Relationship between Financial Literacy and
Behavior of Small Borrowers*#
Ramesh Prasad Chaulagain1
Financial literacy is an emerging and common concept both of education and finance. In general,
the concept is important for every ones who has to manage the money; the concept plays vital role
for low income people and small borrowers in particular. The small borrowers are those who
borrow a limited amount of money from the licensed financial institutions. The borrowers are
small on the basis of their credit limits determined by Nepal Rastra Bank. In this study, financial
literacy, as one of the significant factors to determine the financial behavior of small borrowers,
was measured to establish the relationship to each other. In this paper, the level of financial
literacy of small borrowers was compared with their financial attitude and behavior, for which
data were collected from survey of small borrowers of two cooperatives licensed by Nepal Rastra
Bank. Chi-square test was applied to test the hypothesis that showed the relationship between
these selected variables. The analysis showed that the relationship of financial literacy of small
borrowers was significant with their financial attitude and behavior. Hence, we argue that that
there is a need of a systematic enhancement of financial literacy of the small borrowers to change
their attitude and thereby the financial behavior.
Key Words: Financial Literacy, Financial Behavior, Small Borrowers
JEL Classification: G21, G29
* The paper is a part of PhD thesis. The thesis is under evaluation in Kathmandu University
School of Education
# The earlier version of this paper is available at www.nrb.org.np under NRB Working Paper
series, NRB-WP-38, 2017.
1 Assistant Director, Nepal Rastra Bank. Also a PhD Scholar, Kathmandu University School of
Education, e-mail: email@example.com
34 NRB Economic Review
Relationship between Financial Literacy and Behavior of Small Borrowers 35
Financial literacy is a growing concern in all around the world for every professionals. It
is a personal financial issue under the subject of economics. Sometimes, economics and
finance are used interchangeably, but the finance is a part of economics. Both of the
subjects move around understanding and using money and resources. There are several
priorities to promote financial literacy not only by central bank, but also by financial role
players and service providers. Nepal Rastra Bank [NRB] (2011) prioritizes the financial
literacy in supplying financial services, first time in the policy framework. Economics
gives rise to finance and thereby financial education, financial literacy, financial
knowledge and skill. These variables have the continuum of developing money
management and to achieve more economic benefits. Financial literacy is also a new
educational invention of twenty first century. Organization for Economic Cooperation
and Development (2005) mentions that OECD conducted the first international
comprehensive study on financial education. It shows that financial literacy is an
emerging educational issue.
There are different views and claims about evolution of the issue of financial education
and literacy. Noctor, Stoney and Stradling (1992) have defined (as cited in Jariwala,
2013) financial literacy as informed judgment and ability of decision making of a person
in money management. This is the first definite definition of financial literacy ever found.
However, Sarigul (2014) mentions that the concept of financial literacy was first studied
in 1997 by Jumpstart Coalition as a personal financial literacy survey (p209). But,
Remund (2010) argues that the interpretation and research on financial literacy begins
since 2000. Moreover, focus of financial literacy is closely linked with global financial
crisis of 2007-09 and thereby it becomes a policy agenda in the financial sector.
Aftermaths of global financial distress stimulated the area of financial literacy for policy
makers across the globe (Gupta & Kaur, 2014). Similarly, Miller, Reichelstein, Salas and
Zia (2014) also highlight that the priority of financial literacy increased after of global
financial crisis that teaches the financial system the cost of financial illiteracy, ignorance
and unsystematic financial behavior of financial institutions and consumers. However, the
effects of the global financial crisis was realized mild in Nepali economy, financial
literacy was started to discuss in financial sector thereby with some additional efforts of
the central bank as well.
Wagner (2015) opines that global financial crisis raised the issue of financial literacy with
higher priority. One of the reasons of the global financial crisis was the poor financial
literacy of financial consumers. Normally, the management of money abolished the barter
system, however, the concern of using money is closely linked with human but difficult
to pinpoint the date and context of beginning of financial literacy. The relationship of
knowledge and management of money is inseparable to each other. It is worthwhile to
study the issue as a normal phenomenon that is close to human being. Being financially
informed, conscious, rational and active person in financial matter, the agenda of
financial literacy was established and developed with economic history.
