The Relationship Between Financial Capability, Financial Competence and Household Wellbeing Jonathan Sibley July 2009 PACIFIC FINANCIAL INCLUSION PROGRAMME (PFIP)
Introduction Study undertaken 2007 to measure impact of financial capability development initiative deployed in Fiji 2005. Sample: 400 villagers, 14 villages in Naitisiri Province, Fiji. Additional study undertaken 2008 to determine impact of similar financial capability development initiative in Solomon Islands. Sample 350 villagers, 15 villages, rural Guadalcanal, Solomon Islands Fiji design ex post facto with control group. Solomon Islands design prepost with control group. Research overseen by Massey University, New Zealand and UNDP. A unique opportunity to examine the role of money in communities with a high level of social, economic and environmental homogeneity. Great thanks are owed to the people of Naitisiri Province and the people of Guadalcanal for their willingness to share their time and their lives with us.
Capability, Competence, Wellbeing Capability + + Competence Well-being Capability the ability to do something (knowledge and skill, access) Competence - how well something is done Wellbeing the impact of the action(s) on the individual on their household
Financial Competence and the UNDP/ ANZ Financial Capability Development Initiative in Fiji Attitude to Money Subjective Wellbeing Functional Literacy Competent Financial Behaviour Financial knowledge and skill Household Wellbeing 8,500-9,000 participants in Financial Literacy Workshops in 347 villages 300 villages visited by Rural ing and 50,000 accounts opened Financial Inclusion
Villagers consider the Financial Literacy Training to be worthwhile Why did you attend the Financial Literacy Training Workshop Men Women To learn how to manage money and/or budget 44% To learn how to save and/or learn about using a bank account 24% 46% To learn how to better manage a business 16% 16% Respondent was asked to attend 31% 13% What benefit did you gain from attending the Workshop Men Women Learned how to manage money and/or budget 6 31% Learned how to save and/or learned about using a bank account 3 52% Learned how to better manage a business 11% 16% No benefit 8% 8%
Villagers also consider the Rural ing Service to be worthwhile Why did you open Rural Savings Account What benefit have you gained from your Rural Savings Account Money is safe 14% 6% Able to save money 45% 18% Provide for children/ education 18% 6% Cash (business/farm) 8% - Achieve goals/ Manage money/ provide for future needs - 41% Earn Interest - 8%
Functional Literacy is an Issue Many villagers cannot read the brochures or training material unaided Required reading age (English) equivalent to >=9 years formal education Functional Literacy Questions Answered Correctly Numeracy 0-2 3-4 5-6 Total 0-1 22% 11% 43% Literacy 2-3 6% 12% 38% 4-5 1% 4% 13% 19% Total 3 27% 44% 10 Many villagers reading age likely to be too low for most financial documents Many villagers also have poor numeracy
and inhibits participation in the Financial Literacy Training and Rural ing Service Villagers Functional Literacy Attended FLET Did Not Attend FLET Low 8% Low 12% Has Rural Savings Account High 47% Medium 45% High 49% Medium 39% Does Not Have Rural Savings Ac High 35% Low 3 High Low 41% Medium 35% Medium 39%
Villagers exhibit a similar Attitude to Money to other (urbanised) Socio-Cultural groups studied Power/Prestige: (Money as source of status) Much the same as other groups, although less confident with money. More competent villagers score higher. Retention/Time: (Importance of planning money use) The same as other groups. More competent villagers score higher. High scorers 3 more likely to have Rural Savings Account. Distrust/Anxiety: (Suspicion toward the price of goods and services) Higher scores are more likely to regard money as a source of anxiety, and also as a protection from anxiety. No significant gender differences Modest correlation with age (Higher Distrust and Retention)
