Testing the Financial Capability Framework: Findings from YouthSave-Impact Study Kenya

Testing the Financial Capability Framework: Findings from YouthSave-Impact Study Kenya Abstract In sub-Saharan Africa (SSA), youths (23 years or younger)—who account for almost half the population—are particularly vulnerable to poverty and exclusion from financial markets and intermediaries. In addition, a significant factor in the financial instability of the region appears to be the economic functioning of its youths. In recent years, social work interventions throughout the region have focused on investing in the economic functioning of youths. This study looked at baseline data from one such intervention in Kenya (N = 3,965), using the financial capabilities framework to evaluate the factors related to youths’ saving behaviors. Authors investigated the association between youths’ financial literacy (that is, knowledge, socialization), financial access, and financial capabilities and savings behaviors. Results indicate that adolescents who rate themselves as financially literate and those living in close proximity to a bank are more likely to report higher capabilities. Furthermore, financial capabilities in turn partially mediate the relationship between financial literacy, access, and savings. Overall, the study’s findings point to the positive effect of enhanced financial capabilities among youths and offer support for asset-based interventions targeting youths in SSA. Worldwide, there are 1.8 billion people below the age of 24 (United Nations Population Fund [UNFPA], 2014). In at least 15 sub-Saharan African (SSA) nations, youths account for almost half of the population (UNFPA, 2014). Kenya alone is home to 7.9 million youths ages 15 to 24 years, making up 20.6 percent of Kenya’s total population (Kenya National Bureau of Statistics, 2010, 2012). In Kenya, the highest rates of unemployment are among 18- to 20-year-olds (Zepeda, Leigh, Ndirangu, Omollo, & Wainaina, 2013). With the unemployment rate for those ages 15 to 25 ranging between 20 percent and 35 percent, a large portion of Kenya’s financial instability appears to be influenced by the economic functioning of its youths (Zepeda et al., 2013). In recognition of the critical role youths play in the region’s economic development, financial (Paaskesen & Angelow, 2015) and socioeconomic interventions (Kagotho, Nabunya, Ssewamala, & Ilic, 2013) tailored to enhance this population’s financial capabilities have been proposed. Randomized control trials in Uganda (Jennings, Ssewamala, & Nabunya, 2016), large-scale demonstration studies in the United States (Beverly, Clancy, & Sherraden, 2016), and publicly funded programs in Asia (Loke & Sherraden, 2009) aimed at strengthening the economic functioning of children and youths, continue to show promising results. These innovative socioeconomic interventions have established a strong link between enhanced youth financial capabilities and related economic, social, educational, and behavioral health outcomes. For example, intervention studies indicate that providing youths with a combination of financial information and access to financial intermediaries positively affects not only the financial well-being of these youths and their families (Nam, Kim, Clancy, Zager, & Sherraden, 2013), but also their physical and mental health outcomes (Karimli & Ssewamala, 2015), HIV risk-taking behavior (Ssewamala, Han, Neilands, Ismayilova, & Sperber, 2010), and educational aspirations (Curley, Ssewamala, & Han, 2010). Financial Capabilities Financial capabilities are defined as the ability to act in one’s economic best interests, actions that, in turn, bolster the economic well-being of the actors (Sherraden, Birkenmaier, Sherraden, & Curley, 2013). Financial literacy and access to financial intermediaries engender capabilities. Financial Literacy Financial literacy—a component of financial capability—is defined as the “ability and confidence to effectively apply knowledge related to personal finance” (Huston, 2010, p. 307). SSA has been shown to have low rates of financial literacy (Atkinson & Messy, 2012; Shambare & Rugimbana, 2012). Financial literacy is transmitted through several means, with the family unit being a central source of financial concepts and behaviors (Chowa & Despard, 2014; Kagotho, Nabunya, Ssewamala, Mwangi, & Njenga, 2017; van Campenhout, 2015). Children observe and begin to absorb money management skills and strategies at an early age. Qualitative studies with youths from the region underscore the role that parents play in conveying financial information and offering other supports (Zou et al., 2015). Financial socialization—defined as the intentional and nonintentional transmission of financial concepts (C. F. Bowen, 2002)—through family networks has been linked to good financial practices throughout the life course (Kim & Chatterjee, 2013). When children learn positive behaviors by engaging in practices such as budgeting, credit management, and asset leveraging, they are able to acquire the tools needed to engage in competent money management. Financial Inclusion Financial inclusion—the second element in financial capability—is defined as the availability, affordability, and use of formal financial services such as savings and deposit accounts, payment services, credit, and insurance (World Bank, 2014). The United Nations (UN) General Assembly highlights financial inclusion as a key goal in the UN’s Sustainable Development Agenda (UN Secretary-General’s Special Advocate for Inclusive Finance for Development [UNSGSA], 2016). The global recognition of financial inclusion as a means to boost human development has led to numerous interventions around the world aimed at addressing poverty, hunger, gender inequality, and economic growth (UNSGSA, 2016). Financial inclusion cushions people against financial shock or setbacks, allows investment in human capital (in areas such as health and education), and enables planning for the future (Huang, Nam, & Lee, 2015). For those living in poverty, financial inclusion can be a bridge out of poverty and a large step toward long-term financial security (World Bank, 2014). Generally, rates of financial exclusion tend to be highest among the poor and those living in rural areas or developing countries (UNSGSA, 2016). In Kenya, although the number of those who are financially included has increased over the past decade, an average of 17.4 percent of Kenyans still remain financially excluded; even higher rates (22 percent) of financial exclusion are seen among those living in rural areas (Central Bank of Kenya, Kenya National Bureau of Statistics, & FSD Kenya, 2016). The Financial Access Household Survey of 2016 (a statistically valid, nationally representative sample of Kenyans age 16 and older) reports that the oldest (over 55 years) and youngest (between 18 and 25 years) age groups are most likely to be excluded and least likely to have formal accounts as compared