Measuring Financial Health of Informal Workers: Why it Matters

By Sabina Yasmin, Panchali Banerjee

The global pandemic would be the most recent and appropriate example to substantiate the need for measuring the financial health of informal workers. COVID-19 induced severe downscaling of economic activities, due to which the LMICs have suffered strong financial consequences. Informal enterprises are particularly vulnerable to such financial shocks because of their low levels of savings and investment and minimal capital accumulation (ILO, 2020). Workers engaged in the informal sector have been victims of financial troubles, anxiety, and stress, all induced by the pandemic (Ravikumar et al., 2022).

Recently the concept of financial health has gained prominent focus in various discussion forums. It has developed and been acknowledged as a useful technique to consider the insights that result from both the usage and non-use of financial services. As defined by BFA global, Cafi and MetLife, â€śFinancial health enables us to systematically extend the conversation around financial inclusion that primarily involves access and usage, to one that focuses on the efficacy of that access. It highlights four dimensions or building blocks for measuring financial health, i.e., day-to-day expenses, opportunities, resilience, and agency.” However, as the world is moving closer towards closing the gap around access, the definition of financial health is also ever-evolving with the addition of dimensions such as financial planning, decision making and resilience; as reflected in the globally extensive data on financial health by World Bank (FINDEX).  

Although there exists a broad consensus among stakeholders as to what defines financial health, there is variability in terms of how to measure within or across the dimensions of financial health. For instance, there can be wide variations and diversity amongst the different population segments like low-income vs. middle-income vs. high-income households, gendered differences, formal vs. informal sector, etc. These differences arise from behavioural aspects such as frequency of savings, access to savings/credit/insurance, financial planning, decision-making, and credit behaviour. 

This necessitates the need for measuring financial health to get a robust understanding of the state of financial well-being and henceforth a robust definition of financial health that includes various aspects of the cross-country, socio-demographic, and economic outcomes. Measuring the relevant population’s financial health is a crucial first step in creating policies and programmes that support it. In countries where the notion of financial health is well-established, measurement has been crucial in promoting awareness and helping policymakers, financial service providers, and civil society to learn more about the financial health and well-being of relevant populations. 

Gaps in Existing Frameworks

However, a challenge that arises in terms of measuring financial health is the fact that it cannot be easily and directly observed. Missed bill or EMI payments, the presence of liquid reserves, appetite for short-term and long-term investments, ability to borrow from formal financial institutions, ability to plan, ability to raise contingency funds and ability to take financial decisions must all be used as indicators. Further, a majority of the existing frameworks of financial health measurement are in the context of selected high-income nations. Since measuring financial health is still relatively new in other parts of the world, techniques from high-income nations may need to be modified. The existing measurement tools developed and tested in developed economies may not be quite appropriate to measure the financial health of poorer economies with substantial differences in economic, social and cultural constructs. These sociocultural parameters often impact the financial behavior of individuals and therefore give a skewed understanding and implications for the financial health of these households. 

Moreover, at any level, income correlates positively with the good financial health of individuals. Typically, a steady flow of income, well-managed expenses, investments that give you good returns, sufficient savings, good debt management and agency improves a person’s resilience and financial health. But often a steady flow of income and the related dimensions may vary from individual to individual and over time. In fact, the majority of the population in developing countries are employed in sectors or work arrangements that may not guarantee assured work and income throughout the year. With increased improvement and access to digital infrastructure and shifting dynamics at the workplace, post-2010-11, the world has witnessed an increase in the workforce engaging in the informal sector at different levels, across all sectors. In India alone, 7.7 million workers are engaged in the gig economy and makeup 1.5% of the total workforce as of 2020-21. The gig economy is characterised by a lack of job security, irregular wages and uncertainty of employment status (Niti Aayog, 2022). The uncertainty with the availability of regular work and income can lead to financial stress and anxiety for gig and platform economy workers.  

Therefore, we highlight the importance of measuring the financial health of the informal sector. The recent global pandemic brought forward the plight of this sector and its vulnerability. The workers engaged in the informal sector have been victims of financial troubles, anxiety, and stress, all induced by the pandemic (Ravikumar et al., 2022). Low and middle-income households frequently experience financial stress and anxiety (Roll et al., 2016) both of which have an impact on a person’s quality of life and overall sense of fulfillment in life (Heo et al., 2020). With the onset of the pandemic and the vulnerability that followed, the savings and investments by consumers have been impacted. Household spending patterns are shifting away from items that were previously not considered necessities. In the absence of formal work contracts, this economy continues to face irregularities including payment delays, deferred salaries, and unforeseen cuts amongst others. Additionally, the banks’ inability to assess their risks and underwrite them prevents them from having easy access to financial products like credit and insurance. The lack of widespread awareness and targeted efforts by the government, further leave the community vulnerable to financial risks (Financial Express, 2022). Against this backdrop, it becomes important to understand the financial health of these workers to drive stakeholders to understand and design appropriate solutions via financial products. 

Against this backdrop, the insights from the dimensions of financial health can be utilised to develop a financial health measurement tool or scorecard, that can be used as an index or a set of diverse indicators. The scorecard will be developed as a modular structure which can be applied in different markets across Asia, Africa and South America as a multidimensional concept agnostic to financial goals and choices, to capture the overall financial outcomes and allow comparison across individuals and groups. The measurement of financial health via a scorecard, thus proposed, will be a holistic effort to help the consumers identify and understand their financial well-being exhibited through their choices and behaviour. The scorecard can serve to support the design of financial health-centric policies and products that improve the financial well-being of the population, particularly the disenfranchised segments – women, youth, migrants, micro-enterprises, gig workers, and the poor.

Consequently, this will improve financial behaviour and financial outcomes by targeting the gaps in savings, uptake of credit, insurance, and other opportunities to improve resilience. A financial health scorecard in the context of the target population can be of particular value to the policymakers and financial service providers since it can enable the stakeholders to assess the target population’s financial health, design and implement context-specific policies and monitor improvements to it. The assessment can also be used to monitor policy efficacy and propose targets for specialised policy interventions. As a first step, perhaps one can gauge if one is moving the needle on financial health, by measuring it. We henceforth attempt to devise a scorecard – a simple yet holistic tool, to measure the financial health of informal sector workers. 

This article was first published on Community for Financial Health’s Blog and is the first part of a two-part blog. Read the original piece here. The next part will bring forth insights from various dimensions of financial health from a survey with platform workers in India contributing to the development of the tool to measure financial health in low-income countries. 


About the Authors
Sabina Yasmin is a Senior Research Fellow at LEAD and currently also serves as a Bharat Inclusion Fellow. Her research interests include agricultural economics, rural finance, development economics and applied microeconomics. Sabina is immensely passionate about using her work for the upliftment of marginalised people. Prior to joining LEAD, she taught economics to engineering and social science students at SRM University-Amravati.

Panchali Banerjee has a PhD. in Economics from Jadavpur University and a Master’s degree in Economics from University of Calcutta. Panchali enjoys researching corruption and social protection, and is particularly interested in intersections such as women’s work and gender-based violence.