36 NRB Economic Review
Some Understanding of Financial Literacy
Financial literacy is the ability to make informed judgments and effective decisions
making in money management. Such a literacy develops partly through financial
experience so it is inherent in most peoples lives (NRB, 2011). There are several
defining practices of financial literacy by individuals and institutions. Such definitions
have captured separate aspects of financial literacy. OECD (2005) has the earliest formal
definition of financial literacy. The definition has three major elements; financial literacy
is an individual concern, it talks about understanding and knowledge of financial
information, skill and confidence to recognize personal financial risks. Additionally, the
definition has shown the destination of financial literacy as personal financial well-being.
But the definition lacks the financial attitude and part of financial behavior, which is the
effect or outcome of financial knowledge and skill. Parker (2010) includes financial
knowledge, skill, attitude and decision making (behavior) in financial literacy.
Similarly, Australian Securities and Investments Commission [ASIC] (2014) and
Atkinson and Messy (2012) capture four dimensions in financial literacy; knowledge,
skill, attitude and behavior of individuals in financial matters. Similarly, Program for
International Student Assessment (2012) defines financial literacy as a set of financial
knowledge and financial risk where the knowledge is a part of the concept and the risk is
a part of financial management. But the definition lacks financial attitude and skill of
decision making. In this, Potrich, Vieira and Kirch (2015) present financial literacy as a
key skill to handle the financial scenario. From this view, financial skill concerns about
the ability of managing money and personal financial resources.
II. REVIEW OF LITERATURE
In this section, four dimensions of financial literacy; financial knowledge, skill, attitude
and behavior are reviewed. However, financial education and well-being are described as
intervention and impact of financial literacy. Bebas (2012) links the concept of financial
education to financial well-being in logic model on the basis of input output and
assumptions. The logic model and the theory of changed are used interchangeably, which
links any intervention, its outputs, outcomes and impact. This link explains that financial
education helps to produce financial knowledge and skill; financial literacy; financial
literacy contributes to change financial attitude and thereby improve in financial behavior
of the individuals. Ultimately, the financial behavior increases the potentiality of improve
in financial well-being. In this context, the major four dimensions of financial literacy are
Financial knowledge has significant stake in financial literacy. Huston (2010) and
Potrich, Vieira and Kirch (2014) describe that financial literacy and knowledge are used
synonymously. But, financial knowledge is an integral dimension of, but not equivalent
to, financial literacy (Huston, 2010). These show that financial education, knowledge and
literacy are similar concept to some extent. Sources of knowledge is intrinsic and
extrinsic. Some sources of extrinsic knowledge are observation, audio-visual, own
Relationship between Financial Literacy and Behavior of Small Borrowers 37
experience, listening, reading and research. Similarly, Shim, Barber, Card, Xiao and
Serido (2009) find that the financial knowledge has significant contribution in financial
behavior of a person. But, Collin (2010) argues that knowledge only is inadequate to
change ones behavior. In this connection, Chaulagain (2015) presents financial
knowledge as a first dimension in financial literacy that is contributed by financial
education. Jariwala (2013) opines financial literacy as basic concept and understanding of
financial matters and markets. Basic concepts and understanding of financial services and
market are ones of the sources of financial knowledge.
In the similar lines, Pamarthy (2012) argues that most of the personal financial problems
are caused by deprivation of financial knowledge. Knowledge is the prime factor to solve
the financial problems of persons. Hung, Parker and Yoong (2009) argue that the
financial knowledge includes perceived knowledge, actual knowledge and financial skill.
However, it is necessary to know the basic sources of these knowledge. Perceived
knowledge is derived knowledge from other sources. Financial knowledge is often
considered central to financial literacy; it should be distinguished from general
knowledge (Jariwala, 2013, p.16). Similarly, Bolanos (2012) argues that the financial
knowledge is an important dimension of financial literacy. In this sense, financial
knowledge contributes financial literacy and thereby financial behavior.
Financial Management Skill
Managing the money is more difficult than the making or earning money. A financially
skilled person makes more money by managing how much s/he has than earning. Such
skill of money management is alternatively known as financial skill. As Earl, Gerrans,
Asher and Woodside (2015) take financial management as a cognitive function.
Similarly, Lawless (2010) focuses on investment decision making skill that may add the
value of money for longer period of time. Investing the money in earning areas is also a
part of money management. There is very thin boarder between financial literacy and
skills. Mireku (2015) argues that financial literacy and skill are used synonymously that
contributes financial attitude.
