MICROFINANCE PAPER WRAP-UP: “Determinants of Financial Well-Being: Evidence from Latin America,” by Sebastián Cárdenas, Published by CAF

This paper addresses the measurement and causes of financial well-being in Latin America with the aim of encouraging the deployment of optimal policies and practices by both private institutions and governments. To define the term, Mr Cárdenas cites the US-based Consumer Financial Protection Bureau (CFPB), which considers a high level of financial well-being to mean individuals can “meet their financial obligations successfully, can feel secure about their financial future and are able to make decisions that allow them to enjoy life.” Further, CFPB specifies the following thresholds of financial well-being, in increasing order of desirability: (1) capable of paying off all financial obligations, including basic needs; (2) capable of surviving unexpected financial shocks, including with the support of loved ones; (3) capable of spending on activities beyond basic needs, such as vacations; and (4) on track to fulfill future financial goals, such as buying a home.

The author quantifies financial well-being using a “graded response model,” with data collected from 1,200 people in each of seven countries. The ranking of average results in each country, in decreasing order, is Chile, Colombia, Bolivia, Peru, Ecuador, Paraguay and Argentina.

The study offers the following insights into the determinants of financial well-being: (1) Higher levels of financial knowledge are correlated with higher levels of well-being; (2) Income and general education level do not correlate strongly with financial well-being; (3) Those who compare financial institutions before engaging in a transaction experience higher levels of financial well-being; and (4) Savings is one of the most crucial components of increasing well-being.

In closing, the author recommends the following policies: (1) Public and private entities should implement programs that boost financial literacy; (2) Variables correlating with financial well-being, such as savings and the comparison of financial institutions, should be included in education programs; and (3) Information on financial products and services should be provided in standardized formats to make it easier for citizens to evaluate their choices.

This is a summary of a paper written by Sebastián Cárdenas, published by the Corporacion Andina de Fomento (CAF) as part of its “Public Policies and Productive Transformation” series, September 2021, 52 pages, available at https://scioteca.caf.com/bitstream/handle/123456789/1794/Determinants%20of%20Financial%20Well-Being_Evidence%20from%20Latin%20America.pdf

By Bradley Shulman, Research Associate

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