The Financial Competency of Low-Income Households in PNG

Transcription

1 The Financial Competency of Low-Income Households in PNG

2 Pacific Financial Inclusion Programme The Pacific Financial Inclusion Programme (PFIP) is a joint programme of the United Nations Capital Development Fund (UNCDF) and United Nations Development Programme (UNDP) with additional funding support from the Australian Agency for International Development (AusAID) and the European Union/Africa, Caribbean and Pacific Microfinance Framework Programme (EU/ACP). About Jonathan Sibley Jonathan Sibley is a social researcher. He is an Associate Professor at Central Queensland University, Australia and is a member of the University s Institute for Sustainable Regional Development. His research focuses on the measurement of the financial competence of low income households. He has undertaken a broad range of research projects, spanning New Zealand and Australia, the Pacific, the Middle East and the UK with a focus on financial inclusion. His doctoral study examined the relationship between household financial competence and household wellbeing in rural Fijian communities. USP Library Cataloguing-in-Publication Data Sibley, Jonathan Financial competency of low income households in Papua New Guinea / Jonathan Sibley. -- Suva, Fiji : Pacific Financial Inclusion Programme, UNDP Pacific Centre, p. : ill. (some col.) ; 21 cm x 30 cm. ISBN Financial literacy Papua New Guinea. 2. Finance, Personal Papua New Guinea. 3. Households Economic aspects Papua New Guinea. I. Pacific Financial Inclusion Programme. II.Title. HG179.S Cover Photo credits : UNDP Pacific Centre Flickr

3 Foreword The widespread and very low levels of financial literacy in Pacific island countries (PICs) is seen as a pervasive impediment to achieving greater economic dynamism and financial security at household level. Low levels of money management knowledge suppress demand for financial services and pose a very real challenge to achieving more inclusive financial markets in the region. In recognition of the importance of financial literacy, Pacific central bank Governors and Ministers of Finance and Economic Development, in 2009, endorsed the Money Pacific Goals where, by 2020, each Pacific Island nation, through the combined actions of public and private sectors, will ensure that: All schoolchildren to receive financial education through core curricula; All adults to have access to financial education; Simple and transparent consumer protection to be in place; and Halve the number of households without access to basic financial services. Until now, no PIC has a comprehensive picture of how financially literate their people are especially those who are most vulnerable. The absence of such a baseline limits the ability of PICs to put in place well researched policies and targeted strategies to create a financially competent population. Significantly financial literacy has now gained acceptance by the development partners in the Pacific as integral to developing a financial sector that is inclusive, generates growth and creates sustainable livelihoods. With the increasing interest and proliferation of financial literacy training programmes a financial competency baseline offers a framework to optimize the use of scarce resources and to reach those most needy as well as to assess the efficacy of these training programmes. 2

4 With the financial support of AusAID, the Pacific Financial Inclusion Programme (PFIP) undertook to measure the financial competency of low income adults in 4 PICs Fiji, Papua New Guinea, Samoa and Solomon Islands. A new and well-tested methodology was developed to undertake this work in partnership with each of the central banks using exclusively local enumerators and the deployment of an electronic survey instrument. In each of the 4 countries, the results of the survey have been used to develop a national financial literacy strategy led by the respective central banks. Jeff Liew Regional Financial Capacity Adviser 3

