly can we develop and implement measures that are focused on people and their financial health? The next blog in this series proposes one possibility: using survey data applied to a measurement framework inspired by the multidimensional poverty index (MPI) to construct an overall index of financial health.

Notes & references

[1] CGAP, “What is financial inclusion and why is it important?”: http://www.cgap.org/about/faq

[2] See for example, Leora Klapper of the World Bank on financial inclusion and the SDGs: http://blogs.worldbank.org/developmenttalk/financial-inclusion-has-big-role-play-reaching-sdgs

[3]Hennie Bester, i2i facility blog: “This road will not get you there”: http://www.i2ifacility.org/updates/blogs/14 also http://www.i2ifacility.org/updates/blogs/3

[4] i2i facility publication, “Catering to every need: A measurement framework for functional financial service needs”: http://access.i2ifacility.org/Publications/i2i%20MFW%20Note%204%20-%20Catering%20to%20every%20need_Digital.pdf

[5] CFSI’s Financial health work: http://cfsinnovation.org/research/financial-health/, CFPB’s financial well-being work: https://www.consumerfinance.gov/data-research/research-reports/financial-well-being-scale/

[6] The 2012-13 Kenya financial diaries comprehensively documents the effects that volatile incomes have on the money management practices of the poor: https://fsdkenya.org/financial-diaries/

[7] CGAP, digital credit in Kenya, time for celebration or concern? http://www.cgap.org/blog/digital-credit-kenya-time-celebration-or-concern#.V_YNdoQHwq8.twitter; Digital credit – Have we not been here before with Microfinance? http://blog.microsave.net/digital-credit-have-we-not-been-here-before-with-microfinance/; 4 trends driving a looming credit crisis in East Africa: http://www.dfslab.net/blog/4-trends-driving-a-looming-credit-crisis-in-east-africa

[8] Forthcoming study on the impact of M-Shwari by Tavneet Suri.

[9] “An analysis of drug stock-outs in Western Kenya and subsequent patient impact”: http://www.sciencedirect.com/science/article/pii/S2214999615009583

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