with other age groups (Central Bank of Kenya et al., 2016). The rate of exclusion for this youngest group of Kenyans is 23 percent compared with the national average of 17.4 percent. This is alarming given that exclusion from financial mechanisms like credit and insurance leaves these individuals without access to the resources needed to weather adverse life events, such as the death of a loved one or loss of property. In response to financial shocks resulting from unpredictable events, a significant number of households reported using their personal savings, selling off assets, or seeking help from their social networks to cope (Central Bank of Kenya et al., 2016). Proximity to a Bank Bank deserts are one way in which individuals experience exclusion. Bank deserts occur when physical access to banks is limited or nonexistent (Morgan, Pinkovskiy, & Yang, 2016). This phenomenon—which mainly affects low-income communities—hinders household economic strengthening by reducing access to financial products and services. World Bank data indicate that Kenya has 5.2 bank branches per 100,000 people, slightly higher than the SSA average (4.6 per 100,000) but significantly lower than global estimates of 12.7 per 100,000 (World Bank, n.d.). Although proximity does not guarantee financial inclusion, geographic proximity is a primary necessity if an individual wants to take advantage of certain financial services and products (Beck, Demirgüç-Kunt, & Honohan, 2009). Theoretical Foundation The financial capability framework posits that individuals who are financially literate and have access to financial products are better positioned to act and behave in ways that ensure their economic well-being (E. Johnson & Sherraden, 2007). Financial capabilities are therefore conceptualized as a function of one’s ability to act (literacy) and the opportunities to act (inclusion) (Sherraden, 2013). Specifically, we operationalized financial capabilities as youths’ ability to engage in positive money management. Competent money management is a key indicator of financial capability (Kempson, Collard, & Moore, 2005). Certainly, money management techniques including budgets and spending plans are associated with long-term economic well-being. Although the integration of the financial capabilities framework into economic strengthening interventions has gained traction over the years (Consumer Financial Protection Bureau, 2014; Loke, Choi, & Libby, 2015), the framework remains largely understudied in Kenya. To our knowledge, only one study has attempted to test the financial capability framework among a group of Kenyan school students drawn from across the country (Eissa, Habyarimana, & Jack, 2014). That study, however, yielded mixed results, finding no impact on youth savings, but rather high aspirations with regard to engaging in small business. Given the Kenyan government’s focus on youth economic development (Government of Kenya, n.d.), markedly high financial exclusion rates among this population (Central Bank of Kenya et al., 2016), and their low financial literacy rates (Central Bank of Kenya & FSD Kenya, 2013), testing the financial capability framework on Kenyan youths has become a salient area of study. Present Study The present study tests the financial capability framework among a group of low-income youths in Kenya. We argue that youths who are financially literate (literacy was operationalized as financial knowledge and socialization) and live close to a bank are more likely to display good financial management skills, and that these financial capabilities then engender savings. Expanding on similar intervention work in other SSA countries, results from this study stand to deepen our understanding of the factors related to youths’ saving behaviors and consequently inform efforts aimed at leveraging this population’s economic functioning potential. Using baseline data from the YouthSave-Impact Study Kenya, we aimed to answer the following two questions: (1) Does financial literacy and access to financial institutions result in positive financial management practices? and (2) Do financial management practices mediate the relationship between literacy and access, and asset accumulation? Based on results from other studies in SSA, we expected that financial literacy and access informs positive financial management behaviors, which in turn inform asset accumulation. Method Data Set The data set was drawn from the baseline data of 3,965 youths enrolled in a randomized control trial with an experimental design known as YouthSave-Impact Study Kenya (Ssewamala et al., 2016). The YouthSave study was designed to measure the long-term impact of youth savings on developmental outcomes. Participants were recruited from 90 public schools from across five major regions, namely the Coast (10.4 percent), Mt. Kenya (23.8 percent), Nairobi (28.6 percent), the Rift Valley (18.7 percent), and western Kenya (18.5 percent). Inclusion in the study was open to youths in upper primary school, specifically those enrolled in classes (grades) 5 through 7, with approximately 94 percent of this sample enrolled in class 6. The age range of children in the upper primary classes 5, 6, and 7 in Kenya is between 10 and 12 years (Kenya National Bureau of Statistics, 2012), making the YouthSave sample (M = 12.2, SD = 1.1) slightly older than the national average. To be included in the study, youths also had to be living with a family member. For detailed information on the sample and data collection procedures, please see Ssewamala et al., 2016. Variables A latent variable, financial literacy, was constructed from a series of variables measuring a youth’s financial knowledge and family financial socialization. Perception of financial knowledge was captured by three prompts, with the following response options: “I do not know enough,” “I understand some of what I read,” and “I know as much as I need.” Financial socialization was captured by a series of seven variables measuring a youth’s engagement in household financial matters, including discussions with parents or other caregivers on the importance of saving, household spending, family saving plans, youth’s own spending, the use of credit, and family assets and financial resources; the seventh variable representing lack of inclusion in these activities was included for families who did not engage their children in financial discussions of any kind. Financial inclusion was operationalized as proximity to a bank. Financially included communities generally report geographic proximity to banks and other financial intermediaries. Youths reported the distance of a bank in proximity to their home by selecting one of the following options: 4 = within walking distance from home (0–1 kilometer), 3 = nearby (2–3 kilometers), 2 = far (3+ kilometers), 1 = very far (driving distance), 0 = not aware of the nearest bank. The mediating variable, financial capabilities, was operationalized as engaging in financial