Ozdemir, Temizel, Sonmez and Fikret (2015) express financial literacy as synonymous as
financial skill that contains ability of money management, financial risk identification,
making financial plan and getting financial information. Skill is very close to the
behavior, and the skill which is not practiced, is worthless. OECD, Statistics Canada
(2011) classifies the skill into four types; prose literacy, document literacy, numeracy and
problem solving. However, such skill are more practiced and measured by educated
people only. Generally, financial skill contains financial numeracy, making financial plan
for business, making retirement plan, budgeting, record keeping of regular personal
transactions and decision making in basic level. MacLeod and Straw (Eds) (2010) focus
in budgeting, managing debt, selection of appropriate account and understanding the
statement are basic capability of a person.
Lusardi (2012) argues that the numeracy and financial literacy are important life-time
skills of individual that is closely related with financial decision making in regular
financial behavior. She presents saving, investing and borrowing as the indicators of
38 NRB Economic Review
financial behavior. Numeracy is more related with the capacity of calculating any
transaction such as interest rate both in saving and credit, tax to pay on interest and
business earning, gain discounts or rebates, penalty and service charges to pay. Similarly,
Oanea and Dornean (2012) have defined financial literacy as skill and ability in managing
personal finance under applied definition. Skill is an ability of person, however, being
skilled and applying the skill are not always the same. Hogarth, Beverly and Hilgert
(2003) argue that financial literacy helps in financial skill building, however they cannot
present the process and contents of skill building. Making financial decision is also a skill
that has the behavioral effects.
Financial attitude of a person shows a psychological or mental judgment of financial
matters and situation. In other words, the attitude evaluates how the things are going on,
and guides the activities. Financial attitude is a contextual, dynamic and ever-changing
domain. Normally, attitude is positive and negative, however, sometimes the individuals
also stay indifferent. Walley et al. (2009) (as cited in Jain, 2014) opine that attitude is
divided into three; positive, negative and neutral. Knowledge is one of the sources of
attitude, but not necessarily knowledge always helps in formulating a positive attitude.
Therefore, knowledge, sometimes is an independent and attitude is a dependent factor.
Moreover, when the financial attitude is an independent factor, financial behavior is a
dependent factor. Carpena, Cole, Shapiro and Zia (2011) opine that financial attitude is
the perspective towards financial market and benefits. Similarly, Shim, Barber, Card,
Xiao and Serido (2009) find that the financial knowledge predicts financial attitude and
the financial attitude contributes to financial behavior of a person.
But, Agarwalla, Barua, Jacob and Varma (2015) and Consumer Financial Protection
Bureau (2015) mention that merely the financial attitude does not influence financial
behavior. Therefore, financial attitude is not a single factor determining financial
behavior. Louw, Fouche and Oberholzer (2013) argue that financial literacy helps in
developing positive financial attitude. Here, the financial attitude is subject to change in
improved financial literacy of persons. Financial literacy and financial attitude determine
not only to financial behaviors of individuals but also to their financial well-being.
Atkinson and Messy (2012) argue that negative financial attitude of a person results a
negative and defective financial behavior that may not contribute in financial well-being.
However, there is positive but not necessarily a proportional relationship among financial
literacy, financial attitude, behavior and well-being of individuals.
Financial behavior of individuals is important but difficult to understand, define and
measure. Behavior is a demonstration of the activities, which are possible to watch and
observe by the others too. Tyson (2010) opines that being financally informed and
knowing the correct financial activities is not enough to bring financial change, there is
need of change a poor financial habits into good. Dew and Xiao (2011) present financial
behavior as the financial management behavior. Financial management is the activities of
managing money in maximizing the yield. The people who behaves well with the money
Relationship between Financial Literacy and Behavior of Small Borrowers 39
can get positive financial behavior and thereby sustainable financial well-being and vice-
versa. In this, Xio, Chen and Chen (2013) opine that financial literacy influences financial
Primarily, the financial behavior is about how persons deal with money. In other words,
the financial behavior is an application part of financial literacy that is believed to
contribute financial well-being of persons positively. Gradually, a conscious behavior
shows in decision making, comparing opportunity cost, seeking alternatives of wastage
minimization. Financial behavior can be divided into two; consumption and financing.
