The UN Capital Development Fund (UNCDF) makes public and private finance work for the poor in the world’s 46 least developed countries (LDCs). With its capital mandate and instruments, UNCDF offers “last mile” finance models that unlock public and private resources, especially at the domestic level, to reduce poverty and support local economic development. This last mile is where available resources for development are scarcest; where market failures are most pronounced; and where benefits from national growth tend to leave people excluded. UNCDF’s financing models work through three channels: (1) inclusive digital economies, which connects individuals, households, and small businesses with financial eco-systems that catalyze participation in the local economy, and provide tools to climb out of poverty and manage financial lives; (2) local development finance, which capacitates localities through fiscal decentralization, innovative municipal finance, and structured project finance to drive local economic expansion and sustainable development; and (3) investment finance, which provides catalytic financial structuring, de-risking, and capital deployment to drive SDG impact and domestic resource mobilization. By strengthening how finance works for poor people at the household, small enterprise, and local infrastructure levels, UNCDF contributes to SDG 1 on eradicating poverty with a focus on reaching the last mile and addressing exclusion and inequalities of access. At the same time, UNCDF deploys its capital finance mandate in line with SDG 17 on the means of implementation, to unlock public and private finance for the poor at the local level. By identifying those market segments where innovative financing models can have transformational impact in helping to reach the last mile, UNCDF contributes to a number of different SDGs and currently to 28 of 169 targets. Hosted by UNCDF, the Centre for Financial Health is set-up as an umbrella platform towards convening a global coalition and thought leadership. The Centre for Financial Health acts as a convener, providing a platform to bring together global, regional and local actors committed to using financial and digital solutions to improve the financial lives of low-income families—helping them climb - and stay - out of poverty. The Centre creates space for thought leadership where best financial health practices and models are exchanged and lead to concrete action with governments and the private sector. The Centre is implementing programmes in different countries called Living Labs which support players with a combination of high quality financial, advisory and networking support to design, test and scale financial health solutions. The aim of the programmes is to improve the financial health of five million people over the next four years. The key focus segments are gig economy workers, elders and women, with micro-enterprises and small-holder farmers cross cutting across these segments as livelihood channels. UNCDF’S Work in Financial Health Significant progress has been made in financial inclusion, but some problems persist, indicating that financial inclusion is a useful but narrow lens. More than 1.2 billion people have financial accounts since 2011 (Global Findex); historically disenfranchised groups use a range of products from savings to credit, and countries and governments now have national financial inclusion strategies. Yet, most of this success derives from “first-level access”–the use of basic accounts or payments products. In some cases, financial inclusion has led to unintended but pernicious effects such as over-indebtedness through easy access to digital credit. The effects of financial inclusion on people’s welfare is mixed, and where these effects are positive, they are rather modest. Financial inclusion has also failed to reach all people equally with women, youth and microenterprises still experiencing account ownership, usage and funding gaps. Financially Included but not Financially Healthy A few studies have examined the correlation between financial inclusion and financial health, and the results have not been encouraging. A study by the US-focused Financial Health Network conducted in 2019 shows that only 29% of Americans are financially healthy despite a (pre-COVID-19) booming economy and near-universal financial inclusion.[1] Similarly, while financial inclusion in Kenya increased from 75% to 83% between 2016 and 2019, the percentage of adults deemed financially healthy declined from 39% to 22% in the same period.[2] Gallup’s study indicated that there is no clear relationship between account ownership and financial security in low- and middle-income countries.[3] In the development community, there is a general consensus that the ultimate objective of financial inclusion is to improve lives through creating financial security and increasing control over finances, for example. Yet we might need to pause and reflect on what constitutes “improving lives”. Financial health as an approach offers a way forward. Financial health is not the next panacea but offers a larger, more comprehensive perspective to define, create and measure impact. By definition, financial health encompasses three important aspects of an individual’s financial life: financial security and resilience, financial control and financial freedom. The following definition of financial health captures these dimensions: - The ability to meet one’s ongoing commitments, now and in the future, and under adverse circumstances (financial security). The ability to meet one’s commitments during adverse conditions, sustain oneself through it, and reorient one’s financial life once those conditions cease is termed as financial resilience;
- A feeling of control of one’s finances (financial control); and
- The ability to meet one’s financial goals and enjoy things one values (financial freedom).
Financial health is an improved approach over financial inclusion for many reasons. For one, financial health is more user-centric in that it accounts for both objective and subjective ways to define impact, embodying the principle that impact can mean different things to different people and is best defined by individuals themselves. Financial health also measures what matters. While transactional indicators remain relevant, the perceptive indicators of financial health such as the ability to come up with liquid funds offer a more nuanced view of an individual’s financial life. Financial health also recognizes that a whole range of factors are at play as it relates to people’s financial lives, from individual characteristics such as income and assets to environmental factors such as social capital and public infrastructure. UNCDF is seeking qualified interns to accelerate the learning agenda and the effective support to the UNCDF Financial Health portfolio. [1] US Financial Health Pulse, Financial Health Network, 2019 [2] Inclusive Finance: Headline Findings from Finaccess 2019, FSD Kenya, 2019 [3] Gallup’s Global Financial Health Study, 2018
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