management. Managing one’s income and expenditures demonstrates self-efficacy in economic decision making. Engaging in financial management behaviors such as budgeting is an indicator of a youth’s ability to integrate financial information and the financial tools available to him or her to attain positive economic results. Youths who reported budgeting their spending “usually” or “all the time” were coded as 1, whereas those who “never,” “seldom,” or “occasionally” made spending plans were coded as 0. The outcome variable, youth savings, was captured as a dichotomous variable with 0 = youths who did not currently save and 1 = youths who currently saved. As this study was especially interested in the action of saving, analysis was not restricted to just those youths who reported saving in a financial intermediary, but was expanded to include youths who held savings in various places. Data Analysis Data cleaning, coding, and exploratory factor analysis (EFA) was done in Stata 14 (StataCorp., 2015). Confirmatory factor analysis (CFA) and structural equation models (SEM) were constructed in Mplus 7 (Muthén & Muthén, 2015). Model fit was assessed using the chi-square test. However, because the chi-square test is affected by sample size, and the large sample in this study does make attaining a nonsignificant χ2 difficult, root mean square error of approximation (RMSEA), comparative fit index (CFI), and Tucker–Lewis index (TLI) were also used to determine model fit. An RMSEA point estimate and an upper 90 percent confidence interval (CI) value of less than 0.06 was used as a gauge for good fit. In addition, CFI and TLI values higher than 0.95 were used as indicators of a good fit (N. K. Bowen & Guo, 2011). Missing data were handled using full-information maximum likelihood, and mean and variance-adjusted weighted least squares estimation was used to account for the categorical nature of the variables (Flora & Curran, 2004). Results Respondents ranged in age from nine to 18 years (M = 12.23, SD = 1.11), with a slightly higher representation of female respondents (51 percent). Of the respondents, 42 percent indicated that they knew enough about financial management, 30 percent understood some of what they read, and 12 percent believed that they knew as much as they needed to know with regard to financial management. In addition, approximately 26 percent of youths indicated that their parents or other caregivers did not engage them in discussions regarding saving, spending, credit, and other financial matters. Financial knowledge and family financial socialization were used to construct the latent variable financial literacy. EFA with principal axis factoring and promax rotation suggested a one-factor solution. Using factor loadings of ≥0.30 and correlation residual cutoffs of 0.1 (N. K. Bowen & Guo, 2011), CFA confirmed a final one-factor five-item latent variable, χ2(5, N = 3,965) = 12.717, p = 0.026, RMSEA = 0.020, with 90% CI [0.006, 0.034], CFI = 0.996, and TLI = 0.975. The five variables retained were the importance of savings, household spending, family savings, family assets and resources, and not knowing enough about financial management. Of the sample, 44 percent were able to identify the bank nearest to their home and reported it to be within walking distance, whereas more than 18 percent of the respondents did not know where the nearest bank was. Approximately 58 percent of the sample reported making advanced plans on how to use their money, and close to half of the sample (45 percent) reported having money saved somewhere. Respondents reported saving money in places including, but not limited to, banks and savings and credit cooperative organizations, with parents, in piggy banks, or in some other place in the home. The amounts saved varied greatly within this population, ranging from 5 to 40,200 Kenyan shillings, which equates to approximately US$0.06 to US$464. Figure 1 presents the standardized SEM results of the mediation analysis. Model chi-square was significant [χ2(18, N = 3,928) = 220.3, p ≤ .001], and therefore other model fit statistics were used to confirm fit. RMSEA, CFI, and TLI confirmed a good model fit with an RMSEA value of 0.05 with a 90% CI [0.047, 0.060], CFI of 0.97, and a TLI score of 0.95. Analysis indicates that financial literacy and access do inform youths’ ability to engage in financial management, and that efficacy in money management partially mediates the relationship between literacy and saving behavior (direct effect β = 0.36, p ≤ .001; indirect effect β = 0.06, p ≤ .001) and bank proximity and saving (direct effect β = 0.01, p = .004; indirect effect β = 0.06, p = .002). This partial mediation suggests that youths continue to save even in the absence of fully formed financial capabilities. Both predictor variables were directly associated with financial capabilities. The closer youths lived to a bank, the more likely they were to engage in financial management activities (β = 0.09, p ≤ .001). In addition, those who were financially literate were more likely to report engaging in financial management behaviors (β = 0.55, p ≤ .001). As expected, the direct relationships between the predictors and savings were also significant. Financially literate youths were more likely to be savers (β = 0.36, p ≤ .001) as were youths who lived close to banks (β = 0.06, p = .002). Figure 1: View largeDownload slide Standardized Structural Equation Model Results χ2(18, N = 3,928) = 220.3, p ≤ .001, root mean square error of approximation = 0.053 (90% confidence interval: 0.047, 0.060), comparative fit index = 0.972, Tucker–Lewis index = 0.957. Figure 1: View largeDownload slide Standardized Structural Equation Model Results χ2(18, N = 3,928) = 220.3, p ≤ .001, root mean square error of approximation = 0.053 (90% confidence interval: 0.047, 0.060), comparative fit index = 0.972, Tucker–Lewis index = 0.957. Discussion Social work is embracing economic strengthening programs as poverty alleviation strategies for underserved and fragile households (Sherraden, Birkenmaier, McClendon, & Rochelle, 2016). In recent years, these programs have been focused on children and youths given the lifelong implications of competent money management at an early age. As such, the present study used the financial capabilities framework to examine the context within which predominantly low-income youths in Kenya engage in savings behaviors. We also investigated the complex relationship between youths’ financial literacy, access to financial intermediaries, and subsequent economic strengthening behaviors. Like previous studies conducted in the United States and SSA, our findings demonstrate that financial capabilities result in asset accumulation (Huang, Nam, Sherraden, & Clancy, 2015; Kagotho et al., 2013; Ssewamala, Sperber, Zimmerman, & Karimli, 2010). These baseline data provide us with initial information on YouthSave-Impact Study Kenya participants and will be instrumental in elucidating the mechanisms of