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Financial Capability

Beyond Financial Literacy & Access Financial inclusion strategies are based on the assumption that people who are financially included are able to improve their living situations, move out of poverty and with that, contribute to the growth of the economy they live in.

A people-centered approach to rethink financial inclusion

The Local Financial Capability Study, conducted by the Rural Financial Institutions Programme (RFIP) at GIZ, puts forth an alternative framework that captures the conditions under which the rural poor make decisions pertaining to their financial health.


Knows how to manage


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La c

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iple b


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nk a c

acc oun t

cou n


fo r

ra nc e su in

co ve r

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Part ly, h as b ank


m an y


for M NR

th e n acco unt, if so


Saves reg ularly and in banks, U emergen ses saving cies, retir s for ement an d to build assets

ce in su ra n

Ha s


Saves regularly and in b

practice of saving

Saves regularly in SHGs and banks and has

Has n o

The ‘ability to use insurance’ has been mainly associated with life insurance for all family members, while life insurance cover for only one family member was seen as low financial capability.

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n ss ele r a

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e er th y, t i n

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ati din or


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e th ng o m


p es dr an

ily fam


the ng o ily am fam lity i b si

Ability to coordinate within the family

and decisions are made by taking into account the responsibilities and needs of all members.


n, no tatio epu r o n Has

reful s, more ca l expense o r nt o c Tries to g spendin


se and wi s l ess Spend




ds Spen


efully y car y ver e n o m

and b

u y in


in buys and ly s u dicio ey ju mon s d n Spe


Ability to handle money on daily basis

Ability to participate in community life

Ability to spend money responsibly /wisely

The ‘ability to spend money wisely’ has been associated with households which spend money for items that generate a benefit for the whole household and help the family to improve its living conditions.


The ‘ability to use assets’ has been associated with the ownership of houses, land, farming assets and household items. The focus is on ownership and usage.

The ‘ability to generate sufficient income’ is



Is we ll


Rather Low



Medium Rather High

ed u

ca te

Ha sn


the ya re s




nd h

po s

The levels indicate how a household needs to develop or how certain factors need to change in order to enable a household to reach higher levels of financial capability. The process of improving financial capability is a non-linear process and involves a variety of abilities which influence each other.




and, Owns no other ass

land, Owns

very few a nim







kill ed l

kil ls

du cat ion

ab ou rer s

as kn ow l ed ge










Umesh Behera, a coconut picker in a rural village in Odisha, lost his only source of income about 20 years back because of an accident that rendered him paraplegic. The absence of any insurance cover, lack of savings and recurring medical expenses worsened his family’s financial situation. Many years later, both he and his wife were able to secure assistance from local NGOs in the form of a loan and a wheelchair rickshaw. Through mutual help and assistance, they are now able to generate income that provides them the much needed financial support and has helped them overcome the odds.

Padmabati Das is a Community Animal Health Worker from Odisha living with her two daughters while her husband is a migrant laborer. After an unsuccessful attempt to run a small grocery store financed by a loan, she got training in traditional and modern ways of animal health treatment under a sustainable livestock management scheme launched by the governement. These days she utilizes the acquired knowledge to provide local farmers with medicines and vaccinations and is popularly known as “Doctor Mom”.

Mamta Devi from the mountains high up in Uttarakhand is a busy mother, housewife and a teacher at a local Anganwadi, a government sponsored child-care and mother-care centre. In order to help her husband stay with the family and not migrate in search of a job, Mamta took a loan from a local Microfinance Institution to invest into a small electronics supply store. Today her husband is managing this store, with occassional help from Mamta, selling different kinds of electronic items and computer peripherals as well as offering a mobile phone account charging service.

All focal areas are not equally significant

40% 35% 30% 25%




15% 10% 5% 0%

ed uc at ed

we ll

du ca ted ,


Very High

The various rural Indian low-income households even with their similar living situations have their very individual challenges and advantages. Different factors and circumstances influence their ability to access financial services and their choice how to use them. Their decisions and behaviour are shaped by different individual characteristics, strengths and weaknesses, as well as the environment they are living in. Thus, each household can have varying levels of abilities that influences their financial capability.

Has very lit tle

se ss es s


Each household a different story

how households use financial services and less to social relations, assets and competencies. Statements related to the latter focal area were most salient in Karnataka. In Uttarakhand the use of financial services played a major role, whereas planning for the future was not mentioned frequently.



Is e

The financial capability of households varies across five levels ranging from very low to very high. Very Low

The relative importance of each focal area varies when one moves from the community to a regional level

less voice

Has so me lan Owns d (up to bulloc 3 acres ks and ) house Has a hold it ems lot of lande land d pro (up to perty 10 ac , own res) a s tra nd la ctors nded Has and p a lot ower of la mot tiller nd a or v s ehic nd la les, nde trac d p rope tors rty, o and wns othe r eq uipm ent Has no edu cat ion , no kno wle dge , no lite rac y

Levels of knowledge and skills are outcomes of investments into education and an environment conducive to learning.

