Financial Capability and Asset Building with Diverse Populations

Improving Financial Well-being in Families and Communities

Julie Birkenmaier, Margaret Sherraden, Jodi Jacobson Frey, Christine Callahan, Anna Maria Santiago

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9780815385141
• eBook ISBN: 9781351202299
• Edition: 1
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

Global economic recovery in the aftermath of the Great Recession has not been experienced equally: while the share of wealth owned by the richest 3% has grown, the share owned by the poorest 90% continues to decline, as reported by Oxfam in 2016. This wealth divide disproportionately affects racial and ethnic minority communities.

This book underscores the importance of financial capability and asset building (FCAB) practice, policy and research during a period when vulnerable populations face increasingly difficult economic and financial realities. At the same time, retrenchment and privatization of government-sponsored social services have eroded the safety net available for families experiencing poverty or near-poverty conditions. The proliferation of products and services available from both formal and informal financial institutions highlights the need to promote FCAB to avoid and/or recover from financial difficulties, crises and poverty. The contributors to this volume disseminate findings from interventions designed to increase financial knowledge, financial management and financial access across several vulnerable populations, including immigrant communities. Further, they demonstrate the need for culturally sensitive FCAB service delivery, considering opportunities and barriers posed by past and current life situations, experiences and environments experienced by different populations. The book is aimed at policymakers, researchers and practitioners who assist financially vulnerable people. This book was originally published as a special issue of the Journal of Community Practice.

Building Financial Knowledge Is Not Enough: Financial Self-Efficacy as a Mediator in the Financial Capability of Low-Income Families

David W. Rothwell, Mohammad N. Khan, and Katrina Cherney

ABSTRACT

Policymakers in many countries have taken an interest in population-level financial capability. Limited empirical work has examined how constructs that makeup financial capability relate and how they function for individuals with low incomes. Using a national sample of low-income Canadians, we investigate relationships between financial knowledge, financial self-efficacy, and savings outcomes. Overall, we find that financial self-efficacy fully mediated the relationship between objective financial knowledge and postsecondary-education saving. The association between objective financial knowledge and retirement saving and emergency saving passed through financial self-efficacy. Efforts to promote financial capability need to focus on more than objective financial knowledge.

Social work—with its longstanding commitment to reducing poverty, in-depth understanding of the multilevel and systems affecting marginalized communities, and tradition of applied social research—is leading the scientific development and application of the theory of financial capability. Moreover, financial capability and asset building for all has been identified by the American Academy of Social Work and Social Welfare as one of the 12 grand challenges for social work in the 21st century (Sherraden et al., 2015). Financial capability consists of both the internal capabilities, such as knowledge, skills and attitudes, and external conditions, such as inclusive financial institutions and beneficial financial products and services. Together, internal capabilities and external conditions allow individuals to make informed financial decisions and perform desirable financial behaviors that contribute to their financial wellbeing (Sherraden, 2013). Underlying the theory is an assumption that individuals have varying levels of financial capability. Furthermore, to increase economic security on a broad scale, social interventions must improve both internal capabilities and external conditions.

To date, the relationships between the internal constructs that makeup financial capability theory have not been tested extensively and certainly not in a low-income sample. We address this gap by testing the relationships from a nationally representative survey of Canadians. The purpose of this article is to improve the understanding of how the internal constructs relate to each other and savings outcomes. We focus on financial self-efficacy as an understudied dimension of these internal abilities. The idea of self-efficacy, originally developed by Albert Bandura, suggests that all people seek to gain a sense of control over the events shaping their lives (Bandura, 1995). In a time of growing economic inequality and increasing complexity of financial choices, the ability to exercise command and control over financial resources has never been more complex. By refining the understanding of the mechanisms by which knowledge relates to behavior via self-efficacy, we help identify when and how community practice and economic development interventions might be more effective.

Background: financial capability and low-income saving

Policymakers in many countries are now interested in the concept of financial capability. The idea of financial capability originated from consumer finance and financial security scholars in the United Kingdom, led by Kempson and colleagues, who sought to understand the process of financial decision making. From the perspective of a rational consumer model, which implies that informed consumers make better financial decisions, Kempson, Collard, and Moore (2005) defined financial capability as the function of three interrelated components: financial knowledge, skills, and attitude. Later, emphasizing self-efficacy, De Meza, Irlenbusch, and Reyniers (2008) indicated that financial capability is determined more by individuals’ psychological attributes, rather than simple possession of informational knowledge and skills. Informed by Sen’s work on capabilities (Sen, 1999), social work scholars developed a model of financial capability in which they argued that people are financially capable when they possess “knowledge and competencies, ability to act on that knowledge, and opportunity to act” (Johnson & Sherraden, 2007, p. 122). Governments in Australia, Canada, Japan, the United States, and the United Kingdom now have state-led efforts to study and promote financial capability. Further, the Organization for Economic Co-operation and Development has initiated a cross-country effort to understand financial capability.

