A New Framework for Financial Capability
Despite frequent use world-wide, there is no general consensus on the definition of the concept of financial capability. Financial literacy, generally defined as the inputs required for financial knowledge and skills that shape financial behavior (Lusardi, 2012), is used internationally as interchangeable with financial capability. A theory-based framework that synthesizes previous work on financial capability is particularly important for future studies to provide the consistency needed for comparison studies and/or meta-analyses, and contribute to the goals of policy makers and practitioners for which reliable research outcomes are needed.
A new conceptual framework of financial capability is offered that uses three elements—financial literacy, financial access, and financial functioning — and is grounded in Nussbaum’s capability approach. To establish the foundation for the new framework, the definitions of: 1) financial literacy (i.e., financial knowledge, skills, and attitudes); 2) financial access (i.e., access to formal, appropriate financial products and services); and 3) financial functioning (i.e., financial actions) are clarified in relation to one another. After introduction and discussion of the new framework and comparisons with previous frameworks, implications of the new framework for financial capability practice, policy, and research are discussed.
Derived from Sen and Nussbaum’s work, the capability approach stresses the difference between two key concepts—“functionings” and “capabilities.” Functionings are “beings and doings”, that is, the states of being and activities that a person can undertake, while capabilities are a person’s real freedom to achieve functionings (Nussbaum, 1999; Sen, 1999). Financial capability enables choice among different financial functionings; that is, capability is a necessary condition for, and leads to, the individual’s chosen financial functioning. The model suggests that financial literacy and financial access work interactively on financial functioning.
The proposed model of financial capability is built on Sherraden’s work (2013) with two minor revisions. Sherraden (2013) applies Nussbaum’s capability approach to financial capability, and emphasizes the importance of both financial access (inclusion) and financial literacy on individual’s financial well-being. First, this model formally introduces the concept of financial functionings as options of financial behaviors enabled by financial capability from which individual financial functioning (or behaviors or well-being) is chosen by the individual. Second, the proposed model intentionally emphasizes the interactive other than additive relationship between financial inclusion and financial literacy.
The clarification of financial capability practice as including considerations of financial access and choice, in addition to financial literacy, will aid the development of the field of financial capability practice, policy and research. Clarity about the elements will assist practitioners to include considerations for and advocacy about financial access and individual choice related to financial functioning in their practice. Policy that supports programming that is inclusive of all elements of the framework would promote both financial capability and beneficial financial functioning. In the future, researchers can focus on the measurement of financial literacy and financial access at the individual level, as well as functioning, with the consideration that choice is also an element of financial functioning.