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How Do You Know Your Know-How?

Review of Original Methods to Measure Financial Literacy and Capability

(preliminary findings)

Giuseppe Iarossi Valeria Perotti

Russian Financial Literacy & Education Trust Fund Saint Petersburg Conference

June 26-27, 2012

Fiji Ghana FSS WB FLIT

Kenya FinAccess

Jump$tart

New Zealand

Fin. Literacy Portugal

Portfolio of the Poor

UK FSA

Health & Retirement

Study

Findex

Survey of the States

IPA OECD/INFE

FinScope

Survey of Consumers

Portugal

Opportunity Int’l

WB CPFL

2

List of Surveys Reviewed

Outline Policy Objectives Data Collected Cost and Quality

3

Policy Objectives

Increase awareness and knowledge of financial concepts and products

Enhance ability to manage financial resources effectively

Promote access and use of financial services

Strengthen consumer protection mechanisms

Capability

Access

Consumer Protection

Literacy

Policy Objectives of Different Surveys

1. Financial Literacy Identify the level of consumer understanding of

financial concepts and products.

Exploring knowledge

gaps by topic

Identifying best channels

to provide information on financial

products

US Health & Retirement, HRS, NZL, KEN, OECD Portugal

Interest Rate

Investment Diversification

Inflation

Assets & Liabilities

2. Financial Capability

Financial Knowledge of how to

Financial Behavior

Investment

Diversification

Understand whether people are able to manage their resources effectively.

UK, OECD, Kenya, Opp. Int’l

Jump$tart, Portugal, NZL, Finscope

Dealing with unexpected expenses

Planning

Budgeting

3. Financial Access

Understanding level of

participation in usage of financial

services

Identifying reasons

preventing usage of financial

services

Usage of banking services, credit products, savings, insurance,

remittances

Use of formal/informal savings and borrowing services

Identifying channels to provide information to consumers

Exploring habits and levels of sophistication of investors

Understand the level of financial inclusion

Portugal, NZL, LSMS, S. of Consumers

Finscope, OECD, FLIT, Findex

4. Consumer Protection Determine the level of awareness of consumer

protection laws and redress mechanisms

Portugal Kenya New Zealand WB CPFL

Knowledge of sources of

financial information and redress mechanisms

Users’ understanding

of financial rights &

responsibilities

Attitudes towards financial advisers

Level of trust in

financial services, financial

regulators, & redress

mechanisms

What data is collected?

Financial Literacy Knowledge of

financial concepts

Knowledge of financial products

and services

Knowledge of how to use financial products and

services

inflation

compound interest

portfolio diversification

returns on investment insurance

loan repayment

budgeting

Questions on…

WB CPFL, HRS, Opportunity Int’l

Financial Literacy Knowledge of

financial concepts

Knowledge of financial products

and services

Knowledge of how to use financial products and

services

Portugal, OECD, Jump$start

Home Banking

Overdraft fees

Money Management

Pension Funds

Insurance products

Consumer Protection Info Sources

Stocks and Shares

Questions on…

Financial Literacy Knowledge of

financial concepts

Knowledge of financial products

and services

Knowledge of how to use financial products and

services

Survey of Consumers

Saving for Retirement

Creditor Obligations

Loan Payments

Home Refinancing

Paying off Credit Balance

Insurance Policies

Questions on…

Financial Capability

Effective Saving & Borrowing Money management practices Portfolio Diversification Debt consolidation

NZL, Fiji

Knowledge of how to effectively manage money

Financial Capability

Numeracy skills Keeping financial records Planning Understanding investment statements

NZL, Fiji

Knowledge of how to effectively manage money

Skills in Financial Matters

Financial Capability Knowledge of how to effectively manage money

Planning for expected & unexpected expenses Retirement Ownership of financial products Savings and withdrawals

Financial Diaries

Consumer Behavior

Skills in financial Matters

Financial Capability

Consumer Behavior

Consumer Attitude

Skills in financial Matters

Reasons for saving, borrowing, investing, budgeting, and choosing financial products

