83568 November 2013 Financial capability in MEXICO: results from a national survey on financial behaviors, attitudes, and knowledge Financial capability in Mexico: results from a national survey on financial behaviors, attitudes, and knowledge REKHA REDDY MIRIAM BRUHN CONGYAN TAN © 2013 International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org The findings, interpretations, and conclusions expressed here do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Cover images: World Bank; picture of students © Esther Vargas/October 2012 Cover design/layout: Nita Congress Contents Acknowledgments — vii Abbreviations — ix Executive summary — xi 1 Introduction — 1 1.1 Context  — 1 1.2 Why this report? — 2 1.3 What is financial capability?  — 5 2 Daily money management and financial planning  —  7 2.1 characteristics of financial decision makers  — 7 2.2 Budgeting and monitoring expenses — 9 2.3 Making ends meet: balancing income and expenses — 10 2.4 Planning for major expenses: expected and unexpected — 12 2.5 Plans for children’s future and old age — 12 2.6 Attitudes  — 15 3 Decisions about financial services and financial knowledge  —  17 3.1 Usage of financial services — 17 3.2 Making decisions about financial products  — 22 3.3 Financial knowledge — 23 4 Comparing financial capability  —  27 4.1 Components of financial capability — 27 4.2 Profiles of financial capability in Mexico — 29 4.3 Regional variation of financial capability — 32 4.4 Financial capability of youth — 33 5 International comparisons — 39 6 Linkages between financial capability and financial inclusion  —  45 6.1 Financial knowledge and capability — 45 6.2 Financial knowledge, financial capability, and use of credit and savings — 46 6.3 Financial knowledge, financial capability, access to finance, and formal product usage — 49 v FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE 7 Conclusions and recommendations  —  53 Appendixes A Construction of financial capability scores — 63 B Segmenting the population using cluster analysis — 69 C Youth financial capability — 71 D Methodology to analyze linkages between financial capability and financial inclusion — 75 E Literature review: financial knowledge, capability, and behavior — 85 References — 89 Boxes 1.1 Financial capabilities and knowledge survey data featured in this report — 3 3.1 Comparing different data sources on financial inclusion in Mexico — 18 Figures 1.1 Coverage of the Mexico Financial Capability Survey — 4 2.1 Contributions to the household budget and participation in financial decision making, by age and gender — 8 2.2 Making and adhering to plans about budgeting — 9 2.3 Planning behavior by gender, location, and income  — 10 2.4 Precision of money management — 10 2.5 Shortfalls in money for necessities — 11 2.6 Coping strategies to cover shortfalls — 12 2.7 Ability to cover major unexpected expenses, by income group — 13 2.8 Strategies employed to cover old age expenses — 14 2.9 Coverage of old age expenses, by gender and employment (<60 years of age) — 14 2.10 Attitude toward the future  — 15 2.11 Financial planning horizons — 16 2.12 Achievement orientation — 16 3.1 Percentage of the Mexican population using types of financial products currently or in the past — 19 3.2 Distribution of responses to financial literacy questions — 24 3.3 Distribution of correct financial knowledge responses  — 25 3.4 Distribution of sources of money management information — 26 4.1 Mexico’s mean scores for components of financial capability — 29 4.2 Cluster size by educational attainment and financial inclusion — 31 4.3 Sociodemographic characteristics of each cluster — 32 4.4 Financial capability behavioral and knowledge scores mapped by region — 34 4.5 Financial knowledge by age group — 35 4.6 Percentage agreeing with each statement by age group — 36 4.7 Mean score on behavioral components of financial capability — 37 5.1 Cross-country comparison of components of financial capability — 40 vi Contents 6.1 Correlations between financial knowledge and capability benchmarked by standard deviation — 47 6.2 Use of financial products by individuals with low or high financial capability — 49 6.3 Distribution of bank branches and correspondents across municipalities  — 50 B.1 Scores on financial capability components by cluster — 70 C.1 Educational attainment by age — 72 C.2 Employment of youth (aged 18–24) — 72 C.3 Mean score on a composite index of attitudes by age group — 74 Tables E.1 Recommendations to support improved money management and financial planning and reduce vulnerability in Mexico — xvii 2.1 Financial decision-making roles — 8 3.1 Reasons for saving by respondents who save (%) — 20 3.2 Use of social programs and financial products/services by survey respondents (%) — 21 3.3 Perception of borrowing capacity by respondents who borrow (%) — 22 3.4 Respondent diligence in making financial service decisions, by credit or savings vehicle (%) — 23 4.1 Components of financial capability — 28 4.2 Financial capability clusters in the population — 30 4.3 Average financial capability behavioral and knowledge scores by region — 33 5.1 Summary statistics of key sociodemographic variables — 41 5.2 International comparison of percentages of correct responses to knowledge questions — 42 6.1 Partial correlations between financial knowledge, financial capability components, and use of financial services — 48 A.1 Sample statistics for key sociodemographic variables — 67 D.1 Relationship between financial knowledge and financial capability — 76 D.2 Financial knowledge and use of financial products — 79 D.3 Financial capability and use of financial products — 80 D.4 Partial correlations between financial access points and use of financial products, by financial capability and financial knowledge levels — 82 D.5 Mexican financial literacy survey variable definitions: financial knowledge and financial capability — 83 D.6 Mexican financial literacy survey variable definitions: financial product usage — 83 D.7 Mexican financial literacy survey variable definitions: individual control variables — 84 D.8 Mexican financial literacy survey municipal-level variable definitions and sources — 84 vii Acknowledgments T his report was prepared by a World Bank team led by Rekha Reddy, with contri- butions from Miriam Bruhn and Congyan Tan. Pallavi Nuka provided an analysis of financial capability of the youth population. Valeria Perotti provided research to support the international comparison of Mexican financial capability data. Sarah Antos and Katie McWilliams provided geographic information system mapping exper- tise, and Nita Congress provided editorial and design support. This project was strengthened throughout its design and implementation by a part- nership with project counterparts from the Mexican National Banking and Securities Commission (CNBV) and the National Commission for the Protection and Defense of Users of Financial Services (CONDUSEF): Luis Treviño Garza (CNBV), Arturo Luna Canales, Sara Gutierrez, and Jesus David Chavez Ugalde (CONDUSEF) provided invaluable insights and support. In addition, the team would like to thank Ana Luisa Saavedra and Javier Suarez Luengas (Ministry of Finance and Public Credit) for their guidance throughout this project. Finally, the team would also like to acknowledge the inspiration provided by the late Raul Hernandez-Coss (CNBV), who championed this project from its inception. The team is indebted to numerous colleagues for providing comments, inputs, and suggestions on the execution of this project and on draft reports, including Lily Chu, Eva Gutierrez, and P. S. Srinivas. The team is also grateful to peer reviewers Anna- maria Lusardi, Samuel Maimbo, and James Seward for their valuable comments on this document and the design of this project. We are especially grateful to the Russia Financial Literacy and Education Trust Fund and the World Bank Latin America and the Caribbean region for providing financial support making the collection of the data and their analysis possible. We particularly appreciate the strategic guidance provided by Richard Hinz, Program Manager of the Trust Fund and Kinnon Scott, Task Leader of the global financial capabilities pilot. Finally, the insights from the international academic team that was involved in the design of this survey instrument, namely Gerritt Antonides, Sharon Collard, Elaine Kempson, Olga Kuzina, and Christian Poppe, were invaluable. ix FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE Much of this report is based on new data from a survey in Mexico executed by the firm Ipsos Bimsa. We would particularly like to thank Maria Jose Gentili, Patricia Lopez, and Edgar Monsalvo for their support and insights throughout both the research process. Finally, the team wishes to express its gratitude to the 2,022 Mexican survey respondents who gave of their time to provide us with the insights utilized in this report. x Abbreviations BANSEFI Bank of National Savings and Financial Services (Banco del Ahorro Nacional y Servicios Financieros, S.N.C.) CNBV National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) CONDUSEF National Commission for the Protection of Users of Financial Services (Comision Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros) ENIF National Survey on Financial Inclusion (Encuesta Nacional de Inclu- sión Financiera) IMSS Mexican Social Security Institute (Instituto Mexicano del Seguro Social) INEGI National Statistics Institute for Mexico (Instituto Nacional de Esta- dística y Geografía) INFE International Network on Financial Education ISSSTE Institute for Social Security and Services for State Workers (Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado) NGO nongovernmental organization OECD Organisation for Economic Co-operation and Development SOFIPO popular financial society (sociedad financiera popular) xi Executive summary F indings from the Mexican Financial Capability Survey, the country’s first nationally representative survey on financial behaviors, attitudes, and knowledge, suggest five areas of opportunity to support the Mexican population in sound financial deci- sion making. „„ Daily money management and planning are imprecise. Just 41 percent of those surveyed reported budgeting regularly and 20 percent were monitoring expenses rigorously. „„ Many are vulnerable to shocks. Only 34 percent believe they could cover a major unanticipated expense and 70 percent reported having had regular or occasional difficulties in covering basic expenses, such as food and housing. „„ Even anticipated life events are difficult to cover. Just 28 percent of those under the age of 60 have plans to cover retirement expenses fully in old age, and just over a third of those over age 60 have sufficient provisions for old age expenses. „„ Despite a sharp increase in the availability of financial products and services in recent years, financial inclusion remains a challenge. Almost half (49 percent) do not report any current use of financial services (formal or informal), and there is a high level of usage of sources of informal credit and saving. Even channels designed to increase financial access, such as bank correspondents, are primarily beneficial to those with greater financial knowledge (financial literacy) and capability. „„ Most users of financial products reported making careful financial deci- sions. However, formal financial knowledge was mixed: most understood the concepts of interest paid on a loan and the time value of money, yet only 37 percent could calculate a simple interest rate. This report details how findings vary among different segments and provides recom- mendations to equip the Mexican population to meet these challenges. xiii FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE CONTEXT Over the past decade Mexican consumers have witnessed a dramatic increase in the availability and diversity of consumer financial products. As financial products become more broadly available, financial capability—the ability of consumers to make sound financial decisions and use financial products effectively and respon- sibly—is of crucial importance in accelerating financial inclusion. Promoting responsible financial inclusion and financial education is a high priority for the Mexican government. Given this priority, the Government of Mexico, in partner- ship with the World Bank, commissioned this national financial capability study in order to „„ develop an empirical understanding of the financial behavior, attitudes, and knowledge of the Mexican population; „„ support the design of public policies to enhance both the knowledge about and quality of financial services; „„ highlight vulnerabilities and gaps in particular segments of the population with the goal of improving and focusing public policies and interventions where they are most needed; and „„ provide a basis for international comparison, because similar surveys have been completed in six other countries. This study contributes to and complements existing stores of consumer financial data. The World Bank worked with counterparts at the Mexican National Banking and Securities Commission (CNBV) and the National Commission for the Protection and Defense of Users of Financial Services (CONDUSEF) to develop and execute this survey of a nationally representative sample of 2,022 Mexicans aged 18 and over. The survey instrument collected data on daily money management practices, finan- cial planning, financial product information and choice, financial knowledge and atti- tudes, and sociodemographic characteristics. This report describes a baseline measure of the financial capability of the Mexican adult population. Chapter 1 describes the Mexican context and the rationale for the financial capability study. Chapter 2 describes key findings related to daily money management and financial planning behaviors and attitudes. Chapter 3 examines decisions related to the use of financial products and level of financial knowledge. Chapter 4 summarizes key behaviors and attitudes into financial capability scores, facilitating the creation of profiles and comparisons among different segments of the population. Chapter 5 presents international comparisons. Chapter 6 examines the xiv Executive summary relationship between financial capability, financial knowledge, and financial inclusion. Chapter 7 provides policy recommendations related to the key challenges to finan- cial capability identified in the report. DAILY MONEY MANAGEMENT Over 90 percent of Mexican adults are responsible for some aspect of house- hold financial management, from paying bills, to deciding how money will be spent, to financial planning. Of those surveyed who make household financial decisions, 46 percent are men and 54 percent are women. Women play a key role in household finances even through almost half of women in the sample reported that they do not contribute to the household budget. The 9 percent of adults who reported no participation in household financial decision making were primarily the young and the elderly. For the majority of Mexicans, budgeting income and monitoring spending are imprecise and irregular processes. Although close to 70 percent of Mexicans report that they budget how income will be spent, only 41 percent do so regu- larly, and just one-third consistently adhere to a budget. The majority of Mexicans, over 80 percent, did not know exactly how much they had spent in the last week, and only about one-fifth knew precisely how much they had available for current spending. Higher-income households and urban dwellers are more likely to closely monitor expenses and develop exact plans for household finances. MAKING ENDS MEET AND PLANNING AHEAD More than 70 percent of the population has experienced financial strain, as indicated by regular or occasional shortfalls in income to cover basic expenses such as food and housing. Lower-income individuals, the elderly, and those with informal sector employment or only primary education are particularly susceptible to financial strain. The most common coping strategy is informal borrowing. The majority of Mexicans have no provisions to cover major expenses, either planned (school fees, weddings) or unplanned (job loss, accident). Of those respondents who anticipated an upcoming major expense, only 45 percent believed they could fund it, and only 34 percent of respondents believed they could fund a major unplanned expense. Slightly less than one-third of those with dependent children in their household did not report any plans to support their future, with low- income families more predominantly represented. Planning for old age and retirement is infrequent, with less than a third of the population under the age of 60 reporting any plans in place to cover old-age expense. Of those over age 60, nearly two-thirds report insufficient or no provisions for living costs, with many reliant on support from working-age family and friends. xv FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE Nearly two-thirds of the Mexicans surveyed expressed a greater orientation toward the present than the future. Sixteen percent of survey respondents did not report any financial plans, 27 percent reported their planning time frame to be one week or shorter, and 27 percent reported a planning time frame between one week and one month. At the same time, two-thirds of the survey respondents reported a strong achievement orientation, meaning they felt they worked hard to be their best and improve their future, suggesting a need to harness these aspirations to concrete financial planning actions. MAKING DECISIONS ABOUT FINANCIAL SERVICES Mexicans utilize a range of formal and informal instruments for savings and credit. Nearly half of those surveyed (49 percent) reported that they do not currently use any financial services, formal or informal, for saving and credit purposes, and 42 percent reported that they have not used any financial services in the past five years. Among the 51 percent who are currently using financial services, the most prevalent formal financial products were savings vehicles such as accounts at finan- cial institutions and credit cards. For informal sources of credit and savings, tandas (the Mexican term for informal rotating savings and credit associations, or ROSCAs) and loans from family or friends were commonly mentioned. The majority of those currently using financial services reported making very careful decisions about this usage—even as they chose high-cost informal services such as credit from pawn shops. When considering financial product options, 62 percent of respondents reported detailed knowledge of terms and condi- tions. Those respondents who own formal financial products, have formal sector jobs, or are in higher-income groups are more likely to have researched financial product decisions. FINANCIAL KNOWLEDGE The level of formal financial knowledge among those surveyed showed oppor- tunities for improvement, particularly for interest rate calculations. Most Mexi- cans do not understand how interest is compounded and calculated, and are not familiar with the concept of portfolio diversification. However, the majority of survey respondents correctly answered questions related to basic numeracy and the defini- tion of inflation, and were familiar with the concept of interest paid on a loan. The level of financial knowledge is positively correlated with education and income. Defi- ciencies in financial knowledge suggest challenges in choosing financial products. Half of the surveyed population stated they were never taught how to manage their money—for those who did receive guidance, the primary source was a parent. xvi Executive summary COMPARING FINANCIAL CAPABILITY Analysis of survey data yields seven behavioral and three attitudinal components of overall financial capability (budgeting, living within means, monitoring expenses, using information, not overspending, covering unex- pected expenses, saving, attitude toward the future, not being impulsive, and achievement orientation). Financial knowledge is positively associated with increased financial capability for 7 out of the 10 components, and after controlling for sociodemographic factors, is highly correlated with the not overspending capability, followed by achievement orientation, saving, and living within means. Five distinct clusters in the sampled population were identified using indi- vidual scores on the components of financial capability. These clusters are: unsophisticated money managers (22 percent), short-term money managers (33 percent), young impulsive spenders (12 percent), affluent but disorganized (9 percent), and careful money managers and planners (25 percent). The first two categories, comprising 55 percent of the population altogether, are made up of predominantly low-income and informal sector workers. The unsophisticated money managers do live within their means, but show limited planning, budgeting, and monitoring of finances, and make little use of savings and credit products. The short- term money managers, on the other hand, are strong at day-to-day financial manage- ment, and half of these are using financial services. However, most lack the skills and income to save adequately and make provisions for the future. INTERNATIONAL PERSPECTIVES Compared to survey respondents from other countries (Armenia, Colombia, Lebanon, Nigeria, Turkey, and Uruguay), Mexicans report a relatively shorter time horizon for financial planning and are less likely to plan how they would spend their money. They do, however, report being more inclined to save. Mexico’s budgeting score, measuring the extent to which people plan use of income, was lower than six of the seven countries for which data were collected, the exception being Lebanon. Mexicans also expressed more of a short-term focus as measured by scores on questions of time preference. However, for the saving score, which reports perception of ability to save, Mexico was among the highest of the seven countries. LINKAGES BETWEEN FINANCIAL CAPABILITY AND FINANCIAL INCLUSION Both financial knowledge and financial capability are positively associated with a use of formal financial products such as bank accounts and credit cards. Use of formal financial products (bank accounts, credit cards, personal loans, mortgage, and insurance) is more common among men, urban residents, high- income earners, and formal sector employees. Informal sources of savings and credit (tandas, pawn shop loans, loans from family or friends) are largely utilized on an xvii FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE ad hoc basis by lower-income segments of the population to save for emergencies and cover fluctuations in income, as well as to pay for food and other necessities. Results suggest that banking correspondents increase access to formal financial products primarily for individuals with high financial capability or high financial knowledge (as measured by a battery of financial literacy questions). CONCLUSIONS AND POLICY RECOMMENDATIONS Promoting financial capability and financial knowledge can accelerate finan- cial inclusion and support responsible use of financial products by consumers at all income levels. The findings presented in this report show how financial capability and financial inclusion varies significantly with factors such as educational attainment, income, employment, and geographic location. Additionally, the analysis highlights the strengths (disposition to save) and weaknesses (planning behaviors) of overall financial capability for most Mexicans. Increasing the overall financial capability of Mexicans will require a multi- pronged, multistakeholder strategy involving improved design of financial management tools and financial products, targeted financial education to enhance capability, and supportive regulation ensuring adequate consumer protection. Government agencies at national and local levels, banks and other finan- cial institutions, education institutions, the media, and nongovernmental organiza- tions can all play a role in improving financial capability. Diverse strategies—such as the development of user-friendly financial planning and monitoring tools, strength- ening the infrastructure for expansion of appropriately designed financial products, supporting regulation ensuring adequate consumer protection, and implementing well-designed financial education interventions—all have the potential to enhance financial capability in Mexico. Table E.1 summarizes the report’s policy recommenda- tions with respect to each of the challenges noted above. xviii Executive summary TABLE E.1  RECOMMENDATIONS TO SUPPORT IMPROVED MONEY MANAGEMENT AND FINANCIAL PLANNING AND REDUCE VULNERABILITY IN MEXICO POLICY INSTRUMENT OR PROGRAM MAIN CHALLENGE POLICY GOAL (AND SUGGESTED TIME FRAME) Daily money management and planning ahead Limited budgeting and Build consciousness of ƒƒSupport the development of mobile phone– and Internet-based monitoring of expenses: budgeting and monitoring personal finance tools (such as Juntos Finanzas and the CON- just 41% budget regularly behaviors by using tech- DUSEF tool for family budgeting) and their distribution through and 20% monitor expenses nology to facilitate expense financial and educational institutions (short term) rigorously tracking and budgeting ƒƒEncourage financial institutions and other stakeholders to use text messages and/or social media to relay notices and informa- tion related to personal finance, such as managing account bal- ances, loan repayment, etc. (short term) Vulnerability to shocks: ƒƒEncourage people to save ƒƒEncourage private, and require state-owned, financial institutions 34% believed they could for unanticipated major to pilot product design features supporting savings mobilization cover a major unanticipated expenses (medium term) expense and 70% reported ƒƒCreate mechanisms to ƒƒAdjust contract between relevant government entities to enable regular or occasional encourage recipients of recipients of social assistance to save a portion of their social difficulties covering basic social assistance to save benefits in their associated account and emphasize savings expenses mobilization in financial literacy training to social benefit recipi- ents (medium term) Limited funds for retirement Encourage a culture of ƒƒSupport campaigns to raise awareness of the need to increase and other predictable life saving for retirement and voluntary saving for retirement through entertainment and events: 28% of those under other predictable life-cycle media channels (medium term) the age of 60 has plans to events ƒƒPublic and private institutions providing financial education should cover their expenses fully in develop programs centering around a specific teachable moment, old age such as retirement or a milestone life event such as the com- mencement of higher education or birth of a