Deepening measurement in financial inclusion
You manage what you measure and thus it is important to have a measurement framework that drives the right behaviour. Financial inclusion has strong established measurement frameworks dealing with access to and usage of financial services. (e.g. AFI’s access and usage indicators, FinDex’s formal account ownership indicator and FinScope’s access strand).
These have had a strong impact on policymakers and regulators. 24 AFI members have committed to access targets and 31 to usage targets. National and global advances in these metrics are regularly celebrated and encouraged. New technologies, such as GIS plotting, has opened the door to target access initiatives with greater precision and potentially higher return.
However, developing and emerging economies witness great diversity in infrastructure and other development outcomes. The differences between regions within countries can be even greater. Levels of financial inclusion, even at the basic access level, should thus differ vastly between countries and between regions within countries. Yet, we have only absolute indicators for financial access, unlike, for example, the Body Mass Index, which adjusts ideal body weight based on multiple metrics, including age and height.
The above highlights one of the aims of our new initiative we are launching this week insight2impact | i2i – to reflect deeply on how we measure financial inclusion and why. Any decent measurement framework, which we define as one or more indicators measuring a discrete dimension of financial inclusion, must have an underlying theory. The theory explains why the indicator is significant and can justifiably be used to inspire action. For example, without tracking any other metrics, there is solid medical theory and evidence why a human body temperature of 39 degrees Celsius and higher requires medical attention.
Link between financial inclusion metrics and well-being
In financial inclusion, there is still a limited theory and evidence on the direct link between the existing financial inclusion metrics and the larger goal of financial well-being. The US Consumer Financial Protection Bureau (CFPB) defines financial well-being in terms of four elements: Control over your finances, the capacity to absorb financial shocks, the ability to make choices and the ability to achieve goals. Whereas some thinkers and researchers in developed economies with high levels of formal financial usage, such as the US-based Centre for Financial Services Innovation, have made some progress in defining indicators of financial well-being, the progress in developing economies with large levels of informal financial usage is limited. Why is this?
Firstly, much of the welfare enhancement of financial services lies in their enabling the individual and the household to meet goals. This requires intertemporal decisions – saving for next month’s groceries, saving for old age, or making inter-generational transfers. Yet much of the policy and donor focus in developing countries is on payment mechanisms – bank accounts and digital payments. Digital payments open the door to other formal financial services but is immediate and short term in nature. Savings are still primarily the remit of informal providers. A key consideration for financial inclusions measurement is which indicators should we track to measure whether financial services are enabling poor households to lengthen their planning horizon?
Secondly, we struggle to understand how formal financial services enable poor households to absorb shocks. The financial diaries highlight that poor households’ pool and spread risk across people or even communities, by maintaining multiple financial relationships to draw on in times of need. So how effective are individualised single risk insurance policies at assisting households to deal with a range of unexpected and damaging events? Or is the biggest risk mitigating impact from the formal financial sector actually delivered by remittances? Or even savings? How should we measure the relative contributions of these formal financial services to the risk armoury of the poor to be able to recommend priority actions to governments? These are all key questions we will consider when we work on deepening measurement frameworks in financial inclusion.
Finally, there are the adverse effects of financial inclusion. Deficient consumer protection measures can limit individuals’ choices and reduce their control of their finances. Over-indebtedness, for example, is a widespread problem across many low-income communities (here’s an example), yet credit remains an essential financial instrument accessed by virtually all poor households everywhere on a continuous basis. Most of this credit is done informally, often at high interest rates, with low to no protection. So do we have the right metrics for measuring levels of indebtedness in poor households, or rather the capacity to repay? Will a change in these metrics lead to a completely new product, closer to the evolving digital credit of MShwari and far removed from traditional microcredit?
i2i has started to engage with practitioners and academics worldwide to explore these and other questions. Going forward we hope the conversations lead to a few financial inclusion metrics that allow us to better measure what we want to manage and more accurately predict how financial inclusion can improve financial well-being in developing and emerging markets.