5 Acknowledgements Sincere gratitude is extended to the following people for their participation in and support for this study: Bank of Papua New Guinea: Elizabeth Genia - Assistant Governor - Corporate Affairs, Gae Kauzi - Assistant Governor Research and Economics PNG Institute of National Affairs - Project Management: Paul Barker - Executive Director, Rufina Peter - Senior Research Officer & Project Manager, Busa Jeremiah Wenogo - Senior Project Officer, Teine Korokoi - IT Officer, Maisy Talowani - Librarian & Assistant Logistics Coordinator, Allan Keneke, Kaupa Magis, Jenny Kaupa. National Statistics Office - Enrolments, ID Cards, and Supervision of Field Work: Roko Koloma - Deputy National Statistician, Late Peter Siopun - Assistant National Statistician - Corporate Services Division, Tom Rabu - Statistical Officer, Dorothy Sapalojang - Manager Business Statistics Branch, Annette Takaku - Statistician, Lohia Vaieke - Urban Operations Branch Manager, Vagi Guba - Statistical Officer, Kevin Nelson - Webmaster. Freelance Enumerators - Data Collection and Field Work: Muguwa Dilu, Moby Moses, Hubert Bera, Lawrence Baiet, Derik Darren Ali, John Nokup Junior, Brian Naime, Vincent Komba Yuke, Gimana Rawali, Ashley H Kalagamini, Anna Irumai, Nancy Ebbes, Lilly Kalip Koddy, Miro Lavapo, Serah Isu, Maria Guria, Rose Kotai. Translation: Thomas Willie, Tom Rabu, Sandra Fore, Dean Woruba, Technical Review Committee: Patricia Passingan, Dorothy Sapalojang, Anna Irumai, Thomas Willie, Tom Rabu, Sandra Fore, Dean Woruba, Rufina Peter. PTB Pool Central Province - Transport: Leonard Tarum - Transport Manager, Joe Kerekere - Driver, John Gau - Driver, Kau Gamu Driver. Interview Venues Hire: Senior Pastor Peter Solomon Debeinis Living Waters Church, Fr. James & Fr. Mikaele Catholic Mission Wama, Mr. Gordon Mamis (Manager) - Sioni Kami Church, Stella Sitautau - Sioni Kami Church, Mr. Kinaram (Headmaster) - Kuriva Community School. Ground Coordinators at Survey Sites: Charles Avaisa - Veifa a village, Camillus Inapi - Eboa village, Emmanuel Aume - Bereina village, Anna Aitsi Sikoni (Councillor) - Bereina village, John Ketoto (Youth) - Bereina village Peter, Henry Aitsi (Councillor) - Biotou village, Lohia Rabu - Manumanu village, Joseph Haraima - Tutuna 1 & 2 villages, David Michael (Councillor) - Pinu village, Christine Billy - Doa Rubber Estates, John Bruce 9 Mile settlement, Henry Sape - 8 Mile settlement, Ray Eka - Siraka settlement, Gerenda Koroko - Kuriva village, Ben Heaoa -Talai settlement, Raphael Kulolo - Vadavada settlement, Gilbert Saivon- Morata settlement. Other Logistical Support and Escort Services: Rose Peter Puipui, Mary Peter, Matilda Koma, Peter Moimo Junior, Rosemary Moimo, Henry Foyeke, Paul Ega, Samuel Salo. Pacific Financial Inclusion Programme: Jeff Liew as Regional Project Coordinator with the support of Derek Tam, Anne Nacola and Sanjeev Lal. 4

6 Table of Contents Foreword... 2 Acknowledgements... 4 List of Tables... 7 List of Figures... 8 Executive Summary Chapter One: Introduction Chapter Two: Overview of the Financial Competence of Low Income Households in Papua New Guinea The Financial Competence of Low Income Households Functional Literacy Differences in Financial Competence Location Differences in Financial Competence Gender Differences in Financial Competence Developing an Easily Administered Indicator of Financial Competence Chapter Three: Adult Financial Competency Framework for Low Income Households in Pacific Island Countries What is Competence? What is Financial Competence? Minimum Adult Financial Competency Framework for Low Income Households in Pacific Island Countries Chapter Four: Domain Level Analysis of the Financial Competence of Low Income Households in Papua New Guinea Structure of the Analysis Demographic Overview Domain 1: Managing Money Domain 2: Making Financial Choices Domain 3: Planning Ahead Domain 4: Seeking Financial Advice Chapter Five: Policy Implications Overview of Policy Implications Policy Framework Financial Education Financial Services and Delivery Capability Consumer Protection

7 5.6. Follow up Studies Chapter Six: Design of the Study Instrumentation Translation Sampling Scoring Model Field Work Ethics Appendix

8 List of Tables Table 1: Categorisation of Competence Scores Table 2: Financial Competencies Domains and Activities Table 3: Gender Table 4: Urban and Rural Sample Table 5: Ability to Communicate in English Table 6: Percentage of Respondents Unable to Communicate in English Table 7: Own or Have Access to a Mobile Phone Table 8: Competencies Making and Receiving Payments Table 9: Expenses Incurred by the Household and Use of Cash Payment Table 10: Receipt of Cash or Electronic Payment by the Household Table 11: Competencies Managing Household Income Table 12: Competencies - Managing Household Expenditure Table 13: Keeping Household Financial Records Table 14: Competencies Included in Managing Money Factor Analysis Table 15: Number of Financial Products Owned Table 16: Financial Product Ownership Table 17: Competencies Saving Table 18: How Household Cash is Kept Safe Table 19: Ownership of a Savings Account Table 20: Competencies Investing Table 21: Ownership of Long-term Savings Products Table 22: Funding Retirement Table 23: Competencies Borrowing Table 24: Use of Credit by Gender and Location Table 25: Cost of Money and Financial Terms and Conditions Table 26: Competencies Included in Making Financial Choices Factor Analysis Table 27: Budgeting and Planning Table 28: Question Structure and Scoring Table 29: Ordinal Scaling Table 30: Competencies Used to develop Overall Competence Score Table 31: Financial Competence Score Table 32: Variables used in Regression Analysis Table 33: Regression Analysis Managing Money Table 34: Predictors of Savings Account Ownership Table 35: Regression Analysis - Making Financial Choices Table 36: Predictors of Household Having a Budget Table 37: Regression Analysis Planning Ahead Table 38: Regression Analysis Financial Competence Table 39: Regression Analysis Financial Competence (adjusted)