child (medium term) Decisions about financial products and formal financial knowledge Persistent financial inclu- Continue to develop finan- ƒƒExpand the range of deposit services by supporting regulations sion gaps: 49% do not cial infrastructure to expand that would allow financial cooperatives and regulated deposit- currently use any financial the provision of regulated taking microfinance institutions to operate bank correspondents product, formal or informal, financial products in rural and marginalized locations (short term) for saving and credit pur- ƒƒWiden the scope of transactions executed through banking agents poses by building the business case for low-risk deposit accounts and additional services such as microinsurance (medium term) ƒƒBuild a stronger mobile payments network by enhancing regulation to support interoperability among different mobile network opera- tors and supporting potentially transformational business models (such as mobile point-of-sale schemes) (medium term) ƒƒScale up promising programs that support rural adoption of mobile payments, such as the Telecomm pilot in Oaxaca (short term) ƒƒState development banks could pilot a program to support link- ages from informal to formal sources of savings and credit, such as tandas to banks (medium term) ƒƒMexican authorities could issue more specific rules to promote the marketing of basic bank accounts (medium term) (continued) xix FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE TABLE E.1  RECOMMENDATIONS TO SUPPORT IMPROVED MONEY MANAGEMENT AND FINANCIAL PLANNING AND REDUCE VULNERABILITY IN MEXICO (continued) POLICY INSTRUMENT OR PROGRAM MAIN CHALLENGE POLICY GOAL (AND SUGGESTED TIME FRAME) Limited level of formal Support well-timed, targeted ƒƒMexican authorities could establish a policy framework for finan- financial knowledge hin- financial education interven- cial education that considers the inventory of existing programs ders decision making on tions that equip all segments and incorporates the mixed evidence on the impact of financial financial products: just 37% of the population to respon- education (short term) could calculate a simple sibly use formal financial ƒƒMexican authorities could consider incorporating financial edu- interest rate services cation modules in public school curricula and experiential educa- tion, involving household members in assignments to optimize spillovers (medium term) ƒƒContinue to collect and analyze data to strengthen the empirical basis for policies related to financial capability, e.g., through the National Survey on Financial Inclusion (medium term) Formal financial products, Support consumer protec- ƒƒMexican authorities and other stakeholders could consider even bank correspondents, tion interventions that help scaling up mass media interventions (e.g., telenovelas, radio) are primarily used by indi- mitigate effects of limited to disseminate key messages related to financial capability viduals with high financial formal financial knowledge (short term) capability or high financial ƒƒMexican authorities could require regulated financial institutions knowledge to incorporate research on good practices for disclosure and pricing regimes for financial consumers; these measures could promote the use of formal financial products among less knowl- edgeable segments of the population (medium term) ƒƒDevelop market conduct regulations governing banking transac- tions occurring outside the traditional banking infrastructure (medium term) xx I CHAPTER 1 ntroduction 1.1 CONTEXT In the last decade, the financial landscape in Mexico has been altered by a sharp increase in the availability of consumer financial products and services. To broaden outreach and stimulate competition, Mexican banking authorities have supported legal changes to permit specialized banks. This has facilitated the creation of banks backed by retailers such as Banco Azteca and Banco Walmart, which have a strong physical presence throughout the country. Legislation to provide an enabling framework for third parties, such as neighborhood stores or pharmacies, to deliver banking services (corresponsales, or correspondents) and to establish bank accounts managed via mobile phones was passed in 2009 and 2010, respectively; together, this legislation increases the accessibility and convenience of financial services beyond medium-size urban centers. As of October 2012, 60 percent of Mexico’s 2,456 municipalities were served by a bank branch or bank correspondent, up from 36 percent in June 2009 (CNBV 2009). Credit card use has also expanded significantly. Consequently, Mexican consumers are confronted with an array of financial deci- sions involving credit, savings, investments, and insurance more complex than in previous decades. As access to finance expands, the ability to make sound financial decisions and use financial products responsibly has become more crucial. Good financial decision- making skills help consumers achieve higher levels of individual and family welfare— particularly in households that are vulnerable to economic shocks, such as loss of income. When resources become strained, the effects of suboptimal financial decisions can be more severe. In the aftermath of the global financial crisis, finan- cial literacy and consumer protection issues have gained new prominence both in Mexico and worldwide. Promoting responsible financial inclusion and education has been a high priority of the Mexican government. In fact, in 2006, financial education for the Mexican popula- tion was specifically named a priority of the government. In 2008, a unit dedicated to supporting financial inclusion was set up in the Mexican National Banking and 1 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE Securities Commission (CNBV). In 2009 and 2010, modifications of the Law for Trans- parency and Regulation of Financial Services expanded the regulatory and supervi- sory capacity of the National Commission for the Protection and Defense of Users of Financial Services (CONDUSEF) with the aim of helping eliminate predatory lending practices. Two coordination bodies were established by the government in 2011 to enhance financial education and financial inclusion in Mexico. The Committee on Financial Education (CEF), chaired by the Ministry of Finance, was created as a coordinating and consulting board for the public sector and other stakeholders involved in finan- cial education development (including CONDUSEF, state-owned banks, and public finance institutions). The committee is charged with designing and implement the National Strategy on Financial Education. It is chaired by the Ministry of Finance and Public Credit. The National Council for Financial Inclusion (CONAIF) was created as a board for consultation, advice, and coordination between domestic financial regula- tory bodies and to oversee the National Policy on Financial Inclusion. Internationally, Mexico has taken a leadership role in promoting financial inclusion. It was a founding member of the Alliance for Financial Inclusion, and the CNBV presi- dent sits on that organization’s board. Financial inclusion was also a key priority established by Mexico in its capacity as chair of the G20 in 2012. In this context, Mexico has worked with the Global Partnership for Financial Inclusion and the Inter- national Network for Financial Education (INFE). The priority attached to these issues by the country led to the commissioning of the present financial capability study by the World Bank—the first of its kind in Mexico. Accelerating responsible financial inclusion of the poor is an important part of the World Bank’s goal of promoting shared prosperity in Mexico. An increasing number of institutions are promoting financial education programs among different audiences. A 2009 mapping of financial education initiatives (Heimann and Sainz 2009) found 53 national programs targeting diverse segments including students, teachers, housewives, businesspeople, and migrant workers. These initiatives were being provided by a variety of financial institutions, public organizations, and nongovernmental organizations (NGOs), but in many cases without a clear market diagnostic. 1.2 WHY THIS REPORT? The CNBV and CONDUSEF requested support from the World Bank to develop and execute a nationally representative survey on financial capability. The survey instru- ment used was developed and implemented with the support of the Russia Trust Fund for Financial Literacy and Education as part of a global program (box 1.1). An 2 CHAPTER 1.  INTRODUCTION BOX 1.1  FINANCIAL CAPABILITIES AND KNOWLEDGE SURVEY DATA FEATURED IN THIS REPORT The Mexican Financial Capability Survey implemented by CONDUSEF, the CNBV, and the World Bank collected a range of information on financial behavior and financial knowledge. The data collected include sociodemographic characteristics, daily money management practices, planning for future events, use of and decisions related to financial products/services, and financial knowledge. The survey used both objective and attitudinal questions. The 2012 Mexican survey covered a nationally representative sample of 2,022 adults. Adults over age 18 who reported making financial decisions for their household and/or themselves were eligible for the survey. Respondents were randomly chosen from each eligible and selected household through the use of a Kish grid. Individuals selected for the survey were interviewed face to face in their homes by staff of the survey firm Ipsos Bimsa during July and August 2012. Sampling weights were constructed and applied in the analysis in this report. A multistage probabilistic survey design was applied, which means that each eligible individual had an equal chance of being selected. The National Federal Election Register was utilized as a sampling frame. The sample population was stratified by urban and rural areas (with rural defined as municipalities with fewer than 15,000 inhabitants); localidades, small census enumeration units, were used as the primary sampling units. The distribution of the sample in both rural and urban areas was made according to the proportion of the weight of the localidades relative to the total population, with adjustments to provide greater representation to urban areas, which contain a greater proportion of the population. The estimated margin of error for the sample is ±3 percent for a level of confidence of 95 percent. Comparable data are available for a range of low- and middle-income countries. The survey questions were developed by the Russia Trust Fund for Financial Literacy and Education, which facilitated the collection of similar data using comparable methodologies in six other countries: Armenia, Colombia, Lebanon, Nigeria, Turkey, and Uruguay. The Mexican questionnaire was customized to include additional survey questions on financial knowledge from the Organisation for Economic Co-operation and Development/International Network on Financial Education (OECD/INFE) study, as well as questions on preferences and the use of government programs that were not part of the common core on financial capability. This 2012 survey collected data from adults from all regions of Mexico with a range of sociodemographic characteristics. Of those surveyed, slightly more than half (53 percent) were female. The full age distribution of the adult population over age 18 was covered. The summary statistics for selected sociodemographic factors are presented in table A.1 in appendix A. initial phase of qualitative research was conducted in the six geographic regions of Mexico in various urban and rural settings. The Mexican research included 13 focus groups in October 2010 and 50 in-depth interviews conducted from April to June 2011. This Mexican qualitative research, and the research conducted in a range of low- and middle-income countries worldwide, was used to develop a comprehensive questionnaire on financial capabilities, which was piloted in the state of Puebla in November 2011 and administered to 2,022 Mexican adults nationwide in June and July 2012 (figure 1.1). Although Mexico has a wealth of available financial inclusion data, this report presents the first nationally representative study to detail the finan- cial behavior, attitudes, and knowledge that comprise financial capability. Comple- 3 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE FIGURE 1.1  COVERAGE OF THE MEXICO FINANCIAL CAPABILITY SURVEY Sonora Baja Chihuahua California Coahuila de Zaragoza Baja Nuevo California Sur Sinaloa Leon Durango Zacatecas Tamaulipas San Luis Nayarit Potosí Querétaro de Arteaga Guana- Tlaxcala Aguascalientes juato Yucatan Hidalgo Jalisco Veracruz-Llave Michoacán México Quintana de Ocampo Roo Colima Puebla Campeche Tabasco Distrito Federal Guerrero Oaxaca Morelos Chiapas Source: World Bank and Government of Mexico Financial Capability Survey data. Note: Surveyed states are in orange; nonsurveyed states are in gray. mentary national studies include the 2008 Survey on Financial Culture conducted by Banamex and the National Autonomous University of Mexico (Banamex-UNAM 2008); the 2011 National Firms’ Finance and Competitiveness Survey (ENAFIN) conducted by Banxico, the Inter-American Development Bank, and the CNBV; and the 2012 National Survey on Financial Inclusion (ENIF) conducted by CNBV and the National Statistics Institute for Mexico (INEGI). In addition, the Financial Diaries project, which provides a qualitative record of the financial lives of poor people, began in 2012. Global annually updated data sets, such as the World Bank’s Findex, the International Monetary Fund’s Financial Access database, and the World Bank´s Enterprise Survey data, provide complementary information on financial inclusion. This report has four objectives: „„ To provide empirical evidence to understand the financial behavior, attitudes, and knowledge of the Mexican population 4 CHAPTER 1.  INTRODUCTION „„ To support the design of public policies to enhance both the knowledge about and the quality of financial services „„ To highlight vulnerabilities and gaps in particular segments of the popula- tion with the goal of improving and focusing public policies and interventions where they are most needed „„ To provide a basis for international comparison. 1.3 WHAT IS FINANCIAL CAPABILITY? The term “financial capability” refers to a broader concept than financial literacy alone. Although the specific definition varies from study to study, financial literacy is often equated with the knowledge and skills to make key financial decisions. Studies tend to measure financial literacy based on questions that test knowledge of financial concepts—such as the time value of money (inflation), interest rates, compounding, and risk diversification—that are needed to make key financial choices (Huston 2010; Lusardi and Mitchell 2011; Xu and Zia 2012). Financial capability encompasses an individual’s behavior and attitudes related to his or her finances. Approaches differ, but financial capability recognizes that knowledge alone is necessary but not sufficient to make sound financial decisions and to access and use financial products/services responsibly. The analysis of financial capability that was pioneered in the United Kingdom centered on four areas: managing money, planning ahead, choosing products, and staying informed (Atkinson et al. 2006). A U.S. study (Lusardi 2011) measured Americans’ financial capability in four areas: making ends meet, planning ahead, managing financial products, and financial literacy and decision making. This report describes Mexico’s financial capability related to daily money management, planning ahead, and choosing financial products/services; it also explores levels of financial knowledge and the complex relationship between financial capability, knowledge, and inclusion. Elements of financial capability—particularly financial knowledge—have been linked to a range of behavioral outcomes. Much literature to date has analyzed behaviors related to financial knowledge. Studies on the United States (Lusardi and Mitchell 2009), Italy (Fornero and Monticone 2011), and Japan (Sekita 2011) find that those who are less financially literate are less likely to plan for retirement. Those with more limited financial knowledge are also less likely to choose mutual funds with lower fees (Hastings and Tejeda-Ashton 2008). There are also linkages between financial literacy and debt outcomes. Lusardi and Tufano (2009) find that individuals with lower levels of debt literacy tend to transact in a high-cost manner, incurring a higher debt burden and borrowing at a greater cost. The less knowledgeable also 5 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE report excessive debt loads or that they are unable to judge their debt position. Although there is less evidence to date, attitudes and preferences are also consid- ered to be important elements of financial capability. Mandell and Klein (2007) find evidence supporting motivation as a factor in increasing the financial literacy of respondents. The findings in this report will facilitate discussion about how best to increase finan- cial capability and boost the ability of people to manage their finances in Mexico. Educational interventions (through schools, financial institutions, and the mass media) are the most commonly mentioned strategies, but financial capability facili- tates a more comprehensive approach that considers behaviors and attitudes to help people make better choices in the context of the services and products available to them. This report describes a baseline measure of the financial capability of the Mexican adult population and highlights key results from the first national survey of 2,022 Mexicans aged 18 and over. Chapter 2 describes key findings related to daily money management and financial planning behaviors and attitudes. Chapter 3 examines decisions related to the use of financial products and level of financial knowledge. Chapter 4 summarizes key behaviors and attitudes into financial capability scores, facilitating the creation of profiles and comparisons among different segments of the population. Chapter 5 presents international comparisons. Chapter 6 examines the relationship between financial capability, financial knowledge, and financial inclusion. Chapter 7 provides policy recommendations related to the key challenges to finan- cial capability identified in the report. 6 D CHAPTER 2 aily money management and financial planning T his chapter explores the behaviors and attitudes related to participation in finan- cial decision making, budgeting and monitoring the use of money, balancing income and expenses to make ends meet, saving, and long-term financial planning. The survey results show that 91 percent of Mexican adults actively participate in household expenditure decisions. The majority of household financial managers are women (54 percent), even though women contribute to household incomes less than do men. For the majority of households, daily money management and planning processes are imprecise. Less than half (41 percent) of all households consistently budget, and just 20 percent monitor expenses rigorously. Many Mexican households are financially strained, with 70 percent reporting regular or occasional shortages of funds to cover basic expenses such as food and housing. Most Mexicans have made no provisions to cover major expenses, either planned (such as school fees or weddings) or unplanned (such as job loss or an accident). Nearly two-thirds of those surveyed cite an orientation toward the present rather than the future. Planning for old age is infrequent, with less than a third of the population under the age of 60 reporting any plans in place to cover old age expenses. 2.1 CHARACTERISTICS OF FINANCIAL DECISION MAKERS Of the adults surveyed, 91 percent actively participated in a range of household expenditure decisions, while 6 percent were responsible only for their personal expenses. The remaining 3 percent were excluded from the survey, because they reported not making financial decisions for themselves or the household; this resulted in a total sample of 2,022. Common household expenditure decisions included planning how money was spent, paying household bills (e.g., rent), and/or making financial decisions for the household. Females play a key role in household financial matters even when they are not the heads of household. Nearly half of the women in the sample reported that they did not contribute financially to the household, as opposed to just 12 percent of men (figure 2.1). However, a higher percentage of women surveyed participated in household financial 7 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE FIGURE 2.1  CONTRIBUTIONS TO THE HOUSEHOLD BUDGET AND PARTICIPATION IN FINANCIAL DECISION MAKING, BY AGE AND GENDER Percent 100 80 60 40 20 0 18–24 25–29 30–39 40–49 50–59 60–69 70–79 ≥ 80 Male Female Contributes to budget Participates in decision making Source: World Bank and Government of Mexico Financial Capability Survey data. decisions than men (table 2.1). And a majority of women responded that they ensured that all regular household expenses are paid. Slightly more than half the women making financial decisions identified themselves as partners or wives, while 27 percent were heads of household; the remainder were other types of family relations. The few adults who did not report making any financial decisions for the household were primarily the young (age 18–24) and the old (age 60 and above). As shown in table 2.1, young adults had the highest share (17 percent) of those who reported responsibility only for personal expenses. Those who reported not making any finan- TABLE 2.1  FINANCIAL DECISION-MAKING ROLES % MAKING HOUSE- % MAKING PER- % NOT MAKING HOLD FINANCIAL SONAL FINANCIAL ANY FINANCIAL CHARACTERISTIC DECISIONS DECISIONS DECISIONS Male 88 6 6 Female 94 5 1 Age 18–24 82 17 1 25–46 94 4 2 47–59 91 2 7 ≥ 60 90 3 6 Highest education level Primary or below 94 3 3 Secondary 90 6 3 Tertiary 83 11 6 Source: World Bank and Government of Mexico Financial Capability Survey data. Note: n = 2,090. 8 CHAPTER 2.  Daily money management and financial planning cial decisions—particularly among the young and the old—tended to be economi- cally dependent on the household head and reported that they did not contribute to the household budget. 2.2 BUDGETING AND MONITORING EXPENSES Although about 70 percent of adults said they made plans about how to use the money they received, adherence to these plans was more limited. Adults who planned were split between those who always planned and those who only sometimes planned (figure 2.2). While 61 percent of those surveyed reported keeping to their expenditure plans (approximately one-third all the time, and more than one-quarter some of the time); 9 percent did not keep to their plans at all, and 31 percent did not have any plan at all. Just 21 percent of those surveyed characterized their plans as exact as opposed to rough (figure 2.3). Being a woman, an urban dweller, or having a higher income was associated with a greater likelihood of making exact plans. The 31 percent of the surveyed population that reported not planning at all were characterized by lower education levels, informal employment, and living in a rural area. FIGURE 2.2  MAKING AND ADHERING TO PLANS ABOUT BUDGETING Always Sometimes Not at all/never Make plans about how 41% 28% 31% to use money received Keep to plans made 34% 27% 39% 0 50 100 Percent Source: World Bank and Government of Mexico Financial Capability Survey data. Less than a quarter of survey respondents knew exactly how much they had spent in the last week, suggesting a low level of precision in daily money management. Although 63 percent of those surveyed said they knew how much their household had available for daily expenses, most characterized this knowledge as rough rather than exact (figure 2.4). And while 52 percent knew how much they had spent person- ally in the last week, just 18 percent knew exactly how much they had spent person- ally in the last week.1 Being a formal sector employee or a higher-income individual These results are similar to findings from the first survey on financial culture (Banamex-UNAM 1  2008), in which 18 percent of those surveyed reported having some register of their income, expenses, and debts. 9 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE FIGURE 2.3  PLANNING BEHAVIOR BY GENDER, LOCATION, AND INCOME Percent 80 Make rough plan Make exact plan 60 40 20 0 Male Female Rural Urban Lowest Low- Middle- Highest income middle high income income income Source: World Bank and Government of Mexico Financial Capability Survey data. FIGURE 2.4  PRECISION OF MONEY MANAGEMENT Percent 60 Knowledge of spending Knowledge of amount in last week available for current spending 48 41 40 37 33 22 18 20 0 Exact Rough Does not know Source: World Bank and Government of Mexico Financial Capability Survey data. is correlated with increased likelihood of monitoring spending. In terms of attitudes, perceiving oneself as disciplined in money matters was correlated with a higher degree of precision in managing money. 2.3 MAKING ENDS MEET: BALANCING INCOME AND EXPENSES More than 70 percent of the surveyed population experienced regular or occa- sional financial strain, such as being short of money to cover basic necessities. Only 29 percent of those surveyed reported having money left over after paying for basic expenses such as food and other necessities. Twenty percent of the surveyed sample reported being regularly short of money to cover basic expenses, and 51 percent 10 CHAPTER 2.  Daily money management and financial planning reported occasional shortfalls. For those with funds remaining after paying their basic expenses, saving to provide a cushion against unexpected shocks was by far the most common use. Low-income individuals, the elderly, informal sector employees, and those whose schooling ended with primary education or less were particularly vulnerable to finan- cial strain. Low-income levels and seasonal income fluctuations were two of the most commonly cited reasons for shortfalls in the ability to meet basic expenses. Not surprisingly, income levels were highly correlated with limitations in being able to make ends meet (figure 2.5). Having no knowledge or limited knowledge of how much money was spent in the last week was correlated with being short of money to cover basic necessities. FIGURE 2.5  SHORTFALLS IN MONEY FOR NECESSITIES Regularly Sometimes No Highest income 18 38 43 Middle-high income 12 51 36 Low-middle income 14 55 31 Lowest income 28 54 17 0 50 100 Percent Source: World Bank and Government of Mexico Financial Capability Survey data. Informal borrowing was a common coping strategy to ease financial strain. Nearly half of those who ran short of money cited borrowing from family or friends as their most common solution, and 29 percent of respondents reported being in debt to a friend or family member. Thirty percent of those surveyed reported regularly or occa- sionally borrowing money to buy food or other necessities, and 43 percent reported borrowing to pay off debts (figure 2.6). Having less than a high school education and a lower income was associated with a greater likelihood of borrowing to cover debts, with all other variables held constant. Use of financial services is discussed in more detail in chapters 3 and 6. 