Why Financial Health

With its focus on outcomes, financial health is arguably a more customer-centric approach, one that offers principles to define impact more holistically, measure it systematically and create it in a sustained and meaningful manner.

Based on evidence, it is an improved approach over financial inclusion as it enables the following:

Defines impact in ways that are more customer-centric:

Financial health accounts for both objective and subjective ways to define impact, embodying the principle that impact can mean different things to different people and is best defined by individuals themselves.

Measures what matters:

While conventional data on the number of registered and active accounts and transaction volumes and values remains relevant, financial health provides a deeper understanding of how financial services impact people’s lives. With a range of perceptive indicators such as ability to come up with liquid funds in a said time period to having money left over after essential expenses, financial health offers a more elaborate approach to measuring impact.

Measuring financial health is not as straightforward as measuring financial inclusion, given the complex nature of people’s lives and the environments they inhabit. As a starting point, it is important to separate the outcomes of financial health (what we’re aiming for) from the drivers of financial health (how we get there). Second, it is important to consider both objective financial conditions such as income, debt to income ratio and net- worth and subjective perceptions such as a person’s confidence in their financial futures and a sense of control and freedom over their finances, in order to get a true picture of people’s financial lives.

What’s in it for the Private Sector, Policymakers and Development Community?

The Private Sector: For financial institutions, fintechs and others working to develop financial solutions for end clients, financial health is a fresh lens with which to examine the end clients’ needs and aspirations, not to mention if interventions are in fact improving their lives. This kind of approach has both a social and commercial benefit, allowing organizations to build more financially healthy customers, and by implication, the financial health of their institutions. Financially healthy customers will save more, borrow responsibly and manage risks better. They could be more financially capable, and possibly use a diverse range of financial products and services that will keep them more than just financially included in the financial system, but rather more financially engaged.

Policymakers and Regulators: For governments and public institutions, financial health is a key objective reflected in their broader mandates to ensure the safety, productivity and welfare of their citizens. A financial health lens is then useful to formulate and enforce financial policies and regulations and drive public initiatives such as responsible financial education, customer protection, decent jobs and social safety mechanisms that improve the financial health of individuals and communities.

Development Community: For the development community that has been focused on impacting customers' lives through financial inclusion or the provision of affordable financial services , the approach of financial health can offer a larger and more comprehensive perspective to measure, create and sustain end-customer impact. A financial health lens is needed to revisit and recast our efforts in financial inclusion, and to understand what products, in what bundles and in what settings contribute to the financial health of end customers.