Financial Capability: What Is It, and How Can It Be Created?

Note: The final version of this working paper appears as a chapter in Sherraden, M. S. (2013). Building blocks of financial capability. In J. M. Birkenmaier, M. S. Sherraden, & J. C. Curley, J. (Eds.) Financial Capability and Asset Building: Research, Education, Policy, and Practice (pp. 1–43). New York & Oxford: Oxford University Press.
Financial literacy has been proposed widely as an effective approach to preparing people to manage their finances. This paper proposes an alternative concept, financial capability. Financial capability includes both the ability to act (knowledge, skills, confidence, and motivation) and the opportunity to act (through access to quality financial products and services). Low-income households, who face lack of financial knowledge and institutional barriers to participation in quality financial services, require both financial literacy and financial inclusion. The paper begins by addressing how people acquire financial knowledge and skills through financial socialization, financial education and guidance, and financial advice and counseling. Next, it addresses how financial inclusion can be achieved through financial services that are accessible, affordable, financially attractive, easy to use, secure, and reliable. Then it illustrates how financial knowledge and skills and financial inclusion are linked. The paper concludes with a call for more research.

Project: Financial Capability and Asset Building