11 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE FIGURE 2.6  COPING STRATEGIES TO COVER SHORTFALLS Regularly Sometimes No Borrow to buy food or other necessities 5 25 70 Borrow to pay off debts 4 39 57 0 50 100 Percent Source: World Bank and Government of Mexico Financial Capability Survey data. 2.4 PLANNING FOR MAJOR EXPENSES: EXPECTED AND UNEXPECTED Less than half (45 percent) of those who had a major upcoming expense planned believed they could cover it. Twenty-one percent of those surveyed projected a major upcoming expense in the next year equivalent to one month’s income, such as a wedding or other occasion, or school fees. Of those who felt they could not cover the planned expense, less than half had made some plans toward being able to meet the obligation. Overall, just one-third of respondents believed they could cover a major unplanned expense, compared to about one-quarter of low-income individuals. Only 34 percent of those surveyed had done anything to prepare for an unplanned expense equiva- lent to one month’s income. Perceived ability to cope with a major unexpected expense increases greatly with income, as shown in figure 2.7. Those employed in the formal sector also professed a greater ability to cope with unexpected shocks than those in the informal sector. This vulnerability to shocks is a source of stress. Eighty-two percent of those surveyed were worried about this situation, including some of those who felt they had the means to cover this unexpected expense. 2.5 PLANS FOR CHILDREN’S FUTURE AND OLD AGE Nearly half of those with one or more dependent children had made some plans to provide for their education. Among the sample, 55 percent had dependent children in their household, and the number of children in the household was not correlated with these plans. Plans to save for children’s inheritance were less common, with only 16 percent of respondents with dependent children citing such plans. Slightly less than one-third of those with dependent children in their household did not report any plans to support their future; this proportion was larger among low- income families. 12 CHAPTER 2.  Daily money management and financial planning FIGURE 2.7  ABILITY TO COVER MAJOR UNEXPECTED EXPENSES, BY INCOME GROUP Could not cover, Could not cover, thought Could not cover, done Could cover not thought about about doing something something to plan Lowest income 50 10 16 24 Low-middle income 42 10 18 31 Middle-high income 28 7 19 46 Highest income 23 6 14 57 0 20 40 60 80 100 Percent Source: World Bank and Government of Mexico Financial Capability Survey data. Less than a third of the population under the age of 60 made plans to cover their expenses fully in old age. The most common strategies envisioned by this age group to cover these expenses were to accumulate savings or other financial assets, or seek financial support from the family; just 13 percent reported contributing to a pension (either voluntary or compulsory) through an employer or the government (figure 2.8). A minority of respondents under the age of 60 (28 percent) believed that these strategies would fully cover their expenses in old age, and another 21 percent cited partial coverage; the majority (51 percent) reported having no strategies for coverage at all. A lack of strategies was highly correlated with lower income. And a higher percentage of those who were employed informally had no provisions for old age, as they did not benefit from government- or employer-provided support (figure 2.9). A higher percentage of women than men had no provisions for old age, possibly reflecting their more limited participation in the formal labor force (roughly a 5 percent gap, according to ILO 2011 data). The vast majority of those surveyed (87 percent) cited the ability to fund old age expenses as a source of concern. In a global overview, Lusardi and Mitchell (2011) find that retirement planning is a good proxy for retirement wealth, because those who have calculated how much they need to save reach retirement age with three times the wealth of those who did no such calculations. Nearly two-thirds of those over age 60 reported having insufficient or no provi- sions for old age expenses. Seeking support from family and friends was the most commonly cited strategy, used by one-third of the over 60 population; govern- 13 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE FIGURE 2.8  STRATEGIES EMPLOYED TO COVER OLD AGE EXPENSES Savings/other financial assets Support from family/friends Government pension Business income Keep working always > age 60 < age 60 Employer pension 0 10 20 30 40 Percent Source: World Bank and Government of Mexico Financial Capability Survey data. ment pensions played a role for almost a quarter of respondents in this age group, followed by savings and other assets for more than 15 percent (figure 2.8). Other surveys (e.g., CNBV/INEGI 2012) have indicated that, although by law all formal sector workers must have a pension or a savings for retirement account, a portion of the population did not know that they had individual savings for retirement accounts. FIGURE 2.9  COVERAGE OF OLD AGE EXPENSES, BY GENDER AND EMPLOYMENT (<60 YEARS OF AGE) Has no provision Has provision, not full coverage Has provision, full coverage Female 54 21 26 Male 50 21 29 Informal 61 16 22 Formal 52 16 32 0 20 40 60 80 100 Percent Source: World Bank and Government of Mexico Financial Capability Survey data. 14 CHAPTER 2.  Daily money management and financial planning 2.6 ATTITUDES Nearly two-thirds of the population indicated an orientation toward the present rather than the future with regard to saving and planning. Impatience has been shown to play a role in financial behavior, especially on behavior related to savings and pensions (Hastings and Mitchell 2010). More than two-thirds of the surveyed population agreed with statements expressing a focus on the present day (figure 2.10). Lower levels of education and income are correlated with this stated orientation to the present, while being middle-aged (as opposed to young or old) is correlated with greater orientation toward the future (see chapter 4). This orientation toward the present was also correlated with statements in which the respondents identified themselves as impulsive. FIGURE 2.10  ATTITUDE TOWARD THE FUTURE Strongly agree Partially agree Partially disagree Strongly disagree I only focus on the short term 39 26 16 19 The future will take care of itself 47 25 11 16 I live more for the present day than tomorrow 46 25 14 15 0 20 40 60 80 100 Percent Source: World Bank and Government of Mexico Financial Capability Survey data. More than half of those surveyed cited a financial planning time frame of less than a month. Equal percentages—27 percent of respondents—reported their financial planning time horizon as either less than a week, or as between one week and one month; 16 percent reported no financial plans for the future at all (figure 2.11). Those who were employed in the formal sector reported longer time horizons, as did those in higher-income groups. Stable incomes can facilitate access to products and services—which in turn can facilitate planning, such as automatic deductions for savings or pension accounts. 15 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE FIGURE 2.11  FINANCIAL PLANNING HORIZONS Percent 100 11 10 10 80 19 17 25 More than 6 months 60 25 Monthly/less than 6 months 27 32 Weekly/less than 1 month 40 27 29 Daily/less than 1 week 20 21 No plans for future 16 18 10 0 All Formal Informal Source: World Bank and Government of Mexico Financial Capability Survey data. Over two-thirds of the survey respondents reported a strong achievement orienta- tion. Most of the Mexicans surveyed strongly agreed with questions affirming that they work hard to be the best, have many aspirations, and look for opportunities to improve their situation (figure 2.12). Higher income is correlated with a greater propensity to agree with these three statements, after controlling for various socio- economic and location-related factors. FIGURE 2.12  ACHIEVEMENT ORIENTATION Strongly agree Partially agree Partially disagree Strongly disagree I always work hard to be among the best at what I do 66 19 10 5 I have many aspirations 72 16 6 6 I always look out for opportunities 73 17 6 4 for improving my situation 0 20 40 60 80 100 Percent Source: World Bank and Government of Mexico Financial Capability Survey data. 16 D CHAPTER 3 ecisions about financial services and financial knowledge H ow people choose financial products that are appropriate for their needs and how they make choices between similar financial offerings is an important part of financial capability. Formal knowledge of key financial concepts and the ability to apply numeracy skills in financial situations are also important in the responsible use of financial services. This chapter provides a brief overview of the usage of financial products in Mexico and explores how decisions about financial products are made and the levels of knowledge that are utilized in decision making. Data show that 49 percent of the survey population does not currently use any financial service, whether formal or informal.1 Among those who do, informal loans from family or friends and accounts at financial institutions are the most commonly used financial service. Informal sources of credit and savings—including tandas (informal rotating savings and credit associations), pawn shops, and loans from family or friends—are largely used on an ad hoc basis by lower-income segments of the population to save for emergencies and cover fluctuations in income, as well as to pay for food and other necessities. More than 60 percent of those using financial services reported verifying terms and conditions and comparing various products before making financial decisions. However, just 37 percent of the survey popula- tion was able to do a simple interest rate calculation necessary to compare financial services. Note that, as discussed in box 3.1, financial surveys undertaken in Mexico use differing definitions of financial services. 3.1 USAGE OF FINANCIAL SERVICES Among the range of credit and savings services utilized by the Mexican popula- tion, informal loans and accounts at financial institutions were the most prevalent (figure 3.1). Less than a quarter (22 percent) of those surveyed reported currently receiving credit informally from family or friends. Accounts at financial institutions The Financial Capability Survey defines financial services as including both formal financial 1  products (e.g., accounts at financial institutions, credit cards) and informal sources of credit and savings (e.g., loans from family or friends, pawn shops, and tandas). 17 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE BOX 3.1  COMPARING DIFFERENT DATA SOURCES ON FINANCIAL INCLUSION IN MEXICO Mexico has a wealth of data on financial inclusion from surveys with different scopes, indicator definitions, and coverage. This box compares the financial capability data used in this report to two additional data sets that provide complementary information on the development of financial inclusion in Mexico: (1) Mexico’s ENIF, which extensively covers the usage of financial products and barriers to such usage, the intended use of remittances, access to financial channels, and elements of financial capability, financial education, and consumer protection; and (2) the Global Financial Inclusion database (Global Findex), a survey conducted in 148 countries around the world, including Mexico, that measures how adults save, borrow, make payments, and manage risk. The three surveys cover some similar indicators, providing an opportunity to compare data gathered using different methodologies and question formulations. As shown in the table below, data on some indicators are of similar magnitudes, such as insurance usage from the Financial Capability Survey and Findex, credit card usage across the three surveys, and loan usage (in the aggregate) for Findex and ENIF. Data for other indicators, such as use of formal savings accounts, differ by more than 10 percent. Differences in the wording of survey questions, methodologies, targeted populations, and definitions of financial products are a likely source of disparity across financial inclusion indicators. For example, respondents to the Financial Capability Survey were not explicitly asked about use of accounts to receive payroll as they were in ENIF, so fewer respondents in the former may have considered these in their response. As another example, ENIF defines financial services in accordance with Mexican law; as such, ENIF does not regard tandas and pawn shops as financial services, unlike Findex and the Financial Capability Survey. Despite these differences, triangulating the three data sets enables policy makers to gain a more nuanced understanding of, and wealth of information on, financial inclusion. FINANCIAL CAPABILITY FINDEX ENIF ITEM SURVEY (2012) (2011) (2012) Indicators ƒƒInsurance: 7.6% ƒƒPersonally paid for health ƒƒUsers of private insurance: 22% ƒƒAccount at a formal financial insurance: 8.5% ƒƒAdults with at least one formal institution (e.g., a bank): 14.7% ƒƒAccount at a formal finan- savings product: 36% ƒƒCredit card: 13% cial institution: 27.4% ƒƒBank credit card: 9% ƒƒPersonal/payroll loan: 9.1% ƒƒCredit card: 13% ƒƒPersonal loan: 3.5% ƒƒAuto credit: 3.2% ƒƒLoan from a financial institu- ƒƒPayroll loan: 2.6% ƒƒMortgage credit: 1.7% tion in the past year: 7.6% ƒƒCar loan: 1% ƒƒMortgage loan: 2% Managing World Bank, CNBV, CONDUSEF World Bank CNBV, INEGI entity Number of 2,022 1,000 6,113 respondents Age 18+ 15+ 18–70 Number of 23 + Distrito Federal 28 + Distrito Federal 31 + Distrito Federal states covered Sample Financial decision makers Individuals Individuals Note: Percentages refer to the total number of respondents for each survey. 18 CHAPTER 3.  Decisions about financial services and financial knowledge FIGURE 3.1  PERCENTAGE OF THE MEXICAN POPULATION USING TYPES OF FINANCIAL PRODUCTS CURRENTLY OR IN THE PAST Loan from family or friends Account at a financial institution Credit card Tanda Personal or payroll loan Caja de ahorro loan Insurance Pawn shop loan Investments Auto credit Obtained financial products in last 5 years Currently have financial products Mortgage credit 0 5 10 15 20 25 30 35 Percent Source: World Bank and Government of Mexico Financial Capability Survey data. or participation in tandas were the primary savings products used by the Mexican population. Fifteen percent of the respondents currently had an account at a finan- cial institution, and 11 percent of the respondents participated in tandas. Nearly half of those surveyed (49 percent) did not report any current financial product usage. Only around 10 percent of the population cited currently using credit cards (13 percent), personal or payroll loans (9 percent), insurance products (8 percent), or loans from cajas de ahorro (savings entities) or pawn shops (8 and 7 percent, respectively); even smaller percentages (2–4 percent) used mortgage or car loans or financial investments. Because people use financial services as needed, it is to be expected that reported current use would be less than usage over a five-year span. But the use of certain financial sources—particularly informal services such as loans through family or 19 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE friends, tandas, and pawn shops—is even more sporadic. Sixty-two percent of those who had used tandas and 63 percent of those who had used pawn shops in the past five years reported currently using these services. In contrast, the ratios of current to past use are higher for formal financial products such as bank accounts (88 percent) and credit cards (77 percent). Use of formal financial products (bank accounts, credit cards, personal loans, mortgage, and insurance) was more prevalent among men, urban residents, high- income earners, and formal sector employees. Women, rural residents, and low- income earners more commonly used loans from cajas de ahorro and informal sources of credit and savings such as tandas and loans from family or friends. A higher percentage of men than women used all financial services except tandas. The highest-income group (with monthly income greater than Mex$5,000) used significantly more formal financial products (particularly credit cards) than the other income groups, while groups with lower income were more likely to borrow from family or friends. Respondents who reported no usage of any financial products tended to be low income and employed in the informal sector. Informal sector workers were more frequent users of informal services such as tandas and pawn shops, and were more likely to borrow from family or friends. Unforeseen shocks were the most commonly cited motivation for saving, irrespec- tive of the type of savings mechanism. At least half of the savers with bank accounts, tanda participants, and those who saved without the assistance of a financial inter- mediary reported saving for unforeseen events (table 3.1). Less commonly cited motivations for saving were to cover fluctuations in income, food and other neces- TABLE 3.1  REASONS FOR SAVING BY RESPONDENTS WHO SAVE (%) RESPONDENTS USING/PARTICIPATING IN NO FINANCIAL REASON BANK TANDA INTERMEDIARY Unforeseen events, emergencies, medical fees 64.2 49.0 54.3 Covering fluctuations in income 15.8 21.7 22.8 Food and other necessary items 13.5 17.9 19.0 A known major expenditure 8.7 12.5 10.0 A planned future purchase 9.5 5.0 3.0 No specific purpose in mind 12.3 6.4 5.0 Investment in business or assets 6.2 6.2 5.1 Source: World Bank and Government of Mexico Financial Capability Survey data. 20 CHAPTER 3.  Decisions about financial services and financial knowledge sities, and known or planned major expenditure. These motivations were cited by higher percentages of savers participating in tandas and those saving without finan- cial intermediaries than those using bank accounts. Those who received social security through government or formal sector employ- ment used savings products far more than those who received some form of govern- ment social assistance (table 3.2). Just over half of those receiving funds from the Mexican Social Security Institute (IMSS, the social security program for private sector employees and their families) and 81 percent of those receiving funds from the Institute for Social Security and Services for State Workers (ISSSTE, the social secu- rity program that covers federal government workers and their families) saved in banks. In contrast, less than 20 percent of those receiving social assistance benefits or those affiliated with Seguro Popular (a Ministry of Health program providing health services to people working in the informal economy) had a savings account at a formal financial institution; even their use of informal savings products such as tandas is lower than for IMSS or ISSSTE recipients. Conversely, IMSS and ISSSTE recipients used formal sector credit products at much higher rates than did social assistance and Seguro Popular program participants. TABLE 3.2  USE OF SOCIAL PROGRAMS AND FINANCIAL PRODUCTS/SERVICES BY SURVEY RESPONDENTS (%) SAVINGS PRODUCT/SERVICE LOAN PRODUCT/SERVICE PERSONAL/ FROM FROM SOCIAL % OF SURVEY FINANCIAL PAYROLL CAJA DE FAMILY/ PROGRAM RESPONDENTS INSTITUTION TANDA NONE LOAN AHORRO FRIENDS NONE Social assistance 19 18 38 49 7 10 29 85 Seguro Popular 25 16 36 51 6 11 25 85 IMSS 7 51 51 35 24 8 11 74 ISSSTE 19 81 38 40 15 7 17 81 Source: World Bank and Government of Mexico Financial Capability Survey data. Users of formal savings services were less likely to report being short of money. A quarter of the users of banks reported ever having run short of money for food and other necessities, in contrast with 55 percent of participants in tandas and 30 percent of people without financial intermediaries of any sort. Of those who ran short of money, 80 percent were not associated with any financial intermediary. By way of explanation, those who used formal savings services had higher income levels, which contributed to their relative financial stability. 21 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE Although more than 60 percent of borrowers felt they could take on higher levels of debt, those with nonbank credit were more likely to believe they had borrowed excessively. More than 60 percent of borrowers receiving personal or payroll loans, caja de ahorro loans, or loans from family or friends felt they could afford to borrow more (table 3.3). Higher fractions of borrowers from cajas de ahorro and from family or friends than from banks felt they had reached their borrowing limit (30 percent and 28 percent, respectively). More of these nonbank borrowers felt they had borrowed more than they could afford (9 percent and 10 percent, respectively) than those who borrowed through payroll and personal loans from banks. Female debtors were slightly more likely than males to report that they borrowed more than they could afford, while debtors in higher-income groups and rural dwellers were most likely to feel they could borrow more. TABLE 3.3  PERCEPTION OF BORROWING CAPACITY BY RESPONDENTS WHO BORROW (%) RESPONDENTS BORROWING FROM PERSONAL OR PAYROLL CAJA DE FAMILY OR ALL PERCEPTION LOAN (FROM BANK) AHORRO FRIENDS RESPONDENTS Could afford to borrow more 68.1 60.6 62.2 63.1 Have borrowed to the limit and could 28.5 30.1 27.8 26.1 not afford to borrow more Have borrowed more than can afford 3.4 9.3 10.0 9.2 Source: World Bank and Government of Mexico Financial Capability Survey data. 3.2 MAKING DECISIONS ABOUT FINANCIAL PRODUCTS Most of those using financial services reported making careful decisions about them. The survey results show that more than half the respondents using financial products searched for information and considered many alternatives when making their deci- sions about financial products. Moreover, when considering financial product options, 62 percent of the respondents reported detailed knowledge of the terms and condi- tions (table 3.4). These results must be viewed with some skepticism, however, given similarly diligent reports of verifying terms and conditions provided by those using tandas, which do not have terms and conditions that lend themselves to comparison; and those using pawn shops, which are infamous for steep interest rates. One-third of respondents reported making little effort in obtaining and product-related informa- tion. This raises concerns as to how to best match financial products with consumer needs, given the increasing sophistication of such products. 22 CHAPTER 3.  Decisions about financial services and financial knowledge TABLE 3.4  RESPONDENT DILIGENCE IN MAKING FINANCIAL SERVICE DECISIONS, BY CREDIT OR SAVINGS VEHICLE (%) ALL ACCOUNT AT PERSONAL/PAYROLL LOAN PARTICI- ACTION TAKEN IN FINANCIAL A FINANCIAL FROM FORMAL FINANCIAL PANT IN USE OF MAKING DECISION SERVICES INSTITUTION INSTITUTION TANDA PAWN SHOP Look for information from 57 71 66 53 52 distinct sources Consider various alternatives 62 76 71 60 60 before deciding Look to find the most 68 76 74 68 68 appropriate product for needs Verify terms and conditions 68 81 76 72 64 before contracting Verify terms and conditions 62 66 51 61 60 in detail Source: World Bank and Government of Mexico Financial Capability Survey data. People with formal financial products, with formal sector jobs, and in high-income groups reported more analysis related to making financial product decisions. Half of those surveyed stated that they always sought advice before making a major finan- cial decision. As shown in table 3.4, a larger percentage of people with an account at a financial institution looked for information, considered alternatives, searched for the best product, and verified terms and conditions than did people participating in tandas. In addition, 15 percent more formal sector workers than informal workers sought information before making financial product decisions, and 25 percent more of people from the top income group sought information than those from the bottom income group. Gender did not appear to be a factor influencing the rigor with which individuals made financial decisions. 3.3 FINANCIAL KNOWLEDGE Financial knowledge, or financial literacy, refers to the understanding of financial concepts that complements financial capability (Lusardi and Mitchell 2011). indi- viduals make sound decisions regarding saving, borrowing, and investment. Financial knowledge is analyzed separately from the other components of financial capability in order to maintain the cross-country comparability of results, since not all countries in the financial capability project used the same set of questions to measure financial knowledge. In Mexico, the survey used eight questions related to financial knowl- edge, ranging from relatively basic numeracy questions involving division to more complex questions about portfolio diversification. 23 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE The majority of survey respondents correctly answered questions related to basic numeracy, the definition of inflation, and the concept of interest paid on a loan. Figure 3.2 illustrates the distribution of responses to questions that measured levels of financial knowledge. Over 80 percent of respondents correctly answered a ques- tion testing basic numeracy (division) and a question testing their understanding of the concept of interest paid on a loan. Almost 60 percent understood the concept of the time value of money (i.e., inflation—that an amount of money today does not have the same buying power as the same amount in the future). FIGURE 3.2  DISTRIBUTION OF RESPONSES TO FINANCIAL LITERACY QUESTIONS Correct Don’t know Incorrect response Concept of interest paid on loan 83 12 5 Basic division 81 8 11 Time value of money 58 9 33 Inflation definition 56 18 26 Risk and return 50 23 27 Calculation of simple interest 37 33 30 Portfolio diversification 31 23 46 Compound interest 31 29 40 0 20 40 60 80 100 Percent Source: World Bank and Government of Mexico Financial Capability Survey data. However, most Mexicans surveyed could not perform interest rate calculations, nor were they familiar with the concept of portfolio diversification. Most of those surveyed showed a marked inability to do basic interest calculations: only 37 percent could calculate simple interest, and just 31 percent understood the concept of compound interest.2 This finding corresponds fairly well to survey respondents’ own self-assessments: just 14 percent of those surveyed characterized themselves as very capable of calculating interest rates. The inability to do the interest rate calcula- In a cross-country study, Atkinson and Messy (2012) recorded a response to a multiple-choice 2  compound interest question as correct only if the respondent also correctly answered an open-ended simple interest rate calculation. If the latter practice were used, 14 percent of the Mexicans surveyed would be considered as having answered the compound interest question correctly. 