financial functioning across future time points. Financial literacy is key to asset accumulation. As financial capabilities only partially mediate the relationship between literacy and savings, we must conclude that the ability to effectively apply financial knowledge is still a critical element of asset building. Using a proxy measure for access—physical proximity to a bank—this study finds that the farther away youths live from a banking facility, the less likely they are to engage in positive financial behaviors. This finding should, however, be taken with some caution given that there is certainly more to financial access beyond geographic proximity. Access implies enhanced opportunities to acquire and use financial services and products. An important aspect of access for youths is whether such services and products speak to the unique needs of this population, for example providing electronic and mobile banking products. Strengths and Limitations In comparison to other SSA studies that have tested the financial capability framework, data in this study were collected from five distinct geopolitical regions rather than a subpopulation of children from one particular region. This broader sampling allows us to make generalizations to a diverse range of children, including low-income students. In addition, the data provide us with institutional variables that are often missing from models constructed with other youth studies in this region. Furthermore, the large sample size allows for complex modeling to better understand some of the relationships that have been hypothesized in the literature. There are variable measurement limitations, which may be attributed to the nature of the available data. Financial access is measured by how proximal banks are to the participant, which is an insufficient measure. It is anticipated that how this construct is operationalized will change in coming data iteration cycles when measures of use and access of various financial products are added. In addition, financial management is a problematic proxy for capabilities. Although this particular variable may be a reflection of financial ability, this study posits that financial management signals the ability and skills necessary to integrate financial information and tools in a manner that enhances one’s economic well-being. In addition, exploratory analysis on other financial behavior indicators in the data set determined this to be the most robust indicator for capabilities. However, in spite of these data limitations, findings provided here give us a unique understanding of the current state of financial capabilities and savings behavior among a diverse group of youths prior to their enrollment in economic strengthening services. Implications for Practice Kenya’s future financial stability will be largely influenced by the economic functioning of its youths. Various public and privately funded interventions supporting the economic functioning of the nation’s youths are becoming a critical point of intervention. This study offers support to interventions that enhance this population’s financial capabilities. These findings support previous studies showing that family is integral in engendering youths’ economic well-being, thereby underscoring support for the household-level approach to youth economic strengthening. Youths save when presented with the opportunity and information needed to engage with financial institutions. Interventions that equip and encourage parental and caregiver involvement in youths’ financial well-being have been shown to have positive outcomes on children’s economic behaviors (Gray, Clancy, Sherraden, Wagner, & Miller-Cribbs, 2012; Ssewamala, Nabunya, Mukasa, Ilic, & Nattabi, 2014). We echo suggestions from van Campenhout (2015) calling for greater parental involvement in the development of youths’ financial capabilities. Initiating collaborative partnerships with parents could include equipping parents with skills needed to teach and include children in household financial decisions, encouraging them to cosign for children’s bank accounts, and helping them facilitate deposits in financial institutions. This is an especially salient point in Kenya given that the age requirement to open and independently operate a bank account is 18 years. Given that youths in this particular sample reported holding savings at home in piggy banks, with relatives, or hidden in boxes at home, parents could be instrumental in facilitating their connections to formal financial institutions such as banks. Youths who reported having a bank nearby reported better financial practices and ultimately better savings. But geographic proximity to a bank is only one of the factors associated with financial access. Critical to financial access would be offering services and products that address the unique needs of communities (L. Johnson et al., 2013). One way to address the unique banking needs of youths is leveraging mobile banking platforms (Demirguc-Kunt, Klapper, Singer, & Oudheusden, 2015) to increase access. Data show an uptake of mobile banking among younger Kenyans (Central Bank of Kenya et al., 2016), and given the move from traditional banking toward mobile banking, economic empowerment interventions will need to partner with financial institutions that support this banking platform. Implications for Research Financial inclusion is critical to engendering financial capabilities. Given the recent developments in banking technology, future research studies on economic strengthening should identify and collect information on the role of technology in banking in SSA. For this particular intervention, variables capturing electronic and mobile banking services and products may be accessible in future data collection points. YouthSave-Impact Study Kenya is one of a few regional research studies in SSA that use a rigorous experimental design to measure the long-term impact of savings on the developmental functioning (including health and mental health functioning) of youths. Given the dearth of information on the mechanisms of financial functioning in the region, other large-scale studies are sorely needed to address this research gap. Designing similar regional intervention studies would help build a body of knowledge that explains causal effects of economic strengthening mechanisms and lifelong developmental outcomes. In conclusion, this study tested the financial capability framework with data from a diverse cohort of Kenyan youths, which provided us with a unique perspective of financial capabilities and asset accumulation. When positive behaviors such as financial management are learned, there is the potential to lay a foundation for lifelong competent money management. References Atkinson, A., & Messy, F.-A. ( 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]. 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Testing the Financial Capability Framework: Findings from YouthSave-Impact Study Kenya