The first one is related with how the money is to use in consumption expenditure and the
second one is related with how the money is to use as investment and saving. Lusardi,
Mitchell and Curto (2010) argue that the basic implication of financial literacy is to
change financial behavior of persons. Therefore, the literacy that cannot change the
behavior is worthless. Similarly, Monticone (2010) opines that there is a double
relationships between financial literacy and behavior; financial literacy affects financial
behavior and vice-versa. However, the debate between effects of financial knowledge into
behavior and/or financial behavior into knowledge is to establish by further studies. But,
Lusardi and Mitchell (2013) find that causal relationship to find between financial
literacy and behavior is difficult. In practice, if the literacy and behavior are measured by
following the scientific process, however, measuring the literacy and behavior is not that
III. RESEARCH METHODOLOGY
Quantitative research methodology is the epistemological direction in this study. Indeed,
quantitative research is particularly important for research on financial literacy and
education, since the fluency with numbers (for example, understanding the nature of
compound interest, both in debt and investment) is a cornerstone of financial literacy
(Parker, 2010, p. 88). The cross-sectional survey strategy was used for data collection in
this study with pre-structured questions.
Hypotheses of the Study
To test the following hypotheses, Chi-square test statistics is used. Hypothesis is the
presumed answer of a particular situation or phenomenon of measurement. When there is
need of inferring the mass or population from some units of samples, hypotheses are set
and tested. Jackson (2010) opines that the hypothesis is the determination of statements to
compare the results. The following null hypotheses (H0) are planned to test in this study.
H1 (1): There is relationship between financial literacy and education level.
H1 (2): There is relationship between financial literacy and attitude.
H1 (3): There is relationship between financial literacy and behavior.
H1 (4): There is relationship between financial attitude and behavior.
Data and Measurement
Data in this study are captured from measurement of financial knowledge, skill, attitude
and behavior of the small borrowers. There are ten questions each for measuring financial
40 NRB Economic Review
knowledge and skill, whereas twenty questions each used for measuring financial attitude
and behavior. Binary scale are used for measurement of financial knowledge and skill,
three point Likert scale is used for measurement of financial attitude and multiple options
scale is used for measurement of financial behavior. Jang, Hahn and Park (2014) suggest
binary scale to measure objective financial knowledge. The measured financial literacy,
attitude and behavior are categorized into ordinal data. To measure the financial literacy,
score method is used where the correct response is scored one and zero score for
incorrect and dont know response. World Bank (2013) suggests the score method for
correct response in measuring financial literacy of the people. As Mireku (2015) advices,
the financial literacy level is categorized into three; high (score 16 and above out of
twenty or 80% and above), medium (score 12 to 15 or between 60% and 79%) and low
(below 12 or below 60%) in this study. As Atkinson and Messy (2012) suggest, financial
attitude is also categorized into three; positive, negative and neutral in this study.
Similarly, as Lusardi (2015) suggests, financial behavior is categorized into three; good,
moderate and poor in this study.
In this study, self-reported financial literacy measure (Koenen, Lusardi, Alessie, & Rooij,
2016) has been used for measurement of financial knowledge, skill, attitude and behavior.
The correctness of the response is based on the terms defined in this research because
there may be multiple or otherwise understanding and definitions of these concepts in
practice. The definitions are based on the reference and banking practice in Nepal.
Population and Samples
The study targeted the small borrowers as source of information who are the small
entrepreneurs as well; they borrow for small and local businesses. Small borrowers are
those who borrow a limited amount of money for business from cooperative societies.
NRB (2015) mentions that the micro credit limit for the preceding fiscal year as NPR 500
thousands. To select the small borrowers as samples, the cooperatives licensed by the
Nepal Rastra Bank are selected because NRB (2013) states the saving and credit
cooperatives also as the micro financial model in Nepal. There are 15 such cooperatives
licensed by the Nepal Rastra Bank, among them six cooperatives are established in
province number three of Nepal.
Among the six, two cooperatives capture more than 98 percent of the population or the
small borrowers. Therefore, two cooperative societies, established one in Kavrepanchowk
and another in Kathmandu districts are source of population and samples. Moreover, the
cooperative located in Kathmandu valley provides the services to its small borrowers in
all the three districts in the Kathmandu valley. In this sense, the smaples are selcted from
total four districts. Total 20,586 small borrowers of the two institutions are the population
from which 393 participants are selected as the representative samples by using the
Yamane (1967) formula (as cited in Bhattarai, 2015).
