Maria José Roa is a Senior Researcher at the Center for Latin American Monetary Studies (CEMLA) and a member of the Research Committee of the OECD International Network on Financial Education

Today, many development agendas include strategies designed to encourage financial inclusion. Despite efforts, many people in the world today are excluded from the formal financial sector, more so in developing countries. According to the Global Findex Database, around 56% of adults in the world saved a certain amount of money between 2013 and 2014, while only 27.4% saved in a formal institution.

A recent CEMLA study covering four countries in the Andean region, Bolivia, Colombia, Ecuador, and Peru, analysed the importance of financial capabilities in financial decision-making and participation in the formal financial sector. The results show that financial knowledge, numeracy and personality traits have an important role to play in the use of formal financial services in these countries. The analysis was based on the Financial Capabilities Survey applied by the CAF-Development Bank of Latin America. The survey was created using the OECD/INFE financial literacy survey instrument.

The study measured financial capabilities, numerical ability and personality traits related to conscientiousness, such as: propensity to plan or establish long-term goals; perseverance; and scrupulosity. Two financial knowledge indicators were built i) an indicator based on a group of standard questions developed by Lusardi and Mitchell, and ii) a more sophisticated indicator based on the work of Behrman and co-authors which weights each question by difficulty and by how informative it is.

After taking into consideration the possible endogeneity between financial decisions and financial knowledge, the analysis shows that numerical ability and personality traits related to conscientiousness – propensity to plan, perseverance, and scrupulosity – increase the probability that an individual will both save and hold formal credit and savings products. While the propensity to save through informal mechanisms depends on conscientiousness and income, it is not related to numerical ability. This result could be linked to the fact that formal and informal savings mechanisms coexist across all socioeconomic levels in the countries surveyed. Finally, financial knowledge is negatively related to informal saving, which suggests that a higher level of financial knowledge decreases the probability that an individual will use only short-term, informal savings mechanisms. Financial literacy is also positively related to holding formal financial products.

These results demonstrate the importance of demand-side factors related to financial capabilities when explaining low participation in formal financial markets and financial choices. In this respect, the use of empirical methodologies that measure personality traits and numerical ability could complement measures of financial knowledge to identify individuals who are less likely to keep up with their payments, to save, or to participate in the formal financial sector. Targeted interventions could be designed for individuals in these categories based on successful case studies identified in behavioural finance literature. For example, the design of financial products based on planning could benefit individuals with low levels of propensity to plan. Another example could be the use of regular reminders that mention a saving or repayment goal for individuals with low levels of perseverance. Although more research about the source of change of these factors and the experiences of interventions are necessary, these findings serve as a reminder that new variables need to be incorporated in the analysis of financial capabilities and financial inclusion interventions.

Documents and links

CAF-Development Bank of Latin America, Socio-Economic Determinants of Financial Education. Evidence for Bolivia, Colombia, Ecuador and Peru

Inter-American Development Bank, Formal Saving in Developing Economies: Barriers, Interventions, and Effects

Financial Decisions and Financial Capabilities in the Andean Region, The Journal of Consumer Affairs, 2018

OECD/INFE International Survey of Adult Financial Literacy Competencies

G20/OECD INFE Report on Adult Financial Literacy in G20 Countries

OECD paper on behavioural economics and financial consumer protection

World Bank, Global Findex Database Measuring Financial Inclusion Around the World