Financial literacy to financial capability: Building financial stability and security

Abstract

An increasingly financialized world requires people to make more complex financial calculations and decisions throughout their lives. This fact has led to appeals for improved financial literacy and financial behaviour. Although optimal household financial decision-making and use of mainstream financial products and services can help, these strategies will fall short of building financial stability and security, especially in financially vulnerable households. This chapter suggests that society also has an obligation to shape financial products, services, and public policies in ways that benefit those at the bottom of the economic ladder. This notion is embodied in an alternative conceptualization of financial capability. Financial capability is an individual and structural idea that combines people's ability to act with their opportunity to act. From this perspective, financial capability does not reside within the individual, but rather in the relationship between the individual and social institutions. This chapter examines conceptualization of financial capability, its measurement, and growing evidence from developed and less developed economies.