There is a lack of consensus between different researchers and organizations on how exactly to define and measure financial health. As a result, it is difficult to understand the relative impact of different policies and interventions on improving financial health, as the way progress is measured will vary from case to case. This paper proposes a solution to this problem by introducing a quantitative measurement tool for financial health. The tool can be adopted globally to benchmark progress on financial health as well as to better understand the impact of specific policy interventions and product solutions. As part of this tool, we propose three primary concepts that encompass financial health: Access-to-Funds, which is a final outcome construct, and Access-to-Finance and Financial Behavior, which are intermediate constructs that each incorporate several components. Between 2018 and 2019, IPA tested this measurement tool in eight countries: Afghanistan, Bangladesh, Colombia, the Dominican Republic, Ghana, Peru, the Philippines, and Uganda. This paper describes the response patterns in the data from these eight countries, as well as correlations between our Access-to-Funds questions and our Access-to-Finance and Financial Behavior questions. The behavior and access questions explain a non-trivial part of the variation in Access-to-Funds, even after controlling for demographic and socio-economic variables.

The Challenge

More people than ever before have access to the formal financial sector, and their numbers are increasing rapidly: 1.2 billion adults opened a bank account between 2011 and 2017 according to the latest Global Findex report. However, simply measuring access to formal financial services tells us little about the impact of financial access on their households. Researchers studying the effects of formal financial services have used a variety of concepts to assess household economic stability. However, without a standardized framework for what should be measured and how, it remains difficult to compare outcomes and conclusions from one study to the next. Even seemingly straightforward indicators, like income, are complex to measure in the field, and methodologies to measure them vary from study to study. There is a need to develop a method of measuring these outcomes in a simple, cost-effective, accurate, and standardized way that would allow for comparison across settings.

Context

Existing Frameworks
Our project is a continuation of work developed by the Bill & Melinda Gates Foundation with the Financial Health Network and Center for Financial Inclusion to build an appropriate financial health framework for developing countries. To date, several organizations have developed frameworks for defining the concept of financial health, both for consumers in the United States and for users in emerging markets. A review of these frameworks revealed a few common themes across concepts and definitions:
  1. The ability to successfully manage day-to-day financial needs;
  2. Resilience to shocks and the ability to access financial resources, either to recover from a setback or to take advantage of an opportunity;
  3. Long-term financial outlook; and
  4. Appropriate debt uses and effective debt management practices.

Activities

Validating a new survey instrument
Between 2017 and 2019, IPA developed, tested, and validated a rigorous survey instrument that could measure financial health indicators across different contexts.

  1. For our initial measurement tool, the IPA team began by building an extensive questionnaire bank that drew from dozens of IPA projects, as well as other leading industry surveys such as the World Bank’s Global Findex survey. We evaluated existing questions related to our indicators, both to identify questions that have worked well in previous studies and to identify gaps where we would need to craft new questions. We drew from this bank to create a sample set of preliminary questions that would make up our preliminary survey instruments.
  2. Between January and April of 2018, IPA implemented qualitative field tests on the preliminary survey instrument in five countries: Myanmar, Colombia, Uganda, Tanzania, and Kenya. The key objective of these qualitative field tests was to ensure that the survey questions were relevant across different cultures and captured the intended concepts. For each country we included both urban and rural sites for piloting and interviewed diverse population groups in terms of observable factors such as age, gender, socio-economic background, and occupation. In total, we interviewed 350 respondents across the five pilot countries.
  3. IPA administered the final version of the Financial Health survey between June 2018 and February 2019 to 11,876 individuals in seven countries. We leveraged six host projects in Afghanistan, Bangladesh, Colombia, the Dominican Republic, Peru, the Philippines, and Uganda. The Uganda project includes samples of refugees and nearby host communities, which we analyzed separately. Additionally, the project’s only nationally representative sample comes from Ghana, where we worked with the Ghana Socio-Economic Panel Survey, administered by the Global Poverty Research Lab at Northwestern University, the University of Ghana, and IPA.

A new conceptual framework
In our framework, financial health is the ability to access funds quickly and affordably. This definition also captures related intermediate inputs, including access to financial products and their usage, and prudent financial behaviors such as building reserves and planning ahead. These intermediate inputs are thus quite important as well and are where most of the existing constructs of financial health have focused. We propose three primary concepts that encompass financial health: Access-to-Funds, which is a final outcome construct, and Access-to-Finance and Financial Behavior, which are intermediate constructs that each incorporate several components.

Results

  • As expected across sites, respondents in richer households are more likely to be able to access funds for an unexpected need. At the same time, even among the wealthiest respondents in the sample, easy access to funds is not universal, suggesting that this measure captures information beyond pure economic status. Wealthy individuals may, for instance, exhibit low levels of financial health by failing to live within their means.
  • Access is also generally positively correlated, and often strongly so, with respondents’ ability to predict income (even after controlling for economic status), again suggesting that the Access-to-Funds measure corresponds in the expected ways to aspects of an intuitive understanding of financial health.
  • The samples from projects targeting ultra-poor households for social protection interventions in Uganda and the Philippines score lowest on average. Microcredit clients in Colombia and Colombia rank at the top, and average access to funds in the representative sample in Ghana lies between the highest and the lowest scoring sites.

Recommendations
For those seeking to measure financial health in a quick and simple way, we recommend applying only the Access-to-Funds module. We then suggest a basic summing and averaging of responses to the Access-to-Funds questions only. These recommendations and the survey instrument are presented in the accompanying survey manual.

Our work also attempted to identify the most important questions from the remaining two sections, Financial Behavior and Access-to-Finance, to add to a longer version of a financial health survey instrument. Our analysis showed that, particularly in the Financial Behavior section, none of the questions could be identified as clear winners across the multiple settings in which they were tested. For those wishing to use a longer version of our instrument to capture data on Financial Behavior and Access-to-Finance questions in addition to the Access-to-Funds measure, we recommend picking from the long-form version of our recommended survey instrument, and either selecting those indicators that may be most relevant to your setting, or collecting responses on all and then testing to see which questions are most strongly correlated with financial health for your target population. Finally, we include a set of potential context questions, including questions about income volatility and predictability, which we find to be highly correlated with financial health.

Our goal was to put forward a short, simple survey tool to capture information on financial health in different markets, and in different population segments within the same market, in a standardized way. There is an obvious tradeoff: the shorter and simpler the survey, the less relevant it is in any individual setting. Thus, the work presented here is a starting point to further explore the conceptual and measurement framework. In its current form, this tool can be used by researchers as part of future impact evaluations to standardize the approach to understanding the impact of financial inclusion programs and policies on financial health.