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© 2017 National Association of Social Workers
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Abstract

Abstract In sub-Saharan Africa (SSA), youths (23 years or younger)—who account for almost half the population—are particularly vulnerable to poverty and exclusion from financial markets and intermediaries. In addition, a significant factor in the financial instability of the region appears to be the economic functioning of its youths. In recent years, social work interventions throughout the region have focused on investing in the economic functioning of youths. This study looked at baseline data from one such intervention in Kenya (N = 3,965), using the financial capabilities framework to evaluate the factors related to youths’ saving behaviors. Authors investigated the association between youths’ financial literacy (that is, knowledge, socialization), financial access, and financial capabilities and savings behaviors. Results indicate that adolescents who rate themselves as financially literate and those living in close proximity to a bank are more likely to report higher capabilities. Furthermore, financial capabilities in turn partially mediate the relationship between financial literacy, access, and savings. Overall, the study’s findings point to the positive effect of enhanced financial capabilities among youths and offer support for asset-based interventions targeting youths in SSA. Worldwide, there are 1.8 billion people below the age of 24 (United Nations Population Fund [UNFPA], 2014). In at least 15 sub-Saharan African (SSA) nations, youths account for almost half of the population (UNFPA, 2014). Kenya alone is home to 7.9 million youths ages 15 to 24 years, making up 20.6 percent of Kenya’s total population (Kenya National Bureau of Statistics, 2010, 2012). In Kenya, the highest rates of unemployment are among 18- to 20-year-olds (Zepeda, Leigh, Ndirangu, Omollo, & Wainaina, 2013). With the unemployment rate for those ages 15 to 25 ranging between 20 percent and 35 percent, a large portion of Kenya’s financial instability appears to be influenced by the economic functioning of its youths (Zepeda et al., 2013). In recognition of the critical role youths play in the region’s economic development, financial (Paaskesen & Angelow, 2015) and socioeconomic interventions (Kagotho, Nabunya, Ssewamala, & Ilic, 2013) tailored to enhance this population’s financial capabilities have been proposed. Randomized control trials in Uganda (Jennings, Ssewamala, & Nabunya, 2016), large-scale demonstration studies in the United States (Beverly, Clancy, & Sherraden, 2016), and publicly funded programs in Asia (Loke & Sherraden, 2009) aimed at strengthening the economic functioning of children and youths, continue to show promising results. These innovative socioeconomic interventions have established a strong link between enhanced youth financial capabilities and related economic, social, educational, and behavioral health outcomes. For example, intervention studies indicate that providing youths with a combination of financial information and access to financial intermediaries positively affects not only the financial well-being of these youths and their families (Nam, Kim, Clancy, Zager, & Sherraden, 2013), but also their physical and mental health outcomes (Karimli & Ssewamala, 2015), HIV risk-taking behavior (Ssewamala, Han, Neilands, Ismayilova, & Sperber, 2010), and educational aspirations (Curley, Ssewamala, & Han, 2010). Financial Capabilities Financial capabilities are defined as the ability to act in one’s economic best interests, actions that, in turn, bolster the economic well-being of the actors (Sherraden, Birkenmaier, Sherraden, & Curley, 2013). Financial literacy and access to financial intermediaries engender capabilities. Financial Literacy Financial literacy—a component of financial capability—is defined as the “ability and confidence to effectively apply knowledge related to personal finance” (Huston, 2010, p. 307). SSA has been shown to have low rates of financial literacy (Atkinson & Messy, 2012; Shambare & Rugimbana, 2012). Financial literacy is transmitted through several means, with the family unit being a central source of financial concepts and behaviors (Chowa & Despard, 2014; Kagotho, Nabunya, Ssewamala, Mwangi, & Njenga, 2017; van Campenhout, 2015). Children observe and begin to absorb money management skills and strategies at an early age. Qualitative studies with youths from the region underscore the role that parents play in conveying financial information and offering other supports (Zou et al., 2015). Financial socialization—defined as the intentional and nonintentional transmission of financial concepts (C. F. Bowen, 2002)—through family networks has been linked to good financial practices throughout the life course (Kim & Chatterjee, 2013). When children learn positive behaviors by engaging in practices such as budgeting, credit management, and asset leveraging, they are able to acquire the tools needed to engage in competent money management. Financial Inclusion Financial inclusion—the second element in financial capability—is defined as the availability, affordability, and use of formal financial services such as savings and deposit accounts, payment services, credit, and insurance (World Bank, 2014). The United Nations (UN) General Assembly highlights financial inclusion as a key goal in the UN’s Sustainable Development Agenda (UN Secretary-General’s Special Advocate for Inclusive Finance for Development [UNSGSA], 2016). The global recognition of financial inclusion as a means to boost human development has led to numerous interventions around the world aimed at addressing poverty, hunger, gender inequality, and economic growth (UNSGSA, 2016). Financial inclusion cushions people against financial shock or setbacks, allows investment in human capital (in areas such as health and education), and enables planning for the future (Huang, Nam, & Lee, 2015). For those living in poverty, financial inclusion can be a bridge out of poverty and a large step toward long-term financial security (World Bank, 2014). Generally, rates of financial exclusion tend to be highest among the poor and those living in rural areas or developing countries (UNSGSA, 2016). In Kenya, although the number of those who are financially included has increased over the past decade, an average of 17.4 percent of Kenyans still remain financially excluded; even higher rates (22 percent) of financial exclusion are seen among those living in rural areas (Central Bank of Kenya, Kenya National Bureau of Statistics, & FSD Kenya, 2016). The Financial Access Household Survey of 2016 (a statistically valid, nationally representative sample of Kenyans age 16 and older) reports that the oldest (over 55 years) and youngest (between 18 and 25 years) age groups are most likely to be excluded and least likely to have formal accounts as compared with other age groups (Central Bank of Kenya et al., 2016). The rate of exclusion for this youngest group of Kenyans is 23 percent compared with the national average of 17.4 percent. This is alarming given that exclusion from financial mechanisms like credit and insurance leaves these individuals without access to the resources needed to weather adverse life events, such as the death of a loved one or loss of property. In response to financial shocks resulting from unpredictable events, a significant number of households reported using their personal savings, selling off assets, or seeking help from their social networks to cope (Central Bank of Kenya et al., 2016). Proximity to a Bank Bank deserts are one way in which individuals experience exclusion. Bank deserts occur when physical access to banks is limited or nonexistent (Morgan, Pinkovskiy, & Yang, 2016). This phenomenon—which mainly affects low-income communities—hinders household economic strengthening by reducing access to financial products and services. World Bank data indicate that Kenya has 5.2 bank branches per 100,000 people, slightly higher than the SSA average (4.6 per 100,000) but significantly lower than global estimates of 12.7 per 100,000 (World Bank, n.d.). Although proximity does not guarantee financial inclusion, geographic proximity is a primary necessity if an individual wants to take advantage of certain financial services and products (Beck, Demirgüç-Kunt, & Honohan, 2009). Theoretical Foundation The financial capability framework posits that individuals who are financially literate and have access to financial products are better positioned to act and behave in ways that ensure their economic well-being (E. Johnson & Sherraden, 2007). Financial capabilities are therefore conceptualized as a function of one’s ability to act (literacy) and the opportunities to act (inclusion) (Sherraden, 2013). Specifically, we operationalized financial capabilities as youths’ ability to engage in positive money management. Competent money management is a key indicator of financial capability (Kempson, Collard, & Moore, 2005). Certainly, money management techniques including budgets and spending plans are associated with long-term economic well-being. Although the integration of the financial capabilities framework into economic strengthening interventions has gained traction over the years (Consumer Financial Protection Bureau, 2014; Loke, Choi, & Libby, 2015), the framework remains largely understudied in Kenya. To our knowledge, only one study has attempted to test the financial capability framework among a group of Kenyan school students drawn from across the country (Eissa, Habyarimana, & Jack, 2014). That study, however, yielded mixed results, finding no impact on youth savings, but rather high aspirations with regard to engaging in small business. Given the Kenyan government’s focus on youth economic development (Government of Kenya, n.d.), markedly high financial exclusion rates among this population (Central Bank of Kenya et al., 2016), and their low financial literacy rates (Central Bank of Kenya & FSD Kenya, 2013), testing the financial capability framework on Kenyan youths has become a salient area of study. Present Study The present study tests the financial capability framework among a group of low-income youths in Kenya. We argue that youths who are financially literate (literacy was operationalized as financial knowledge and socialization) and live close to a bank are more likely to display good financial management skills, and that these financial capabilities then engender savings. Expanding on similar intervention work in other SSA countries, results from this study stand to deepen our understanding of the factors related to youths’ saving behaviors and consequently inform efforts aimed at leveraging this population’s economic functioning potential. Using baseline data from the YouthSave-Impact Study Kenya, we aimed to answer the following two questions: (1) Does financial literacy and access to financial institutions result in positive financial management practices? and (2) Do financial management practices mediate the relationship between literacy and access, and asset accumulation? Based on results from other studies in SSA, we expected that financial literacy and access informs positive financial management behaviors, which in turn inform asset accumulation. Method Data Set The data set was drawn from the baseline data of 3,965 youths enrolled in a randomized control trial with an experimental design known as YouthSave-Impact Study Kenya (Ssewamala et al., 2016). The YouthSave study was designed to measure the long-term impact of youth savings on developmental outcomes. Participants were recruited from 90 public schools from across five major regions, namely the Coast (10.4 percent), Mt. Kenya (23.8 percent), Nairobi (28.6 percent), the Rift Valley (18.7 percent), and western Kenya (18.5 percent). Inclusion in the study was open to youths in upper primary school, specifically those enrolled in classes (grades) 5 through 7, with approximately 94 percent of this sample enrolled in class 6. The age range of children in the upper primary classes 5, 6, and 7 in Kenya is between 10 and 12 years (Kenya National Bureau of Statistics, 2012), making the YouthSave sample (M = 12.2, SD = 1.1) slightly older than the national average. To be included in the study, youths also had to be living with a family member. For detailed information on the sample and data collection procedures, please see Ssewamala et al., 2016. Variables A latent variable, financial literacy, was constructed from a series of variables measuring a youth’s financial knowledge and family financial socialization. Perception of financial knowledge was captured by three prompts, with the following response options: “I do not know enough,” “I understand some of what I read,” and “I know as much as I need.” Financial socialization was captured by a series of seven variables measuring a youth’s engagement in household financial matters, including discussions with parents or other caregivers on the importance of saving, household spending, family saving plans, youth’s own spending, the use of credit, and family assets and financial resources; the seventh variable representing lack of inclusion in these activities was included for families who did not engage their children in financial discussions of any kind. Financial inclusion was operationalized as proximity to a bank. Financially included communities generally report geographic proximity to banks and other financial intermediaries. Youths reported the distance of a bank in proximity to their home by selecting one of the following options: 4 = within walking distance from home (0–1 kilometer), 3 = nearby (2–3 kilometers), 2 = far (3+ kilometers), 1 = very far (driving distance), 0 = not aware of the nearest bank. The mediating variable, financial capabilities, was operationalized as engaging in financial management. Managing one’s