Measuring Multidimensional Financial Resilience: An Ex-ante Approach

Financial resilience is the capacity of individuals to effectively mitigate the impacts of adversities by utilizing appropriate resources. Previous studies primarily assess financial resilience using an ex-post approach, evaluating resilience after a shock has occurred, causing additional stress for households. Conversely, ex-ante assessments rely heavily on economic resources like savings and emergency funds to mitigate adverse effects. However, in developing countries with underdeveloped financial systems, access to financial services is a major challenge. Households in these regions rely on a variety of resources, capabilities, and networks to remain resilient. Thus, both ex-post and ex-ante approaches are limited by being narrow, unidimensional, and backward-looking. This paper posits that financial resilience is a forward-looking, multidimensional concept emphasizing ex-ante preparedness for future adversities using internal and external resources. We propose a financial resilience framework encompassing financial inclusion, financial literacy, digital literacy, participatory decision-making, and social capital. Using data from the 2016 Intermedia’s Financial Inclusion Insight Survey of India and employing multivariate statistical techniques, including multiple correspondence analysis and principal component analysis, we develop a composite measure of financial resilience. Our analysis identifies vulnerable segments of the population, suggesting that only about 2% of adults are financially resilient, while one-fourth are financially vulnerable. Specifically, adults in rural areas, females, younger and older individuals, those with low education levels, and individuals without full-time employment are more likely to be financially vulnerable. We discuss policy implications aimed at enhancing financial inclusion, financial and digital literacy, and women’s empowerment to better protect against future shocks.