24 CHAPTER 3.  Decisions about financial services and financial knowledge tion suggests that most people found it more difficult to calculate a percentage than to do division. This lack of understanding calls into doubt the ability of many Mexi- cans to make comprehensive decisions about financial products. Most of the Mexicans surveyed could answer a least half of the financial literacy questions correctly. As shown in figure 3.3, 30 percent of those surveyed answered three questions or fewer correctly. Note, however, that calculating a financial knowl- edge score using a simple sum of correct answers assumes that all the questions asked are equivalent, when some might be considered more important or complex than others. Urban dwellers and those with higher levels of education (high school graduates) and income (more than Mex$3,000 monthly) were more likely to answer most questions correctly. FIGURE 3.3  DISTRIBUTION OF CORRECT FINANCIAL KNOWLEDGE RESPONSES Percentage of respondents 20 15 Low scores High scores 10 5 0 0 1 2 3 4 5 6 7 8 Number of questions answered correctly Source: World Bank and Government of Mexico Financial Capability Survey data. Half of the surveyed population said that they had never been taught how to manage their money. Financial education is not taught systematically in most Mexican schools, and parents were the most common source of information cited by those who had received some sort of guidance on managing their money (figure 3.4). 25 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE FIGURE 3.4  DISTRIBUTION OF SOURCES OF MONEY MANAGEMENT INFORMATION Mother Father A teacher Other family member Other No one 0 10 20 30 40 50 60 Percentage of respondents Source: World Bank and Government of Mexico Financial Capability Survey data. Note: Results do not total 100, because respondents could choose multiple responses. Although these results were similar irrespective of head of household status, they were correlated with both age and education: the older the person, the less frequency with which they reported being taught money management. The higher their education level, the more frequently respondents reported having been taught money management. Men were more likely to report having been taught money management by their fathers, while women were fairly evenly split between the two parents. 26 C CHAPTER 4 omparing financial capability T his chapter examines the seven behavioral and three attitudinal components of financial capability, facilitating identification of strengths and weaknesses among different segments of the Mexican population. Mexico’s strongest compo- nents are achievement orientation and living within means. Education, income, and participation in household money management are all positively associated with most components of financial capability. These 10 components are used to profile five distinct clusters of financial capability that occur within the Mexican popula- tion with the goal of highlighting the diversity of challenges for specific clusters. The largest cluster, comprising a third of the surveyed population, is particularly strong at aspects of day-to-day money management and budgeting, but is weak in saving and making provisions for unexpected expenses and long-term goals. Further analysis of the variation in financial capability by region shows that residents of the North- east and Northwest generally had relatively higher financial capability. Comparison of youth to adults shows that while youth are better educated with greater formal financial knowledge, they also cited some difficulty in controlling overspending rela- tive to the rest of the population. 4.1 COMPONENTS OF FINANCIAL CAPABILITY Financial capability is a multidimensional concept for which 10 distinct components have been identified. These 10 components, which span a range of behaviors and attitudes related to daily money management, planning ahead, and choosing financial products, are drawn from a report of the Russia Trust Fund for Financial Education and Literacy summarizing results from seven countries that participated in the Trust Fund’s financial capability measurement project (Kempson, Perotti, and Scott 2013). These components were determined using principal component analysis1 and represent a Principal component analysis is a data reduction method that uses the correlation structure 1  of variables in the data set to find the smallest possible number of linear combinations of these variables that best synthesize the information contained in the data (see appendix A). Once a combination of variables is identified as explaining or “loading on” the same underlying compo- nent, a single component score can be calculated based on a weighted average of the variables 27 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE means of consistently measuring the dimension of financial capability across all seven countries in the project. Not all of the countries participating in the project chose to collect information on financial knowledge, so that concept is discussed separately. The 10 components of financial capability are detailed in table 4.1. TABLE 4.1  COMPONENTS OF FINANCIAL CAPABILITY COMPONENT DESCRIPTION Behavioral components Budgeting Whether people planned how to spend their money, how frequently they budgeted and how exactly, and how frequently they adhered to their plans Living within means Whether people run short of money because of overspending, how frequently they borrow, and if they had borrowed at affordable levels Monitoring expenses How precisely respondents knew how much money they spent and how much they had avail- able to spend Using information Combination of getting information and advice before making important financial decisions, learning from other people’s mistakes in financial matters, and being disciplined Not overspending How frequently people bought things they could not afford or bought unnecessary things before they bought essential items Covering unexpected expenses Whether people are capable of, or expressed concern about, covering unexpected expenses Saving How regularly people tried to save for the future, to save regularly even if just a little, and to have provisions for emergencies and unexpected expenses Attitudinal components Attitude toward the future Orientation toward the future rather than the present Not being impulsive Acting without thinking things through, self-identifying as impulsive, speaking without thinking Achievement orientation Always looking for opportunities, having aspirations, working hard to be the best A mean score is calculated for each component on a scale from 0 (least capable) to 100 (most capable). Mexico’s highest financial capability component scores were for achievement orientation and living within means (figure 4.1). Lower scores were attained for activities related to budgeting, monitoring expenses, and attitude toward the future. Education, income, and participation in household expenditure decisions are all asso- ciated with higher financial capability for most component scores. The regression in the combination. The weights are the coefficients obtained through the principal component analysis. The goal is to aggregate variables that measure different nuances of the same compo- nent in order to obtain a single measure for that component to facilitate analysis and interna- tional comparisons. 28 CHAPTER 4.  Comparing financial capability FIGURE 4.1  MEXICO’S MEAN SCORES FOR COMPONENTS OF FINANCIAL CAPABILITY Achievement orientation Living within means Using information Not overspending Covering unexpected expenses Not being impulsive Saving Budgeting Monitoring expenses Attitude toward the future 0 20 40 60 80 100 Mean score Source: World Bank and Government of Mexico Financial Capability Survey data. analysis shown in table D.1 in appendix D highlights how financial capability varies by gender, age, education, employment, income, and location. On average, women scored significantly higher than men on budgeting and saving. Those individuals who had completed tertiary education scored higher than those with only secondary education on budgeting, attitude toward the future, and not being impulsive—although they showed more of an inclination to spend unneces- sarily. Higher-income groups tended to score better on nearly all components of financial capability compared to lower-income groups. Participating in household expenditure decisions (as opposed to being responsible for only personal expenses) is strongly associated with higher scores for budgeting, monitoring expenses, using information, covering unexpected expenses, and saving behavior. 4.2 PROFILES OF FINANCIAL CAPABILITY IN MEXICO Five distinct clusters of financial capability were identified within the Mexican popu- lation (table 4.2). These groups were identified through cluster analysis (Kempson, Perotti, and Scott 2013; see appendix B for detailed methodology) to help Mexican policy makers and other stakeholders understand the diversity of challenges facing specific groups in the population. Cluster analysis was used because it permits comparison of scores across all 10 components of financial capability. The identifica- tion of clusters has the potential to facilitate more targeted interventions to improve 29 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE TABLE 4.2  FINANCIAL CAPABILITY CLUSTERS IN THE POPULATION CLUSTER BEHAVIOR AND ATTITUDES CHARACTERISTICS 1. Unsophisticated Below-average scores on all but two components of Eighty-three percent low income; many have money managers financial capability (not overspending and living within variable incomes. More likely not to be formally (~22% of means). Very low scores for budgeting and monitoring employed. Many have low levels of education (47% respondents) expenses; low levels of financial inclusion. Relatively with at most primary education or less). Despite an short-term view of finances and limited concern above-average number of people age 60 or over about old age. (18%), group has the lowest proportion of people describing themselves as retired (3%). 2. Short-term Strong scores for components of daily money man- Eighty percent low income, more likely to be middle- money managers agement (especially budgeting); poor at saving and aged (age 41–60) and have dependent children. Most (~33% of making provisions for the future, particularly for unex- (70%) live in urban areas. Half of them (49%) were respondents) pected expenses. using financial products or services. 3. Young impulsive More impulsive and inclined to overspend; perhaps Highest percentage of youth, less likely to have a spenders (~12% of as a consequence, has lowest scores as a cluster for dependent child, predominantly secondary educa- respondents) living within means. Best for covering unexpected tion or lower. Medium-low incomes, but highest level expenses, strong at monitoring expenses. of informal employment. 4. Affluent but Poor budgeters, yet manage to live within means; High income relative to other clusters; group with disorganized (~9% least impulsive and most future oriented relative to highest proportion of individuals with at least sec- of respondents) the other clusters reporting saving and making plans ondary education; high percentage in rural areas. for unexpected expenses. Highest level of financial inclusion. 5. Careful money Above-average scores for all components except Steady incomes in the middle of the distribution, managers and monitoring expenses. Excellent scores for budgeting, highest education levels, highest percentage with a planners (~25% of living within means, and using information; most partner, highest percentage with a dependent child, respondents) concerned about the future and old age and most predominantly urban. achievement oriented compared to other clusters. financial capability. Figure B.1 in appendix B presents the mean scores for each cluster across all 10 components of financial capability. Over half the population falls into Clusters 1 and 2—unsophisticated money managers and short-term money managers. These two groups had the lowest aggregate financial capability scores. Individuals in these two clusters were, on average, less educated than those in other clusters and had the lowest levels of financial inclusion. The unsophis- ticated money managers, in particular, performed poorly on all but two components of financial capability (see figure B.1). This cluster contained the highest percentage of low-income individuals, many of whom live in rural areas, and it had the lowest mean score for financial knowledge. This cluster also had the lowest level of financial inclu- sion: only 37 percent of the individuals in the cluster had financial products. The short-term money managers (Cluster 2) were particularly strong at aspects of day- to-day money management and budgeting, but weak in terms of saving and making provisions for the future, particularly for unexpected expenses. As a group, this cluster had the second lowest income level (80 percent of those in the cluster were in the two lowest-income quartiles), but the second highest average financial literacy score and a 30 CHAPTER 4.  Comparing financial capability majority (62 percent) that had completed secondary education. Compared to the unso- phisticated money managers (Cluster 1), this cluster was more likely to have financial products and to be employed in the formal sector. Compared with the other groups, they were more likely to be middle-aged and to have dependent children. The remaining 45 percent of the surveyed population fell into three clusters: young spenders, affluent but disorganized, and careful money managers and planners. The careful money managers and planners comprised the largest of the three groups, and displayed above-average performance on all components except for living within means. This group had the highest proportion of people living with a partner (73 percent), the highest percentage of people with stable (no seasonal variation) incomes (36 percent), and the highest percentage having completed tertiary educa- tion (16 percent) (figure 4.2). The young impulsive spenders cluster had the highest proportion in formal employment (40 percent), but low scores for living within means—and, consequently, high scores for covering unexpected expenses as a coping mechanism. The remaining group, described as affluent but disorganized, had the highest incomes compared to other groups and the highest level of financial inclusion, with 61 percent citing the use of financial products. However, with respect to budgeting and planning for old age, their scores were comparable to those of the unsophisticated money managers. Figure 4.3 shows how the clusters vary across key sociodemographic factors. FIGURE 4.2  CLUSTER SIZE BY EDUCATIONAL ATTAINMENT AND FINANCIAL INCLUSION Percentage having financial products 100 80 189 60 279 507 40 606 441 20 0 0 5 10 15 20 Percentage that completed tertiary education Source: World Bank and Government of Mexico Financial Capability Survey data. Note: Width represents cluster size. 31 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE FIGURE 4.3  SOCIODEMOGRAPHIC CHARACTERISTICS OF EACH CLUSTER Cluster 1 Cluster 2 Cluster 3 Cluster 4 Cluster 5 Female 49 57 53 53 52 Age 18–30 32 28 37 26 26 Primary education at most 47 38 25 36 30 Not formally employed 88 78 60 71 71 Has no financial products 63 51 41 39 43 Has dependent children 49 57 54 52 57 Responsible for choosing products 50 64 79 64 75 Source: World Bank and Government of Mexico Financial Capability Survey data. Note: Width represents percentage. 4.3 REGIONAL VARIATION OF FINANCIAL CAPABILITY Understanding regional variations in financial behavior and knowledge can enable authorities to better target interventions to improve financial capability. Levels of devel- opment across regions in Mexico vary.2 Table 4.3 shows financial capability scores by region, and figure 4.4 maps these scores. The Northeast and Northwest regions have relatively stronger scores on most financial capability components. The Northeast region has high-income states such as Nuevo Leon and states on the U.S. border such as Chihuahua. This region shows strong finan- cial management related to living within means and covering unexpected expenses; it shows relative strength vis-à‑vis the other regions, in terms of monitoring expenses, but has low scores on using information. The Northwest region has high scores for components including not overspending, saving, and obtaining information, although it has low scores related to covering unexpected expenses and financial knowledge. The South/Southeast, Central West, and Central regions show a mixed performance on the components of financial capability. The South/Southeast region, which contains 2  In this section, the geographic regions of the surveyed states were defined following defini- tions in the Mexican National Development Plan: Central Region: Distrito Federal, Queretaro, Morelos, State of Mexico, Hidalgo, Tlaxcala, Central West Region: Colima, Jalisco, Guanajuato, San Luis Potosi, Michoacan, Zacatecas, Northeast Region: Nuevo Leon, Tamaulipas, Chihuahua, Northwest Region: Sonora, Sinaloa, South/Southeast Region: Tabasco, Quintana Roo, Puebla, Veracruz, Guerrero, Oaxaca, Chiapas. Note that the financial capability survey did not cover all states in Mexico. 32 CHAPTER 4.  Comparing financial capability TABLE 4.3  AVERAGE FINANCIAL CAPABILITY BEHAVIORAL AND KNOWLEDGE SCORES BY REGION CENTRAL SOUTH/ CENTRAL WEST NORTHEAST NORTHWEST SOUTHEAST Financial capability behavioral component Budgeting 56 47 50 54 52 Living within means 77 78 80 78 78 Monitoring expenses 39 41 47 45 36 Using information 62 72 67 86 71 Not overspending 64 59 72 52 65 Covering unexpected expenses 69 76 65 75 70 Saving 52 51 56 79 56 Financial knowledge 4.2 4.4 4.0 3.0 4.4 Source: CNBV, INEGI, and International Financial Statistics (IFS). Note: Financial capability scores range from 0 to 100; financial knowledge scores range from 1 to 8 correct responses. Regional averages only take into account the departments included in the survey. the poorer states of Chiapas and Oaxaca, has low scores for monitoring expenses. The Central West region also has relatively low scores related to budgeting and saving behavior but higher scores related to obtaining information and financial knowledge. The Central region, with its diverse levels of development (containing both the wealthy Distrito Federal and the poorer states of Hidalgo and Tlaxcala), has relatively high scores for budgeting but lower scores for living within means and not overspending. 4.4 FINANCIAL CAPABILITY OF YOUTH This section compares the youth population with the adult population on three key aspects of financial capability—knowledge, attitudes, and behavior—with the goal of providing insights into a population commonly targeted for financial education inter- ventions. Appendix C provides a more detailed exposition of the analysis discussed here. In this analysis, youth are defined as those between the ages of 18 and 24. The adult population is divided into two categories: those between the ages of 25 and 59—typically the age range for active labor force participation—and those age 60 and above, classified here as the elderly. Mexican youth are, on average, more likely to better educated than older cohorts. The large majority of youth, 84 percent, have completed secondary education, compared to only 59 percent of the age 25–59 group and 18 percent of the 60 and over age group. Only 6 percent of Mexican youth report having completed tertiary education compared to 18 percent of Mexicans aged 25–29, indicating that a significant frac- tion is still in tertiary education. This is confirmed by the fact that 22 percent of youth respondents in Mexico are students, compared to only 2 percent of those aged 25–29. 33 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE FIGURE 4.4  FINANCIAL CAPABILITY BEHAVIORAL AND KNOWLEDGE SCORES MAPPED BY REGION a. Budgeting b. Living within means North- North- west west Northeast Northeast Central Central Central Central Western Western 53–56 South/Southeast 78–81 South/Southeast 51–52 78–78 48–50 77–78 47–48 76–77 c. Monitoring expenses d. Using information North- North- west west Northeast Northeast Central Central Central Central Western Western 41–47 South/Southeast 72–87 South/Southeast 40–41 67–72 37–39 63–67 36–37 62–63 e. Not overspending f. Covering unexpected expenses North- North- west west Northeast Northeast Central Central Central Central Western Western 65–73 South/Southeast 59–65 56–79 South/Southeast 53–56 52–59 52–53 51–52 51–52 g. Saving h. Financial knowledge North- North- west west Northeast Northeast Central Central Central Central Western Western 70–77 South/Southeast 4.25–4.5 South/Southeast 69–70 4.0–4.25 65–69 3.0–4.0 64–65 2.75–3.0 Source: World Bank and Government of Mexico Financial Capability Survey data. 34 CHAPTER 4.  Comparing financial capability Overall, Mexican youth are less likely to contribute to the household or to participate in household financial decision making than adults. The majority of youth, 59 percent, in the 18–24 age group are still living with parents, compared to only 32 percent of the slightly older 25–29 year old cohort. Among Mexican youth, 51 percent contribute to household budgets and only 55 percent participate in financial decision making. Thirty-seven percent of Mexican youth report they are “mainly” responsible for their own personal spending, compared to 66 percent of adults aged 25–59 and 63 percent of those age 60 and over. A minority of Mexican youth, 11 percent, report that they are heads of households and responsible for both personal and household expenditures. Although Mexican youth overall have slightly higher scores than Mexican adults on most measures of financial knowledge, the difference is not statistically significant. While youth do score higher on some questions of financial knowledge compared to the 60 and over age group, their financial knowledge is largely on par with adults in the age 25–59 groups (figure 4.5). Eighty-five percent of Mexican youth are able to do simple division, compared to 81 percent of adults aged 25–59. But only 74 percent of those age 60 and over can do simple division. Younger age groups are more likely to understand how the value of money decreases due to inflation: 58 percent of both youth and adults aged 25–59 indicated that they understand the time value of money (inflation) relative to only 46 percent of those age 60 and over. Younger age groups are also more likely to be familiar with the concept of portfolio diversification FIGURE 4.5  FINANCIAL KNOWLEDGE BY AGE GROUP Portfolio diversification 18–24 Risk and return 25–59 Inflation definition 60 and over Compound interest Principal plus interest Interest rate Time value of money Division 0 20 40 60 80 100 Percentage providing correct answer Source: World Bank and Government of Mexico Financial Capability Survey data. 35 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE compared to the 60 and over age group. This is not surprising given that the average educational level of youth is higher than in older age groups. Responses to questions about time preferences indicate that youth are more concerned about the future than are older age groups. Attitudes form a crucial link between knowledge and behaviors. Of particular interest in looking at youth financial capability is how youth prioritize short-term versus longer-term needs, how impulsive they are, and how oriented they are toward achievement. Only 37 percent of youth strongly agree with the statement that the future will take care of itself, compared to 45 percent of adults and 63 percent of the elderly (figure 4.6). However, this concern does not appear to translate into planning for longer-term needs, as indicated by the positive response rate to questions about living for the present and having a short- term focus. Youth tend to score lower, overall, on financial behaviors than older age groups, but the differences are not significant for all types of behaviors (figure 4.7). The key difference between youth and older age groups is on overspending. Mexican youth find it significantly more difficult to not overspend compared to older age groups. On the indicators of sound financial management—such as budgeting and being able cover unexpected expenses—youth score significantly worse than adults aged 25–59, but are on par with those age 60 and over. Two factors may contribute to the lower scores on these aspects of financial behavior. One is that youth face FIGURE 4.6  PERCENTAGE AGREEING WITH EACH STATEMENT BY AGE GROUP Agree Agree to Disagree to Disagree strongly some extent some extent strongly “The future will take 18–24 care of itself.” 25–59 ≥ 60 18–24 “I live more for today 25–59 than for tomorrow.” ≥ 60 18–24 “I only focus on 25–59 the short term.” ≥ 60 0 20 40 60 80 100 Percent Source: World Bank and Government of Mexico Financial Capability Survey data. 36 CHAPTER 4.  Comparing financial capability FIGURE 4.7  MEAN SCORE ON BEHAVIORAL COMPONENTS OF FINANCIAL CAPABILITY Not overspending Monitoring expenses Living within means Budgeting Using information Saving 18–24 25–59 60 and over Cover unexpected expenses 0 20 40 60 80 100 Score Source: World Bank and Government of Mexico Financial Capability Survey data. greater expenses than adults as they try to establish careers and households, so their expenses exceed income. Second is that since the majority of youth live with parents, they have some buffer against the consequences of overspending and poor financial management, and are less likely to rein in spending. Few youth (and adults) report actively monitoring spending. The mean score for youth on monitoring expenses is 35, indicating only an approximate knowledge of how much money is available and how funds are spent. For the most part, however, youth do report living within their means. The mean score for youth on living within means is 77, indicating fairly low rates of indebtedness and short-term borrowing. The majority of youth surveyed obtained and used information in financial deci- sion making. The mean score for using information among Mexican youth is 68, compared to 72 for adult and elderly populations. Saving behavior among youth and adults is comparable, but adults outperform youth on the ability to cover unexpected expenses. Mexican youth are significantly less likely than adults to have obtained information and chosen financial products in the past five years. 