Levels of Financial Capability


Each region a different profile

, it is



g ing ga En arn e o Tw


The illustrated graph shows that for the given study, more participants in Odisha, than in any other state, spoke about how to generate, manage and use money, whereas the share of statements related to planning for the future is the lowest among all four states. In Rajasthan the participants referred more often to

Has no property, no l

Ability to gain knowledge and skills

Ability to generate sufficient income


s s es job g, 2 sin ied ndin u r b n ala yle n s one ow rns s, di a m e b , g jo te re ga ul ltu d ied En u r a la y ric sa er ag in ev , d g in ge ga nd le En y e on m

ion putat no re

s eles voic

, influence in the Has good reputation community

Ability to use assets

ing affected by the number arn ee n o , of income sources, the type o rk ute b w i r of income sources, the number age ont w c e y l en som dai ldr , , i g g h t of earners who contribute to in ,c min adul egg ber income generation, the far g t in b em n c i d m a arn age ntr old regularity of income and the e g o h n c e e E , on ous te ess way time is managed. lt h rk, e ibu sin u r o r u t d u w a n e yb u lt s co c ag i et t n r r w p re n ag mbe ild aily di s e ss, ge d d er, ch s, dult ga an ine ld m b s se En n a u m o s o i t e b e h g ) m in nin gra se tty us mi old r ou pe eh n b 3 ea lt h n( us i , w u o h r ad es ,o ed o



, it is port

y n, the The ‘ability to take part putatio Has re in community life’ has been associated with the ey reputation, respect and ntacts, th pport, co dignity households tion and su ta pu he re t help o rs Has good enjoy.

Uses plans and budgets



n tio na rdi ily o n o tio fam dc ina the oo d g r g on nd oo am ya sc n mil Ha atio a f The ability to din s the oo r e n c i b r coordinate within the y em ood nit m g u ily s family has been and Ha fam ily the fam g associated with n e o n th am families in which all ty i uni s a members have a voice, H


thers help o


ry and unwise Spends unnecessa



Ability to use insurance

Ability to plan for the future The ‘ability to handle money’ depends on how households are able to balance income and expenditure, and the knowledge to use budget planning instruments.


Ability to use bank accounts

Ability to invest



Ability to save


Ha s

Pla nn ing

U & s i g n n g i M g a o n n a e y M , g n i t a r e n Ge

Ability to use loans


earn ing, shor daily tage spen s, n o ding plan with s an acut d bu e dget Daily s earni ng, d a il Prepa y spe res pl nding ans b with s ut do horta esn’t ges follow budge Manag t es bala nce be tween expend income iture. Pre and pares p lans and budgets Spends acc ording to income Uses plans an d budgets

The ‘ability to use bank accounts’ has been associated with households which have access to saving or loan accounts, and actually make use of banking services.

The ‘ability to invest’ refers to the identification and use of investment opportunities.



not in banks

The ‘ability to use loans’ refers to access to loans from diverse sources such as banks and PACS, to be able to repay on time, and to use loans for business development.

Ac tiv el In y ve se st ek s in s n bu sin ew in es ve s, ho stm No u se ent th ink s, la opp ing bo or an ur d , la tun pla No nd itie nn fut s ing ur ep fo lan rt he fu Ho tu us re eh old pla ns for the Ha s fo fut ure res igh ta nd pl a The ‘ability to plan for ns for Pla the future’ requires ns the lon fut taking into account g te u re rm, longer-term aspects of for chi ldre income and expenditure. na nd em erg enc ies


The ‘ability to save’ has been mainly associated with households that deposit money in a bank, save regularly, save for emergencies and retirement, and for building assets.

k in








Saves irregularly,


d has no


save an Does not

e r u2 t u3 F e


The study identifies 13 key abilities which determine the financial capability level of a particular household i.e. the household’s ability to manage finances to their own benefit. These abilities could be aggregated into four focal areas - three of which relate to financial functions while the fourth pertains to personal attributes (knowledge, skills, attitude) and social relations in the family and community.

pital, Assets and Co m ial Ca p e t Soc e n c ing i e s Us

om ows fr , borr oans ates mal l est r to for inter h cess s hig No ac from , pay ows ders borr eylen rces ans, mon u o s al lo l form rma , info s to HGs cces ther S, S no a nd o PAC Has rs a nde from ws eyle mon orro Ss s, b PAC oan to l and ess ks acc ban Has ity rom f n s mu a ns rce co m o lo ou ss ss t iou cce ya var m eas fro Has ns loa to CS e ss PA t acc nd en a as y tm ks an se es Ha sb nv ha oi ,N suc ion pt oo t s sn en es ei stm sin om ve bu inc n i n i ing No ts as re st, s, es e v Inc es In inv sin o es m yt bu cit co in in pa ts g s ca sin ve No In ea s d cr in se a n of es ), l ks sin ers in bu t h Th o w of ne t( of s en m oy pl em




Using Financial S e 3 4 2 5 1 rvic 1 2 es 3 4


fo rt h

Personal Attributes, Environment and The Ability to Act

Generating, Managing and Using Money

Planning for the Future

Using Financial Services

Using Social Capital, Assets, and Competencies



Looked in totality, the frequency distribution of statements across focal areas points to the most salient, and probably relevant, elements of the local financial capability concept as defined by the research participants. The distribution indicates that people’s thoughts are mostly directed towards income generation, spending patterns as well as family and community relations when it comes to describing a household’s financial capability.

understand . support . enable

Planning for the future




Using Social Capital, Assets and Competencies

Generating, Managing and Using Money

26% Using Financial Services

Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH RURAL FINANCIAL INSTITUTIONS PROGRAMME


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