9 List of Figures Figure 1: Ranked Competency Scores Figure 2: Financial Competence by Group Figure 3: Ranked Competency Scores by Ability to Communicate in English Figure 4: Difference in Financial Competence by Location Figure 5: Difference in Financial Competence by Gender Figure 6: Correlation of Financial Competence Scale and Financial Competence Indicator Scale Figure 7: Age Distribution Figure 8: Age Distribution Rural and Urban Samples Figure 9: Mobile Phone Usage Figure 10: Participation in Financial Literacy Training Figure 11: Percentage of Respondents who have used Bank/ Electronic Transactions Figure 12: Percentage of Respondents Making Electronic Payments - Impact of Literacy and Location Figure 13: Percentage of Respondents who had sent or received Electronic Remittances Figure 14: Competence Making and Receiving Electronic Payments Figure 15: Sources of Income Figure 16: Regular Sources of Household Income Figure 17: Joint Management of Household Income Figure 18: Self or Self and Spouse Response for Management of Household Income Figure 19: Competence - Managing Household Income Figure 20: Respondent Responsible for Management of Household Expenditure Figure 21: Knowledge of Short-term Household Expenditure Figure 22: Household Spending on Non-Essential Items Figure 23: Household s Ability to Pay Regular Expenses Figure 24: Competence with Managing Components of Household Expenditure Figure 25: Competence Managing Household Expenditure Figure 26: Responsibility for Household Record Keeping Figure 27: Competence Keeping Household Records Figure 28: Competence Managing Money Figure 29: Household Savings Patterns relative to Bank Account Ownership Figure 30: Transaction Frequency Figure 31: Ownership of a Savings or Cheque Account with a Bank Figure 32: Competence Savings Figure 33: Competence Long-term Savings Figure 34: Ability to Make Loan Repayments Figure 35: Frequency of Use of Credit and Knowledge of Household Borrowing Figure 36: Competence Borrowing Figure 37: Limited Knowledge of Cost of Money Figure 38: Competence - Cost of Money Figure 39: Competence - Making Financial Choices Figure 40: Involvement in Household Financial Planning Figure 41: Responsibility for Planning and Budgeting Figure 42: Competence - Planning and Budgeting

10 Figure 43: Financial Competence of Households That Budget Figure 44: Framework for Considering Policy Implications of Financial Competence Figure 45: Measurement of Financial Competence

11 Executive Summary This report examines the financial competence of low income households in Papua New Guinea (PNG). These competencies were identified by asking low income households in both rural and urban areas to describe the financial activities they needed to be able to undertake, for the household to be able to manage its cash flows effectively. The findings from the study indicate these households are not able to effectively engage in the financial activities required for successful engagement with the money economy and the formal financial systems. Overall, rural households are less competent than urban households. Of particular importance, the findings from the study indicate women in low income households are significantly less financially empowered than men. Households in Papua New Guinea appear to be generally better at managing immediate and shorter term financial activities but are less competent at managing longer term financial activities (including activities which require forward planning) and more complex financial activities, including those which require engagement with the formal financial system. The overall understanding among these households, of the cost of money, was also found to be very low. The lack of a functional ability with the English language was found to be a significant constraint to financial competence, influencing most financial activities measured by the study. Households that had financial products, that had a budget and in which finances were managed jointly, were found to be generally more financially competent than households that did not plan their future income and expenditure, did not manage finances jointly, and, that did not use financial products to facilitate the management of household cash-flows. Overall, men take a greater role in the management of household finances, although this may be the result of more men having a functional ability with the English language. Men are also more likely to report bank account ownership and usage of electronic transactions. In general, urban communities exhibit higher levels of financial competence than rural communities, a feature that is most likely influenced by the greater prevalence of wage and salary incomes and the need to communicate in English. The findings from the study suggest several key policy issues. Firstly, that the pervasive low levels of financial competence potentially expose low income households in PNG to several major risks. These include the risk of financial exclusion, the risk of exploitation by financial predators, and the risk of 10

12 ineffective use of household cash flows. There is a need to continue to focus on increasing levels of financial literacy and to increase the number of households that have access to the formal financial system and to focus on increasing the financial empowerment of women. There is also a need to increase the understanding of the cost of money, through both training and consumer protection. As households become increasingly involved with the money economy, a failure to understand the cost of money and the associated risks of using financial institutions and financial instruments carries significant risks for low income households, in particular, with respect to poor financial choices and vulnerability to predatory practices. Ongoing assistance also needs to be provided to households to enable better identification and management of household cash flows. 11