income and expenditures demonstrates self-efficacy in economic decision making. Engaging in financial management behaviors such as budgeting is an indicator of a youth’s ability to integrate financial information and the financial tools available to him or her to attain positive economic results. Youths who reported budgeting their spending “usually” or “all the time” were coded as 1, whereas those who “never,” “seldom,” or “occasionally” made spending plans were coded as 0. The outcome variable, youth savings, was captured as a dichotomous variable with 0 = youths who did not currently save and 1 = youths who currently saved. As this study was especially interested in the action of saving, analysis was not restricted to just those youths who reported saving in a financial intermediary, but was expanded to include youths who held savings in various places. Data Analysis Data cleaning, coding, and exploratory factor analysis (EFA) was done in Stata 14 (StataCorp., 2015). Confirmatory factor analysis (CFA) and structural equation models (SEM) were constructed in Mplus 7 (Muthén & Muthén, 2015). Model fit was assessed using the chi-square test. However, because the chi-square test is affected by sample size, and the large sample in this study does make attaining a nonsignificant χ2 difficult, root mean square error of approximation (RMSEA), comparative fit index (CFI), and Tucker–Lewis index (TLI) were also used to determine model fit. An RMSEA point estimate and an upper 90 percent confidence interval (CI) value of less than 0.06 was used as a gauge for good fit. In addition, CFI and TLI values higher than 0.95 were used as indicators of a good fit (N. K. Bowen & Guo, 2011). Missing data were handled using full-information maximum likelihood, and mean and variance-adjusted weighted least squares estimation was used to account for the categorical nature of the variables (Flora & Curran, 2004). Results Respondents ranged in age from nine to 18 years (M = 12.23, SD = 1.11), with a slightly higher representation of female respondents (51 percent). Of the respondents, 42 percent indicated that they knew enough about financial management, 30 percent understood some of what they read, and 12 percent believed that they knew as much as they needed to know with regard to financial management. In addition, approximately 26 percent of youths indicated that their parents or other caregivers did not engage them in discussions regarding saving, spending, credit, and other financial matters. Financial knowledge and family financial socialization were used to construct the latent variable financial literacy. EFA with principal axis factoring and promax rotation suggested a one-factor solution. Using factor loadings of ≥0.30 and correlation residual cutoffs of 0.1 (N. K. Bowen & Guo, 2011), CFA confirmed a final one-factor five-item latent variable, χ2(5, N = 3,965) = 12.717, p = 0.026, RMSEA = 0.020, with 90% CI [0.006, 0.034], CFI = 0.996, and TLI = 0.975. The five variables retained were the importance of savings, household spending, family savings, family assets and resources, and not knowing enough about financial management. Of the sample, 44 percent were able to identify the bank nearest to their home and reported it to be within walking distance, whereas more than 18 percent of the respondents did not know where the nearest bank was. Approximately 58 percent of the sample reported making advanced plans on how to use their money, and close to half of the sample (45 percent) reported having money saved somewhere. Respondents reported saving money in places including, but not limited to, banks and savings and credit cooperative organizations, with parents, in piggy banks, or in some other place in the home. The amounts saved varied greatly within this population, ranging from 5 to 40,200 Kenyan shillings, which equates to approximately US$0.06 to US$464. Figure 1 presents the standardized SEM results of the mediation analysis. Model chi-square was significant [χ2(18, N = 3,928) = 220.3, p ≤ .001], and therefore other model fit statistics were used to confirm fit. RMSEA, CFI, and TLI confirmed a good model fit with an RMSEA value of 0.05 with a 90% CI [0.047, 0.060], CFI of 0.97, and a TLI score of 0.95. Analysis indicates that financial literacy and access do inform youths’ ability to engage in financial management, and that efficacy in money management partially mediates the relationship between literacy and saving behavior (direct effect β = 0.36, p ≤ .001; indirect effect β = 0.06, p ≤ .001) and bank proximity and saving (direct effect β = 0.01, p = .004; indirect effect β = 0.06, p = .002). This partial mediation suggests that youths continue to save even in the absence of fully formed financial capabilities. Both predictor variables were directly associated with financial capabilities. The closer youths lived to a bank, the more likely they were to engage in financial management activities (β = 0.09, p ≤ .001). In addition, those who were financially literate were more likely to report engaging in financial management behaviors (β = 0.55, p ≤ .001). As expected, the direct relationships between the predictors and savings were also significant. Financially literate youths were more likely to be savers (β = 0.36, p ≤ .001) as were youths who lived close to banks (β = 0.06, p = .002). Figure 1: View largeDownload slide Standardized Structural Equation Model Results χ2(18, N = 3,928) = 220.3, p ≤ .001, root mean square error of approximation = 0.053 (90% confidence interval: 0.047, 0.060), comparative fit index = 0.972, Tucker–Lewis index = 0.957. Figure 1: View largeDownload slide Standardized Structural Equation Model Results χ2(18, N = 3,928) = 220.3, p ≤ .001, root mean square error of approximation = 0.053 (90% confidence interval: 0.047, 0.060), comparative fit index = 0.972, Tucker–Lewis index = 0.957. Discussion Social work is embracing economic strengthening programs as poverty alleviation strategies for underserved and fragile households (Sherraden, Birkenmaier, McClendon, & Rochelle, 2016). In recent years, these programs have been focused on children and youths given the lifelong implications of competent money management at an early age. As such, the present study used the financial capabilities framework to examine the context within which predominantly low-income youths in Kenya engage in savings behaviors. We also investigated the complex relationship between youths’ financial literacy, access to financial intermediaries, and subsequent economic strengthening behaviors. Like previous studies conducted in the United States and SSA, our findings demonstrate that financial capabilities result in asset accumulation (Huang, Nam, Sherraden, & Clancy, 2015; Kagotho et al., 2013; Ssewamala, Sperber, Zimmerman, & Karimli, 2010). These baseline data provide us with initial information on YouthSave-Impact Study Kenya participants and will be instrumental in elucidating the mechanisms of financial functioning