Measuring Financial Literacy of Small Borrowers in Nepal

Abstract

Financial literacy is an emerging personal financial agenda at globe. Financial literacy concerns with management of money for consumption expenditure, borrowing and saving at home and outside, which is also termed as personal finance. The borrowing and saving function carried out with formal financial institutions refers to institutional finance. Increasing monetization of the economy, complexities of financial markets, protection of financial consumers and global financial crisis gave rise to agenda of financial literacy to equip customers with personal and institutional financial literacy. Both personal and institutional financial literacy has behavioral implication and affects the financial well-being of individuals. This study used the framework of theory of planned behavior and social cognitive theory. The theory of planned behavior states that the literacy i.e. knowledge and skill on financial matters will develop attitude; and if attitude is positive, the persons will behave accordingly. The social cognitive theory reveals that the literacy alone can also affect financial behaviors. Therefore, both of the theoretical paths leading the behavior with financial literacy in this study are satisfied. This study aims to fulfill the knowledge gap of an academic study on financial II literacy, attitude and behavior, in connection with the reality that several efforts and investments have been made in the financial literacy programs by the central bank, other financial and non-financial institutions in Nepal. This study was carried out by generating empirical evidence on the level of financial literacy of Nepali people and their effects on their financial attitude and behavior on the use of financial resources both at the level of personal and institutional finance.The study used quantitative methodology under which sample survey was carried out with 393 small borrowers out of 20,586 in the Cooperatives in Nepal, who had borrowed up to NPR 500 thousands at a time. Multi-stage systematic random sampling method was applied for the sample selection. Chi-square and logistic regression were used for the data analysis. The study reveals that level of financial literacy contributes positively to both personal and institutional financial attitude. Personal financial attitude leads to behavior of personal and institutional finance. Institutional financial attitude do not affect both of personal and institutional financial behavior. However, the literacy alone affects both types of financial behavior indicating that the people behave without much evaluation. Moreover, personal financial attitude leading both of personal and institutional financial behavior reveals that people behave as they learn from their personal initiation, financial cultures and traditions. This study has policy implications for promoting institutional financial literacy to increase their positive attitudes towards financial institutional services and resulting to the use of institutional financial services for diverting into formal financial system. For this, financial institutions have more obligations towards their consumers in educating about proper financial services promoting entrepreneurships.