37 I CHAPTER 5 nternational comparisons T he financial capability survey utilized for Mexico was also applied in six other countries that were selected to receive funding to implement this first set of surveys on financial capability. Mexico was selected from a pool of applicant coun- tries—along with Armenia, Colombia, Lebanon, Nigeria, Turkey, and Uruguay—by the Russia Trust Fund for Financial Literacy and Education to participate in the process of developing and piloting these financial capability surveys. These comparator countries were linked by an interest in piloting a new survey instrument rather than by shared or similar socioeconomic conditions. This chapter compares the financial capability of the Mexicans surveyed to those surveyed in these other countries. The international comparisons rely on 10 components of financial capability, rather than a single financial capability score. Analysis revealed that it was not possible to develop a single index score for financial capability by combining scores on the 10 components of financial capability.1 Figure 5.1 compares Mexican responses with those provided in other countries (where available) on each component. Compared to survey participants in the other six countries, the Mexican respondents indicated stronger saving behavior. They scored higher on average on a composite of questions measuring the inclination to save and to have provisions for unexpected major expenses. Mean scores for other components such as monitoring expenses, using information, and achievement orientation were similar to those found in the other countries surveyed. However, Mexicans’ budgeting activity and attitude toward the future were less pronounced than in other countries. Mexico’s budgeting score—measuring the extent to which people plan how to use their money and whether they stick to their plans—was lower than for any of the other countries for which data were collected, with the exception of Lebanon. Similarly, Mexicans also expressed more of an inclina- tion to a short-term planning horizon relative to other countries except for Armenia. Latin American comparators Colombia and Uruguay—although they scored slightly 1  For further explanation, see footnote 1 in chapter 4. 39 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE FIGURE 5.1  CROSS-COUNTRY COMPARISON OF COMPONENTS OF FINANCIAL CAPABILITY a. Budgeting b. Living within means 100 100 80 80 60 60 40 40 20 20 0 0 Armenia Colombia Lebanon Mexico Nigeria Turkey Uruguay Armenia Colombia Lebanon Mexico Nigeria Turkey Uruguay c. Monitoring spending d. Using information 70 100 60 80 50 40 60 30 40 20 20 10 0 0 Armenia Colombia Lebanon Mexico Nigeria Turkey Uruguay Armenia Colombia Lebanon Mexico Nigeria Turkey Uruguay e. Not overspending f. Covering unexpected expenses 100 80 80 60 60 40 40 20 20 0 0 Armenia Colombia Lebanon Mexico Nigeria Turkey Uruguay Armenia Colombia Lebanon Mexico Nigeria Turkey Uruguay g. Saving h. Attitude toward the future 60 60 40 40 20 20 0 0 Armenia Colombia Lebanon Mexico Nigeria Turkey Uruguay Armenia Colombia Lebanon Mexico Nigeria Turkey Uruguay i. Not being Impulsive j. Achievement orientation 80 100 80 60 60 40 40 20 20 0 0 Armenia Colombia Lebanon Mexico Nigeria Turkey Uruguay Armenia Colombia Lebanon Mexico Nigeria Turkey Uruguay Source: Kempson, Perotti, and Scott 2013. 40 CHAPTER 5.  INTERNATIONAL COMPARISONS higher than Mexico in terms of attitude toward the future—were also biased toward the short term. The countries for which financial capability data are available show diverse socio- economic conditions—particularly related to educational attainment, structure of employment, and income flows. As shown in table 5.1, some characteristics were similar across countries, such as the higher proportion of women than men in the survey samples (53 percent in Mexico). Other characteristics, such as the share of survey respondents with completed secondary education varied widely—from 20 percent in Nigeria to 55 percent in Mexico to 69 percent in Armenia—indicating major differences in educational attainment. Both Mexico and Colombia had low TABLE 5.1  SUMMARY STATISTICS OF KEY SOCIODEMOGRAPHIC VARIABLES ARMENIA COLOMBIA LEBANON MEXICO NIGERIA TURKEY URUGUAY VARIABLE MEAN SD MEAN SD MEAN SD MEAN SD MEAN SD MEAN SD MEAN SD Female 0.66 0.48 0.63 0.48 0.55 0.50 0.53 0.50 0.51 0.50 0.50 0.50 0.53 0.50 Age 18–30 0.26 0.44 0.27 0.45 0.30 0.46 0.29 0.46 0.26 0.44 0.36 0.48 0.29 0.45 Age 60+ 0.23 0.42 0.16 0.37 0.14 0.35 0.14 0.35 0.15 0.36 0.10 0.31 0.20 0.40 Primary ed. at most 0.02 0.14 0.34 0.47 0.27 0.45 0.36 0.48 0.66 0.47 0.51 0.50 0.31 0.46 Secondary ed. at most 0.69 0.46 0.45 0.50 0.46 0.50 0.55 0.50 0.20 0.40 0.41 0.49 0.52 0.50 Tertiary education 0.29 0.46 0.21 0.41 0.27 0.44 0.09 0.28 0.13 0.34 0.08 0.27 0.18 0.38 # of hh members 18+ 3.56 1.45 3.19 1.49 3.51 1.50 2.82 1.17 2.94 1.57 3.10 1.48 2.49 1.03 Has dependent children 0.50 0.50 0.61 0.49 0.46 0.50 0.55 0.50 — — 0.52 0.50 — — Rural area 0.39 0.49 0.34 0.47 0.33 0.47 0.38 0.49 0.71 0.45 0.04 0.20 0.09 0.28 Has financial products 0.81 0.39 0.55 0.50 0.57 0.50 0.51 0.50 0.21 0.42 0.58 0.49 0.87 0.33 Formal employee 0.26 0.44 0.19 0.39 0.31 0.46 0.24 0.43 0.42 0.49 0.22 0.41 0.41 0.49 Informal employee 0.06 0.24 0.06 0.23 0.11 0.31 0.15 0.36 — — 0.08 0.27 0.08 0.28 Self-employed 0.16 0.36 0.10 0.30 0.16 0.36 0.03 0.16 — — 0.08 0.27 0.09 0.29 Unemployed 0.07 0.25 0.03 0.18 0.02 0.13 0.05 0.22 0.08 0.28 0.03 0.17 0.04 0.20 Retired 0.18 0.39 0.05 0.22 0.05 0.21 0.04 0.20 0.36 0.48 0.16 0.37 0.17 0.38 Housework 0.21 0.41 0.25 0.43 0.31 0.46 0.27 0.44 0.02 0.13 0.33 0.47 0.12 0.32 Other 0.01 0.08 0.29 0.45 0.00 0.02 0.15 0.35 0.04 0.20 0.01 0.12 0.04 0.20 Income seasonality: 0.03 0.18 0.07 0.26 0.05 0.22 0.10 0.30 — — 0.15 0.36 0.24 0.43 no income Income seasonality: 0.45 0.50 0.63 0.48 0.47 0.50 0.60 0.49 — — 0.24 0.42 0.32 0.47 variable income Income seasonality: 0.52 0.50 0.30 0.46 0.48 0.50 0.30 0.46 — — 0.62 0.49 0.43 0.50 stable income Source: World Bank and Government of Mexico Financial Capability Survey data. Note: — = not available; SD = standard deviation. 41 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE percentages of survey respondents who considered their income to be stable (30 percent). Internationally comparable data are also available for a range of financial knowledge questions. Financial knowledge questions were not applied by all of the countries in the Financial Capability Survey, so Mexico’s performance is compared to a sample of countries in the 2012 Organisation for Economic Co-operation and Development (OECD)/INFE pilot study, from which the financial questions reported on here were drawn. Table 5.2 shows the performance of the eight countries that participated in the OECD/INFE pilot study. Some caution should be exercised with international comparisons of financial knowl- edge. The sample structure for Mexico was constructed including only those individ- uals who make financial decisions, which may bias results relative to the OECD/INFE countries that had nationally representative samples with no restrictions on eligi- bility. Furthermore, certain countries modified the battery of questions, such as Peru, which eliminated a question on interest rates. TABLE 5.2  INTERNATIONAL COMPARISON OF PERCENTAGES OF CORRECT RESPONSES TO KNOWLEDGE QUESTIONS SOUTH UNITED QUESTION ARMENIA COLOMBIA HUNGARY IRELAND MEXICO PERU AFRICA KINGDOM Numeracy (division) 86 86 96 93 82 90 79 76 Time value of money 83 69 78 58 58 63 49 61 Interest paid on loan 87 87 95 88 83 — 65 90 Calculation of principal 53 35 61 76 37 40 44 61 and interest Compound Interest rate 18 10 46 29 14 14 21 37 (and correct calculation of principal and interest) Risk and return 67 — 86 84 55 69 73 77 Definition of inflation 57 — 91 88 68 86 78 94 Diversification 59 — 61 47 30 51 48 55 % of high scorers (6 or 46 — 69 60 34 41 33 53 more questions) correct Source: Analysis of 2012 Colombia and Mexico Financial Capability Surveys (World Bank and Governments of Colombia and Mexico). With the exception of Colombia and Mexico, data are from the OECD/INFE survey as described in Atkinson and Messy (2012). Note: — = not available. Atkinson and Messy (2012) recorded a response to the multiple-choice compound interest rate question (row 5 in the table) as correct only if the respondent also correctly answered the previous open-ended simple interest rate calculation (row 4). Other studies (e.g., Xu and Zia 2013) simply report the correct responses to the multiple-choice compound interest question irrespective of the answer to the simple interest rate calculation. Following the latter practice means that 31 percent of Mexicans surveyed answered the compound interest question correctly, a result high- lighted in section 3.3. 42 CHAPTER 5.  INTERNATIONAL COMPARISONS With respect to financial knowledge, Mexico’s level of correct responses to questions related to numeracy, the time value of money, and interest paid on a loan was in line with that of other countries surveyed. However, Mexico had a lower percentage of correct responses on questions regarding the calculation of a simple interest rate than all of the countries surveyed with the exception of Colombia. Knowledge of risk and return and awareness of the benefits of portfolio diversification were lower than in the other countries surveyed. Knowledge of compound interest was lower for Mexico than for any of the other countries surveyed except Colombia and Peru. Mexico also had a relatively small percentage of high scorers on the battery of questions: just 34 percent of survey respondents answered six or more questions correctly; this was a lower percentage than for any of the other countries surveyed except South Africa. 43 L CHAPTER 6 inkages between financial capability and financial inclusion I n Mexico, dialogue and policies related to improving financial capability and finan- cial knowledge often complement efforts to promote responsible financial inclu- sion. Understanding the linkages between these issues can facilitate better design and better targeting of policy interventions. This chapter provides strong evidence for the linkages between financial knowledge, financial capability, and financial inclu- sion, as measured by use of formal financial products. It suggests that expanding financial knowledge and enhancing financial capability are crucial steps toward the goal of accelerating responsible financial inclusion. Specifically, it finds that financial knowledge and financial capability are positively associated with the use of formal financial products such as bank accounts and credit cards. Findings presented here also suggest that the use of banking correspondents increases access to formal financial products primarily for individuals with high financial capability or high finan- cial knowledge, and not for those with low financial capability or knowledge. 6.1 FINANCIAL KNOWLEDGE AND CAPABILITY A number of studies have found links between financial knowledge and elements of financial behavior. Using data from the United States, Lusardi and Tufano (2009) find that individuals who have low measured levels of financial knowledge tend to pay minimum balances on credit cards, incur late fees on cards, and use informal sources of credit. Stango and Zinman (2009) show that people who make mistakes in interest and future value calculations tend to borrow more and save less. Lusardi and Mitchell (2009) illustrate that people with low levels of financial knowledge think less about retirement and that most of them have not planned for retirement at all. A survey of Russian households shows that financial knowledge is significantly and positively related to retirement planning involving private pension funds and schemes (Klapper and Panos 2011). In Mexico, Hastings and Tejeda-Ashton (2008) conducted a survey that reveals that less knowledgeable individuals tend to choose pension mutual funds with higher fees. The Mexican Financial Capability Survey provides an opportunity to add to this literature because of the range of data it collects on both financial knowledge and financial capability. 45 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE In Mexico, a higher financial knowledge score is associated with a higher financial capability measure for 7 out of 10 components of financial capability. The analysis examines the relationship between the financial knowledge score and each of the 10 financial capability measures (listed in table 4.1), controlling for several personal and municipality characteristics that could lead to a spurious relationship between knowledge and capability (see appendix D for more details on the methodology). Four of the behavioral components (not overspending, living within means, covering unexpected expenses, and saving) and all three attitudinal components are corre- lated with financial knowledge (see table D.1 in appendix D). The other three compo- nents—budgeting, monitoring expenses, and using information—show no statistically significant relationship with financial knowledge. Financial knowledge showed the largest correlation with the not overspending component, followed by achievement orientation, saving, and living within means. Figure 6.1 compares the magnitudes of the correlations with financial knowledge across different components of financial capability by showing correlations bench- marked by standard deviation.1 The correlations between financial knowledge and the not being impulsive, attitude toward the future, and covering unexpected expenses components are smaller and, as discussed above, they are zero for the other three components. 6.2 FINANCIAL KNOWLEDGE, FINANCIAL CAPABILITY, AND USE OF CREDIT AND SAVINGS This section uses the financial knowledge and capability component measures discussed earlier in this report and examines the extent to which they predict whether an individual or household uses a range of formal and informal financial services. This analysis focuses on the six most frequently used financial services in Mexico as reported in the Financial Capability Survey: bank accounts, credit cards, bank loans, tandas, pawn shop credit, and loans from family or friends. The relation- ship between financial knowledge or financial capability and use of these products is measured through a regression analysis described in detail in appendix D. Table 6.1 displays abridged results from this analysis, showing the partial correlation between 1  That is, it shows by how much each financial capability measure increases when the financial knowledge score increases by one standard deviation (the standard deviation of this score is 1.8), where the increase in the capability measure is scaled to represent percentage points of the standard deviation of the capability measure. This scaling is used because the same size increase (e.g., two points) could either be large or small, depending on how much variation there is in the capability measure. For example, if most people score around 50 on a given capability component, a 2-point increase would represent a larger magnitude than for a compo- nent on which most people score between 10 and 90. 46 CHAPTER 6.  Linkages between financial capability and financial inclusion FIGURE 6.1  CORRELATIONS BETWEEN FINANCIAL KNOWLEDGE AND CAPABILITY BENCHMARKED BY STANDARD DEVIATION Budgeting Monitoring expenses Using information Covering unexpected expenses 6.4 Attitude toward the future 7.7 Not being impulsive 10.7 Living within means 13.2 Saving 14.5 Achievement orientation 14.6 Not overspending 17.7 0 5 10 15 20 Percent Source: World Bank and Government of Mexico Financial Capability Survey data. Note: Correlations are based on the estimates shown in appendix D. The correlations reflect how much the score for each financial capability component increases when the financial knowledge score increases by one standard deviation (the standard deviation of this score is 1.8), where the increase in the capability mea- sure is scaled to represent percentage points of the standard deviation of the capability measure. each financial knowledge or capability component measure and the likelihood of using each financial product. These partial correlations measure the relationship between financial knowledge or capability and financial product use after controlling for other factors that could be driving this relationship (see appendix D). A higher financial knowledge score is positively associated with the use of bank accounts and credit cards, but shows no statistically significant relationship with use of other financial services. As shown in table 6.1, a 1-point increase in the financial knowledge score is associated with a 2.9 percentage point increase in the likeli- hood of having a bank account and a 1.7 percentage point increase in the likelihood of having a credit card.2 The results in the table are not causal, and it is not certain whether more people with formal knowledge are more likely to seek bank accounts and credit cards, or whether people are more knowledgeable because of their expo- sure to these financial services. Financial knowledge shows no statistically significant relationship with usage of other financial services (bank loans, tandas, pawn shop loans, or loans from family or friends). Most financial capability components show a positive and statistically significant relationship with having a bank account and a credit card. Table 6.1 displays the relationship between nine measures of financial capability and financial product A one-point increase in the financial knowledge score is equivalent to answering one more 2  question correctly, since the score is based on correct responses to eight questions. 47 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE TABLE 6.1  PARTIAL CORRELATIONS BETWEEN FINANCIAL KNOWLEDGE, FINANCIAL CAPABILITY COMPONENTS, AND USE OF FINANCIAL SERVICES DEPENDENT VARIABLE: DUMMY VARIABLE INDICATING WHETHER THE INDIVIDUAL HAS/PARTICIPATES IN A LOAN FROM BANK CREDIT PAWN SHOP FAMILY OR   ACCOUNT CARD BANK LOAN TANDA LOAN FRIENDS Financial knowledge score 0.029*** 0.017** 0.006 0.000 0.005 −0.013 Financial capability component Budgeting 0.000 0.000 0.006** 0.002 0.001 −0.003 Monitoring expenses 0.011*** 0.010** 0.003 0.002 0.001 −0.010** Using information 0.010** 0.011*** −0.004 −0.003 −0.006* −0.012** Not overspending 0.006 −0.008 −0.005 −0.011*** −0.006** −0.015** Covering unexpected 0.013*** 0.015*** 0.004* 0.001 0.001 −0.006* expenses Saving 0.012*** 0.010*** 0.002 0.001 −0.005** −0.008* Attitude toward the future 0.013*** 0.006 −0.001 −0.001 −0.001 −0.004 Not being impulsive 0.017*** 0.009** −0.002 −0.001 −0.004** −0.001 Achievement orientation 0.014*** 0.008** 0.007** 0.004 0.002 0.009 Financial capability indexa 0.056*** 0.037*** 0.009 0.005 −0.014** −0.033*** Source: World Bank and Government of Mexico Financial Capability Survey data. Note: See appendix D for sources of control variables and more details. Partial correlations measure the relationship between financial knowledge or capability and financial product usage after controlling for personal and municipality characteristics that could be driving the relationship. Statistical sig- nificance levels: * 10 percent, ** 5 percent, *** 1 percent. a. Average of components listed above. usage.3 The results show that positive behaviors related to using information, not overspending, saving, and not being impulsive are associated with a lower likelihood of borrowing from a pawn shop or from family or friends. 3  The living within means measure is excluded here since it is in part based on questions that ask about use of loans and may thus be mechanically correlated with financial product usage. The other financial capability measures are not based on questions about product usage. In some developed countries, such as the United States and the United Kingdom, measures of financial capability have included product usage as a component. However, under the Russia Financial Literacy and Education Trust Fund project, it was decided to construct measures of financial capability that do not rely on the use of financial products, as in many developing countries (including Colombia and Mexico), a large portion of the population does not use any products, in part because the supply of financial services is often more limited than in devel- oped countries. See also Kempson, Perotti, and Scott (2013). The numbers are scaled so they correspond to a 10-point increase in the capability measure. For example, a 10-point increase in monitoring expenses capability is associated with a 1.1 percentage point increase in the likeli- hood of having a bank account. 48 CHAPTER 6.  Linkages between financial capability and financial inclusion Higher financial capability is related to a higher probability of using formal financial products. The last row of table 6.1 summarizes the results by showing the relation- ship between product usage and a financial capability index that is the average of the nine components listed. The results of this index indicate that, overall, higher financial capability is related to a higher probability of using formal financial products (bank accounts and credit cards) and a lower probability of using informal credit (from pawn shops or family or friends). Figure 6.2 illustrates these results by showing the percentages of individuals with low or high financial capability who have a bank account, credit card, pawn shop loan, or loan from family or friends. Individuals clas- sified as low (high) financial capability are those who have a financial capability index below (above) the median. Individuals with high financial capability are twice as likely to have a bank account or credit card as individuals with low financial capability. They are also about 30–40 percent less likely to have a pawn shop loan or a loan from family or friends. FIGURE 6.2  USE OF FINANCIAL PRODUCTS BY INDIVIDUALS WITH LOW OR HIGH FINANCIAL CAPABILITY Percentage of individuals with low/high financial capability 30 Low financial capability High financial capability 26.1 25 17.9 20 15.4 14.1 10 9.4 8.1 7.6 5.7 5 0 Bank account Credit card Pawn shop loan Loan from family or friends Source: World Bank and Government of Mexico Financial Capability Survey data. Note: Low (high) financial capability is defined as having a financial capability index below (above) the median. The index is an average of the nine financial capability components listed in table 6.1. The differences shown in this figure control for personal and municipality characteristics (see appendix D). 6.3 FINANCIAL KNOWLEDGE, FINANCIAL CAPABILITY, ACCESS TO FINANCE, AND FORMAL PRODUCT USAGE This section analyzes the financial capability data with municipality-level financial infrastructure data to see if increased access to financial services through banking correspondents is associated with greater use of financial products and how this correlates with financial capability. As discussed in chapter 3, only 15 percent of 49 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE those surveyed reported having a formal account at a financial institution, 14 percent a credit card, and 9 percent a bank loan. A first step for bringing more individuals into the formal banking system is to provide access points for financial institutions. Figure 6.3 uses data from the Consejo Nacional de Inclusión Financiera (2011) to illustrate the distribution of bank branches across the 95 municipalities covered in the Mexican Financial Capability Survey. As shown, 19 municipalities have no bank branch at all; most others have between one and three branches per 10,000 adults. The average number of bank branches per 10,000 adults in the sample is 1.2. The data set from the Consejo Nacional de Inclusión Financiera also includes infor- mation on the number of banking correspondents in each municipality. Starting in 2009, banks signed correspondence agreements with retail stores and other insti- tutions, such as convenience store chains like OXXO and Telecomunicaciones de México, to provide access to banking services through the store or branch network of these establishments. The services provided through correspondents vary from bank to bank, but often include payment services, money withdrawal, money deposits, and credit card payments (see Consejo Nacional de Inclusión Financiera 2011 for more information). The average number of banking correspondents for the 95 municipalities in the Mexican Financial Capability Survey is 2 per 10,000 adults, exceeding the 1.2 bank branches per 10,000 adults. Figure 6.3 shows that correspon- dents provide more bank access points in these municipalities compared to bank branches. Only 11 municipalities have no correspondents, compared to 19 that have no bank branch. In addition, 20 municipalities have three or more banking correspon- FIGURE 6.3  DISTRIBUTION OF BANK BRANCHES AND CORRESPONDENTS ACROSS MUNICIPALITIES Number of municipalities 40 33 Bank branch Banking correspondent 30 26 25 20 19 20 18 14 11 10 10 10 3 1 0 0 0–1 1–2 2–3 3–4 >4 Number of access points in the municipality (per 10,000 adults) Source: Consejo Nacional de Inclusión Financiera 2011. Note: Data are for the 95 municipalities in the Mexican Financial Capability Survey. 50 CHAPTER 6.  Linkages between financial capability and financial inclusion dents per 10,000 adults, versus only 4 municipalities with a corresponding number of bank branches per 10,000 adults. The analysis in table D.4 in appendix D shows the extent to which the presence of bank branches and banking correspondents in a municipality is associated with use of formal financial products by respondents to the Mexican Financial Capability Survey. Results suggest that banking correspondents increase access to formal financial products only for individuals with high financial capability or high financial knowl- edge. The results in table D.4 show no statistically significant relationship between the number of commercial bank branches in a municipality and the number of indi- viduals in the survey who use formal financial products. Although the relationship is not causal, the number of banking correspondents is associated with greater use of bank accounts and credit cards for individuals with high financial capability or high financial knowledge. For individuals with low financial capability or low financial knowledge, neither bank branches nor banking correspondents are associated with use of financial products, after controlling for other factors, including income. As discussed earlier, individuals with low financial capability rely more on informal than formal financial products. The results here suggest that the increase in formal sector access points through banking correspondents has not been sufficient to integrate these individuals into the formal financial sector. 