in the 21st Century

Financial Capability and Financial Inclusion 255
2 Financial capability: An evolving concept in need
of measurement
The measurement of financial literacy started out with questions to test
understanding of compound interest rates, inflation and risk diversification
in developed country contexts (Lusardi, 2008), and it has been found to be
strongly associated with engagement with financial products and services such
as retirement planning and investment choices. Even within these contexts, the
definition of financial literacy lacks consensus (Huston, 2010; Remund, 2010),
but it has mainly been associated with financial knowledge in order to address
policy-related concerns regarding consumers’ interaction with the financial
sector that have risen over the last decade. As research has developed and,
in particular, as evidence of the impact of financial education programmes
has demonstrated relatively little impact of financial education on financial
literacy itself (Mandell and Klein, 2009), the complexity of the relationship
between knowledge and behaviour has also become more evident, which has
brought about a shift to a wider conception of financial capability to capture
this broader perspective.
Measures of financial literacy based on the understanding of financial concepts
have been adapted and expanded to address developing country contexts
(Cole et al., 2009; Carpena et al., 2011) in order to examine the relationship
between knowledge and attitudes and behaviour towards financial services.
While financial literacy is correlated to having a bank account in developing
countries (Xu and Zia, 2012), its relationship with financial service use is more
tenuous in a context where such use is low, and financial capability appears
of greater relevance when embracing a wider conception of effective money
and resource management.
Research in both developed and developing countries has shown that people
talk about financial capability as comprising behaviours, attitudes, psychological
traits and motivations (Kempson et al., 2005; Kempson et al., 2013), and this
further demonstrates that the role of knowledge is not central in people’s
decision-making process. Financial capability has been found to be a composite
of different skills covering areas such as day-to-day money management,
planning for the future, choosing products and being informed (Atkinson
et al., 2007). In their exploratory study, Kempson et al. (2005) found that
knowledge and understanding, as well as skills and the personal characteristics
of confidence and attitudes, affect individuals’ levels of financial capability. The
concept of financial capability thus appears to be multidimensional, both in
terms of what behaviour it relates to and its determinants (Collins et al., 2009b;