From Financial Literacy to Financial Capabilities: Implications for Practitioners

This article by Guy Stuart is cross-posted from the Center for Financial Inclusion blog. 

In the United States, it is financial literacy month, but all the talk these days is of financial capability. Why? Is this another fad to make the topic of financial literacy a little more interesting? Is it an effort by one group or another to differentiate themselves? Maybe. But there are also important, substantive, and practical reasons to be talking about financial capability, which means having the ability and opportunity to manage your money well. And there is no better way to understand this than to look to the pioneer of the capabilities approach, Amtya Sen, to see why it is important, both in the developed and developing world.

In brief, Sen’s capabilities approach:

• Forces a discussion of a multi-dimensional understanding of what it means to be a fully functioning member of society that takes into account not only what a person knows, owns, and earns, but also what they can do, and what they actually do
• Opens the door to thinking about financial capability in the broader development context that encompasses other capabilities such as being healthy, educated, and earning a sufficient income to support an individual and their family
• Recognizes that what it takes to be capable in one context is different from what it takes to be capable in another

The practical implications of this are important:

• A multi-dimensional understanding of what it means for an individual to manage their money well goes beyond being “literate” (having the right knowledge and skills). It also includes having an individual be able to act on that literacy (financial behavior) and having access to the appropriate financial instruments to fully realize their aspirations. In other words, the capability approach to money management includes a discussion of behavior and access. This means, practically, we have to understand the connection between financial literacy and financial behavior in all its complexity. It also means that talk of financial inclusion and increased access should focus on how they increase financial capabilities, which means a focus on financial service use, not just uptake.
• Development often happens in silos, and the burgeoning financial capabilities “industry” is no exception. A capabilities approach reminds us that financial capability is just one of many capabilities that people value. Furthermore, being financially capable can impact other capabilities directly, and vice-versa. Managing your money well can help a person better deal with a health crisis, which would otherwise cripple their capability of being healthy. Or being educated generally (being able to read and write) broadens the scope of what a person can learn about managing their money well. As a result, organizations and individuals interested in building the financial capabilities of individuals should be looking across development sectors for ways to cooperate and partner with others. Funders should be doing the same.
• The understanding that what it takes to be capable in one context may not be the same as what it takes to be capable in another has programmatic implications for those involved in building financial capabilities. So, for example, in a culture where there is a strong expectation of giving and receiving cash gifts to/from family and friends, whether it be for mutual support or other reasons, a financially capable person may be one who is adept at handling their requests for and receipt of cash gifts, and balancing them against their own need to accumulate personal savings. As a result, a financial education curriculum focused on the accumulation of personal savings might also include a discussion of effectively managing gift giving/receiving. Practically, this means that programs that aim to build financial capabilities must be adapted to their local context, not only in terms of language and content emphasis, but also substantively to take into account local understandings of what it means to be financially capable.

So as we celebrate financial literacy month in the U.S., let’s broaden our scope and think about financial capability across the globe.