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Newsletter Article - Measuring Financial Literacy

Author: Parul Agarwal

The case of little response from the target population towards both the conventional and innovative financial products in rural areas has received a lot of global attention. It has been suggested that low literacy levels and, more importantly, the lack of financial awareness are responsible for this phenomenon. In order to address this issue, numerous financial literacy training programmes have been designed, tested, and implemented using various methods and technological setups. Significant research has also been done to evaluate the effectiveness of these training programmes but their contrasting and inconclusive results are hardly of any use to the policymakers. All this muddled up landscape of financial literacy can be attributed to the lack of a universal definition of the term, making it difficult to tag an individual as “Financially Literate”. Although the need and importance of financial education has been acknowledged globally, there exists no benchmark to measure the success of efforts that are put in to achieve it. 

Each of the implementing agencies that are working in this realm of financial literacy develops the training programme as per its own customized definition of the concept. Some focus on savings and financial planning, others also include numeracy, banking or borrowing practices to the list. Customization is required but it ought to be done as per the actual need of the target community and not according to implementer’s perception about it. Although customization is necessary, it ought to be as per the need of target community and not as per implementer’s perception about financial literacy.  

Clubbing all the assumed essential components together, we attempted to develop a tool to measure perceived financial knowledge & capability and comfort with basic formal financial services (financial literacy) of 397 people across nine states of the country. What follows are the findings from the first part of data collection that was done for the purpose i.e. some findings on the self-reported financial knowledge and capability of people who might not have obtained a formal financial literacy training. Graphs 1.1 and 1.2 summarize these.

As depicted by graph 1.1, people in Maharashtra, Tamil Nadu, Gujarat and Orissa rate their knowledge of ‘credit options in the neighbourhood’ the highest. People in rural Karnataka report that they know very little about insurance, banking products, and credit options available to them and do not know at all about the complex financial terms like equity investment. Overall, people think that they are aware of the credit options available to them. With this information, if an organization were to develop a training programme, it should focus on generating awareness of insurance programs more than that of credit options and banking products.. The programme should be designed in a manner that it focuses more on some aspects in some parts of some states as per the need assessment that can be done this way.

Graph 1.2 shows that people from Tamil Nadu who were interviewed are most confident about their financial capability. Also noted is that there is little confidence regarding unexpected financial shocks, indicating a need for guidance regarding preparing for the future and saving for emergency. Likewise, there should be counselling regarding money management for those not confident about their families’ financial stability.

Given this level of variation, need of the sector is to clearly define financial literacy, at least the goals of such a programme so that it can be designed effectively. After this is done, the onus lies with the implementing agencies to categorize the target community based on the need assessment exercise that they ought to conduct (may be similar to the one mentioned above) and then design and provide the required customized intervention. 


  1. the more we fail in practice the more we theorize or shall I say over theorize...


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