13 Chapter One: Introduction This study of the financial competence of low income households in Papua New Guinea provides an important baseline against which to measure progress in improving the financial behaviour of financial decision makers in low income households in Papua New Guinea. In addition, outcomes from initiatives to increase participation in the formal financial system can also be measured against this baseline. The objective of the study has been to measure the level of financial competence of low income households in Papua New Guinea. This report both establishes a baseline and discusses key aspects of this study, relative to the baseline. The study has sought to develop an understanding of how low income households in Papua New Guinea manage their household finances and engage with the formal and informal financial systems. The study builds on an earlier study of financial competence in rural Fiji 1 and a related pilot study of the financial capability of low income households in Port Moresby 2 and is complementary to financial competence studies being undertaken in several other Pacific Island countries. The study has examined the financial competence of low income households in two rural locations in Central Province (Mekeo and Galley Reach) and several settlements in Port Moresby. The study is not a national study and as such does not make a claim to have the ability to make generalisations on the financial competence of all low income households in PNG. Difficulties in sampling and data collection in PNG, due principally to the logistics of sampling in remote rural and island locations, impose constraints on large-scale national studies. The Mekeo and Galley Reach regions and the settlements in Port Moresby were chosen for this study as they are likely to represent low income households across the spectrum of monetisation. It is considered likely the findings from this study will demonstrate the pattern of household financial management in low income monetising and monetised households across PNG. A key output from the study has been the development of a set of domain-specific baseline indicators of the financial competence of those who are responsible for making financial decisions on behalf of their household, in addition to the summary indicator. The indicators used are taken from the Minimum Adult Financial Competency Framework for Low Income Households in Pacific 1 Sibley, J.E. (2010). Financial Capability, Financial Competence and Wellbeing in Rural Fijian Households, UNDP, Suva. 2 The World Bank & The Bank of Papua New Guinea, PNG Financial Capability Study 12

14 Island Countries 3. The indicators also encompass modes of payment used by households, management of household income and expenditure, financial products (both formal and informal) used by households and planning and budgeting for future income and expenditure. The study has been undertaken by the Bank of Papua New Guinea (BPNG). Data collection for the study was managed by the Institute for National Affairs (INA). The National Statistics Office (NSO) assisted with enrolment and field work, while the Pacific Financial Inclusion Programme (PFIP) developed the research methodology and provided financial and technical support. PFIP is a joint programme of the United Nations Capital Development Fund (UNCDF) and United Nations Development Programme (UNDP) with additional funding support from the Australian Agency for International Development (AusAID and the European Union/African, Caribbean and Pacific Microfinance Framework Programme (EU/ACP). The mission of PFIP is to increase by 500,000, the number of low income and rural households, micro and small enterprises in Pacific Island Countries (PICs) that have on-going access to quality and affordable financial services by Sibley, J.E., Liew, J.P. (2011) Minimum Adult Financial Competency Framework for Low Income Households in Pacific Island Countries. PFIP, Suva. 13

15 Chapter Two: Overview of the Financial Competence of Low Income Households in Papua New Guinea 2.1. The Financial Competence of Low Income Households a) Levels of Financial Competence Low income households in Papua New Guinea generally exhibit low to-moderate levels of financial competence. The households which participated in this study are considered to be a generally representative sample of low income household livelihoods and monetised financial behaviours in Papua New Guinea, and encompass all adult age groups, and both urban and rural locations. The principal conclusion from this study is that most low income households in Papua New Guinea are not demonstrating competent financial behaviours. There are several characteristics of financial management in low income households, typical across most households in the survey, which may warrant a policy and program focus to increase levels of financial competence: Barriers to participation: As noted above, lack of functional English literacy appears to be a barrier to participation in the formal financial system and to the development of financial competence. A second significant barrier appears to be lack of access to financial services, particularly in rural communities. Persistence of cash payments: Most households continue to use cash payments. This does not appear to relate to employment or proximity to financial services. Cash payments not only have potentially higher risks (particularly cash remittances), but can also incur higher transaction costs. The use of cash payments limits household savings activity and, in addition, cash payments have no record and it is consequently more difficult for the household to manage household cash-flows. A short term focus: Households exhibit higher levels of financial competence at managing short term cash-flows, including regular financial commitments (for example management of essential expenditure) than the management of longer term finances (for example planned expenditure). The issues in respect to low financial competence are pervasive and span all aspects of household financial management. Importantly, the competency set measured has been identified by low income households as the minimum required for those households to be able to manage their cash flows effectively. With the exception of the management of essential household expenditure and 14

