Our understanding of how financial disadvantage disrupts people's lives and the way it can be best addressed is undergoing a rethink in light of a new research report from the Centre for Social Impact (CSI) at UNSW Business School.

Led by Kristy Muir, a professor and research director at CSI, the Financial Resilience Report proposes a more holistic approach to the problem, with factors based on a capacity to adapt, rather than the globally adopted benchmark of financial inclusion.

"We're trying to look at a new way to understand how people respond to financial shocks," Muir says.

Financial inclusion was coined as a term in 1995 to explain processes that prevent certain social groups from accessing the formal financial system. In practice, it has come to mean  access to a transactional bank account, to a moderate amount of credit and to general insurance. Someone is considered to be financially excluded if more than one of these three elements is unavailable to them.

It's estimated that more than two billion people across the world are financially excluded – approximately 70% of the adult population in developing countries, and 20% in developed countries. CSI says that almost one in six people in Australia has been severely or fully financially excluded.

It's a surprising finding, considering that 98% of adult Australians do have a transactional bank account, but it serves to highlight how the new measure of financial resilience can provide a more detailed insight into economic need.

Muir explains the premise of this research: "When something goes wrong and we need money to fix it – no matter who we are – where do we get it from? And how do we make sure that it can help us get out of trouble as opposed to sending us in an alternative direction, whatever those consequences might be?"

'If you've only got $100 and you need to budget for rent and your food, it doesn't matter how good your budgeting skills are'

KRISTY MUIR

More than access

The Financial Resilience Report was funded by National Australia Bank, as has been the previous research on financial inclusion, under a five-year collaboration with CSI.

Muir acknowledges that "financial inclusion – having access to products and services that are appropriate and affordable and are acceptable based on what you need – is still important.

"But just having access … isn't going to be enough for us to understand the complexity of what's going on, or what people need," she says.

Similarly, the efficacy of focusing solely on financial literacy – "people's knowledge, skills and behaviour relating to money and financial products and services – is also limited if it's looked at in isolation as well.

"If, for example, you've only got $100 and you need to budget for rent and your food, it doesn't matter how good your budgeting skills are – the money that you've got isn't going to be sufficient to cover what you actually need. So giving you more financial literacy as an intervention point is not going to be useful," Muir says.

"So what we're trying to do is re-conceptualise this – to think about what the four key areas of resources are that people need to draw on to make sure that they can recover from financial adversities they might face."

Four pillars of resilience

The first area is economic resources – "How much money you've got and then what you do with that in terms of having savings, or managing your debts, and being able to meet the basic standards of cost of living," Muir explains.

"The second component is financial products and services – which is the traditional definition of financial inclusion. It not only considers the types of products and services that people have access to, but also whether they actually need them and want them.

"The third resource is financial knowledge, skills and behaviours. It is traditionally thought about in terms of financial literacy and capability. It's about people having the knowledge and skills to understand and manage their money, and the knowledge and skills to make decisions around what products and services they might actually use."

The fourth important resource is social capital: "Do they have the right relationships in place, whether that's family, friends or community services? Do they have the ability to get the support where and when they need it?"

The report is a sobering snapshot of Australians at financial risk. It identifies 11.1% of the adult population (2,022,000 people) as being in severe or high financial stress and vulnerability. So, how knife-edge is their existence?

"It becomes more knife-edge when people have overlapping limited resources across the four components," Muir says.

An example would be someone with very little money, without access to mainstream financial products and services, and with low levels of social capital, but who can budget.

"[Then] you're incredibly vulnerable because you've fallen off three of those four pillars of resilience," Muir says.

'How do we scale up a low-interest loan scheme, or a no-interest loan scheme, for vulnerable people?'

KRISTY MUIR

Limited resources

"I think the issue around having overlapping weaknesses – in terms of those four pillars of financial resilience – is that you're potentially at risk in what choices you're able to make next," Muir says.

For those who retain access to financial products, the first choice may be to cover expenses with credit cards. But if the debt isn't repaid, it can lead to a deeper hole because there's no discharge date on credit card debt.

According to the Australian Securities and Investments Commission, if you only make minimum repayments on an average debt of $4300, it will take 31 years to pay off and cost around $15,000 in interest payments. Australia's present credit card debt is an alarming $31 billion dollars.

For those without access to traditional credit, their choice may be the flourishing payday loan sector, which can be even more expensive.

Alternatively, there are some no-interest loan schemes (NILS), such as those provided by Good Shepherd Microfinance, but that sector is dwarfed by payday lending operators. During 2014 and 2015, NILS provided around 50,000 small loans totalling $42 million. During the same period, payday lenders made 1.3 million loans totalling $667 million.

"The NILS scheme is really important, but it currently struggles to keep pace with the scale of the fringe lending sector," Muir says. "So I think that's one of the questions for us: How do we scale up a low-interest loan scheme, or a no-interest loan scheme, for vulnerable people?"

But not having enough money to meet your needs in the first place is the fundamental problem "we are always going to struggle with".

The Financial Resilience Report is published on the websites of CSI and NAB. It can assist support organisations in the not-for-profit sector to more accurately apportion their limited resources by pinpointing specific causes of disadvantage.

Similarly, it's hoped the report can benefit the banking and finance industry in responsibly managing relationships with their customers.

The academic underpinnings of the report were published last year in the paper, Are you really financially excluded if you choose not to be included? Insights from social exclusion, resilience and ecological systems, co-authored by Muir and CSI colleagues Fanny Salignac and Jade Wong.