Finance

MEASURING FINANCIAL LITERACY: THEORY AND INTERNATIONAL PRACTICE

Arthur POKRIKYAN

Summary

The importance of financial literacy as one of the bases for financial stability and financial inclusion
has been increased tremendously throughout recent years. Many countries started to implement
nationwide policies to increase the level of financial literacy, however there is no consensus
concerning how financial literacy should be measured. During last years, OECD and World Bank
implemented financial literacy assessment studies in different countries based on their own
approach. These studies helped to get internationally comparable data, however due to certain
factors these studies are not sufficient for effective policymaking in terms of policy priority setting,
monitoring of effectiveness and public accountability by the respective authorities of the country. In
this paper, globally applied methodologies for financial literacy measurement have been analyzed
from perspective of policy implications.

Keywords:
Financial capability, financial education, financial inclusion, financial literacy, financial stability

Introduction

The importance of financial literacy has been increased during the last decade. The
developments in financial system led to improved access to basic financial products and services as
well as to the development of new and more sophisticated financial products and services. As a
result, people face new challenges and risks in the process of managing their personal finances.
The recent financial crisis in 2008 brought the importance of financial literacy to a new level.
Even though lack of financial literacy explains only part of the Global Financial Crisis, it is argued
that financially literate people would be much more thoughtful in taking on credit they could not
afford. The knowledge, skills, attitude and behavior incorporated in financial literacy are important
for people to make responsible and informed decisions, manage potential risks and improve their
financial well-being.
During the G20 Presidency meeting in 2012, the importance of financial literacy and
education was highlighted on a global scale. Moreover, improving financial literacy has emerged as
a strategic policy objective that complements governments’ financial inclusion and consumer
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protection agendas. Especially, more attention was paid to the role of National Strategy for
Financial Education (NSFE) as an important policy insight for the improvement of financial literacy
among population. According to the OECD at least 36 countries have established or are in the
process of designing a national strategy for financial education. Moreover, 80 percent of these
countries have used a survey as a diagnostic method to identify the key priorities for their national
strategies (OECD, 2013).
Even though globally there is a consensus related to the importance of financial literacy and
many countries have policies dedicated to this issue, there is not a common generally accepted
approach for measuring the level of financial literacy. During recent years, different countries and
international organizations have elaborated number of methodologies to assess financial literacy.
Among those the Organization for Economic Co-operation and Development (OECD) with its
International Network on Financial Education (INFE) and World Bank (WB) in cooperation with
Russian Trust Fund (RTF) are the major ones (World Bank, 2013). Each of those institutions aimed
at creating a unified approach, which will help to get globally comparable data related to the level
of financial literacy across different countries.
These two approaches were implemented and helped many countries, including Armenia, to
set up a baseline measure concerning the level of financial literacy. However, considering country
specific factors, it is needed to understand, if these methodologies provide relevant set of tools for
financial education policy implementation in terms of effective policy priority setting, monitoring
and evaluation.
Thus, the main objective of this paper is to introduce and compare the main methodologies of
financial literacy measurement and highlight their positive and negative aspects in terms of
helpfulness to policymaking. Particularly, we will focus on the definition of financial literacy, key
components and scoring system of the methodologies developed by OECD and WB.

Financial literacy definition

The concept of financial literacy is relatively new in the academy and its importance in terms
of macroeconomic impact on financial stability and financial inclusion was especially emphasized
during last decade. One of the early pioneers of financial literacy was Jump$tart Coalition for
Personal Financial Literacy, which defined it as “the ability to use knowledge and skills to manage
one’s financial resources effectively for a lifetime of financial security” (2015, p. 1). As you can
notice from the definition, it is mainly focused on financial literacy as a combination of certain