16 household goal setting, low income households have demonstrated low or at best, moderate levels of competence, in respect to all competencies identified as essential. Overall, low income households in Papua New Guinea exhibit low-moderate levels of financial competence across most components of financial competence. As shown in Table 1, no financial competence score was rated as High. One competence (managing regular and one-off expenditure) was rated Moderate-High. However, the average score was 51.75, marginally above the minimum threshold. Eight competencies were rated as Moderate-Low. Four competencies were rated Low. The significant number of competencies which can be categorised as low is of particular concern as key competencies in which households appear to have a limited ability to manage competently include managing the cost of money (which may mean households have a limited understanding of the cost of financial services and are therefore vulnerable to exploitation), managing budgeting (which may mean households have a limited ability to manage household cash flows), and managing non-cash transactions, which may indicate a limited ability to successfully operate a bank account. Most households have demonstrated low competence at managing all aspects of financial services (whether formal or informal). It is likely these households will have limited capability to use transaction services, savings products (both short and long term) and credit to assist in the efficient and effective management of the household s income, expenditure and ability to fund assets in order to increase the household s wellbeing. Table 1: Categorisation of Competence Scores High - Competence with managing regular and one-off expenditure Moderate - High Competence with managing essential expenditure Competence with setting household goals and plans Competence with managing household income Low-Moderate Competence with identifying and recording household expenditure Competence with managing requests for financial assistance Competence with managing savings Competence with managing borrowing Competence with managing long term savings Competence with keeping household records Low Competence with household budgeting Competence with non-cash transactions Competence with managing cost of money 15

17 The average financial competence scores for the competencies measured are shown in Figure 1. The competencies have been ranked from highest to lowest (with a maximum score of 100). Low income households are generally more competent at managing household expenditure (both regular and day-to-day expenditure). Households are least competent at managing household budgeting, managing non-cash (electronic) transactions and managing the cost of money Figure 1: Ranked Competency Scores Managing regular and one-off expenditure Managing essential expenditure Setting household goals and plans Managing household income Identifying and recording household expenditure Managing requests for financial assistance Managing savings Managing borrowing Managing long term savings Keeping household records Household budgeting Non-cash (electronic) transactions Managing cost of money As shown in Figure 2, at the level of overall financial competence, levels of competence tend to diminish with age. Men demonstrate higher levels of financial competence than women. Similarly, urban households demonstrate higher levels of financial competence than rural households Figure 2: Financial Competence by Group.00 < >60 Male Female Urban Rural Cannot Can Age Group Gender Location English Language 16

18 Households in which the adults who make financial decisions on behalf of the household can communicate fluently in English, are more likely to be financially competent than other households. Households that have a budget are more likely to be financially competent. Overall, however, low income households in Papua New Guinea exhibit levels of financial competence that are likely to be inadequate for the household to manage money effectively and engage effectively with the formal financial system. Many households would therefore appear to be financially vulnerable. b) Risks Resulting from Low Levels of Financial Competence Low levels of financial competence expose low income households to several significant risks: The risk of financial exclusion due to a limited capability to engage with the formal financial system as a consequence of access constraints. This risk would appear to be high and poses potential systemic issues if not addressed, as many low income households will likely continue to be unable to access formal financial services. The risk of ineffective use of household cash-flows: Households which do not know the pattern of income and expenditure in the household are at risk of failing to use household cash flows effectively. These households have a more limited ability to build savings in order to provide for regular household requirements and are more likely to have to borrow for consumption expenditure. The risk of exploitation by financial predators due to a limited understanding of the actual cost of financial services and the risks associated with financial services products and service providers. Low income households are at significant risk of incurring exploitative costs for financial services, whether these are transaction services (both domestic and international), savings services, or borrowing (both formal and informal). Households are also at a heightened risk of unknowingly participating in financial scams. Each of the risks is significant. Low income households will require support through a range of interventions to enable the financial decision makers in the household to increase their level of financial competence. This will require a mix of education, product provision, and regulation and policy settings. 17

19 c) Predictors of Financial Competence Multiple regression analysis was conducted to examine the impact of location, age, gender, source of income, English language fluency, participation in the formal financial system, and the mode of household financial management on overall financial competence. Overall, the model explained 49% of the variance in the financial competence score. Seven variables were significant (refer Table 38, Appendix): The household living in an urban location, gender (male), functional English language ability, the household having a bank account and the number of financial products owned by the household, managing household finances jointly and the household having a budget. Urban households and men in low income households in Papua New Guinea appear to be consistently more competent at managing money than women. This appears to be linked to functional English literacy. Having the ability to communicate in English appears to have a pervasive influence on engagement with the formal financial system. The number of financial products owned by the household is an indication of the depth of engagement with the financial system, in particular the formal financial system. Within this context, households having a bank account (or more generally a formal savings account), is an indicator of pro-active management of cash-flows and the household s ability to keep money safe. The senior members of the household (both men and women) managing the household s finances jointly and the household having a budget are indicators of the extent to which the household pro-actively and inclusively manages cash-flows and plans and manages future income and expenditure. A second regression model was developed excluding ownership of a savings account, the number of financial products owned, and the household having a budget, as these variables had been included in the analysis of competence. While the individual contribution to the overall score by each variable was small, it is useful to understand indicators that are not components of domain-level financial competence (Refer Appendix: Table 39). The predictive power of the model was, as expected, lower (R 2 =.213). Nevertheless the model indicates that gender (male), living in an urban community, functional English language ability and earning income from business, are significant non-financial indicators of financial competence. 18