Relationship between Financial Literacy and Behavior of Small Borrowers 41
Here, n is the sample size, N is the population size and e is the level of significance; 5 for
IV. DATA ANALYSIS
This section presents data and analysis. The data includes the description of sample
characteristics and the test of hypothesis. The characteristics of the samples are as follow.
Characteristics of the Participants
In this study, the characteristics of the samples are measured in nine categories; age, sex,
marital status, ethnicity, occupation, first speaking language, religion, monthly income
and education level. The frequency distribution and categories of the characteristics are
shown in Annex I. The age of the participants is divided into five groups, sex, marital
status and monthly income into two groups, occupation, language and religion into three,
and education into six groups. There are around 40 percent of participants in age group
25-34 years and 5.34 percent of participants above 55 years as highest and lowest. Sex-
wise there are 81.17 percent female participants and remaining males. Similarly, 92
percent participants are married and remaining unmarried. Participants below per capita
earning and above per capita earning are forty and sixty percent respectively. The per
capita earning for the period was NPR 6500 approximately per month. Moreover, one
third of the participants are illiterate group and 9-12 class passed group each.
Level of Financial Literacy
However, financial literacy is a relative term, for example, it may be one thing for a
business person, another for a job holder, a farmer, and a household. In the Annex II,
aggregate level of financial literacy of participants are shown. According to the table, the
number of participants and the level of financial literacy goes parallel. The table also
shows that, however the majority of participants are relatively having low income, rural
women and less educated people, the financial literacy is in greater degree. The finding
shows that the number of participants scoring high, medium and low level of financial
literacy are 180 (45.8 percent), 150 (38.2 percent) and 63 (16 percent) respectively.
There are two reasons of higher score or levels of financial literacy however the
participants are relatively less literate. First, the rigorous process of contextual tools
formulation. The tools formulation process follows literature review, interviews with
small borrowers, and panel discussions with experts and experienced role players of
financial field and rating method of item selection. Second, the terminologies are related
to the financial practice, which are using in daily financial activities of the small
borrowers. Similarly, these days, the cooperative institutions counsel, provide orientations
and trainings to their members about financial matters, services and institutions. Another
reason for high level of financial literacy in this study is the effect of international
provision of cooperative education. The cooperative education is the awareness program
in most of the member and community based cooperatives in Nepal. These institutions
counsel and train potential members in initial orientation programs about the institution,
services they offer, cost and benefits of the services and alike. Tchami (2007) mentions in
his handbook that education, training and informing the member is one of the seven
42 NRB Economic Review
international principles of the cooperatives formulated by International Cooperative
Alliance in 1995.
In a Cambridge research, by National Bureau of Economic Research (NBER), Clark,
Lusardi and Mitchel (2015) also find an average of 80 percent of financial knowledge of
the employees which was relatively high score. Their finding of high financial literacy
shows that when the participants have less diversity, in terms of occupation, the
participants can respond the questions correctly, if the questions are contextual too.
Similarly, Klapper, Lusardi and Oudheusden (2014) mention that a global study on
financial literacy, conducted by Standard and Poor, reports 71 percent of financial literacy
level in Denmark, Norway and Sweden. The same study reports that only 18 percent
Nepali youths are financially literate. The survey study uses the five questions about
understanding and management of money for all the 140 countries including developed,
developing and underdeveloped countries like Nepal. It provides two messages: the
financial literacy score is achieved high if the questions are comfortable as the context,
and as comfort as their business and financial experiences. The questions are familiar and
comfortable for developed countries and more educated persons. Similarly, the same
question may not work effectively and equally in all the country, place and professionals.
The implication of high degree of financial literacy contributes in increasing self-capacity
in decision making, good behavior and thereby improved financial well-being.
Theoretically, financial literacy is the source of self-efficacy in financial activities and
good financial health of individuals. Self-efficacy theory claims that a strong sense of
self-efficacy enhances accomplishment, allows a person to overcome obstacles, face
challenges, and persist in their efforts to reach a goal (Bebas, 2012). Self-efficacy opens
the market opportunity in finding, comparing and judging the better financial landscape
for those who are financially literacy. It helps in increasing the self-confidence.