Villagers who attended the Financial Literacy Training have greater Financial Knowledge (in respect to topics covered by the Training) 8 Able to Describe a Budget 7 6 5 4 3 Flet non-flet Fiji Solomon Islands
there is evidence participation in the Financial Literacy Training lead to the increase in Financial Knowledge 6 Able to describe a budget 5 4 3 NA/DK Saving money Managing money Managing money and saving Setting goals, managing money and saving Pre-FLET Post-FLET Guadalcanal Solomon Islands
and contributed to a change in Financial Behaviour 5 Keep copies of financial documents 45% 4 35% 3 25% 15% 5% Don't receive any Keep none Keep some Keep all Pre-FLET Post-FLET Guadalcanal Solomon Islands
particularly in respect to topics covered by the Financial Literacy Training 10 9 8 7 6 5 4 3 Household has a Budget Both FLET Neither No Budget Budget 10 9 8 7 6 5 4 3 Household has a Budget Both FLET Neither No Yes Guadalcanal Solomon Islands Naitisiri Fiji At household level, attendance by one member of the household at the Financial Literacy Training is a significant predictor of the household having a budget At individual level, villager s ability describe a budget is a significant predictor of whether household has a budget Having a rural savings account and high functional literacy are significant predictors as to whether villagers can describe a budget There is, therefore evidence of intra household learning
Villagers with access to the ing System exhibit more positive Financial Behaviours Use of Surplus Funds FLET/ Non-FLET/ FLET/ non- Non-FLET/ non- Put surplus in bank 51% 35% 13% Save surplus at home 33% 53% 61% 66% Spend surplus 15% 11% 29% 21% Have a Rural Savings Ac Do not have a Rural Savings Ac Don t keep money safe Hide at home Don t keep money safe Hide at home 5 6 Keep money safe 9 Deposit in 8 an Account Keep money safe Deposit in an Account 5 4
Women accept greater responsibility than men for management of the household s cash flows and appear to engage in a broader range of income generating activities Usual Way Household Expenses Are Managed 10 9 8 7 6 5 4 3 Male Female Don't Manage Manage Sometimes Usually Manage Managing Household Cash Flows Men Women Keepfinancial records 18% 63% Check bills and accounts are correct 45% 66% Have a household budget 37% 57% Set financial goals for the household 54% 85% Paying Bills Men Women Without difficulty 31% 22% Sometimes a struggle 29% 42% Always struggle/ Financial Problems 15% 32% Don t know 16% 3% Spend money as it is received and do not plan Sources of Income 10 9 8 7 6 5 4 3 Women Men 10 9 8 7 6 5 4 3 Male Female Agree Neither Disagree 0 1 2 3 4
Villagers currently access retail credit 25% Type of Loan Purpose of Loan 15% 15% 5% 5% FLET/ non-flet/ FLET/ non- non-flet/ non- Store Credit Hire Purchase Commercial/ Agricultural FLET/ non-flet/ FLET/ non- non-flet/ non- Groceries Household/ Family Commercial Agricultural 3 25% 15% 5% Use of store credit for purchases Interest Many villagers have a limited understanding of interest Deposit interest 36% - 61% Credit interest 8% - 16% FLET and Rural ing Rural ing Only FLET only Neither FLET nor Rural banking
however, many villagers are not competent at managing their borrowings 10 9 8 7 6 5 4 3 Able to describe how a formal loan works Both Rural ing FLET Neither Know Store Credit is a Form of Loan FLET/ Non-FLET/ non- Male Female Know 59% 44% 66% 36% Do not know 3 36% 26% 39% Able to state how a loan works Not able to state how a loan works Loan Repayments and Arrears FLET/ non-flet/ FLET/ non- non-flet/ non- Repayments up to date 10 85% 44% 47% Arrears Store credit NS 5 42% Arrears Hire purchase NS 25%
The situation is similar in the Solomon Islands 10 Loan repaid successfully 9 8 7 6 5 4 Not paid off successfully/ not up to date Paid off successfully/ up to date 3 Money Lender