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skills and knowledge. On the other hand, the definition stresses on the role of financial literacy as
key factor for people wellbeing. Similar to this definition, the early definitions of financial literacy
describe it as a set of knowledge and skills. However, the concept of financial literacy has been
changed and advanced throughout these years. Moreover, in mid-2000s UK introduced another
broader concept known as “financial capability”. The latter focuses on not only knowledge and
skills, but also attitude and behavior people should demonstrate in order to be financially capable.
Particularly, Financial Sector Authority (FSA) of UK defined financially capable person as follows:
“Financially capable people are able to make informed financial decisions. They are numerate
and can budget and manage money effectively. They understand how to manage credit and debt.
They are able to assess needs for insurance and protection. They can assess the different risks and
returns involved in different saving and investment options. They have an understanding of the
wider ethical, social, political and environmental dimensions of finances.” (2005, p. 13).
Nowadays the researches, policymakers and international organizations usually use the terms
“financial literacy” and “financial capability” interchangeably and they can be defined differently
depending on the context, where they are used.
Since 2009, OECD implemented different initiatives to measure the financial literacy on a
global scale. In 2010, a pilot study was initiated across 14 different countries including Armenia.
The main objective of the study was measuring the level of financial literacy across these countries
and get globally comparable data. In frame of this research, OECD defined financial literacy as “a
combination of awareness, knowledge, skills, attitude and behavior necessary to make sound
financial decisions and ultimately achieve individual financial wellbeing” (OECD, 2012, p. 14). As
one can notice, this definition incorporates all four components of financial literacy such as
knowledge, skills, attitude, and behavior. In addition, OECD prefers to use the term “financial
literacy”, however this concept can be defined differently depending on the initiative. For example
within the framework of Program for International Student Assessment (PISA) also conducted by
OECD and the subsequent report, OECD (2013, p. 144) provided other definition of financial
literacy:
“Financial literacy is knowledge of financial concepts and risks, and the skills, motivation and
confidence to apply such knowledge and understanding in order to make effective decisions across
a range of financial contexts, to improve the financial well-being of individuals and society, and to
enable participation in economic life”.
Even though presented definitions given by OECD are different, they both lay to the same
main components.

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Russian Trust Fund conducted another major financial literacy measurement initiative in
2012, in collaboration with the World Bank. In frame of these initiative another financial literacy
assessment methodology has been developed, which was used in seven countries, including
Armenia. The main objective of this methodology was to develop an approach that would allow
evaluating the level of financial capability in low and middle-income countries without taking into
account the education and income factors. In this study, World Bank (2013, p. 1) refers to financial
capability as an “internal capacity to act in person’s best financial interest, given socio-economic
environmental conditions. It therefore encompasses the knowledge, attitudes, skills, and behaviors
of consumers with regard to managing their resources and understanding, selecting, and making use
of financial services that fit their needs”. Here as well we see the similar trend of defining financial
literacy, however it is important to mention that in frame of World Bank study the term “financial
capability” was used and “financial literacy” was associated only with financial knowledge.
To sum up, both OECD and World Bank use common approach while defining financial
literacy. However it is important to consider that depending on the context “financial
literacy/capability” can be defined differently to support the general idea of the initiative. In terms
of policymaking, it is also important to give a clear definition of financial literacy and make
distinctions between other related concepts such as financial education.

Financial literacy measurement

To discuss the OECD/INFE approach, it is important to present main principals of financial

literacy measurement methodology. For the measurement of financial literacy, OECD/INFE has
developed a standardized questionnaire, which was discussed with OECD member countries as
well. Mainly questions related to money management, planning and choosing financial services
were used in the questionnaire. In terms of financial literacy measurement, OECD/INFE considered
three main components: Knowledge, Attitude and Behavior. Based on question results related to
these components a separate Knowledge, Attitude and Behavior scores are calculated. Interesting to
notice that even though OECD mentions “skills” separately in the definition of financial literacy,
there is no separate score for this component, and some consistency issues may arise. OECD/INFE
also highlighted the importance of calculating single score of financial literacy based on the sum of
Knowledge, Attitude and Behavior scores.