Increased financial literacy has also the human capital implication according to the
human capital theory. Improved knowledge and skill in several matters including
personal finance, individuals can develop themselves and contribute the society as capital.
Capital is one of the sources or factors of production (Dae-Bong, 2009) of goods and
services. In the similar context, Melike, Melda, Seckin, and Elcin (2005) compare human
capital and human qualification as equal. It implies that more financial literacy
contributes individuals to become human capital.
Education and Financial Literacy
The education level of participants are classified into six; illiterate, literate, class 1-5 pass,
class 6-8 pass, class 9-12 pass and above class 12 pass. Literate participants are those who
can simply read and write without any school education. Near to one third participants are
illiterate, hence most of them are women from low income group. The result is shown in
Annex III. In the education and financial literacy, the upper most class; among the
participants above than 12 class, 62.50 percent have high financial literacy. It shows that
the participants with higher the education have also higher financial literacy. Here, only
28 percent of illiterate participants have high financial literacy. The relationship between
education and financial literacy of small borrowers is statistically significant (p=.00). It
Relationship between Financial Literacy and Behavior of Small Borrowers 43
indicates that their financial literacy can be improved by motivating them for higher
The statistically significant relationship between education level and financial literacy
level of small borrowers shows that education plays decisive role in their financial
literacy. The finding is consistent with Potrich, Vieira and Kirch (2015). It indicates that
the education makes difference in financial literacy of small borrowers. The result shows
that increasing education helps in increasing financial literacy. Education is the prime
source of financial knowledge and skill. Education also helps to understand the financial
services and thereby motivate towards positive financial attitude. Financial information is
the power, and such information mostly comes from formal education sources, print
Medias and other visual aids. More educated people can understand economics and
finance because the formal education system teaches a basic level of financial
information and skill of money management. Sucuahi (2013) argues that financial
education as a source of financial literacy, however Wagner (2015) finds that financial
education affects both of financial literacy and behavior.
Financial Literacy and Attitude
The financial attitude includes personal judgment, motivation, beliefs, desire and claim
towards financial services, institution and employees. Twenty financial statements are
used to measure the attitude of small borrowers in the study. This section contains two
analysis; the description of financial attitude and relationship of financial literacy level
with financial attitude. Financial literacy level is converted into ordinal scale on the basis
of total score, i.e high, medium and low. Financial attitude is also ranked as positive,
neutral and negative.
Average positive financial attitude of small borrowers is the highest both in significant
variables as 66.9 % (Annex IV) and insignificant variables as 62.52 % (Annex V). It
shows that the majority of small borrowers have positive attitude towards financial
matters, market and services. The largest positive financial attitude or 87 percent small
borrowers is in income-saving relationship that they are interested to increase their saving
while income increases. The smallest number of participant or 11.7 percent have positive
financial attitude in quick returns from their current business anyway. It indicates that
people believe on a normal trend of return from their business than an inconsistent
Kruskal-Wallis (H) test is used to find the association between financial literacy and
attitude. From the analysis, the small borrowers have positive attitude towards the
cooperative institutions and they are motivated by the institution in doing their present
business. The mean rank shows that the financial literacy of people in moving towards
one with increasing level of financial literacy. The hypothesis for the test is as follow:
H1: There is relationship between financial literacy and attitude.
There are thirteen financial attitudinal statements, out of total twenty, have insignificant
relationship with financial literacy (Annex V). The insignificant relationship in the
statements show that their attitude do not have any statistical relationship with their
44 NRB Economic Review
financial literacy. The attitude they show may be due to other factors rather than their
financial literacy. Moreover, financial literacy have a statistically significant relationship
with remaining seven financial attitude (Annex IV).
Business Motivation: The cooperative institutions are member based organizations which
provide loan and promote saving of members but also motivate their members in doing
local businesses as their knowledge, skill and capacity of investment. The significant
relationship between the attitude and financial literacy (p=.00) indicates that business
success of small borrowers also depends on the institutional counseling and motivation.
Quick Returns: While doing business, the rate of return is possible with particular
gestation period of the investment. The maturity of benefits or gain does not depend on
desire and need of people. Around 72 percent of small borrowers oppose to earn profit
from present business anyway. Majority of the participants reject an immature and
inconsistent income from their business. The relationship between the attitude and
financial literacy (p=.00) indicates that their attitude towards a normal rate of return is
caused by their financial literacy.
