In: Accounting
‘Skills and knowledge’ and ‘Attitudes and motivation’ have been identified as two distinct components of financial capability. Briefly explain the difference between these two components, and why a person’s financial capability is weakened if they have one without the other.
There is no generally accepted definition of the term ‘financial capability’. Financial capability is the combination of attitude, knowledge, skills, and self-efficacy needed to make and exercise money management decisions that best fit the circumstances of one’s life, within an enabling environment that includes, but is not limited to, access to appropriate financial services.
A person’s financial capability is best judged by their actual behaviour. Someone can be financially literate (in the sense that they have the knowledge, understanding and skills which would enable them to manage their personal finances well) without necessarily being financially capable, as demonstrated by their actual behaviour.
Traditional idea of financial literacy, focus on knowledge acquisition and skill development. Nevertheless, while knowledge acquisition and skills development play an important role in building the capacity of a person to act, they fall short in explaining the strength of intention or motivation necessary to act, and the potential barriers to action. With respect to financial capability, attitude and self-efficacy are key psycho-social concepts that broadly refer to a person’s positive or negative evaluation of the value of managing money proactively (attitude) and to their belief or confidence in their ability to actually do so.
Given this definition of financial capability, two policy conclusions follow. First, financial education cannot “do it all” – it cannot build financial capabilities in isolation nor guarantee behavior change. MFO defines financial education in the following way:
Financial education equips people with knowledge and skills, and strengthens their attitude and belief in themselves, to make and exercise informed, confident and timely money management decisions.