Risk and coping strategies, attitudes towards advisers, preferences for receiving information on products

Confidence in formal saving, making complaints, comparing loans, understanding rules and policies, confidence in using new technologies

Survey of Consumers, Kenya, Portugal, Finscope

IPA

Opportunity Int’l

Knowledge of how to effectively manage money

Financial Capability Knowledge of how to effectively manage money

Knowledge, Skills,

Attitudes and

Behavior

Consumer Behavior

Consumer Attitude

Skills in financial Matters

Financial capability measured across four domains: managing money, planning ahead, making choices about financial products, and staying informed

FSA, FLIT

USAGE KNOWLEDGE ATTITUDES

Findex, Portugal

Informal Saving

Credit Cards

Saving & Borrowing

Formal accounts

Frequency of Using Fin. Products

Insurance

Questions on…

Home-banking

Loans

Financial Access

Financial Access

USAGE KNOWLEDGE ATTITUDES

Portugal, OECD

Overdraft Fees

Bank Websites Saving & Borrowing

Bank Fees

Knowledge of Financial Products

Questions on…

Cost of Using Credit Cards

Financial Access

USAGE KNOWLEDGE ATTITUDES

Portugal, Findex, Finscope

Perceptions of informal financial services

Perceptions of formal account ownership

Reasons for Obtaining Loans Perceptions of

banking products

Questions on…

Risk Aversion

NZL

Jump$tart

FLIT, Kenya,

Finscope

Consumer Protection KNOWLEDGE

CP as a problem of asymmetric info

TRUST CP is an issue of

confidence

Awareness of consumer protection laws.

Consumer understanding of debt guarantors responsibilities

Consumer awareness of protection rights and of existing recourse mechanisms.

Kenya

WB CPFL

Consumer Protection

Confidence in resolving problems with financial service providers Attitudes towards government institutions.

Experiences with financial institutions, degree of ease in receiving financial information Making complaints and evaluating agreements

KNOWLEDGE CP as a problem of

asymmetric info

TRUST CP is an issue of

confidence

Cost and Quality of Survey Data

Cost & Quality Irrespective of which policy goal is pursued,

designing effective interventions requires the collection of accurate survey data

In surveys the same amount of data can be collected

with a fraction of the cost by simply changing one aspect of the design

25

What is the right cost of a survey?

A number of factors play a role such as: sample size, mode of interview, experience of interviewers, length of questionnaire, number of locations covered, etc…..

Example of Cost

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$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

Cost of HH Surveys

Sample Size Source: Financial Inclusion Measurement for Regulators

Main Components of Cost

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Switch mode of interview 70 % of tot. cost in savings!

63% 15%

7% 6% 9%

Share of HH Survey Cost

Staff Transport

Equipment

Supplies Other

Source: The Power of Survey Design

Personnel & Transportation account for approx. 80% of cost

BUT this has an impact the quality and quantity of information available

Cost Savings Strategies

28

Without compromising quality, cost can be reduced by: Exploiting the underlying characteristics of the population

that is targeted, and Properly fine tuning the representativeness and the size of

the sample to the purpose of the analysis 3 APPROACHES

Sample Representativeness Sample Structure Sample Size

1. Sample Representativeness

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“Nationally representative sample” can be

expensive ! How can you reduce the cost? By choosing the appropriate level of

representativeness Properly fine tuning the representativeness

and the size of the sample to the purpose of the analysis

2. Sample Structure

30

Reduce sample size & save resources by exploiting the characteristics of the population to design the structure of the sample

How? Within the population, identify

groups of individuals that are similar with respect to the issue measured, and divide the overall sample in groups

Sample Stratification

31

Example: Mongolia – Measuring financial capability

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

Checking accounts per capita

3. Sample Size

32

Save on sample size by tailoring the precision of the estimates to the purpose of the analysis

Decide how precise the estimate should be … the

more precise you want to be the more resources need to be expensed ….

Desired Estimate Level of Precision

Sample Size

60-80% 20% 96

60-70% 10% 384

60-64% 4% 2400

THANK YOU