Business Consistency: In Nepal, small borrowers are facing some uncertainties of their
business and its long term sustainability. Such uncertainty attitude demotivate them in
their work by which their credit may go to default, which may negatively affect their
financial well-being in the long run. Therefore, their beliefs and judgment on their income
earning work is appropriate to measure. As a result, majority of the participants (more
than 70 percent) believe that their business goes continue for a longer period of time. The
significant relationship between the attitude and financial literacy (p=.00) shows that
small borrowers have positive attitude on their business continuity due to their financial
Service Availability: The beliefs of members towards service supply in cooperatives can
motivates them for saving and credit. Such beliefs helps the cooperatives in retaining
their existing members and attract the new members as well. Majority of small borrowers
(74.7 percent) believe that the cooperative institution they affiliated with has provided
sufficient financial services they need. Therefore, the statistical relationship between such
attitude and financial literacy (p=.00) shows that such positive attitude is also caused by
their financial literacy.
Financial Goal Setting: Setting a financial goal, of everyone in general and small
borrowers in particular, is an important financial belief. Such goal setting helps in
allocating financial resources in good manner and control the personal finance as well.
Majority of participants (82.1 percent) were found positive towards setting a goal that
their saving and credit is to contribute in their financial well-being. The financial literacy
is statistically significant with this attitude (p=.00) which indicates that more financially
literate people have positive attitude towards setting a financial goal and vice-versa.
Selection Autonomy: Every members of cooperatives have the right of free entry and exit
in the institution for their financial transactions. Similarly, they are also free to select the
amount and institution for their saving and credit activities. In this, 76.8 percent
participants feel that they are free to choose their financial transactions, such as saving
Relationship between Financial Literacy and Behavior of Small Borrowers 45
and credit, and institutions as they require. Similarly, the statistical relationship between
such attitude and their financial literacy find significant (p=.00) that shows that level of
financial literacy of the participants makes difference in their financial attitude on
freedom of the selection.
Contingent Saving: Normally, low income and marginalized people save for minimizing
the expenses and for contingent use of the saving. A significant number of small
borrowers (82.6 %) have positive attitude on positive contribution of saving in managing
their contingent financial need. Similarly, the significant relationship of such attitude and
financial literacy of them (p=.00) indicates that saving is required also for handling the
contingent financial crisis of participants.
Financial Literacy, Attitude and Behavior
To find the relationship of financial behavior with financial literacy and attitude of the
small borrowers, the following hypothesis is developed.
H1: There is relationship between financial literacy and behavior, and between financial
attitude and behavior. See annex VI.
There is a mix result in measuring relationship of financial literacy and attitude with
financial behavior. In this study, among 20 financial behavior items, six are significant
with both the financial literacy and attitude, where two are insignificant with both of the
financial literacy and attitude. Similarly, ten items are significant with financial literacy
but insignificant with financial attitude and two are significant with financial attitude but
insignificant with financial literacy. The findings are consistent with Wagner (2015);
Scheresberg (2013) and Selcuk (2015). But, Monticone (2011) questions of a particular
extent of financial literacy necessary for trading-off risk and return of a particular
financial investment. He has the same opinion whether financial literacy, behavior and
well-being does not go parallel; some inertia, over-confidence and behavioral biases also
affect in financial behavior and thereby the financial well-being.
The financial behavioral items, which are statistical significant both with financial
literacy and attitude indicate that the behaviors are influenced both by the literacy and
attitude. Similarly, those itmes which are statistical significant only with financial literacy
but not with financial attitude show that the behaviors are influenced by the literacy but
not by the attitude and vice-versa. Similarly, those behavioral items insignificant with
both of the literacy and the attitude show that these behaviors are not affected by their
financial literacy and attitude.
V. CONCLUSION AND IMPLICATIONS
Major objective of this study is to measure the level of the financial literacy of the small
borrowers and to find whether the financial literacy and attitude contributes their financial
behavior or not. It is necessary to measure the relationship that financial behavior has the
well-being implications of the individuals. The measurement of the financial literacy
46 NRB Economic Review
shows that the level of the financial literacy of the small borrowers is relatively high. The
study finds that there is statistically significant relationship between financial literacy and
attitude, between financial literacy and behavior and between financial attitude and
behavior. Therefore, to change the financial behavior of the small borrowers, their
financial literacy is to be improved. Similarly, the improved education contributes the
financial literacy of the individuals. The take-home message of the study is to educate and
improve the financial literacy to change the behavior of the people.