Several efforts are attempting to understand financial capability at the national level. However, there is considerable need to develop knowledge for how this model applies specifically to low-income groups. Studies and reports of financial capability show an expected income gradient for financial capability (Atkinson, McKay, Collard, & Kempson, 2007; Applied Research and Consulting LLC, 2009; Taylor, 2011). For example, the first national US study found that 83% of persons with over $75,000 in annual household income rated their financial knowledge high, compared to 56% of persons with household income less than $25,000 (Applied Research and Consulting LLC, 2009). A similar gradient was observed in a more objective five question assessment of money knowledge (average correct answers for low income group was 2.02 compared to 3.42 in the upper income group). Additional studies have suggested that financial knowledge and financial inclusion are associated with savings among low-income people (Huang, Nam, Sherraden, & Clancy, 2015; Jamison, Karlan, & Zinman, 2014). We are not aware of any national studies that examine the financial capability of only those at the bottom of the income distribution.

Conceptual framework

Our study is informed by the financial capability framework proposed by Sherraden (2013). In this framework, a key distinction is made between an individual’s internal capabilities and external conditions, determined by the macro-economic environment (Sherraden, 2013). As mentioned, the primary purpose of this study is to examine relationships between the internal constructs that makeup financial capability and the behavioral outcome of saving.

A person’s knowledge about financial systems and money markets is a necessary component of financial capability. Financial knowledge—an internal construct—is defined as an individual’s understanding of both micro and macro economics and finance (Lusardi & Mitchell, 2014). More specifically, financial knowledge is comprised of (a) numeracy, (b) understanding inflation, and (c) understanding risk diversification. Previous studies use various terms to capture the idea of objective financial knowledge such as financial knowledge, financial literacy, and actual knowledge (Babiarz & Robb, 2014; Robb & Woodyard, 2011; Xiao, Chen, & Chen, 2014). For clarity, we use the term objective financial knowledge.

Objective financial knowledge—as with other forms of knowledge like reading and math—is measured through an assessment of answers to questions that are scored correct or incorrect (Lusardi & Mitchell, 2014), and is positively correlated with a number of saving and other positive financial behaviors (Hilgert, Hogarth, & Beverly, 2003). For example, a recent experiment showed the probability of holding a children’s savings account was 8.7 percentage points higher for mothers with high levels of objective financial knowledge, compared to low objective financial knowledge (Huang, Nam, & Sherraden, 2013). Interventions to promote objective financial knowledge normally include an array of topics such as fundamentals of the financial system, interest, and credit management and take place in various social work and other settings, e.g., educational programs in high schools, community-based seminars and workshops.

A sense of control and confidence in financial matters is also an essential internal component of financial capability. We refer to this as financial self-efficacy. The construct of financial self-efficacy is a subjective indicator of financial capability, and is rooted in the original theoretical developments of self-efficacy (Bandura, 1982). Financial self-efficacy is understood as an individual’s attitudes, beliefs, and confidence in making financial decisions (Kempson et al., 2005). Importantly, in conceptualization and measurement, financial self-efficacy is distinct from objective financial knowledge. People may be highly confident in their abil...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Citation Information
• Notes on Contributors
• Introduction – Financial Capability and Asset Building: Building Evidence for Community Practice
• 1 Building Financial Knowledge Is Not Enough: Financial Self-Efficacy as a Mediator in the Financial Capability of Low-Income Families
• 2 Promoting Financial Capability of Incarcerated Women for Community Reentry: A Call to Social Workers
• 3 Toward Culturally Sensitive Financial Education Interventions with Latinos
• 4 From Being Unbanked to Becoming Unbanked or Unbankable: Community Experts Describe Financial Practices of Latinos in East Los Angeles
• 5 Ethnic Differences in Financial Outcomes Among Low-Income Older Asian Immigrants: A Financial Capability Perspective
• 6 Financial Knowledge and Behaviors of Chinese Migrant Workers: An International Perspective on a Financially Vulnerable Population
• Index