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For the measurement of financial literacy, OECD/INFE used a universal approach to be able
to get internationally comparable data as a primary objective. As a result, OECD/INFE approach
may not fully reflect the specific characteristics of a country and priorities of policymaker’s in the
field of financial education. As we already mentioned one of the primary objectives of OECD/INFE
approach is the comparison of different countries in terms of financial literacy. For this reason, the
questionnaire used during the surveys was also developed according to universal standards and may
not include some important policy related or country-specific questions.
On the other hand, some questions used by OECD/INFE in different countries may lead to
bias due to cultural differences. Thus, in order to elaborate and implement national strategy of
financial education efficiently, it is important to consider policy related and country-specific aspects
of financial literacy. Though countries, which used this approach, could add some additional
questions to the survey questionnaire, this is limited and may not cover the mentioned issue.
In addition, the thematic areas included in the questionnaire are limited as well, and do not
include financial literacy related topics such as personal rights protection. The latter is important
topics as in practice many people are not aware of their rights and responsibilities while using
financial services.
As mentioned before, according to OECD/INFE approach there is not any separation between
“Knowledge” and “Skill” components of financial literacy, which makes it difficult to understand
needs of target groups more specifically and implement a targeted policy as well as evaluate its
efficiency in regard of these components. In order to design and implement financial education
related projects more efficiently it is important fully understanding the needs of target groups. For
example, usually people may have theoretical knowledge about economy as a whole, but are not
able to project its effects on the management of personal finances. It is important to separate these
components for policymakers to be able to see the cumulative result of financial education related
initiatives. Unlike OECD, Financial Services Authority (FSA) separated “Knowledge” and “Skill”
components of financial literacy during the exploratory study in UK (FSA, 2005). World Bank also
used the separated approach.
Calculating certain scores for thematic dimensions of financial literacy is important in terms
of its assessment, but the OECD/INFE approach does not contain such a set of tools. The financial
knowledge, behavior and attitude scores calculated in accordance with OECD/INFE methodology
do not allow the financial education policymakers to comprehensively identify the needs of the
population, make clear targeting for and measure the effectiveness of the financial education policy.

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The OECD/INFE approach underestimates the role of the “attitude” component in the context
of financial literacy measurement. The overall financial literacy score as provided for by
OECD/INFE is calculated using the amount of the knowledge, attitude and behavior scores and may
take any value in the range 1 to 22. The financial knowledge and behavior scores have greater
weight in the overall score calculation, and the financial attitude is, therefore, less important
according to the OECD/INFE approach. Although forming an appropriate behavior is more
important in the financial education strategy point of view, we should not underestimate the
remaining components of financial literacy. Specifically, a negative attitude can be a serious
obstacle to a successful and effective financial education projects. For example, in Armenia after
the collapse of the Soviet Union, many people lost their deposits held with Soviet banks, which
resulted in citizens having built little trust in the banking system. As a result, implementing
financial education programs become less effective for people who demonstrate similar attitude.
Moreover, there is not any specific study, which shows the importance of financial literacy
components in terms of their impact of financial literacy.
In case of World Bank, the approach to measure financial literacy was different. Here at the
beginning focus groups were used to identify main manifestations of financially capable people in
relation to knowledge, behaviors, skills and attitudes, which were then grouped into four major
thematic dimensions such as managing money, planning ahead, making choices and getting help.
As a result, the financial literacy assessment questionnaire included questions relating to the main
pattern of financial literacy reflecting these thematic areas. The RTF/WB approach was used to
identify 12 scores in four major thematic dimensions of financial literacy.
In case of this approach as well, some challenges may arise in terms of policymaking.
Thematic dimensions of financial literacy pointed out by RTF/WB are general in nature and may
not reflect the priorities set by domestic policymakers in financial education. As told earlier, the
RTF/WB Financial literacy Assessment questionnaire was based on the feedback from the focus
groups. However, the information may not entirely cover the priorities set by policymakers in
financial education, so questions that are essential to the policy may have stayed out of the
questionnaire.
The RTF/WB approach to financial literacy assessment does not take into account such
factors as education and income level. The financial literacy assessment questionnaire includes
questions, which are mostly neutral with regard to education and income levels. Whereas, reviewing
different factors, including the effect of education and income levels on financial literacy, and
considering peculiarities of the target groups, is important in terms of developing effective

