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Studies have examined the correlation between financial inclusion and financial health, and the results are not promising. For example, while financial inclusion in Kenya increased from 75% to 83% between 2016 and 2019, the percentage of adults deemed financially healthy declined from 39% to 22% in the same period. Gallup’s study indicated that there is no clear relationship between account ownership and financial security in low- and middle-income countries [1]. Financial health as an approach offers a way forward and below offers a brief overview on how:
Financial health offers a more comprehensive perspective to define, create and measure impact. It's is an improved approach, considering the tools for poverty reduction and economic welfare, for various reasons. [1]
Financial health is a layered subject, and a distinction must be made between the outcomes of financial health and the drivers of those outcomes. Solving complex problems requires probing, sensing, and then responding.
The measurement of financial health offers an alternative to the binary measure of financial inclusion, which allows intermediate outcomes to a realization of the SDGs - a policy priority for governments across the world. [1]
Governments understand that the financial health of individuals impacts their capacity to be productive citizens. Yet the practice of creating policies that target financial health is still nascent and not being implemented. [1]
Financial providers can continue to achieve greater growth and maximize long term shareholder value by putting customers’ financial health at the center of the journey. [1]
Financial inclusion sets the stage for financial health. Enabling the use of financial services drives financial health. However, inclusion is not the end of the journey. Financial health goes beyond inclusion, towards financial freedom. Financial health offers a more comprehensive perspective to define, create and measure impact. [1]
Financial health is more layered and complex than the relatively straightforward concept of financial inclusion. In this section, the UNCDF working paper does a great job in unpacking what we mean by financial health and identify its parameters. The following two questions in particular help explain the concept of financial health in more concrete terms: (1) what are financial health outcomes? and (2) what are the drivers (or determinants) of financial health outcomes?
The outcomes of financial health are often conflated with its determinants. We must disentangle these components to be clear about what we are aiming for (outcomes) and how we get there (determinants). UNCDF uses an hourglass framework to explain financial health determinants and their relationship to financial health outcomes. Determinants are classified as environmental, human and individual, which in various combinations lead to financial health outcomes.
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