51 C CHAPTER 7 onclusions and recommendations I mportant challenges related to financial behavior, attitudes, and knowledge have been identified for different segments of the Mexican population based upon data from this first nationally representative survey on financial capability. „„ Chapter 2 highlights weaknesses in daily money management and planning processes, finding that 41 percent of those surveyed consistently budget, and just 20 percent monitor expenses rigorously. Furthermore, it suggests that many Mexican households are financially strained, with 70 percent reporting regular or occasional shortages of funds to cover basic expenses and the majority having no provisions to cover major expenses, planned or unplanned. Planning for old age is infrequent, with less than a third of the population under the age of 60 reporting any plans in place to cover old-age expenses. „„ Chapter 3 shows gaps in financial inclusion, finding that 49 percent of the population does not currently use any financial products. Among those who do, informal loans and accounts at financial institutions are the products used most commonly. More than 60 percent of those using financial prod- ucts reported verifying terms and conditions and comparing various products before making financial decisions. However, only 37 percent of the survey population was able to do a simple interest rate calculation—an ability that would be necessary to analyze financial products. „„ Chapter 4 describes five distinct clusters within the sample population that were identified using individual scores for the components of financial capa- bility. The most common clusters were short-term money managers and unso- phisticated money managers, which made up 33 percent and 25 percent of the surveyed population, respectively. One of the smaller clusters consisted of young impulsive spenders (12 percent of those surveyed). „„ Chapter 5 compares the financial capability of Mexicans to respondents in six other countries and finds that Mexicans have a relatively shorter planning time horizon and are less likely to plan how they would spend their money. The Mexicans surveyed did, however, report a fairly high inclination toward saving behavior relative to the other countries. With respect to formal financial 53 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE knowledge, Mexicans displayed a weaker performance relative to respondents in most of the other surveyed countries on interest rate calculations, under- standing of the concept of risk and return, and understanding of portfolio diversification. „„ Chapter 6 provides evidence of linkages between financial knowledge, finan- cial capability, and financial inclusion, as measured by the use of formal finan- cial products. The chapter suggests that banking correspondents increase access to formal financial products primarily for individuals with high finan- cial capability or high financial knowledge. This finding in turn suggests that expanding financial knowledge and enhancing financial capability are crucial steps toward the goal of accelerating responsible financial inclusion. Increasing the overall financial capability of Mexicans will require a multipronged, multistakeholder strategy involving improved design of financial management tools and financial products, targeted financial education to enhance capability, and supportive regulation ensuring adequate consumer protection. The seven policy recommendations listed below are based on lessons learned and describe interven- tions that have been successfully implemented in other countries. Taken together, they could address the challenges related to financial capability that Mexicans face. 1. Promoting technology that increases timely access to personal finan- cial information can foster more precise daily money management and encourage planning behaviors that are missing in many of those surveyed. –– Designated Mexican authorities and other stakeholders could support the development of mobile phone– and Internet-based personal finance tools and their distribution through financial and educational institutions. These tools can help households track spending by categorizing transac- tions and motivating saving toward budget goals. In recent years, a number of tools with web and/or mobile phone interfaces have been developed, such as HelloWallet, Mint, Pageonce, Rocket, and Juntos Finanzas. In partic- ular, Juntos Finanzas (which won the 2012 Mexico G20 innovation award for financial inclusion) is suitable for a range of Mexican households, as it was developed specifically to help cash-based households, is available in English and Spanish, and is an SMS (short message service) -based applica- tion that works with the simplest mobile phones. Financial authorities could encourage tool developers to partner with financial institutions to promote the use of these tools among their clients and to develop complementary tools for personal finance. CONDUSEF recently launched an app supporting household budgeting. Nearly all of the Mexican population has access to a mobile phone and a quarter of the Mexican population uses the Internet 54 CHAPTER 7.  Conclusions and recommendations (INEGI 2010), so Internet- and mobile phone–based personal finance tools are a particularly good way to reach youth, who are disproportionately active users of these media. –– Financial sector regulators and other relevant authorities could encourage financial institutions and other stakeholders to use text messages and social media to relay simple notices and information related to personal finance, such as managing account balances, loan repayment, adhering to debt management plans, and savings mobilization. A randomized control trial in the Philippines found that personalized reminders to repay loans were associated with timely repayment (Karlan, Moren, and Zinman 2012). A study of financial institutions in Bolivia, Peru, and the Philippines showed that letters or text message reminders to save increased the likelihood of reaching saving goals by 3 percent and the total saved in the reminding financial institution by 6 percent (Karlan et al. 2012). Some NGOs in India have provided financial behavior–related content by voicemail in an effort to reach illiterate populations. This recommendation also has particular potential to reach the youth population that actively uses mobile phones and social media. The financial education and behavior messages promoted through social media should be based upon concepts for which there exists evidence and general agreement. 2. To address the challenge of too little funds set aside for retirement and other predictable life events, encourage a culture of voluntary saving. –– Mexican authorities and other stakeholders could consider implementing media campaigns—e.g., through television programs—to transmit key messages related to financial capability, such as the need to increase voluntary saving for retirement. In 2010, 95 percent of Mexicans owned a TV (INEGI 2010). Developing concise key messages and transmitting them through mass media interventions could capture the attention of large segments of the population. For example, those who viewed financial education messages provided through a popular South African soap opera had a significantly higher financial knowledge of the issues highlighted in the soap opera storyline, and were almost twice as likely as those who did not view the soap opera to borrow from formal sources and were less likely to engage in gambling (Berg and Zia 2013). Telenovelas (Mexican soap operas) are highly popular and could be used to spread key messages. –– Financial sector authorities (such as CONDUSEF) could enhance content related to teachable moments when people might be seeking infor- mation about financial decisions. A teachable moment could be paying for education; the purchase of a home; a milestone occasion such as a 55 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE marriage, the birth of a child, or retirement; or even the registering of a consumer complaint on a financial product. Using a sample of Indonesian migrants, Doi, McKenzie, and Zia (2012) show that financial education can have large effects when provided at a teachable moment, but that this impact varies by training recipient. Duflo and Saez (2011) find positive impacts of financial education on planning for retirement or investment portfolio choices, leading to an increase in retirement plan participation. New Spanish-language content on the U.S. Consumer Financial Protection Bureau website offers one model of providing clear information at key deci- sion points.1 It includes information on how to buy a car or a home or pay for college; this could be used to augment information CONDUSEF currently offers related to loan cost calculators. 3. Strengthen savings mobilization, particularly to cover unanticipated financial shocks, by encouraging financial institutions to adopt attractive product design elements. –– Labeling savings for specific goals is a simple, relatively cheap way to make gains from a savings account feel tangible and curb tendencies to overspend. In Colombia, banks such as AV Villas are piloting mobile phone wallets with different “pockets” named for specific goals (such as vaca- tions, special events, or education). In Mexico, the mobile wallets provided by a diverse set of financial institutions, including microfinance institutions, could be similarly equipped. A randomized controlled trial found that treat- ment groups in Ghana with access to accounts that individuals labeled for specific savings goals saved 31 percent more on average than the control group (Karlan et al. 2012). A Peruvian financial institution created jigsaw puzzles with pictures of savings goals (such as a child in school or a vehicle). The group receiving a puzzle piece for each deposit was 2.3 percentage points more likely to meet its savings commitment than the control group (Karlan et al. 2009). –– Commitment savings accounts enable users to voluntarily restrict access to their savings for a set period of time, helping them establish discipline while avoiding the distraction of less valuable daily purchases. For example, after one year, individuals in the Philippines who gave up access to their savings for a set period of time increased their savings 81 percent rela- tive to a control group (Ashraf, Karlan, and Yin 2006). An experiment that randomly assigned some Kenyan farmers the choice to commit some of their earnings immediately to a savings account dedicated to fertilizer 1  Accessible in Spanish at http://www.consumerfinance.gov/es/. 56 CHAPTER 7.  Conclusions and recommendations or wait a few days before committing the funds found that 57 percent of those who immediately saved in the account purchased fertilizer in the next planting season, compared with 30 percent in the control group (Duflo, Kremer, and Robinson 2006). Finally, a deferred payment scheme that utilizes future dated mobile payments (i.e., the ability to send money to oneself at a future date), has been proposed as the functional equivalent of traditional commitment savings for mobile phones. The customer’s funds would not be accessible until the date is reached, and the future date would be associated with a purpose in the customer’s mind (Mas 2013). –– Remittance-linked products aligned with the needs of migrant workers and their families offer the opportunity to move transfers directly into savings products. Such products could draw on insights from a study of U.S.-based El Salvador migrants (Ashraf et. al 2011), which found that savings accounts that offer the remittance senders greater monitoring and control over their account accumulate the most savings. –– Encouraging recipients of social welfare benefits to save transfers into their associated bank account rather than withdrawing their entire transfer at once would support saving among a segment of the population that now demonstrates relatively low use of formal financial services. For example, accounts in the state-owned Bank of National Savings and Financial Services (BANSEFI) opened for Oportunidades social welfare beneficiaries are underutilized, in large measure because Oportunidades benefits are not paid into these accounts, even though the bank’s infrastructure (cards and point-of-sale terminals) is used to effect the payments. The contract between the Ministry of Social Development (SEDESOL) and BANSEFI does not permit Oportunidades beneficiaries to delay or receive benefits partially, or to use money paid into their account to purchase goods elec- tronically at retail stores. Instead, programs could pay benefits directly into beneficiary bank accounts, allowing beneficiaries to administer their funds as they see fit. Social benefit recipients could also be given an easy account portability option, which would increase competition among banks and provide incentives to market additional products to beneficiaries and extend correspondent networks into marginalized communities. A similar approach might be used for social programs that attempt to alleviate food insecurity and provide income support to the elderly. 4. Continue to develop financial infrastructure to improve access to formal financial services for segments of the Mexican population that are currently not using financial services or that are using suboptimal informal services. 57 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE –– Mexican governmental authorities could enact regulatory changes that allow additional financial institutions, such as financial cooperatives and deposit-taking microfinance institutions (popular financial soci- eties—SOFIPOs) to operate through bank correspondents. This autho- rization would strengthen financial access, as most retail correspondent chains do not extend into slums or peri-urban areas or smaller towns. Today, Telecomm (a government agency) is the only Mexican banking correspondent chain that reaches smaller towns. Authorities could allow deposit-taking SOFIPOs and the cooperatives that are present in those areas to sign up banking correspondents on the same terms as do banks (i.e., on a fully funded, real-time basis). In this way, these financial institu- tions could expand geographically and could offer more convenient service to their customers. Note that permitting SOFIPOs and cooperatives to engage as banking correspondents would require changes in their respec- tive governing laws. Relatedly, financial institutions, including public entities, could consider assigning additional networks to operate bank correspon- dents. For example, full utilization of the extensive network of Diconsa subsidized rural food stores, Pemex gas stations, and cajas de ahorro would expand the potential for basic savings. –– Efforts to widen the scope of transactions executed through bank correspondents would support financial inclusion. Although the opening of low-risk deposit accounts is permitted by regulation, few banks are opening these accounts through correspondents. Currently, many banking agents deliver a limited range of operations, so access and usage points are restricted. Building the business case for financial institutions to offer additional financial products and services through correspondents is a key challenge. –– Mexican government authorities could strengthen regulations to build a stronger, more open mobile payments network. For example, regulations to support the interoperability of the mobile payment system would help ensure that consumers can execute transactions irrespective of the mobile network operator or bank chosen. Currently, certain mobile financial services are not interoperable with other telecommunications providers or even with other banks, limiting market growth. Promoting new busi- ness models that support the growth of a mobile payments network, such as mobile point-of-sale schemes, has shown promise in other developing economies; these are now being rolled out in Mexico as well. –– Scaling up promising programs to expand financial access to rural areas would increase opportunities for Mexicans to save and participate 58 CHAPTER 7.  Conclusions and recommendations in other formal financial transactions. A recent Telecomm pilot project in Oaxaca found that, following installation of mobile network communica- tion infrastructure and the provision of mobile phones to the population, 48 percent of those in the pilot became “savers” with balances exceeding Mex$100, and 33 percent became active users of mobile financial services (CGAP 2013). Participants were provided with instruction on how to use mobile financial services—another example of taking advantage of a teach- able moment to provide financial education. –– Mexican authorities could promote the marketing of basic accounts. In 2007, the Mexican Congress approved a law that made it mandatory for all institutions that receive money deposits to offer basic payroll accounts. There are now some 24 million basic accounts, the majority of which are associated with payroll collection for formal employees. Through “mystery shopper” visits to financial institutions, Gine, Martinez-Cuellar, and Mazer (forthcoming) find that, although Mexican law requires basic savings accounts to be offered at all banks, such accounts were not offered to a single shopper in more than 100 visits to institutions—despite these low- cost products being a good match for the needs of many of the consumers in the exercise. These bank accounts may not be having the intended impact on savings access for low-income consumers; this situation could be improved through more specific marketing rules so providers make consumers aware of the product’s existence. –– Encourage programs supporting linkages from informal to formal prod- ucts—e.g., between tandas and banks. In Egypt, the rotating savings and credit association model was combined with bank insurance to protect member savings in case a member defaults (El-Gamal et. al 2011). Similarly, India’s National Bank for Rural Development has had a program in place since 1992 to link informal self-help groups (groups that collect small amounts of savings from members) with banks. The banks deal with the group rather than individuals, thereby helping to minimize the transac- tion costs on these relatively small deposits while paying a market rate of interest. 5. Support consumer protection interventions that help mitigate the effects of limited formal financial knowledge of segments of the Mexican popu- lation. –– Relevant Mexican authorities could require regulated financial institutions to incorporate research on good practices for disclosure and pricing regimes for financial consumers. A study of the use of AFORES (retirement investment funds) in Mexico finds that workers with low financial knowl- 59 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE edge are better able to analyze and compare the fees charged by funds when these are presented as total costs in pesos rather than as an annual percentage rate (Hastings and Tejada-Ashton 2008). A study executed by the Consultative Group to Assist the Poor (CGAP), CONDUSEF, and the World Bank notes similar findings regarding consumer understanding of percentages; it also finds that even sales agents for financial products had poor knowledge of the definitions of key terms required to be disclosed to consumers, such as total annual cost or total annual earnings for savings and credit cards (Gine, Martinez-Cuellar, and Mazer forthcoming). In consumer credit products, total annual cost should be expressed as “total amount you pay,” with the amount due expressed in pesos rather than as a percentage value. Other interventions suggested by the researchers include having banks present sample user profiles for new customers that best approximate their behavior (e.g., light user versus heavy user) to help them make more decisions across product features more easily. Mexican authori- ties could also consider interventions related to promoting impulse control, such as requiring credit card companies to allow users to place lower ceil- ings on charges than those approved by the credit card company. –– Developing market conduct regulations governing banking transactions occurring outside the traditional banking infrastructure will be critical. As new methods of transactions develop—such as mobile banking—or new types of correspondents arise, the relevant Mexican authorities may need to adapt regulations to reflect these new channels. 6. School-based financial education programs could address the deficien- cies in financial behaviors and knowledge identified in this report, but should be designed and implemented carefully given the mixed impact of global interventions to date. –– Mexican authorities could consider carefully designed school-based programs to offer opportunities to educate youth on a regular basis before they make key financial decisions. Current dialogue about the Mexican public educational system includes discussion of increased time for class- room instruction and increased opportunities for experiential education— both of which offer opportunities for financial education curricula. Insights from existing school-based financial education programs could inform this design. For example, Bruhn et al. (2013) conducted a randomized evaluation of a financial education program in Brazilian public high schools that incor- porated modules into different aspects of the curriculum and integrated assignments that involved family budgeting. They find positive effects on knowledge, attitudes, and behaviors, including a 24 percent increase 60 CHAPTER 7.  Conclusions and recommendations in student savings rates and spillovers to parents such as a 17 percent increase in the number of parents who track monthly expenses. School- based education programs could be coupled with programs promoting responsible use of financial products, such as the opening of savings accounts for youth. Once designed, courses can also be transmitted in tele- secundarias, which provide secondary education through television broad- casts in areas that are rural or otherwise difficult to access. –– Mexican authorities should consider the mixed evidence on the impact of financial education programs within their planned policy framework for financial education. Programs provided by financial institutions are partic- ularly challenging. Bruhn, Ibarra, and McKenzie (2013) describe a financial literacy course offered by a financial institution in Mexico City and find that take-up of voluntary programs is extremely low and that the benefits of the training were partial (a 9 percent increase in financial knowledge and a 9 percent increase in savings outcomes but no impact on credit card behavior, retirement saving, or borrowing). While financial literacy courses may be beneficial for some segments of the population (such as individuals with higher levels of education, who are accustomed to learning in a class- room setting), other types of interventions may be needed to reach the broader population. 7. Sustained analysis is needed to support the Mexican financial capability agenda. –– Building on the baseline of the comprehensive financial capability data set underlying this report, Mexican authorities could consider monitoring a smaller subset of questions from the Financial Capability Survey over time, possibly as part of ENIF. If properly designed, such a survey could provide the opportunity to test the impact of program interventions over time. More frequent monitoring and evaluation could be considered by utilizing the G20-recommended indicators related to financial capability that are currently under development. –– Mexican authorities could also opt to participate in the next round of the OECD’s Programme for International Student Assessment (PISA) financial literacy exercise. This participation would increase the body of knowledge on financial literacy strengths and weaknesses of the youth population, and permit Mexico to benchmark its youth to peers in other OECD countries. –– Additional research could explore linkages between the Financial Capability Survey and other Mexican data sources. 