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education programs. Moreover, the RTF/WB approach considers calculating various financial
literacy scores only by thematic dimension, which does not enable financial education policymakers
to fully identify the needs of population and evaluate the effectiveness of the financial education
strategy. The aforementioned 12 scores do not reflect the financial literacy components –
knowledge, skills, attitude and behavior. It enables to understand the financial literacy only in four
major thematic fields. Moreover, the scoring model is not simple enough in terms of public
accountability, so the financial education policymakers, therefore, may face difficulty in describing
the impact of their programs to the public.
To sum up, the RTF/WB methodology also does not allow policymakers to develop and
implement an effective and targeted NSFE. The comparison table of discussed methodologies is
presented below.

Conclusion

The role of financial literacy has been especially highlighted in terms of financial decisions of
individuals related to savings, retirement planning and household wealth (Lusardi, 2008b; Rooij,
Lusardi, & Alessie, 2011), choice of financial services (Lusardi, 2008a) and borrowing (Lusardi &
Tufano, 2009). The relevance to study the impact of financial literacy on different economic aspects
such as financial decision-making thereby financial stability has been emphasized after Global
Financial Crisis. Thus, in order to be able to develop and implement an effective financial education
policy the policymakers need very comprehensive data related to the level of financial literacy in
the country and people behavior in terms of decision-making.
As discussed before both approaches of financial literacy measurement developed by OECD
and World Bank contain some challenges, which impact policymaking process. This is why, there is
a need to develop more comprehensive tool for financial literacy measurement, which will allow:
• Policy makers to ensure proper policy priority setting and multilaterally monitoring
the effectiveness of policies dedicated to financial education,
• FE project implementers to easily map the existing financial literacy issues across
different target groups, thematic areas and financial capability components
(knowledge, skills, attitude, behavior),
• Public to monitor the progress and hold accountability of policymakers in a simple
manner.

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In order to ensure that above mentioned points happen, the financial literacy measurement
methodology should be consistent with the methodologies discussed in this research, as no matter
the challenges, the existing approaches have created a strong base for financial literacy
measurement. In addition, it should be designed in a way to fully reflect the domestic characteristics
and priorities established by the policymakers, allow flexibility and thus international comparison
between different countries, use simple set of indicators for both financial literacy components and
thematic areas. The latter will allow determining the weak and strong aspects of financial literacy in
the country and based on further analysis develop more targeted and effective financial education
initiatives.

References

FSA. (2005). Measuring Financial Capability: An Exploratory Study. Financial Services Authority,
London.
Jump$tart Coalition for Personal Financial Literacy. (2015). National Standards in K-12 Personal
Finance Education. Washington.
OECD. (2012). Measuring Financial Literacy: Results of the OECD / International Network on
Financial Education (INFE) Pilot Study. OECD Working Papers on Finance, Insurance and
Private Pensions No. 15.
OECD. (2013). Advancing National Strategies for Financial Education. A joint publication by
Russia’s G20 Presidency and the OECD.
OECD. (2013). PISA 2012 Assessment and Analytical Framework: Mathematics, Reading, Science,
Problem Solving and Financial Literacy. OECD Publishing.
World Bank. (2013, August). Financial Capability Surveys Around the World: Why Financial
Capability is important and how surveys can help. Retrieved from www.worldbank.org/fpd
Lusardi, A. (2008a). Financial Literacy: An Essential Tool for Informed Consumer Choice?
(Working Paper No. 14084). National Bureau of Economic Research. Retrieved from
http://www.nber.org/papers/w14084
Lusardi, A. (2008b). Household Saving Behavior: The Role of Financial Literacy, Information, and
Financial Education Programs (Working Paper No. 13824). National Bureau of Economic
Research. Retrieved from http://www.nber.org/papers/w13824

