Over the past decade, financial health has emerged as a key outcome metric for gauging the efficacy and effectiveness of financial inclusion strategies. The measurement of financial health is often motivated by the premise that inclusion in formal finance ought to engender positive financial outcomes for the target segments. Good financial health, broadly defined as an individual/household’s ability to meet current needs, plan for the future, and withstand shocks, has steadily come to be regarded as the positive financial outcome that financial inclusion policy should aspire to.
Most approaches to impact measurement in financial inclusion map the determinants of financial health, their influencing factors and their preconditions, with the intent to identify whether positive outcomes fail to materialise or adverse outcomes persist. This is akin to the role of a canary in a coal mine. Just as miners of the 20th century would use canaries to detect the presence of dangerous gases, financial health measurement is deployed to detect early warning signals of distress. The typical approach to financial health measurement, therefore, only paints a general picture of financial health outcomes in the population targeted by financial inclusion efforts. In this paper, we argue that using financial health metrics as a warning signal is useful, but not inherently actionable, since it is difficult to know where the failure has occurred and what appropriate corrective measures may look like.
Our submission in this paper is that impact measurement in financial inclusion, i.e., financial health measurement can, and ought to, play a more diagnostic role in financial inclusion strategy. This is the conceptual departure that the title of the paper describes as the shift ‘from a canary in a coalmine to a thermostat’. The Financial Health Survey (FHS) proposes, quite differently from most other financial health measurement efforts, that such measurement should be able to detect the current state of financial health and indicate potential corrective mechanisms. In a sense, the FHS acts like a thermostat. Similar to how a thermostat indicates whether the room is hot or cold and regulates the temperature by activating heating or cooling systems, the FHS takes stock of customer financial health and provides some indication regarding what to do about it. The FHS is built upon the “-Input-Output-Outcome-Context-” (-I-O-O-C-) model, which is an alternate theory of change (ToC) that can explain financial health outcomes. It enables cross-referential readings of data on input (access), output (usage), and outcome (financial health), mediated and coloured by measurable contextual factors. This allows us to identify where the pathway from access to usage to impact may be breaking down and failing to contribute to positive financial health for specific customer cohorts. Thus, the true value of the FHS lies in its ability to segment financial health outcomes by various contextual factors. Particularly, our approach is cognizant that financial health is a composite of a complex set of factors, only some of which are readily amenable to interventions by policymakers or Financial Service Providers (FSPs). FHS directs focus to aspects of context that are within the sphere of influence of FSPs and policymakers, as laid out in Section 2. This narrowing of focus paradoxically expands the field of possibility for stakeholders in financial inclusion, by giving them truly actionable insights that help them intervene more meaningfully in those areas where they are able to create the best impact. That is, by measuring and reading impact alongside financial product access, their usage and the context of target users, the FHS can offer operationally feasible insights for both business and policy strategy.
Overall, the FHS offers policymakers and financial service providers (FSPs) some degree of adaptive capacity to incrementally orient themselves to customers’ actual experiences of financial products and policies. It contributes towards much-needed alignment between the financial health of low-income customers and the financial system at large.
This paper is structured as follows. Section 2 provides a functional representation of financial health and clarifies the boundaries and parameters that constitute it. Section 3 summarises the theories of change (ToCs) underlying other approaches to impact measurement in financial inclusion and identifies their shortcomings. Section 4 describes the conceptual model underlying the FHS, titled the Input-Output-Outcome-Context (-I-O-O-C-) model and explains how it improves upon the existing approaches described in the preceding section. Section 5 outlines some key characteristics of the -I-O-O-C- model, followed by an explanation of the FHS’ diagnostic capability in Section 6. Section 7 provides concluding remarks and a brief summary of the ideas presented in the paper.
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