20 2.2. Functional Literacy Differences in Financial Competence The average financial competence scores for the competencies measured, comparing functionally literate and non-functionally literate respondents, are shown in Figure 3. There are no significant differences across most competencies, with the exception of the household financial planning, household record keeping and (relatively) managing the cost of money. Overall, whilst English language ability is a predictor of financial competence, households in which financial decision makers do not speak English would appear to be able to be, in general terms, as financially competent as households in which at least one of the financial decision makers is functionally literate in English. Functional English literacy does appear to assist with household record keeping and, also with accessing formal financial services Figure 3: Ranked Competency Scores by Ability to Communicate in English Managing regular and one-off expenditure Setting household goals and plans Managing household income Managing essential expenditure Identifying and recording household expenditure Managing requests for financial assistance Managing savings Managing borrowing Managing long term savings Keeping household records Household budgeting Non-cash transactions Managing cost of money Cannot Can 2.3. Location Differences in Financial Competence The levels of financial competence between urban and rural communities are shown in Figure 4. Urban households demonstrated greater financial competence in twelve out of the thirteen competencies measured. The difference was not, however, significant in respect to most competencies. There was a very significant difference in respect to competence at managing noncash (electronic) transactions. This is likely to be a function of greater access to electronic transaction services in urban households. In addition, there was a significant (>10 point) difference in respect to household record keeping. This is likely to be due to generally higher functional English 19

21 language ability in urban households. Location-based variances in financial competence are more evident at the level of specific financial activities. For example, urban households are four times more likely to have undertaken non-cash (electronic) transactions than rural households and are between four and five times more likely to have sent or received a remittance. Urban households are three times more likely to have a bank account and to keep household savings in an account Figure 4: Difference in Financial Competence by Location Managing regular and one-off expenditure Setting household goals and plans Managing essential expenditure Managing household income Managing requests for financial assistance Identifying and recording household expenditure Managing savings Non-cash Managing transactions long term savings Managing borrowing Keeping Household household budgeting records Managing cost of money Urban Rural 2.4. Gender Differences in Financial Competence Gender differences in financial competence are pervasive across the financial competencies and most financial activities measured by this study. Women are not only less financially competent than men, but appear to be generally less involved in the management of household finances than men. Women are also less likely to consider themselves functionally literate in English. 53% of women stated they could not communicate in English, compared to 31% of men. Men are three times more likely to have undertaken non-cash (electronic) transactions than women. Men take a greater role in all aspects of household financial management (payments, income management, expenditure management and planning). Women are very significantly less likely to state they are involved in larger household financial transactions (one-off household financial transactions or requests for financial assistance). Women are less likely to be involved in household record keeping (this may, to 20

22 some extent, be related to functional English literacy) and are therefore less likely to be aware of the household s financial situations. Women are less likely to own financial products. Some of the gender variances in financial competence may be due to the differences in role between men and women in low income households in Papua New Guinea. Other variances may be due to differences in functional English language ability in particular, in urban households. Whilst wage/salary levels are low, men are more likely to be in employment. This may also account for some of the differences in respect to long term savings (and potentially ownership of a bank account). Different levels of access to the financial system appear to have a significant role in respect to gender difference, particularly in respect to access to the formal financial system. This may indicate a focus is required on bringing more women into the formal financial system, primarily through access to (regulated) savings products Figure 5: Difference in Financial Competence by Gender Managing regular and one-off expenditure Setting household goals and plans Managing requests for financial assistance Managing essential expenditure Managing household income Identifying and recording household expenditure Managing savings Managing borrowing Managing long term savings Keeping household records Non-cash transactions Household budgeting Male Female 2.5. Developing an Easily Administered Indicator of Financial Competence The four significant financial management variables were indexed (using equal weighting) and correlated with the financial competence indexed value. The correlation (r) was 0.553(p<.001). The two scales are shown in Figure 6. There appears to be reasonable correlation between the scales. Though further sampling is required, the four financial management variables may be used as a simple and readily administered indicator of financial competence in low income households. 21

23 Figure 6: Correlation of Financial Competence Scale and Financial Competence Indicator Scale < >60 Male Female Urban Rural Cannot Can Age Group Gender Location English Language Financial Competence Financial Competence Index 22

