> Posted by Microfinance Opportunities (MFO)

At the FI2020 conference in London this week speakers and participants used the term “financial capability.” But there is no one, clear definition of the term, which begs the question: what is financial capability?

At MFO our focus is on financial capability development, so we think it is important to have a definition that can be translated into practical action on the ground, while also being consistent with the research literature on capability development, and actually making sense to other stakeholders who work on this issue as well.¹ This blog is MFO’s (humble) contribution to the effort to establish a working definition. In our minds, it is the following:

Financial capability is the combination of attitude, knowledge, skills, and self-efficacy needed to make and exercise money management decisions that best fit the circumstances of one’s life, within an enabling environment that includes, but is not limited to, access to appropriate financial services.

Put more succinctly: Financial capability is not just what you know, but whether you have the willingness, confidence, and opportunity to act.

This definition provides more depth and breadth than the familiar, traditional idea of financial literacy, with its more narrow focus on knowledge acquisition and skill development.² Of course, to be capable, a person needs to know about beneficial money management practices, such as tracking one’s money or saving. In addition, people need the skills to be able to put that knowledge into practice, such as recording income and expenses in two columns to help track money, or keeping a marked envelope where she saves money for a particular purpose.

Nevertheless, while knowledge acquisition and skills development play an important role in building the capacity of a person to act, they fall short in explaining the strength of intention or motivation necessary to act, and the potential barriers to action. With respect to financial capability, attitude and self-efficacy are key psycho-social concepts that broadly refer to a person’s positive or negative evaluation of the value of managing money proactively (attitude) and to their belief or confidence in their ability to actually do so (self-efficacy).³

Our definition of financial capability also speaks to the circumstances in which a person lives. The phrase “decisions that best fit the circumstances of one’s life” reflects the fact that people in different societies and economies, and at different life stages, face very different money management challenges. One person’s decision may be very different, and equally appropriate, than another person’s decision given their particular circumstances. They may both be financially capable, but exercise their capability in differing ways.

This is reinforced by the last part of the definition, which focuses on the enabling environment: the formal and informal economic, political, social, and physical contexts in which people live.4 Some environments are more enabling than others and so affect the extent to which someone can be financially capable. They offer different opportunities to act. Furthermore, a person’s intention or motivation to act is influenced by how she thinks others expect her to act and her past experience of social pressure to act in a particular way. It is also influenced by their evaluation of the external barriers or obstacles to active money management.

In sum, MFO’s definition states that a financially capable person is someone who:

  1. Sees the value in managing money proactively (attitude);
  2. Knows what is needed to make appropriate money management decisions and act on them;
  3. Has the skills to turn that knowledge into practice;
  4. Believes and has confidence that she or he is able to act on that desire (self-efficacy); and
  5. Has access to an environment that enables them to act on that desire.

Given this definition of financial capability, two policy conclusions follow. First, financial education cannot “do it all” – it cannot build financial capabilities in isolation nor guarantee behavior change. MFO defines financial education in the following way:

Financial education equips people with knowledge and skills, and strengthens their attitude and belief in themselves, to make and exercise informed, confident and timely money management decisions.

In other words, financial education can affect attitude, knowledge, skills, and self-efficacy. But it cannot affect the enabling environment, at least not directly. So those who use financial education must work hand-in-hand with those whose goal is to improve the enabling environment, whether these are financial service providers, savings group promoters, activists trying to change the “rules of the game,” regulators who set those rules, or other stakeholders within a particular economy and society.

Second, our definition of financial capability suggests that initiatives such as financial education and financial inclusion are means to ends. The goal is financial capability development. It is not enough to provide people with new knowledge about money management and financial services. Those providing financial education should do so in ways that change how a person behaves. In addition, access to formal and semi-formal financial systems is not enough, and may even be counter-productive. What is needed is the creation of an enabling environment that supports the appropriate money management decisions and actions of marginalized and excluded people.

Microfinance Opportunities develops ideas and solutions that help the financial community better serve the low-income consumer. Our commitment as a nonprofit organization is to develop a deep understanding of the financial realities and needs of low-income households in the developing world.

This blog is a cooperative effort of a number of senior staff at MFO: Guy Stuart, Executive Director, Maria Jaramillo, Senior Manager, Content Strategy and Business Development, and Julie Lee and Robyn Robertson, Senior Technical Advisers, Financial Education. In addition, we have benefited from conversations with MFO staff present and past: Craig Tower, Senior Research Officer, Bailey Butzberger, and Amna Kanoun. Finally, this blog benefited from conversations with Monique Cohen, President Emeritus of MFO. MFO also wishes to thank Citi Foundation for its on-going support for MFO’s strategic planning, of which this blog post is a part.

Have you read?

Four Insights into Youth Financial Capability

Clearing the Path to Financial Capability in Latin America

Leveraging Religions for Financial Capability


[1] A previous blog by Guy Stuart, Executive Director of MFO, discussed why we now talk about financial capability rather than just financial literacy.

[2] As Monique Cohen and Candace Nelson note: “Definitions… [financial literacy] vary by source and context. Most originate in developed countries where financial literacy has received far more attention than in the developing world. However, the common foundation is the importance of having the skills and knowledge to make informed financial decisions. See p. 2 in Cohen, M. and C. Nelson (2011). “Financial Literacy: A Step for Clients Towards Financial Inclusion,” Microfinance Opportunities Working Paper prepared for the Microcredit Summit Campaign.

[3] When applied to behavior, which is key in money management, attitude “refers to the degree to which a person has a favorable or unfavorable evaluation or appraisal of the behavior in question.” See Ajzen, I. (1991). “The Theory of Planned Behavior.” Organizational Behavior and Human Decision Making Processes. Vol. 50, p. 188.

Self-efficacy “is the measure of the belief in one’s own ability to complete tasks and reach goals.” See Ormrod, J. E. (2006). Educational psychology: Developing learners (5th ed.). Upper Saddle River, N.J.: Pearson/Merrill Prentice Hall.

[4] This idea was introduced into the discussion of financial capability by Elaine Kempson. See, for example, p. 2 in Kempson, E. (2005) “Financial Capability: An Exploratory Study.” Prepared for the Financial Services Authority, U.K. by the Personal Finance Research Center, University of Bristol. But it is also highly consistent with Amartya Sen’s idea of capability more generally.