61 APPENDIX A Construction of financial capability scores The text in sections A.1 and A.2 is taken from Kempson, Perotti, and Scott (2013: 58–61), a publication of the Russia Financial Literacy and Education Trust Fund. The main objective of the Russia Financial Literacy and Education Trust Fund measure- ment project was to develop indicators of financial capability that are as neutral as possible with respect to culture and to education or income levels. One of the key questions to be answered through empirical analysis was the possibility to construct valid measures that can be used for comparisons across countries. A.1 IDENTIFYING FINANCIAL CAPABILITY COMPONENTS The aim of the analysis is to construct a score Sc for each component c of financial capability (c = 1,…, C, where the number of components C is unknown) as a linear combination of the (standardized) variables V1,V2,…, VK contained in the data set, which have correlation matrix ∑: V1 − µ1 V − µ2 V − µK Sc = w c 1 + w c2 2 + w cK K σ1 σ2 σK where μi and σi denote, respectively, the mean and standard deviation of Vi, and the weights w are unknown. A key advantage of factor analysis is that the weights attributed to each component are not determined in advance, but are calculated through empirical analysis and therefore reflect the importance of each variable in the context of interest; low- and middle-income countries for this project. A specific weight wci (which denotes the importance of the ith variable for component c) can be zero, meaning that variable i is not relevant for a specific component c. In short, this means that neither the number nor the nature of the components is determined a priori. For example, if there are 10 variables in the data set, it might be that two components exist, where the first is a combination of the 1st, 3rd, and 10th variables only, and the other variables are relevant for the second component. By looking at which specific variables are relevant for a particular component, it is possible to identify the nature of the component. The results of this analysis are then compared to the manifestations of financial capability that emerged from the focus groups. If 63 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE the components are comparable to the focus group concepts, they can be consid- ered reliable measures for these concepts. Several procedures exist to extract components from data. A frequently applied method is PCA [principal component analysis], which captures all of the variance of the variables and is the most adequate technique when the measurement scales are not yet validated. PCA is based on maximization of the variance of S1 to find the weights for the first component (w11, …, w1K), maximizing the variance of S2 to find the weights of the second component (w21, …, w2K), and so on, subject to the constraint that the sum of the squared weights for each component be equal to one. The weights that solve this maximization problem are a function of the matrix of correlations between the components, and of its eigenvalues and eigenvectors. This method produces a matrix Λ of factor loadings, which represent the correlation between each variable and the components. The columns of this matrix are equal to the eigenvectors of the correlation matrix ∑, scaled by the square root of the corre- sponding eigenvalue. Alternative extraction methods include principal factoring (reducing the variance explained by the components to the shared variance among the variables, not total variance), and maximum likelihood (aimed at reproducing the correlation matrix). Principal factoring is preferred when a clear a priori structure for the scales and constructs in the analysis is assumed. Maximum likelihood has the advantage of being able to test the statistical fit of the component solution. A completely different method is confirmatory factor analysis, in which the structural relationships between the variables are determined a priori and tested using maximum likelihood estima- tion. Since the goal of the present project was to develop measure(s) of financial capability, an exploratory type of analysis was favored; hence PCA was selected as the main analysis technique. PCA extracts as many components as there are variables in the correlation matrix, in order of decreasing explained variance. Typically, the first few components explain a large percentage of the variance, say over 50 percent. At some point, the marginal contribution of a component becomes too low and the remaining components are omitted. One common criterion to decide about the number of components to be retained is that a component have an eigenvalue greater than one, meaning that the component explains more than the average variance explained by each component. Another criterion, often applied in combination with the eigenvalue criterion, is the scree test, in which the eigenvalues are plotted against the components. Since the principal components are ordered from high to low, the eigenvalues at first drop very quickly, then level off. Usually there is a break in the slope of the line drawn through the first few eigenvalues and the slope of the line drawn through the remaining 64 Appendix A.  Construction of financial capability scores eigenvalues. The “kink” between the two lines indicates the cutoff point for compo- nents: those before the kink are retained and those after it are omitted. It is recommended that at least three measures be included in the PCA, several of which should be substantially correlated. To test whether the set of chosen variables is adequate for PCA, Kaiser’s measure of sampling adequacy is usually calculated and a value over 0.60 is considered adequate (Tabachnick and Fidell 2001). For the analysis, the Kaiser measure was calculated and a value higher than 0.60 was obtained except for one component of capability (using information, for which it was 0.56). Although the principal components explain the common variance among the vari- ables, the component weights, shown in the component loading matrix, cannot be interpreted easily. The initial PCA solution represents the variables in the orthogonal component space. By rotating the space, the variables can be represented such that they are maximally related to certain components, indicating convergent validity, and minimally to other components, indicating discriminant validity. Rotation results in high weights for some components and low weights for other components for the same variable. The rotated component loading matrix can be interpreted more easily, since typically each component is related to a particular set of variables, and not to the remaining variables. The interpretation then follows from the nature of the high- loaded variables. For example, a component that is highly related to questions such as “When you receive money, do you plan how it will be used?,” “Do you plan exactly how you will use the money or only make a rough plan?,” and “Do you keep to the plan you made for spending your money?” might be interpreted as “budgeting.” Rota- tion may be accomplished in many different ways, the main ones being orthogonal rotation, assuming that the components are unrelated, and oblique, in which case the components are allowed to be correlated. If the structure of the data is not known beforehand, it is good practice to run PCA with oblique rotation first, and if the component correlations are low (e.g., below 0.32), to present the orthogonal rotation, effectively neglecting the low correlations (Tabachnick and Fidell 2001). Interpretation problems arise if the same variable has more than one high loading, in which case the components cannot be interpreted uniquely. Sometimes a solution is to drop such a variable from the analysis. To assess the reliability of the components, the standard Cronbach’s alpha is used as a measure of reliability based on the number of items related to a component (the more items, the higher the internal consistency will be) and on the average correla- tion between the items. Cronbach’s alpha varies between 0 and 1, and values higher than 0.65 are typically considered to denote satisfactory reliability. In this project, the Cronbach’s alpha calculated for the components was higher than 0.65 except for 65 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE two components (using information and not being impulsive, for which it was 0.37 and 0.61, respectively). The results of the analysis showed that 10 components could be identified in each country and that their composition was comparable across countries. Two addi- tional components were identified but only applied to subgroups of the population (people under 60 years, and people who choose financial products personally). These components are described in more detail in chapter 6 of Kempson, Perotti, and Scott (2013)]. A.2 CONSTRUCTING COMPONENT SCORES Once a group of variables is identified as loading on the same component, a single score can be calculated for each individual with respect to that component, by weighting each variable by the coefficients obtained through the PCA. The most commonly used procedure to obtain the coefficients w is the regression approach… which calculates the matrix of score coefficients as Λ∑−1. The component scores are standardized (have zero mean and unit variance) and in principle may run from −∞ to +∞. However, because the range of values of the observed variables is limited, the range of component scores is also limited. One more easily interpretable way of presenting the component scores consists of rescaling them between extremes formed by the responses of an extremely inca- pable person (who would score 0) and responses of an extremely capable person (who would score 100). This procedure amounts to having the questionnaire completed (hypothetically) by two such extreme persons, then calculating their respective component scores to be used for rescaling. The rescaling formula is S* = 100*(S − a)/(b − a) with S the original component score, a the minimum score, and b the maximum score. A.3 COMPARING FINANCIAL CAPABILITY Regression analysis was used to examine the extent to which respondents’ indi- vidual characteristics were associated with each of the 10 components of financial capability. Table A.1 lists the sample summary statistics for the covariates used in the regressions. All are binary variables (equal to 1 if the category applies to the respondent, equal to 0 otherwise), except for the number of adults in the household and the financial knowledge score. The means presented for the binary variables are interpreted as follows: for example, if “female” is on average equal to 0.53, then this means 53 percent of the sample are women. 66 Appendix A.  Construction of financial capability scores TABLE A.1  SAMPLE STATISTICS FOR KEY SOCIODEMOGRAPHIC VARIABLES VARIABLE MEAN STANDARD DEVIATION Female 0.53 0.50 Age 18–30 0.29 0.46 Age 31–40 0.25 0.43 Age 41–50 0.19 0.40 Age 51–60 0.12 0.33 Age 60+ 0.14 0.35 Primary education at most 0.36 0.48 Secondary education 0.55 0.50 Tertiary education 0.09 0.28 # household members 18+ 2.82 1.17 Living with a partner 0.69 0.46 Has dependent children 0.55 0.50 Rural area 0.38 0.49 Income group 1 0.37 0.48 Income group 2 0.34 0.47 Income group 3 0.17 0.37 Income group 4 0.13 0.33 Has financial products 0.51 0.50 E1: Formal employee 0.24 0.43 E2: Informal employee 0.15 0.36 E3: Self-employed 0.03 0.16 E4: Unemployed 0.05 0.22 E5: Waiting for busy season 0.02 0.14 E6: Student 0.04 0.19 E7: Retired 0.04 0.20 E8: Sick 0.01 0.12 E9: Housework 0.27 0.44 E10: Other 0.15 0.35 Financial literacy score 2.79 1.27 Responsible for day to day 0.74 0.44 Responsible for planning 0.75 0.44 Responsible for choosing financial product 0.66 0.74 Income seasonality: no income 0.10 0.30 Income seasonality: variable income 0.60 0.49 Income seasonality: stable income 0.30 0.46 Source: World Bank and Government of Mexico Financial Capability Survey data. Note: n = 2,022. 67 APPENDIX B Segmenting the population using cluster analysis This appendix draws on analysis from Kempson, Perotti, and Scott (2013) summa- rizing results from all of the countries in the Russia Financial Literacy and Education Trust Fund financial capability project. Cluster analysis was used by the project team to segment the population into groups with comparable levels of capability. This iterative procedure aggregates individuals into groups that have shared attributes distinguishing them from others in the population (in this case, similar financial capa- bility strengths and weaknesses). This approach was used, for example, in the United Kingdom and in the Netherlands. The clustering process consists of two steps: prox- imity analysis (to calculate dissimilarity measures between respondents) and hierar- chical cluster analysis (to determine the number of clusters). The steps are described below, as per Kempson, Perotti, and Scott (2013: 64). B.1 PROXIMITY ANALYSIS This step is only required if a single measure of financial capability cannot be developed. In this case, individuals need to be compared along many dimensions, by calculating a dissimilarity measure that takes into account all the dimensions. Several methods can be used to calculate dissimilarity, but a very common one is the squared Euclidean distance, defined as d ( X ,Y ) = ∑ ( X i − Yi )2 i with Xi and Yi the values of the ith variable for individuals X and Y. In other words, the distance between two observations is calculated as the sum of the squared differ- ences between the values of the observations. Note that this measure should not be interpreted as an overall index of capability, but simply as a practical method to iden- tify individuals who have similar capability scores across the different dimensions. B.2 HIERARCHICAL CLUSTER ANALYSIS The distances between the respondents serve as a starting point for the hierarchical cluster analysis to determine the number of clusters or groups of respondents. The procedure initially assigns each of the N respondents to a separate cluster, so that in the first iteration there are N clusters. In each of a maximum of N−1 consecu- 69 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE tive steps, the two most similar clusters are merged. Clusters that are combined in later stages are more dissimilar than clusters that are combined in earlier stages. If the within-cluster variation in adjacent steps becomes too large, it is considered an indication that the two clusters are too dissimilar for merging: the process is terminated before merging the dissimilar clusters. The differences of the minimized within-cluster sum of squares between two steps are used to determine the number of clusters (Ward’s method; see Bacher, Pöge, and Wenzig 2010). We can then describe, or profile, the types of people who tend to be in each of the clusters by summarizing their sociodemographic characteristics (age, gender, rela- tionship with household head, education, income, etc.). Regression models can also be estimated to look at these characteristics jointly. For example, by estimating a logistic regression model for the probability of belonging or not belonging to each of the clusters, we may find that people with specific characteristics (e.g., women or respondents with dependent children) are more likely to belong to a particular cluster than people with different characteristics. Figure B.1 presents the results of the cluster analysis and describes the mean score for each cluster across the 10 components of financial capability. FIGURE B.1  SCORES ON FINANCIAL CAPABILITY COMPONENTS BY CLUSTER CLUSTER 1 CLUSTER 2 CLUSTER 3 CLUSTER 4 CLUSTER 5 n Achievement orientation 78.11 84.69 81.64 84.30 90.99 n Not impulsive 52.23 61.15 40.42 70.18 69.25 n Attitude toward the future 30.92 33.09 30.68 36.39 40.26 n Saving 33.95 44.99 56.14 78.42 77.20 n Covering unexpected expenses 49.04 38.13 87.12 87.44 86.92 n Not overspending 71.62 72.32 47.26 69.53 75.89 n Using information 60.81 70.50 71.92 76.37 79.23 n Monitoring 24.88 34.23 62.29 51.23 40.14 n Living within means 76.41 77.63 67.28 85.56 82.93 n Budgeting 1.01 73.62 74.89 2.63 75.59 Source: World Bank and Government of Mexico Financial Capability Survey data. 70 APPENDIX C Youth financial capability This appendix compares the youth population, aged 18–24, with the adult population, on financial behavior, attitudes, and knowledge with the goal of providing insights into a population that is commonly targeted for financial education interventions. Young people are entering an increasingly complex financial services market due to technological advances, and financial deregulation. Parents are not uniformly equipped to transmit sound financial management skills. Research shows that finan- cial capability is strongly correlated with family economic and educational levels, and those inequalities in financial capability persist across generations (Lusardi, Mitchell, and Curto 2010). Higher-income and urban populations are typically more likely to access financial services. For poorer parents, their educational levels—and conse- quently their financial knowledge—may be lower than that of their children. The age range of respondents in the Mexican Financial Capability Survey is 18–97, with a median age of 39. For this analysis, “youth” is defined as those between the ages of 18 and 24. The adult population is divided into two categories, those between the ages of 25 and 59—typically the age range for active labor force participation— and those aged 60 and over, classified here as the elderly. C.1 EDUCATION, EMPLOYMENT, AND PARTICIPATION IN FINANCIAL DECISION MAKING Mexican youth are, on average, more likely to be better educated than older cohorts (figure C-1). A large majority of youth (84 percent) has completed secondary educa- tion, compared to only 66 percent of the age 25–29 group and 68 percent of the age 30–39 group. Twenty-two percent of youth respondents in Mexico are students, compared to only 2 percent of those aged 25–29. The majority of youth is employed in the formal or informal sector, or is studying (figure C-2). Formal sector employment peaks for the age 25–29 group: this sector employs 22 percent of youth and 42 percent of adults age 25–29. Formal employment rates hover around 30 percent for the age 30–49 group, after which rates decline sharply to 16 percent for the age 50–59 group. A significant propor- tion—17 percent—of Mexican youth is employed in the informal/self-employed sectors. Thirty-four percent of young Mexican women in the age 18–24 group report 71 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE FIGURE C.1  EDUCATIONAL ATTAINMENT BY AGE Percent 100 80 Tertiary 60 Secondary 40 Primary 20 0 18–24 25–29 30–39 40–49 50–59 60–69 70–79 ≥ 80 Source: World Bank and Government of Mexico Financial Capability Survey data. FIGURE C.2  EMPLOYMENT OF YOUTH (AGED 18–24) Employed, formal sector 22% Other Employed, 9% informal 14% Housewife/ Self-employed, farming work/caregiver 3% 18% Looking for work Studying 10% 21% Sick/ Waiting for disabled busy season < 1% 3% Source: World Bank and Government of Mexico Financial Capability Survey data. Note: n = 267 (136 male; 131 female). no employment outside the home. The proportion of women in homemaker roles increases significantly with age, rising to 52 percent of women aged 25–60 and to 67 percent of women aged 60 and over. Mexican youth are less likely to contribute to the household or to participate in household financial decision making than adults. Youth aged 18–24 are the age group least likely to contribute to the household budget and participate in household financial decision making. Only 51 percent of the age 18–24 group contributes to the household budget, and only 55 percent participates in financial decision making in 72 Appendix C.  Youth financial capability the household. The majority of Mexico’s youth (59 percent) aged 18–24 report living with their parents, compared to 32 percent of those in the age 25–29 cohort. Thirty- seven percent of youth report being “mainly” responsible for personal spending, compared to 66 percent of adults aged 25–59 and 63 percent of those over age 60. Only 11 percent of youth report that they head a household and are responsible for both personal and household expenditures, compared to 47 percent of adults aged 25–59 and 64 percent of those over age 60. C.2 FINANCIAL KNOWLEDGE, ATTITUDES, AND BEHAVIORS Mexican youth overall score slightly better than Mexican adults on most measures of financial knowledge, but the difference is not statistically significant. While youth score slightly higher on questions of financial knowledge compared to the 60 and over age group, their financial knowledge is largely on par with adults age 25–59 (figure 4.5). This finding is not surprising, given that the average educational level of youth is higher than for older age groups. As the purchasing power of the age 18–24 group increases and as they gain financial independence, increases in their financial knowledge beyond the level of the current adult cohort would be expected. Younger age groups are more likely to understand how the value of money decreases due to inflation: 58 percent of both youth and adults aged 25–59 indicated that they understand the time value of money (inflation) relative to only 46 percent of those over age 60. Most youth are able to do simple division (85 percent) and understand the concept of an interest rate (82 percent). Youth are more concerned about the future than are older age groups. Attitudes form a crucial link between knowledge and behaviors. Of particular interest in looking at youth financial capability is how they prioritize short- versus longer-term needs, how impulsive they are, and how oriented they are toward achievement. Only 37 percent of youth strongly agree with the statement that the future will take care of itself, compared to 45 percent of adults aged 25–59 and 63 percent of the elderly (figure 4.6). This concern, however, does not appear to translate into planning for longer-term needs, as indicated by the positive response rate to questions about living for the present and having a short-term focus. Analysis of responses to ques- tions about attitude and achievement orientation indicates that, while they are more impulsive in their speech and actions than adults, youth’s achievement orientation is comparable to that of older cohorts. A composite score for attitudes was developed based on individual responses to questions about attitude toward the future, impul- sivity, and achievement orientation. As shown in figure C.3, youth have the lowest mean score among the age groups: 59 out of 100. However, the differences in score between youth and the older age groups are not statistically significant. While there is some variation in financial behaviors across age groups, this variation is less than for financial knowledge. On indicators of sound financial management, such as not overspending and budgeting, youth score slightly worse than adults. 73 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE FIGURE C.3  MEAN SCORE ON A COMPOSITE INDEX OF ATTITUDES BY AGE GROUP Composite attitude score 100 80 Interquartile range 60 Mean 40 20 0 18–24 25–29 30–39 40–49 50–59 60–69 70–79 ≥ 80 Source: World Bank and Government of Mexico Financial Capability Survey data. Mexican youth find it significantly more difficult to not overspend compared to older age groups, and youth score significantly lower on budgeting behavior than do adults (figure 4.7). Possible reasons for this disparity may be that youth have greater expenses than do adults as they try to establish careers and households or, conversely, that since the majority of youth live with parents, they have some buffer against the consequences of overspending. Few youth (and adults) report actively monitoring spending. The mean score for youth on monitoring expenses is 35, indicating only an approximate knowledge of how much money is available and how funds are spent. However, youth do report living within their means for the most part. The mean score for Mexican youth on living within their means is 77, indicating fairly low rates of indebtedness and short- term borrowing. The majority of youth in Mexico use information in their financial decision making, although at a slightly lower level than reported for the adult population. The mean score for youth on using information is 68, compared to 72 for both the adult (aged 25–59) and elderly (over age 60) populations. A larger difference between youth and adults exists with regard to selecting from among various financial products. Saving behavior among youth and adults is comparable, but adults outperform youth on the ability to cover unexpected expenses. Mexican youth are significantly less likely than adults to have obtained information and chosen financial products. Only 41 percent of youth had personally chosen and bought a financial product in the last five years compared to 54 percent of adults. 74 APPENDIX D Methodology to analyze linkages between financial capability and financial inclusion D.1 RELATIONSHIP BETWEEN FINANCIAL KNOWLEDGE AND FINANCIAL CAPABILITY To analyze the relationship between financial knowledge and financial capability, table D.1 displays the results from 10 separate ordinary least squares regressions of the following form: FinancialCapabilityi,m =  + FinancialKnowledgei,m + Xi,m + Zm + i,m   (1) where FinancialCapability is 1 of 10 measures of financial capability (see full list in table D.1), FinancialKnowledge is the financial knowledge score (see definition in table D.5), X is a set of individual control variables (see table D.7), and Z is a set of municipality control variables (see table D.8). The control variables are included to isolate the relationship between financial knowledge and capability that is not driven by these other variables. The standard errors of the regression are clustered at the municipality level. The numbers reported in the first row of table D.1 are the coefficients  from the 10 regressions. That is, they show the partial correlations between financial knowledge and each measure of capability after controlling for personal and municipality char- acteristics that could be driving the relationship. The sizes of the correlations repre- sent the increase in each financial capability measure for a one-point increase in the financial knowledge score (as described below, the financial knowledge score runs from 0 to 8, representing the number of correct answers to five financial knowledge questions, while the financial capability measures are scaled from 0 to 100). Figure 6.1 in chapter 6 graphically displays the results in table D.1. The numbers plotted in this figure show by how much each financial capability measure increases when the financial knowledge score increases by one standard deviation (the stan- dard deviation of this score is 1.8), where the increase in the capability measure is scaled to represent percentage points of the standard deviation of the capability measure. 75 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE TABLE D.1  RELATIONSHIP BETWEEN FINANCIAL KNOWLEDGE AND FINANCIAL CAPABILITY DEPENDENT VARIABLE: FINANCIAL CAPABILITY MONITORING USING INFOR- NOT OVER- LIVING WITHIN VARIABLE BUDGETING EXPENSES MATION SPENDING MEANS Financial knowledge score 1.536 (0.987) 0.772 (0.801) 0.530 (0.472) 2.712*** (0.619) 1.359*** (0.479) Female 4.910*** (1.857) 1.592 (1.499) 0.536 (1.187) 1.166 (1.190) 1.238 (0.922) Middle aged (35−39) 2.433 (1.726) −0.481 (1.657) 0.989 (1.137) 4.653*** (1.532) 1.444 (1.274) Old age (60+) 4.953* (2.947) 5.098** (2.422) 2.694 (1.877) 6.814*** (2.287) 5.330*** (1.296) Married 1.017 (2.026) −3.244* (1.784) −0.335 (1.124) −1.123 (1.510) 1.178 (0.968) Secondary education 1.376 (2.525) 1.580 (2.114) −2.384 (1.533) -4.842 (1.623) *** −1.706 (1.061) Higher education 7.205*** (2.713) 1.625 (2.130) −0.865 (1.721) −8.145*** (2.126) 1.390 (1.323) Formal job 8.980*** (3.157) 5.984** (2.615) 2.770 (2.027) −5.425** (2.533) −0.227 (1.784) Employed −1.572 (2.300) 0.281 (2.171) −2.571 (1.748) −1.526 (1.963) −1.788 (1.372) Medium income 1.803 (2.278) 5.109** (2.460) 3.293* (1.703) 3.056* (1.739) 2.708*** (0.955) High income 9.038** (3.820) 19.801*** (3.026) 10.272*** (1.992) 0.695 (2.613) 1.981 (1.857) Household questions 16.431*** (4.075) 13.201*** (3.344) 10.883*** (2.682) −1.268 (3.167) −2.618 (2.082) Rural location −8.353* (4.902) −1.583 (4.051) −3.475 (2.439) −0.682 (3.157) 2.733* (1.657) Bank branches/10,000 adults −0.240 (2.167) −2.699 (1.724) −1.102 (1.213) −3.544** (1.747) −0.605 (0.939) Correspondents/10,000 adults −1.808 (1.319) −1.742 (0.905) * −0.731 (0.605) 1.415 (1.055) 0.765* (0.441) GDP per capita (million pesos) 34.657 (78.120) 33.744 (45.979) 16.395 (30.938) −59.161 (44.693) −20.463 (26.396) Central West region −7.784 (7.116) 2.893 (3.752) 7.415*** (2.856) 8.854* (4.594) 1.052 (2.502) Northeast region −4.204 (3.766) 8.192* (4.395) −0.214 (2.999) 0.397 (4.655) 0.908 (3.193) Northwest region 6.144 (7.775) 8.395 (6.723) 10.005** (4.189) 29.342*** (5.044) −2.311 (3.061) South/Southeast region −2.388 (3.800) −6.031* (3.597) 1.890 (2.654) 9.633*** (3.279) −0.072 (2.304) Constant 26.413*** (8.784) 23.678*** (7.015) 57.525*** (4.788) 56.806*** (4.908) 69.899*** (3.864) R−squared 0.082 0.125 0.073 0.142 0.045 Observations 1,834 1,834 1,834 1,834 1,834 (continued) 76 Appendix D.  