Financial Health and the Impact of Financial Inclusion

The concept of financial health has contributed significantly to the way the global development community thinks about financial inclusion. It has pushed us beyond thinking only about whether poor people have access to financial services and how often they use them, giving us a practical framework through which to talk about whether these services are improving low-income people’s ability to manage their financial lives. But the framework and its component metrics are not meant to go far enough to tell us whether financial management leads to welfare impacts on people’s lives.

Fish merchants in Nicaragua. Photo: Antonio Aragon Renuncio, 2016 CGAP Photo Contest
Fish merchants in Nicaragua. Photo: Antonio Aragon Renuncio, 2016 CGAP Photo Contest

The financial health framework brings to financial inclusion some previously ignored outcomes that people seek in their financial lives whether they are rich or poor or somewhere in the middle: the ability to effectively manage day-to-day finances and to be resilient and able to pursue opportunities. Given my particular life experience, it took me a while to grasp the relevance of this concept across people’s different socioeconomic contexts. Having been raised in a highly unequal society like the one in Nicaragua, I internalized from an early age that I, and those around me, faced different realities. Our socioeconomic context set some boundaries around what we could reasonably aspire to, which made our goals different and, consequently, the financial strategies we used to achieve those goals.

Even though I find the financial health framework robust in that I can see all the people I know across the socioeconomic spectrum actively pursuing financial health, I would still argue that context matters when we talk about the ultimate impact of financial inclusion. Each of us strives to become financially healthy to achieve different goals in different ways given our context. But the achievements we reach will ultimately be influenced by many more factors than the decisions we make about managing our money. The contextual factors that limit our choices with regard to jobs, the incomes we are able to earn, the prejudices we experience and the assets we have or don’t have as our starting base will certainly influence the outcomes we aim to achieve. And although these contextual factors are explicitly acknowledged in the financial health framework — and the general development and academic community, for that matter — they remain poorly understood and ignored in discussions about the impact of financial inclusion, perhaps because of their complex, interdisciplinary nature.

To be sure, the financial health framework has been very influential in taking us a step beyond access to financial services. It has identified compelling indicators that reveal whether the use of financial services leads people to balance their income and expenses, build and maintain reserves, access and manage loans, plan ahead, withstand shocks and use a wider range of financial tools. This certainly pushes financial inclusion circles in the direction of understanding clients’ livelihoods and the different factors that determine how they use financial services. But these are intermediate outcomes, which should not be confused with the ultimate impact of financial services on people’s lives. People don’t pursue financial health for its own sake but as a means to achieve livelihood goals. 

If we accept the challenge of developing a better evidence-based understanding of how financial services help people improve their well-being, we need more research on people’s livelihood goals and motives for becoming financially healthy. Then, we need to understand the way these motives shape how people value and make use of the financial services available to them. The diversity of people’s livelihood goals and strategies means that we may not be able to encapsulate the impact of financial inclusion with a single concept like financial health. 

Returning to my life experience, I have never found it valuable to be part of a community savings and loans group, though lower-income people I grew up with used them to manage liquidity and pay for their children’s education. Likewise, I have never needed to use an invoice-factoring credit product, but I know people who grew up wealthier who have found them critical to grow their businesses. In the universe of people I know, you can’t determine a priori which financial product is likely to positively impact their lives without understanding their context.

CGAP is developing a theory of change on how the use of financial services may improve well-being, which connects available evidence, identifies current evidence gaps and sheds light on the various pathways that lead from intermediate financial outcomes (like those measured by financial health) to well-being. By untangling these pathways, we aim to help make sense of the contradictory impact estimates out there and hypothesize which contextual characteristics determine whether certain financial services have positive, neutral or negative impacts on various dimensions of people’s lives. We hope this work sparks discussion among providers, policy makers, academics and donors about the conditions that lead to positive outcomes in the lives of the people we intend to serve.

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