A delicate balance: How financial capability development and education intersect

If you have ever read an article on community development or microfinance, you will recognise the terms ‘financial capability development’ and ‘financial education’. Often used interchangeably, these terms represent very different concepts. 

In this article, we will outline the distinctive qualities of each, how they affect each other, and how they are vital for effective financial inclusion.

Financial education

Education is the very first step to empower people to make responsible financial decisions. Financial education specifically focuses on providing the knowledge and skills needed to engage with financial services. This could include how to identify financial products, learn the terms and what they mean, that could start to build peoples’ confidence to deal with financial institutions. It also works on building an awareness and understanding of the rights, responsibilities and risks associated with the use of formal financial products and services. We define this process as building the ‘capacity to act’, where learners are equipped with knowledge and skills to make money management decisions

Financial education is beneficial for both individuals and microfinance institutions (MFIs). An individual can learn how to choose the most appropriate and beneficial products for their circumstances, while an MFI can benefit from having clients that are both well-informed and likely to be more loyal if they understand that the institution they chose offers the best fit products and services.

Financial capability development

Financial capability is a life skill. It is a combination of knowledge, skills, attitudes and self-efficacy which are needed to make and exercise money management decisions suitable to one’s circumstances and priorities. While financial education is building ‘capacity to act’, financial capability development adds the ‘self efficacy’ which is the key for people to ‘act’ or exercise their capacities.

It signifies a shift from intention to actually changing behaviours and habits, and taking action that best fit the circumstances of one’s own life and support ones financial wellbeing.

Financial capability development encourages and provides opportunities for experimentation and rehearsal which are needed to build what is called the ‘motivation and confidence to act’.  

Without adequate financial capability, financial consumers are less likely to take advantage of the financial products and services that could help them, while others may suffer harm through misuse or susceptibility to rogue providers. 

A prime example of the success that financial capability development can achieve can be seen through Good Return’s Consumer Awareness and Financial Empowerment (CAFE) program. CAFE works towards strengthening and improving the financial situation of participants by encouraging positive financial behaviour change. 

In the 2018/19 year, CAFE learners in Cambodia reported a 68.7% increase in their confidence and demonstrated a 61.25% increase in positive financial behaviours after completing the Financial Foundations and Applied program. These positive financial behaviours include preparing for financial emergencies, thinking through the consequences of choices and actions before making a decision, using a written tool to track money and asking for information when shopping financial products to be adequately informed. 

On top of this, learners in the Solomon Islands reported a 36.47% increase in their financial wellbeing after completing the Coaching program.

Positive financial habit formation is a long-term process and reinforcement is necessary to sustain behaviour change.

Using financial education and capability training to achieve financial inclusion

So you’ve given people knowledge through education and created positive behaviour change through financial capability development. Now what?

The final step to tie it all together is financial inclusion, or ‘inclusive finance’. Put simply, financial inclusion ensures access to financial products so that individuals and businesses can put their knowledge and skills to use.  

Financial inclusion refers to a state in which all working age adults have effective access to credit, savings, payments, remittances and insurance from formal service providers. It is essential that these are provided at affordable prices, in a convenient manner, and with dignity for the clients. Financial services are delivered by a range of providers. A provider that practices effective financial inclusion will take steps to reach everyone who can use them, including people living with a disability, families living in poverty, people living in rural areas, and other minority groups.

Financial inclusion encompasses more elements than financial education or capability, including the access, affordability, functionality and an inclusive regulatory environment of financial services. Effective financial education and capability development work as valuable tools for financial inclusion. Financial inclusion, including the continued use of financial services and more engaged financial consumers, can be achieved faster with a financially capable population.

An inclusive process

Positive financial habits and behaviour change cannot be taught overnight. Instead, they are part of a process that encompasses financial education and capability development, to help low-income families become financially empowered with access to financial products.