Rural Fijians are happy!! Financial Competence and Household Wellbeing have little influence on Villagers Happiness Personal Wellbeing Standard of Living 95 Australian average Rural Fiji Future security 80 Health 65 Part of community 50 Achievements in life Safety Relationships
All villagers have similar Financial Priorities (with the exception of commercial priorities) FLET/ non-flet/ non- Financial Priority Financial Priority Improve/ Extend farm 8% 6% Start/Extend Business 8% Increase savings/ Investment 2% 5% Repay loans/ canteen credit 4% 6% Immediate Family Welfare 47% 29% Children's Education 63% 56% Improve Family Home 24% 24% Household Furnishing/ Appliances 2% 3% Extended Family Obligations 2% Village/Church/Vanua contributions 29% 26%
Villagers who exhibit more competent financial behaviours focus more on investment Investment Goals Household Goals 4 35% 3 25% 15% 5% 8 7 6 5 4 3 Improve/ Extend farm Start/Extend Business Increase savings/ Investment Children's Education Improve Family Home Household Furnishing/ Appliances FLET/ FLET non-flet/ non- FLET/ FLET non-flet/ non- Social Goals Gender Differences 8% 7% 6% 5% 4% 3% 2% 1% Extended Family Obligations Village/Church/Vanua contributions FLET/ FLET non-flet/ non- 7 6 5 4 3 Improve/ Extend farm Start/Extend Business Men Women Household Furnishing/ Appliances Children's Education
and appear to re-invest more in the farm and generate more income Investment per Hectare FLET/ non-flet/ non- No 42% 62% Irrigation Yes 58% 38% Average number of farm implements 0.38 0.22 Average head of stock 4.21 2.18 Average supplement expenditure per hectare $370 $355 Calculated Relative Income FLET/ non-flet/ non- Income Hectare $ 3,141 $ 2,692 Exp Hectare $ 502 $ 381 Net Income Hectare $ 2,622 $ 2,401
and are more conservative in estimating income 10 9 8 7 6 5 4 3 Funds Remaining at the End of the Payment Cycle Rural banking Account No Rural ing Account <5 of the time - never 5 of the time Always >5 of the time Estimated Household Surplus FLET/ non-flet/ non- Average Farm/Business Net Income PA $ 3,249 $ 3,357 Average Household Spending PA $ 3,123 $ 2,737 Average Household Surplus PA $ 126 $ 620
and own more household durables Number of Household Durables FLET/ non-flet/ non- Durables pre-2005 2.0 1.4 Durables Purchased post-2005 1.2 1.2 Total Durables 2007 3.2 2.6 Kitchen Appliances 0.6 0.2 Selected Household Durables Average <2005 Average >2005 FLET/ non-flet/ non- 2002 HIES Bedroom furniture 62% 88% 87% 91% NA Living room furniture 18% 24% 33% 21% NA Refrigerator/Freezer 4% 7% 11% 5% 22% Oven 15% 15% 24% 12% 31% Washing Machine 2% 5% 15% 12% Sewing machine 9% 14% 17% 16% NA Television 12% 17% 26% 21% 28% Radio 24% 49% 54% 64% NA Telephone 1% 19% 26% 17% 11% Car/van 1% 1% 1% 1% 8%
Villagers with higher functional literacy tend to engage more with the money economy and to seek to enhance Financial Capability, which leads to greater Financial Competence and greater Household Wellbeing + Attitude to Money + Higher investment in agriculture Higher investment in business More household durables Functional Literacy Competent Financial Behaviour + Household Wellbeing + + Financial knowledge and skill + Higher savings activity Better management of credit Higher propensity to Budget More positive general financial behaviour More conservative estimation of income and expenditure
Financial Capability, Financial Competence, Household Wellbeing Financial Capability + Financial + Competence Household Well-being The Fiji and Solomon Islands studies offer support for the model: Financial Capability can be increased Higher Financial Capability leads to greater Financial Competence (self-reenforcing) Greater Financial Competence leads to greater Household Wellbeing
But, alas, not necessarily greater happiness!!