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Lusardi, A., & Tufano, P. (2009). Debt literacy, financial experiences, and overindebtedness.
National Bureau of Economic Research. Retrieved from
http://www.nber.org/papers/w14808
Rooij, M. van, Lusardi, A., & Alessie, R. J. (2011). Financial Literacy, Retirement Planning, and
Household Wealth (Working Paper No. 17339). National Bureau of Economic Research.
Retrieved from http://www.nber.org/papers/w17339

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ՖԻՆԱՆՍԱԿԱՆ ՈՒՆԱԿՈՒԹՅՈՒՆՆԵՐԻ ԳՆԱՀԱՏՈՒՄ. ՏԵՍՈՒԹՅՈՒՆ ԵՎ

ՄԻՋԱԶԳԱՅԻՆ ՓՈՐՁ
Արթուր Լիպարիտի ՓՈՔՐԻԿՅԱՆ

Համառոտագիր

Ֆինանսական ունակությունների կարևորությունը՝ որպես ֆինանսական կայունության

և ֆինանսական ներգրավվածության կարևոր հիմնաքարերից մեկը, էականորեն աճել է
վերջին տարիների ընթացքում: Շատ երկրներ սկսել են մշակել և իրականացնել
համազգային ռազմավարություն՝ ֆինանսական ունակությունների մակարդակը
բարձրացնելու համար, սակայն դեռևս բացակայում է միջազգայնորեն ընդունված
մոտեցում, թե ինչպես պետք է արդյունավետորեն գնահատել ֆինանսական
ունակությունները: Վերջին տարիների ընթացքում ՏՀԶԿ-ն և Համաշխարհային բանկը
իրականացրել են ֆինանսական ունակությունների գնահատման հետազոտություններ
տարբեր երկրներում իրենց կողմից մշակված մեթոդաբանությունների հիման վրա: Այս
հետազոտությունները օգնել են ձեռբ բերել միջազգայնորեն համեմատելի տվյալներ,
ինչը սակայն, հաշվի առնելով որոշ առանձնահատկություններ, բավարար չէ
արդյունավետ ազգային քաղաքականություն մշակելու համար՝ քաղաքականության
առաջնահերթություններ, համապատասխան մարմինների կողմից վերահսկում,
գնահատում և հանրային հաշվետվողականություն ապահովելու տեսանկյունից: Այս
հոդվածը նպատակ է հետապնդում ուսումնասիրել և վերլուծել միջազգայնորեն
կիրառված այս մեթոդաբանությունները՝ ֆինանսական ունակությունների մակարդակի
բարձրացմանն ուղղված ազգային քաղաքականության շրջանակում կիրառելու
տեսնակյունից:

Առանցքային հասկացություններ՝ Ֆինանսական ունակություններ, ֆինանսական

կրթում, ֆինանսական ներգրավվածություն, ֆինանսական գրագիտություն,
ֆինանսական կայունություն

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ОЦЕНКА ФИНАНСОВОЙ ГРАМОТНОСТИ: ТЕОРИЯ И МЕЖДУНАРОДНАЯ ПРАКТИКА

Артур Липаритович ПОКРИКЯН
Резюме

Важность финансовой грамотности как одной из основ финансовой стабильности и

финансовой вовлеченности значительно возросла на протяжении последних лет. Многие
страны начали осуществление общенациональной политики с целью повышения уровня
финансовой грамотности, однако нет единого мнения относительно метод измерения
финансовой грамотности. В последние годы Всемирный банк и ОЭСР провели
исследования по оценке финансовой грамотности в разных странах на основе
методологий разработанных ими. Эти исследования помогли получить международно
сопоставимые данные, однако из-за некоторых факторов обе методологии недостаточны
для выработки эффективной политики с точки зрения приоритетности проводимой
политики, мониторинга эффективности и подотчетности соответствующими органами
страны перед обществом. Данная статья имеет цель исследовать и анализировать эти
международные методологии по оценке финансовой грамотности с точки зрения
сопоставимости с общенациональной политикой.

Ключевые слова: финансовые возможности, финансовая грамотность, финансовое

образование, финансовая вовлеченность, финансовая стабильность.

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