across future time points. Financial literacy is key to asset accumulation. As financial capabilities only partially mediate the relationship between literacy and savings, we must conclude that the ability to effectively apply financial knowledge is still a critical element of asset building. Using a proxy measure for access—physical proximity to a bank—this study finds that the farther away youths live from a banking facility, the less likely they are to engage in positive financial behaviors. This finding should, however, be taken with some caution given that there is certainly more to financial access beyond geographic proximity. Access implies enhanced opportunities to acquire and use financial services and products. An important aspect of access for youths is whether such services and products speak to the unique needs of this population, for example providing electronic and mobile banking products. Strengths and Limitations In comparison to other SSA studies that have tested the financial capability framework, data in this study were collected from five distinct geopolitical regions rather than a subpopulation of children from one particular region. This broader sampling allows us to make generalizations to a diverse range of children, including low-income students. In addition, the data provide us with institutional variables that are often missing from models constructed with other youth studies in this region. Furthermore, the large sample size allows for complex modeling to better understand some of the relationships that have been hypothesized in the literature. There are variable measurement limitations, which may be attributed to the nature of the available data. Financial access is measured by how proximal banks are to the participant, which is an insufficient measure. It is anticipated that how this construct is operationalized will change in coming data iteration cycles when measures of use and access of various financial products are added. In addition, financial management is a problematic proxy for capabilities. Although this particular variable may be a reflection of financial ability, this study posits that financial management signals the ability and skills necessary to integrate financial information and tools in a manner that enhances one’s economic well-being. In addition, exploratory analysis on other financial behavior indicators in the data set determined this to be the most robust indicator for capabilities. However, in spite of these data limitations, findings provided here give us a unique understanding of the current state of financial capabilities and savings behavior among a diverse group of youths prior to their enrollment in economic strengthening services. Implications for Practice Kenya’s future financial stability will be largely influenced by the economic functioning of its youths. Various public and privately funded interventions supporting the economic functioning of the nation’s youths are becoming a critical point of intervention. This study offers support to interventions that enhance this population’s financial capabilities. These findings support previous studies showing that family is integral in engendering youths’ economic well-being, thereby underscoring support for the household-level approach to youth economic strengthening. Youths save when presented with the opportunity and information needed to engage with financial institutions. Interventions that equip and encourage parental and caregiver involvement in youths’ financial well-being have been shown to have positive outcomes on children’s economic behaviors (Gray, Clancy, Sherraden, Wagner, & Miller-Cribbs, 2012; Ssewamala, Nabunya, Mukasa, Ilic, & Nattabi, 2014). We echo suggestions from van Campenhout (2015) calling for greater parental involvement in the development of youths’ financial capabilities. Initiating collaborative partnerships with parents could include equipping parents with skills needed to teach and include children in household financial decisions, encouraging them to cosign for children’s bank accounts, and helping them facilitate deposits in financial institutions. This is an especially salient point in Kenya given that the age requirement to open and independently operate a bank account is 18 years. Given that youths in this particular sample reported holding savings at home in piggy banks, with relatives, or hidden in boxes at home, parents could be instrumental in facilitating their connections to formal financial institutions such as banks. Youths who reported having a bank nearby reported better financial practices and ultimately better savings. But geographic proximity to a bank is only one of the factors associated with financial access. Critical to financial access would be offering services and products that address the unique needs of communities (L. Johnson et al., 2013). One way to address the unique banking needs of youths is leveraging mobile banking platforms (Demirguc-Kunt, Klapper, Singer, & Oudheusden, 2015) to increase access. Data show an uptake of mobile banking among younger Kenyans (Central Bank of Kenya et al., 2016), and given the move from traditional banking toward mobile banking, economic empowerment interventions will need to partner with financial institutions that support this banking platform. Implications for Research Financial inclusion is critical to engendering financial capabilities. Given the recent developments in banking technology, future research studies on economic strengthening should identify and collect information on the role of technology in banking in SSA. For this particular intervention, variables capturing electronic and mobile banking services and products may be accessible in future data collection points. YouthSave-Impact Study Kenya is one of a few regional research studies in SSA that use a rigorous experimental design to measure the long-term impact of savings on the developmental functioning (including health and mental health functioning) of youths. Given the dearth of information on the mechanisms of financial functioning in the region, other large-scale studies are sorely needed to address this research gap. Designing similar regional intervention studies would help build a body of knowledge that explains causal effects of economic strengthening mechanisms and lifelong developmental outcomes. In conclusion, this study tested the financial capability framework with data from a diverse cohort of Kenyan youths, which provided us with a unique perspective of financial capabilities and asset accumulation. When positive behaviors such as financial management are learned, there is the potential to lay a foundation for lifelong competent money management. References Atkinson, A., & Messy, F.-A. ( 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]. 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Social WorkOxford University Press

Published: Jan 1, 2018

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