Methodology to analyze linkages between financial capability and financial inclusion TABLE D.1  RELATIONSHIP BETWEEN FINANCIAL KNOWLEDGE AND FINANCIAL CAPABILITY (continued) DEPENDENT VARIABLE: FINANCIAL CAPABILITY COVERING ATTITUDE UNEXPECTED TOWARD THE NOT BEING ACHIEVEMENT VARIABLE EXPENSES SAVING FUTURE IMPULSIVE ORIENTATION Financial knowledge score 1.114* (0.590) 2.583*** (0.629) 1.123** (0.505) 1.739*** (0.638) 1.744*** (0.387) Female 1.830 (1.325) 2.272 (1.442) −1.169 (1.179) 1.860 (1.370) −1.259 (1.032) Middle aged (35–39) 1.850 (1.472) −0.517 (1.924) 0.448 (1.437) 5.233*** (1.824) −0.182 (1.004) Old age (60+) 2.269 (2.801) 2.229 (3.067) −2.860 (2.003) 7.556*** (2.366) −0.760 (1.748) Married 1.226 (1.365) 1.663 (1.855) 0.340 (1.362) 1.893 (1.488) 1.261 (1.055) Secondary education 1.340 (1.972) 0.339 (1.907) 3.344 (1.641) ** 0.609 (1.729) −0.783 (1.445) Higher education 1.938 (2.536) 2.610 (2.427) 4.526** (2.052) 3.413* (1.958) 0.031 (1.713) Formal job −0.094 (2.533) 4.716 (2.895) 0.350 (2.294) −3.198 (2.500) 2.189 (2.150) Employed 3.170 (2.046) −2.234 (2.460) −2.396 (1.841) −1.150 (1.990) −1.516 (1.825) Medium income 2.519 (1.912) 8.468*** (2.434) 3.466** (1.545) 1.600 (1.724) 3.746*** (1.280) High income 13.961*** (2.212) 20.515*** (2.294) 3.571 (2.555) 3.606 (2.678) 5.775*** (1.811) Household questions 12.411*** (3.490) 11.519*** (3.124) 3.690 (2.747) 1.415 (3.704) 4.723** (2.091) Rural location 4.461 (2.736) −3.339 (3.330) −0.220 (2.603) 2.351 (2.887) −2.007 (2.226) Bank branches/10,000 adults 0.589 (1.429) −1.534 (1.703) −0.538 (1.395) −1.331 (1.294) −2.215 (1.351) Correspondents/10,000 adults −0.842 (0.823) − 1.337 (0.813) 1.121 (0.637) * 1.156 (0.604) * 0.594 (0.533) GDP per capita (million pesos) −7.433 (41.997) −3.762 (56.610) −90.654** (42.47) −65.438* (38.549) 40.333* (23.652) Central West region − 6.291* (3.487) −2.639 (3.991) −10.812***(3.466) 6.067 (4.017) 2.192 (2.545) Northeast region 5.416 (3.959) 6.961 (4.417) 1.713 (3.995) −6.153* (3.729) −10.092***(3.120) Northwest region −11.252** (5.592 31.576*** (8.202) 3.232 (5.774) 4.544 (4.755) 13.930*** (2.560) South/Southeast region −2.687 (3.459) −1.488 (4.141) −2.430 (3.603) 2.072 (3.327) 2.529 (2.015) Constant 39.851*** (5.746) 28.977*** (6.143) 26.738*** (5.174) 41.938*** (6.385) 71.041*** (3.900) R−squared 0.078 0.160 0.066 0.056 0.112 Observations 1,834 1,834 1,834 1,834 1,834 Source: World Bank and Government of Mexico Financial Capability Survey data. Note: Robust standard errors, clustered at the municipality level, in parentheses. Statistical significance levels: * 10 percent, ** 5 percent, *** 1 percent. 77 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE D.2 RELATIONSHIP BETWEEN FINANCIAL KNOWLEDGE, FINANCIAL CAPABILITY, AND PRODUCT USAGE To analyze the relationship between financial knowledge, financial capability, and product usage, table 6.1 in chapter 6 displays the results from 66 separate ordinary least squares regressions (6 product usage measures multiplied by 11 financial knowledge or capability measures) of the following form: ProductUsagei,m =  + FinancialCapabilityi,m + Xi,m + Zm + i,m   (2) where ProductUsage is a dummy variable indicating whether the individual i in municipality m reports having the financial product (see full list of product usage dummy variables in table D.6), FinancialCapability is a measure of financial knowl- edge or capability (see full list in table D.5), X is a set of individual control variables (see table D.7), and Z is a set of municipality control variables (see table D.8). The control variables are included to isolate the relationship between financial capability and product usage that is not driven by these other variables. The standard errors of the regression are clustered at the municipality level. The numbers reported in table 6.1 are the coefficients  from the 66 regressions. Due to space constraints, not all coefficients from all 66 regressions are reported, but tables D.2 and D.3 display the full regressions for the financial knowledge score and the financial capability index. The first row of coefficients in each of these tables corresponds to the coefficients reported in in table 6.1. The remaining rows show the coefficients that are not reported in the main text. Figure 6.2 in chapter 6 plots the percentage of individuals with low financial educa- tion who report having each financial product, where low financial capability is defined as having a financial capability index below the median. The bars for indi- viduals with high financial capability are computed as the percentage of individuals with low financial education who report having each financial product plus the coef- ficient  from the following regression multiplied by 100 (for each financial product): ProductUsagei,m =  + HighFinancialCapabilityi,m + Xi,m + Zm + i,m   (3) where all variables are defined as in equation (2), except that HighFinancialCapability is an indicator variable for the individual having a financial capability index above the median. The standard errors of the regression are clustered at the municipality level. The coefficient  in equation (3) represents the difference in product usage across individuals with high and low financial capability, after controlling for individual and municipality characteristics that could be driving this difference. 78 Appendix D.  Methodology to analyze linkages between financial capability and financial inclusion TABLE D.2  FINANCIAL KNOWLEDGE AND USE OF FINANCIAL PRODUCTS DEPENDENT VARIABLE: DUMMY VARIABLE INDICATING WHETHER THE INDIVIDUAL HAS/PARTICIPATES IN A LOAN FROM BANK PAWN SHOP FAMILY OR VARIABLE ACCOUNT CREDIT CARD BANK LOAN TANDA LOAN FRIENDS Fin. knowledge 0.029*** (0.007) 0.017** (0.008) 0.006 (0.005) 0.000 (0.005) 0.005 (0.004) −0.013 (0.009) score Female −0.003 (0.021) −0.008 (0.018) −0.025* (0.015) 0.055*** (0.017) −0.020 (0.014) −0.011 (0.017) Middle aged 0.089*** (0.019) 0.076*** (0.018) 0.048*** (0.015) −0.006 (0.016) 0.007 (0.018) −0.011 (0.023) (35−39) Old age (60+) 0.142*** (0.025) 0.081*** (0.028) 0.039* (0.021) −0.030 (0.022) −0.010 (0.022) −0.080** (0.033) Married −0.008 (0.017) 0.008 (0.016) −0.016 (0.014) 0.009 (0.018) −0.004 (0.012) 0.007 (0.021) Secondary ed. 0.020 (0.019) 0.055 (0.019) *** 0.045 (0.019) ** 0.038 (0.020) * 0.031 (0.017) * 0.003 (0.031) Higher ed. 0.108*** (0.026) 0.106*** (0.026) 0.051** (0.021) 0.001 (0.020) −0.007 (0.021) −0.005 (0.038) Formal job 0.094*** (0.028) 0.100*** (0.033) 0.060** (0.030) −0.029 (0.023) −0.057** (0.027) −0.070* (0.036) Employed −0.046** (0.021) −0.024 (0.022) −0.019 (0.019) −0.004 (0.020) 0.039* (0.022) 0.022 (0.028) Med. income 0.080*** (0.020) 0.014 (0.017) 0.034** (0.015) −0.018 (0.021) 0.004 (0.016) −0.047 (0.029) High income 0.206*** (0.034) 0.191*** (0.037) 0.105*** (0.029) 0.010 (0.026) −0.013 (0.022) −0.098** (0.038) HH questions 0.017 (0.034) 0.045 (0.029) 0.048* (0.025) 0.064*** (0.021) −0.029 (0.033) 0.007 (0.051) Rural location −0.013 (0.032) −0.017 (0.040) −0.037 (0.030) 0.008 (0.023) −0.033* (0.019) 0.025 (0.040) Branches/ −0.004 (0.017) 0.016 (0.015) 0.011 (0.015) −0.007 (0.013) −0.002 (0.012) −0.033 (0.022) 10,000 adults Corr./10,000 0.012 (0.009) 0.014 (0.010) −0.006 (0.006) 0.010 (0.006) −0.005 (0.005) 0.005 (0.011) adults GDP per capita 0.375 (0.554) 0.449 (0.561) 0.290 (0.271) 0.367 (0.250) 0.219 (0.304) 0.141 (0.536) (million pesos) Central West 0.071* (0.043) 0.103** (0.048) 0.012 (0.024) 0.050 (0.032) −0.028 (0.030) 0.037 (0.043) Northeast 0.068 (0.046) −0.013 (0.034) 0.025 (0.041) −0.033 (0.031) −0.002 (0.030) 0.022 (0.053) Northwest −0.028 (0.071) −0.037 (0.077) 0.024 (0.072) −0.088** (0.038) 0.084 (0.052) 0.196** (0.079) South/SE 0.063** (0.025) 0.052 (0.034) 0.057** (0.027) 0.021 (0.027) −0.012 (0.027) 0.056 (0.044) Constant −0.244*** (0.069) −0.231*** (0.071) −0.079 (0.049) −0.012 (0.037) 0.118** (0.048) 0.322*** (0.077) R−squared 0.182 0.184 0.072 0.031 0.020 0.039 Observations 1,834 1,834 1,834 1,834 1,834 1,834 Source: World Bank and Government of Mexico Financial Capability Survey data. Note: Robust standard errors, clustered at the municipality level, in parentheses. Statistical significance levels: * 10 percent, ** 5 percent, *** 1 percent. 79 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE TABLE D.3  FINANCIAL CAPABILITY AND USE OF FINANCIAL PRODUCTS DEPENDENT VARIABLE: DUMMY VARIABLE INDICATING WHETHER THE INDIVIDUAL HAS/PARTICIPATES IN A LOAN FROM BANK PAWN SHOP FAMILY OR VARIABLE ACCOUNT CREDIT CARD BANK LOAN TANDA LOAN FRIENDS Financial capa- 0.056*** (0.008) 0.037*** (0.010) 0.009 (0.006) −0.005 (0.007) −0.014** (0.006) −0.033*** (0.011) bility index Female −0.012 (0.020) −0.007 (0.017) −0.023 (0.015) 0.061*** (0.017) −0.012 (0.013) −0.002 (0.020) Middle aged 0.074*** (0.019) 0.066*** (0.016) 0.042*** (0.015) −0.004 (0.015) 0.010 (0.017) 0.000 (0.022) (35−39) Old age (60+) 0.119*** (0.024) 0.066** (0.027) 0.029 (0.019) −0.024 (0.021) −0.008 (0.021) −0.065* (0.033) Married −0.006 (0.016) 0.005 (0.016) −0.012 (0.014) 0.013 (0.017) −0.002 (0.012) 0.016 (0.022) Secondary ed. 0.027 (0.018) 0.054 (0.017) *** 0.042 (0.018) ** 0.038 (0.020) * 0.031 (0.015) ** −0.011 (0.029) Higher ed. 0.116*** (0.025) 0.101*** (0.026) 0.050** (0.021) 0.005 (0.017) −0.000 (0.020) −0.000 (0.036) Formal job 0.091*** (0.026) 0.093*** (0.033) 0.051* (0.029) −0.026 (0.022) −0.053** (0.026) −0.068* (0.036) Employed 0.042** (0.020) − −0.018 (0.021) −0.013 (0.018) −0.003 (0.019) 0.040** (0.020) 0.029 (0.029) Med. income 0.061*** (0.020) 0.004 (0.017) 0.036** (0.014) −0.013 (0.020) 0.013 (0.016) −0.037 (0.031) High income 0.156*** (0.032) 0.167*** (0.038) 0.102*** (0.027) 0.021 (0.028) 0.007 (0.021) −0.073* (0.039) HH questions −0.024 (0.034) 0.012 (0.028) 0.038 (0.025) 0.071*** (0.020) −0.017 (0.031) 0.044 (0.051) Rural location −0.005 (0.033) −0.014 (0.039) −0.038 (0.030) 0.007 (0.022) −0.038** (0.019) 0.020 (0.039) Branches/ 0.004 (0.016) 0.016 (0.014) 0.009 (0.014) −0.006 (0.013) −0.006 (0.012) −0.034 (0.023) 10,000 adults Corr./10,000 0.015 (0.009) 0.015 (0.010) −0.005 (0.006) 0.008 (0.007) −0.004 (0.005) 0.004 (0.012) adults GDP per capita 0.431 (0.551) 0.511 (0.540) 0.256 (0.253) 0.478** (0.241) 0.190 (0.309) 0.245 (0.590) (million pesos) Central West 0.076* (0.043) 0.093** (0.047) 0.012 (0.023) 0.043 (0.029) −0.031 (0.029) 0.038 (0.044) Northeast 0.050 (0.041) −0.022 (0.031) 0.017 (0.038) −0.033 (0.031) −0.005 (0.031) 0.020 (0.055) Northwest −0.123 (0.077) −0.091 (0.079) 0.004 (0.070) −0.086** (0.036) 0.089 (0.055) 0.236*** (0.078) South/SE 0.067*** (0.024) 0.053* (0.031) 0.052** (0.026) 0.018 (0.025) −0.012 (0.027) 0.044 (0.044) Constant −0.401*** (0.076) −0.332*** (0.080) −0.094 (0.059) −0.001 (0.050) 0.198*** (0.059) 0.405*** (0.098) R−squared 0.195 0.190 0.069 0.032 0.023 0.042 Observations 1,935 1,935 1,935 1,935 1,935 1,935 Source: World Bank and Government of Mexico Financial Capability Survey data. Note: Robust standard errors, clustered at the municipality level, in parentheses. Statistical significance levels: * 10 percent, ** 5 percent, *** 1 percent. 80 Appendix D.  Methodology to analyze linkages between financial capability and financial inclusion Tables D.4 displays the results from three separate ordinary least squares regres- sions (one for each formal financial product) of the following form: ProductUsagei,m =  + HighFinancialCapabilityi,m + 1HighFinancialCapabilityi,m × BankBranchesm + 2LowFinancialCapabilityi,m × BankBranchesm + 1HighFinancialCapabilityi,m × Correspondentsm + 2LowFinancialCapabilityi,m × Correspondentsm + Xi,m + Zm + i,m   (4) where all variables are defined as in equation (2), but instead of including control variables for bank branches per 10,000 adults or correspondents per 10,000 adults, the regression includes four interaction terms between (1) number of bank branches per 10,000 adults in the municipality times an indicator variable for the individual having high financial capability or knowledge, (2) number of bank branches per 10,000 adults in the municipality times an indicator variable for the individual having low financial capability or knowledge, (3) number of correspondents per 10,000 adults in the municipality times an indicator variable for the individual having high financial capability or knowledge, and (4) number of correspondents per 10,000 adults in the municipality times an indicator variable for the individual having low financial capability or knowledge. The standard errors of the regression are clustered at the municipality level. Table D.4 reports the coefficients 1, 2, 3, and 4 that represent the partial correla- tion between bank branches or correspondents and financial product usage for indi- viduals with high or low financial capability (or knowledge), respectively. 81 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE TABLE D.4  PARTIAL CORRELATIONS BETWEEN FINANCIAL ACCESS POINTS AND USE OF FINANCIAL PRODUCTS, BY FINANCIAL CAPABILITY AND FINANCIAL KNOWLEDGE LEVELS DEPENDENT VARIABLE: DUMMY VARIABLE INDICATING WHETHER THE INDIVIDUAL HAS A BANK ACCOUNT CREDIT CARD BANK LOAN By financial capability level Bank branches per 10,000 adults × 0.011 (0.027) 0.041 (0.026) 0.021 (0.021) Individuals with high financial capability Bank branches per 10,000 adults × −0.013 (0.011) −0.016 (0.011) −0.005 (0.013) Individuals with low financial capability Banking correspondents per 10,000 adults 0.026* (0.016) 0.032** (0.014) 0.004** (0.009) × Individuals with high financial capability Banking correspondents per 10,000 adults 0.005 (0.007) 0.002 (0.008) −0.004 (0.007) × Individuals with low financial capability By financial knowledge level Bank branches per 10,000 adults × −0.013 (0.024) 0.021 (0.022) −0.001 (0.021) Individuals with high financial capability Bank branches per 10,000 adults × 0.003 (0.015) 0.009 (0.017) 0.023 (0.017) Individuals with low financial capability Banking correspondents per 10,000 adults 0.029** (0.014) 0.025* (0.013) −0.008 (0.007) × Individuals with high financial capability Banking correspondents per 10,000 adults −0.003 (0.007) 0.003 (0.009) −0.004 (0.008) × Individuals with low financial capability Sources: Consejo Nacional de Inclusión Financiera 2011; World Bank and Government of Mexico Financial Capability Survey data (see below for details and sources of control variables). Note: Regressions include the following control variables (see tables below for definitions): female, middle-aged, old age, married, secondary education, higher education, formal job, employed, medium income, high income, household questions, rural location, bank branches per 10,000 adults, corre- spondents per 10,000 adults, GDP per capita (million pesos), and region dummy variables. Robust standard errors in parentheses. Statistical significance levels: * 10 percent, ** 5 percent, *** 1 percent. 82 Appendix D.  Methodology to analyze linkages between financial capability and financial inclusion TABLE D.5  MEXICAN FINANCIAL LITERACY SURVEY VARIABLE DEFINITIONS: FINANCIAL KNOWLEDGE AND FINANCIAL CAPABILITY VARIABLE DEFINITION Financial knowledge index Number of correct answers to eight financial knowledge questions (index from 0 to 8) Nine components of financial capability As defined in previous chapters (scale from 0 (budgeting, monitoring expenses, using to 100) information, not overspending, covering unexpected expenses, saving, attitude toward the future, not impulsive, achieve- ment orientation) Financial capability index Simple average of nine financial capability components listed above (scale from 0 to 100) TABLE D.6  MEXICAN FINANCIAL LITERACY SURVEY VARIABLE DEFINITIONS: FINANCIAL PRODUCT USAGE VARIABLE DEFINITION Bank Based on question d_1_6 account Dummy variable indicating whether the respondent reports having a “Cuenta bancaria (o con otra institución financiera)” Credit card Based on question d_1_7 Dummy variable indicating whether the respondent reports having a “Tarjeta de crédito” Bank loan Based on questions d_1_5 Dummy variable indicating whether the respondent reports having a “Crédito personal (bancario) o crédito nomina” Tanda Based on question d_1_10 Dummy variable indicating whether the respondent reports having “Tandas” Pawn shop Based on question d_1_9 Dummy variable indicating whether the respondent reports having “Empeño” Loan from Based on question d_1_11 family or Dummy variable indicating whether the respondent reports having “Prés- friends tamos de familiares o amigos” 83 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE TABLE D.7  MEXICAN FINANCIAL LITERACY SURVEY VARIABLE DEFINITIONS: INDIVIDUAL CONTROL VARIABLES VARIABLE DEFINITION Female Based on question r_2 Dummy variable indicating whether the individual is female Age Based on question r_4 Two dummy variables indicating whether the individual is middle-aged (35–59) or old (over 59); young (18–34) is the omitted category in the regressions Marital status Based on question f_2 Dummy variable indicating whether the individual is married Education Based on question r_8 Two dummy variables indicating whether the individual has completed secondary or higher education; primary education or less is the omitted category Employment Based on question f_5 One dummy variable indicating whether the individual works (either as an employee or self-employed); another dummy variable indicating whether the individual has a formal sector job Income Based on question f_23_mx Two dummy variables indicating whether the household has a medium (Mex$3,000—Mex$5,000) or high (> Mex$5,000) income level; low income (< Mex$3,000) is the omitted category Survey Based on question a_6 questions Dummy variable indicating whether the individual answered questions about the financial products that he or she personally uses or that the household uses Rural location Dummy variable indicating whether the individual lives in a rural area Region Four dummy variables indicating whether the individual lives in the Central West, Northeast, Northwest, or South/Southeast of Mexico; Central Mexico is the omitted category TABLE D.8  MEXICAN FINANCIAL LITERACY SURVEY MUNICIPAL-LEVEL VARIABLE DEFINITIONS AND SOURCES VARIABLE DEFINITION SOURCE GDP per capita Value added (sum across all industries) divided by total Value added from INEGI population (million pesos) 2009; population from INEGI 2005 Bank branches per 10,000 adults Number of commercial bank branches divided by number of Consejo Nacional de Inclu- adults living in the municipality times 10,000 sión Financiera 2011 Correspondents per 10,000 adults Number of banking correspondents divided by number of adults living in the municipality times 10,000 84 APPENDIX E Literature review: financial knowledge, capability, and behavior A number of studies have investigated the relationship between financial knowledge and financial behavior. Using data from the United States, Lusardi and Tufano (2009) find that individuals who have low measured levels of financial knowledge tend to pay minimum balances on credit cards, incur late fees on cards, and use informal sources of credit. Stango and Zinman (2009) show that people who make mistakes in interest and future value calculations tend to borrow more and save less. Lusardi and Mitchell (2009) illustrate that people with low levels of financial knowledge think less about retirement and that most of them have not planned for retirement at all. A survey of Russian households shows that financial knowledge is significantly and positively related to retirement planning involving private pension funds and schemes (Klapper and Panos 2011). And in Mexico, Hastings and Tejeda-Ashton (2008) conducted a survey that reveals that less knowledgeable individuals tend to choose mutual pension funds with higher fees. These studies tend to measure financial literacy based on questions that test knowl- edge of the time value of money (inflation), interest rates, compounding, and risk diversification, although the specific measures used vary from study to study (see also Xu and Zia 2012 for a discussion of different measures of financial knowledge). Most studies do not aim to measure financial capability in addition to financial knowledge, and thus there is little existing evidence about the relationship between financial capability and financial behavior. One caveat with the studies mentioned above is that these results are not neces- sarily causal. They show a correlation between proxies for financial knowledge and outcomes of interest, but these correlations may simply reflect unobserved charac- teristics of individuals such as their numeracy, ability, parental background, or other such features. Although some studies try to measure these characteristics and try to account for them in the analysis, some of these features may not be measurable and can thus potentially bias the results. A growing literature tries to address this issue by relying on quasi-experimental or experimental variation in the provision of financial education programs to measure the impact of financial knowledge on financial behavior. The context of these studies 85 FINANCIAL CAPABILITY IN MEXICO: RESULTS FROM A NATIONAL SURVEY ON FINANCIAL BEHAVIORS, ATTITUDES, AND KNOWLEDGE varies widely—for example, in terms of the economic environment and the type of individuals targeted through the financial education programs. Compulsory financial education classes taught in high schools have been the subject of a number of studies. Bernheim, Garrett, and Maki (2001) use exogenous varia- tion in high school financial education mandates across U.S. states to show that students exposed to financial education classes save more as adults. However, Cole and Shastry (2008) cast doubt on these findings, showing that they are not robust to controlling for state-fixed effects and examining effects over time. Shorter-term evidence comes from Bruhn et al. (2013), who conducted a randomized experi- ment providing financial education in Brazilian public high schools. They find positive effects on financial knowledge, attitudes, and behaviors, and an increase in savings rates. These impacts are small in absolute magnitude: a 3 percentage point increase in knowledge, and a 1 percentage point increase in savings. In Germany, Lührmann, Serra-Garcia, and Winter (2012) find teenagers given financial literacy training show increased interest in and knowledge of financial matters, and save more in a hypo- thetical task, but they do not measure actual savings. Other studies have focused on providing financial education to working adults, recog- nizing the differences in households’ financial needs and exposure across developed and developing countries. The literature in developed countries tends to study the impact of financial education on planning for retirement or investment portfolio choices. Duflo and Saez (2011) show that participation in seminars discussing retire- ment savings leads to an increase in retirement plan participation. In the developing country context, impact evaluations of financial literacy training have studied the unbanked, insurance take-up, and migrants. One of the first papers to examine the impact of financial education in a developing country was by Cole, Sampson, and Zia (2011). The authors implemented a field experiment in Indonesia where they offered randomly selected unbanked households a financial education course geared toward opening a bank savings account. They find that the financial education course had no effect on the likelihood of opening a bank savings account in the full sample, but it had modest effects for uneducated and financially illiterate households. Cai (2011) used a randomized experiment to show that farmers in rural China are more likely to take up crop insurance and become less price sensitive after attending financial education sessions. Gibson, McKenzie, and Zia (2012); Doi, McKenzie, and Zia (2012); and Seshan and Yang (2012) analyze how providing information and financial education affects the behavior of migrants and their households. Gibson, McKenzie, and Zia (2012) work with migrants in New Zealand and Australia, and find that financial educa- tion increases knowledge about remittance transaction costs but does not lead to changes in the amount of remittances sent or use of the cheapest remittance 86 Appendix E.  Literature review: financial knowledge, capability, and behavior method. Using a sample of Indonesian migrants, Doi, McKenzie, and Zia (2012) find that impacts on financial knowledge, behavior, and savings are largest when both the migrants and their families receive financial education. The results show that finan- cial education can have large effects when provided at a teachable moment, but that this impact varies according to who is receiving the training. Seshan and Yang (2012) find that Indian migrants in Qatar increase savings after financial education training, but only if they had low financial knowledge to begin with. Overall, the literature thus finds a positive relationship between financial knowl- edge and use of formal financial products. Impact evaluations of financial education courses suggest that this relationship is, at least in part, causal. However, these evaluations also highlight that financial education courses often only lead to behavior change for certain groups of individuals—such as those who had low knowledge to begin with—but not for others. In addition, the measured impacts are often small, and participation rates in financial education courses tend to be low. The small effects and low participation rates suggest that classroom-style workshops may not be the best way of conveying financial education to adults, who may not have the time or motivation to attend such workshops. The literature is now moving toward exploring whether innovative channels for providing financial education can affect behavior. Ongoing studies in India, Peru, South Africa, and the United States (among others) are testing whether the provision of information via videos, radio, mass media, or video games is effective in improving individuals’ financial decisions (see, e.g., Berg and Zia 2013). Finally, while literature has mostly focused on financial knowledge so far, it has also touched on concepts related to specific financial capability. Some of the financial education courses studied through impact evaluations try to teach techniques to improve budgeting and monitoring of expenses. For example, Bruhn et al. (2013) find that a comprehensive financial education program in Brazilian high schools leads to an increase in the percentage of students and parents who make a list of expenses. The program also increased saving rates. Other studies have examined the relation- ship between time preferences and saving behavior. 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