24 Chapter Three: Adult Financial Competency Framework for Low Income Households in Pacific Island Countries 3.1. What is Competence? Competence is a person s ability to interact with their environment: both their physical environment and their personal and social environments. Competence is fundamental to enabling people to live a successful and rewarding life. Competence is developed over time through learning, which occurs as a consequence of a person s opportunities to interact with their environment. The set of competencies a person has or requires will evolve over time as the contexts in which the person functions, changes. The definition and selection of competencies that are considered to be important are influenced by the things societies, institutions, communities, groups and individuals within the society consider important. Competence can be divided into component elements that can be codified at varying levels of specificity. This facilitates measurement. Inherent in the concept of competence is the specification of contextual competencies, the things a person needs to be able to do to engage effectively with their environment in a particular situation. a) Constraints to competence There can be a range of environmental and service-related constraints to competence. People may not have access to the basic services they need to be able to function effectively. The support services available to an individual may be inadequate for them to function at the level of competence required to successfully interact with their environment. Alternatively, a person may be denied access to required support services, or may be prevented from accessing services due to factors such as cost or accessibility. By determining the set of competencies a community or group of people require to interact successfully with their environment, the various constraints to competence can also be determined. This provides a basis for policy and programme development and programme impact measurement. 23

25 b) Individual constraints to competence A person may have individual constraints to competence. They may lack the skills required to interact successfully with their environment, or may have a disability which necessitates support to enable them to successfully interact with their environment. By determining the set of competencies a person requires, individual support and intervention requirements can be determined What is Financial Competence? Financial competence comprises the set of specific behaviours an individual must be able to enact in order to successfully use money and interact with the financial system. A person s financial competency set will be influenced by both individual capabilities relating to financial knowledge and skill, and social capabilities relating to financial inclusion. The situations in which competent financial behaviour must be demonstrated, and the components of the competency set will vary depending on a person s circumstances, from the relatively simple (for example a rural community commencing engagement with the money economy) to the highly complex (for example the requirement to be competent at making individual retirement provisions in a society with a complex financial system and a regulatory environment which requires formal individual provision for retirement savings). People who make financial decisions on behalf of their household must also be competent at managing money on behalf of other members of the household. They must be able to manage the household s finances successfully and must also be able to differentiate between their own personal money and the household s money. The competency set is therefore situation-specific and defined by a person s mode of financial engagement with their environment and is likely to change over time. In a monetised economy, financial competence is a core component of the set of competencies required to function effectively. 24

26 The financial competency set used to examine the financial competence of low income households in Papua New Guinea is the Minimum Adult Financial Competency Framework for Low income Households in Pacific Island Countries Minimum Adult Financial Competency Framework for Low Income Households in Pacific Island Countries a) Overview of the Framework The Minimum Adult Financial Competency Framework for Low income Households in Pacific Island Countries is an outline of the set of competencies essential to the financial decision makers in low income households so that they are able to manage money successfully and to interact effectively with the formal and informal financial system. The framework was developed for those responsible for policy formulation, programme design and programme measurement. The Framework was developed from the ground-up during 2010 and A series of focus groups were held with adults from low income households in four Pacific Island countries: Papua New Guinea, Samoa, Fiji and Papua New Guinea. The purpose of the focus groups was to develop an understanding of the financial activities the households needed to be able to undertake successfully. Whilst there are differences in emphasis in the activities between communities, the set of activities people stated they needed to be able to engage in, was relatively consistent. It is evident, for example, that greater emphasis is placed by adults in Pacific low income households on earning income from a range of sources and managing a variety of forms of credit, including informal credit and reciprocal obligations to family or community members, than is typically evidenced in middleincome households in a developed country. By contrast, low income households demonstrated less emphasis on saving for retirement than middle-income households in a developed country. Following the determination of financial activities by the focus groups in each country, a draft set of competencies, encompassing knowledge, skill and behaviour was developed. The competencies are simply a statement of the specific knowledge, skill (understanding), and behaviours required to undertake the activity successfully. 4 Refer Appendix. 25

