This chapter focuses on the concept of financial capability and its related components. It reviews the local and international literature on financial attitude, financial knowledge, financial behaviour and numeracy skills among different socio-demographic categories in order to emphasise the need for financial capability among university students. The data gathered on the financial capability of accounting students at universities in KwaZulu- Natal is presented and analysed and the hypotheses formulated in relation to the financial capability of these accounting students are tested. Finally, the findings are discussed in line with the relevant literature.
Financial capability plays an important role in financial stability, financial inclusion and the effective functioning of financial markets (Zottel, 2013; Lusardi and Mitchell, 2014). It is also a vital ingredient in promoting financial stability at the household level (Lusardi, 2011;
Sherraden, 2013). It is for this reason that it has received increased attention from governments and policymakers in both developing and advanced economies (Lusardi and Mitchell, 2014). Lusardi (2011) suggests that financial capability can be measured from the perspective of how households make financial decisions such as making ends meet, budgeting and choosing and managing financial products as well as having the requisite skills and knowledge of financial matters. Financial capability also improves financial stability by curbing growing economic inequalities among households (Sherraden, 2013).
In terms of financial inclusion, Mitton (2008) notes that financial capability can improve both financial decision making as well as access to appropriate financial products and services, which are the two defining elements of such inclusion. This is necessary as
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people need to take responsibility for their financial security during retirement, physical incapacitation and periods of unemployment (Atkinson et al., 2007).
Furthermore, constant changes in financial markets call for increased financial capability at the individual level (Bucher-Koenen et al., 2017).
The World Bank defines financial capability as an individual’s capacity to behave in their best financial interests given socio-economic conditions. It encompasses the knowledge (literacy), attitudes, skills and behaviours of consumers in managing their resources, and understanding, selecting and making use of financial services that meet their needs (Zottel, 2013). In their study on the financial capability of low-income millennials, West and Friedline (2016) define this concept as an individual’s ability to adopt healthy financial behaviours in an institutional context with opportunities that facilitate such behaviours.
The authors further identify financial knowledge and financial inclusion as the two foundational pillars of financial capability.
The British Household Panel Survey (BHPS) survey on the financial capability and well- being of British residents, defines financial capability as:
“…a broad concept, encompassing the people’s knowledge and skills to understand their financial circumstances, along with the motivation to take action. Financially capable consumers plan, find and use information, know when to seek advice and can understand and act on this advice, leading to greater participation in the financial services market”
(Taylor et al., 2009).
Thus, financial capability reflects a person’s knowledge of financial matters. This is demonstrated by how the individual manages and controls his or her finances (Taylor, 2011).
Banerjee et al. (2017) conceptualise financial capability as the ability and opportunity to save, access credit and invest money in the mainstream economy. The Financial Services Board describes it as people’s knowledge and skills to understand their own financial circumstances, along with the motivation to take action.
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It adds that financially capable individuals plan ahead, find and use information, know when to seek advice and can understand and act on this advice, leading to greater participation in the financial market.
Xiao et al. (2015) observe that financial behaviour and financial literacy are closely related to financial capability. They add that financial literacy is displayed by a certain level of such literacy and positive financial behaviours. Sherraden et al. (2015) are of the view that being financially capable helps individuals to accumulate the financial assets that are necessary for their long-term financial security. They suggest that financial capability should be a lifelong pursuit, beginning from birth via the opening of a Child Development Account (CDA) for each newborn. Zhu (2018b) study on the influence of parental financial socialisation on the financial capability of Chinese adolescents, conceptualised this phenomenon as an enduring cognitive-behavioural ability that comprises of multifaceted aspects relating to the management of finances.
Zhu (2018b) found that parents play a vital role in the development of financial knowledge among children and adolescents. Davies’ (2015) survey of 946 adolescent students in Hong Kong also concluded that parental financial norms and conscious financial education of their children were key contributors to the study participants’ financial behaviours and capability.
Financial education aims to improve the overall financial literacy levels of individuals, with the primary aim of making them financially capable. While financial capability is influenced by several factors, Deacon and Firebaugh (1988) propose a conceptual model that considers both internal and external influences. This is illustrated in the diagram below:
Figure 3. 1 Modified Family Resource Management Model
MODIFIED FAMILY RESOURCE MANAGEMENT MODEL - DEACON AND FIREBAUGH
Environmental Influences Input Throughputs
Parents Peers Media
Financial Knowledge Numerical Skills Financial Attitudes Personal Characteristics
Financial behavior
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