Financial Capability & Development — Malawi
Imagine two individuals that earn comparable incomes. They both face same economic realities: rising food prices, escalating school fees, unexpected medical bills, volatile fuel prices, increasing data costs, escalating fertiliser prices, and the daily uncertainty that characterises many livelihoods in Malawi. Yet one consistently pays bills timely, plans for the future, avoids unnecessary debt and manages financial shocks more effectively than the other. The billion-kwacha question is: What explains the difference? Economists increasingly argue that the answer lies not only in how much people earn, but also in how they manage resources available to them. This brings financial literacy to the centre of the discussion.
What is Financial Literacy?
Financial literacy refers to the knowledge, skills, and confidence that enable individuals to make informed financial decisions, plan effectively, and navigate economic uncertainty. In environments where individuals face persistent financial pressures, financial literacy may be an important pathway through which people build financial resilience and improve their financial health.
Over the past two decades, financial literacy has emerged as an important area of research in economics, development studies, and public policy. Pioneering work by Lusardi & Mitchell (2014) demonstrated that financially literate individuals make better decisions regarding saving, borrowing, investment and retirement planning. More recently, Kaiser et al (2022), in a comprehensive review of foundational education programmes, concluded that financial education pointedly improves knowledge and financial behaviours across diverse settings.
Although this international evidence is captivating, empirical research from Malawi remains comparatively limited. My recent study seeks to contribute to this mounting body of knowledge by examining whether financial literacy is associated with better financial health among Malawians.
Looking Beyond Income
When analysing individual or household welfare, economists often focus on income or consumption. These measures are indisputably significant, but they tell only part of the story. Individuals with similar incomes may experience very different levels of financial wellbeing depending on how effectively they manage their resources.
Financial health reflects an individual's (or household's) ability to meet daily financial obligations, manage debt, plan for the future, withstand financial shocks and maintain a sense of control over personal finances.
Thus, it captures current financial circumstances and future financial resilience.
Using data from the Financial Literacy and Capabilities Follow-up Survey (2023), this study constructed a Financial Health Index based on six dimensions of financial wellbeing: food security, debt management, timely bill payment, financial planning, access to financial resources and financial control. Respondents were classified into three categories:
- Financially vulnerable — struggle to meet basic financial needs; limited ability to absorb shocks.
- Financially coping — able to manage their finances but remain exposed to risks; surviving but not yet secure.
- Financially healthy — strong financial wellbeing, resilience, security and autonomy; prepared for future uncertainty.
The results reveal an important challenge for Malawi. Approximately one-third of respondents were financially vulnerable, nearly half were financially coping, while fewer than one in five were financially healthy. These findings suggest that although many Malawians manage to survive, relatively few enjoy genuine financial security.
Why Ordered Logit Model?
The study applies an Ordered Logit Model. This is an econometric method designed for outcomes that follow a natural ranking. Unlike variables like income, financial health cannot be measured simply as "low" or "high". Individuals (or households, as the case may be) move from ordered stages (financially vulnerable, financially coping, and financially healthy). Considering that these categories have logical sequence but not equal numerical distances between them, conventional linear regression is not the most appropriate tool.
In our case, the Ordered Logit Model estimated how different characteristics influence the probability of moving from one financial health category to another. The estimates were obtained after controlling for social, economic and demographic determinants of financial health. These determinants were age, education, employment status, marital status, household size, region of residence (north, central or south) and place of residence (urban vs rural). Consequently, the Ordered Logit Model addressed the question of whether financial literacy increases the likelihood that an individual will move from financial vulnerability towards financial health.
Findings
The findings show a strong positive association between financial literacy and financial health. Financially literate individuals were significantly more likely to belong to higher financial health categories compared to those that were not financially literate. For economists, the estimated coefficient (odds ratio) indicates a statistically significant positive association between financial literacy and financial health.
For the wider public, however, regression coefficients are often difficult to interpret. Probabilities provide a more intuitive understanding of what the results mean in everyday life. Therefore, we estimated average marginal effects to translate the econometric findings into practical terms.
After controlling for age, education, employment status, marital status, household size, region, and place of residence, the results show that financially literate individuals were:
These findings indicate that financial literacy enhances financial health.
Education Matters, But So Does Financial Knowledge
The study also revealed a vital pattern that extends beyond financial literacy itself. Individuals with higher levels of formal education were more likely to achieve better financial health than those with little or no schooling. Moreover, urban residents performed better relative to their rural counterparts, suggesting that location and access to opportunities play an important role in shaping financial well-being. Regional differences were also observed. Individuals in the central and southern regions of Malawi exhibit higher levels of financial health than those in the northern region. This suggests that financial health is also influenced by contextual factors including differences in economic opportunities, access to financial services, and local livelihood conditions.
Economically active individuals exhibited stronger financial outcomes, while married respondents were more likely to experience better financial health than those that were unmarried. Conversely, larger household sizes were associated with greater financial pressure, reducing the likelihood of attaining financial health.
These findings remind us that financial health is shaped by multiple factors. Financial literacy is important, but it operates alongside education, employment opportunities, household characteristics, residency and the wider economic environment. This is consistent with Human Capital theory (Becker, 1964), which argues that investment in knowledge and skills improves people's ability to make productive decisions throughout life. Further, it aligns with the Organisation for Economic Co-operation and Development's (OECD) Financial Capability Framework (Atkinson & Messy, 2012), which emphasises that financial wellbeing depends not only on access to services but also on people's knowledge, attitudes, and financial behaviours.
Implications for Malawi
These findings carry important implications for public policy in Malawi.
First, financial inclusion efforts have concentrated on expanding access to banks, microfinance institutions, savings groups, and digital financial services. While these initiatives have increased opportunities for many Malawians, access alone is not enough. People also need the knowledge and confidence to use financial products effectively.
A savings account has limited value if individuals do not appreciate the importance of regular saving.
Similarly, credit can become a burden rather than an opportunity if borrowers lack the skills to borrow responsibly and manage debt effectively.
Second, in view of the fact that financial literacy is associated with better financial health, financial education should become a central pillar of Malawi's inclusion strategy. Schools, universities, financial institutions, employers, community organisations, and Ministries, Departments and Agencies (MDAs) have important roles to play in strengthening financial capability across populations.
Third, the results reveal geographical differences in financial health across Malawi. Individuals residing in central and southern regions were more likely to attain higher levels of financial health compared to those in the northern region. Policy interventions should therefore consider geographical disparities when designing financial inclusion and capabilities programmes.
Finally, the results also highlight the importance of complementary investment in education and productive economic participation. Individuals with higher education and those who were economically active were more likely to achieve better financial health. In contrast, rural residents and larger households were less likely to do so. Therefore, financial literacy programmes should be complemented by policies that expand educational opportunities, support productive employment, and target financially vulnerable groups, especially in rural areas. Such an integrated approach is more likely to improve financial wellbeing and strengthen individual and household financial resilience.
Conclusion
This study offers a simple but important lesson.
Financial literacy is more than the ability to calculate interest rates or understand banking terminology: it is a form of human capital that empowers individuals to make better decisions throughout their lives.
Better financial decisions can improve individual and household resilience, strengthen communities and contribute to national development.
As Malawi strives to achieve sustainable and inclusive economic growth, investing in financial capability should become part of its broader development agenda.
Financially literate citizens are better equipped to navigate uncertainty, seize economic opportunities, and build more secure futures for themselves and their families.
The evidence presented here suggests that financial literacy alone cannot eliminate poverty. But it can help individuals and households move along a vital pathway — from financial vulnerability to financial health.