27 The initial competency set was developed from earlier research undertaken in Fiji 5 and Papua New Guinea 6 for the Adult Financial Capability Framework 7 developed by the Financial Services Authority and the Basic Skills Agency in the UK. The draft competencies were then workshopped with the reference group of subject matter experts in each country. Following completion of the focus groups and workshops, the completed draft set of competencies was then circulated to each of the reference groups. b) Structure of the Minimum Adult Financial Competency Framework The four domains of the Pacific Framework are derived from the financial domains determined by the Baseline Study of Financial Capability undertaken by the Financial Services Authority in the UK 8. The structure of the Minimum Adult Financial Competency Framework for Low income Households in Pacific Island Countries is based on the Adult Financial Capability Framework developed by the Financial Services Authority and the Basic Skills Agency in the UK. c) Focus of the Minimum Adult Financial Competency Framework A set of financial competencies can never be definitive. However, the competencies are intended to be a reasonable encapsulation of the minimum set of financial knowledge, skill and related financial behaviours currently required by an adult living in a low income household in a Pacific island country, and who manages finances on behalf of his or her household. Importantly, the focus of the Framework is on financial activities required to be undertaken by adults who make financial decisions for, and manage the finances of their household. The Framework does not encompass the income-generating activity of the household; in particular the focus is on the financial competencies required to manage farming, fishing or business activity. In addition, the receipt of group-based rent or royalty income is a feature of a number of Pacific island communities. The Framework does not describe financial competencies required to be able to manage funds flows from group-based income on behalf of the recipients of the income. 5 Sibley, J.E. (2010). Financial Capability, Financial Competence and Wellbeing in Rural Fijian Households, UNDP, Suva. 6 Sibley, J.E. (2008) The Relationship between Adult Financial Competence and Household Wellbeing in Indigenous Rural Households in Papua New Guinea. UNDP, Honiara. 7 Financial Services Authority, Basic Skills Agency (2006). Adult Financial Capability Framework. FSA. London 8 Financial Services Authority. (2006). Financial Capability in the UK: Establishing a Baseline. FSA, London. 26

28 Chapter Four: Domain Level Analysis of the Financial Competence of Low Income Households in Papua New Guinea 4.1. Structure of the Analysis The domain level analysis of the financial competence of low income households is structured as follows: 1. An initial descriptive analysis of the participants in the study 2. An analysis of the financial competence for each of the financial competence domains in the Adult Financial Competency Framework and factors which may predict domain-level financial competence using a standard set of dependent variables a) Financial Domains The Adult Financial Competency Framework has adopted a domain structure derived from the financial domain structure developed by the FSA for the baseline study of financial capability in the UK 9. Within domains, competencies have been grouped into activity-level sub-sections derived from the focus groups to determine the competency set for low income households in the Pacific. These are summarised in Table 2: Domain Managing Money Making financial choices Planning Ahead Getting Help Table 2: Financial Competencies Domains and Activities Activity-Level Sub-Section Making payments Managing household income Managing household expenditure Keeping household records Saving Investing Borrowing The cost of money and financial terms and conditions Financial organisations and financial issues Planning Budgeting Seeking financial advice 9 Financial Services Authority. (2006). Financial Capability in the UK: Establishing a Baseline. FSA, London. 27

29 The analysis of each domain proceeds as follows: Introductory overview of the domain, activity-level subsections and competencies Analysis of activity-level sub-sections, and intra sub-section analysis of competencies Factor analysis of each domain to determine a domain score Regression analysis of factors which may indicate domain-level financial competence The first part of the sub-section analysis explores differences in the patterns of response for each group of competencies within the sub-section. A standard set of respondent categorical variables has been used for the analysis: - Age group - Gender - Location of residence (rural or urban) b) Competency Scores A summative financial competence score has been developed for each competency. Different people have different levels of activity and perform those activities at different levels of competence. A competence score needs to reflect this. It is inappropriate to score competencies which measure an activity someone may not engage in as incompetent. Competency scores were averaged to create activity-level scores. Refer to Section 6.6 for an overview of the construction of the financial competency scores. Refer to the Appendix (Table 32) for the variables used for the regression models Demographic Overview Households that participated in the study were low income households in PNG. Participants in the study were drawn from the urban and rural low income population in selected communities in Central Province. It was not feasible to use formal income criteria to determine relative household income. The Household Expenditure and Income Survey (HEIS) income deciles were not available at the time data was collected. In addition, as most low income household income is informal, verifiable measures of income were not available. Consequently, proxy criteria were used. Location-specific proxies were developed in conjunction with INA, NSO, subject matter experts and 28

30 local community leaders. In order to be enrolled for the study, households were required to meet all proxy criteria. The study has not sought to be representative of all cultural groups in PNG. The study has sought to develop an understanding of the financial competence of both monetised households and households which are still monetising. The livelihoods of households which participated in the study are considered to be typical of the livelihoods of most households which engage with the money economy. In total 451 valid interviews were conducted. 396 interviews were conducted in households in which the two Principal Financial Actors 10 in the household were interviewed (198 households) and 56 interviews in which one valid interview was conducted. In total, 254 households participated in the study. a) Gender and Age Distribution The objective of the sampling was to select adults in low income households in Papua New Guinea, who make financial decisions on behalf of their household. There was no target age distribution. The sample was skewed to younger respondents. The mean respondent age was years. The modal age was 32.0 years. The mean age for men (40.89 years) was higher than for women (35.14 years) (refer Figure 7). Figure 7: Age Distribution 10 The two people (male and female) who make most financial decisions on behalf of the household. 29