This study has three-fold implications; for the government, service suppliers and
researchers. Primarily, the government includes Ministry of Education and the central
bank for this concern. The government should develop curriculum from the school and
college level education. Such curriculum based financial literacy programs have long
term and sustainable effects to the students. The students of today will be the human
capital for the days to come; they will be the entrepreneurs, business persons, politicians,
policy makers, bureaucrats. Similarly, the central bank should regulate banks and
financial institutions in compulsory provision of financial education program for their
service consumers such as counselling and training programs. Kempson, Perotti and Scot
(2013) prescribe financial literacy as a policy agenda both in high and low income
The service suppliers are very close to the service consumers rather than the policy
makers and other sectors. Educating and counseling the people is the social obligations of
the financial service suppliers as well. Hence, the improved financial literacy impacts the
well-being of the people, the financial service suppliers should develop a clear cut,
common and appropriate financial literacy programs to their clients frequently. Educating
the clients also contributes to minimize the cost of finance, helps in decreasing the
defaults and increases the quality of financial services.
The researchers can be benefitted from this study to focus their issue. They can use the
Nepali context of socio-economy which is different from the previous studies. Behrman,
Mitchell, Soo and Bravo (2012) advice to formulate the education policy to improve
financial behavior through improving the financial literacy. There are several areas under
this issue for research in Nepal. Nepal (2016) suggests to study the impact of financial
literacy in financial inclusion, particularly for Nepal.
Relationship between Financial Literacy and Behavior of Small Borrowers 47
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Relationship between Financial Literacy and Behavior of Small Borrowers 51
Annex I: Sample Characteristics
S.N. Characteristics Number Percentage
> 25 years
4 Marital status
6 First speaking language
8 Monthly income
Below than NPR 6500
Above than NPR 6500
9 Education level
Class 1-5 pass
Class 6-8 pass
Class 9-12 pass
More than class 12 pass
52 NRB Economic Review
Annex II: Overall Financial Literacy Level of Small Borrowers
Statistics Low Medium High Total
Annex III: Education and Financial Literacy Level
Education (n, %) Total p
literacy Illiterate Literate 1-5 6-8 9-12 > 12
Annex IV: Financial Literacy and Attitude (significant), =0.05
Financial attitude (n, %)
p Positive Neutral Negative Total
Business motivation 272
390 31.1 .00
Quick returns 45
385 19.2 .00
Business consistency 274
387 10.1 .00
Service availability 289
387 11.2 .00
Financial goal setting 317
388 29.7 .00
Selection autonomy 298
388 17.3 .00
Contingent saving 322
390 22.8 .00
Average Percentage 66.90 12.80 20.30
Relationship between Financial Literacy and Behavior of Small Borrowers 53
Annex V: Financial Literacy and Attitude (insignificant), =0.05
Financial attitude (n, %)
p Items Positive Neutral Negative Total
Financial institutions 147 (38)
387 4.4 .11
Transparency 289 (74.7)
387 .30 .86
Saving motivation 323 (82.2)
385 2.8 .25
Fraudulence 303 (77.3)
Opportunity cost 230 (58.6)
391 5.4 .07
Counseling 312 (79.8)
391 1.8 .41
Credit Autonomy 78 (20.1)
388 .36 .83
Demonstration effects 115 (29.8)
386 5.59 .06
Debt quicksand 281 (72.4)
388 1.9 .39
Saving for credit 119 (30.6)
389 2.4 .30
Income-saving 340 (87)
391 4.2 .12
Asset growth 332 (84.7)
392 4.6 .10
Price comparison 298 (76.8)
388 1.6 .44
Average percentage 62.52 20.74 16.74
Annex VI:The Relationship of Financial Behavior with Financial Literacy and
Financial Attitude (H-test)
S.N. Financial behavior Financial literacy (p) Financial attitude (p)
1 Credit utilization .33 .36
2 Review of financial statements .00 .29
3 Negotiation in saving and credit .00 .01
4 Risk diversification .02 .33
5 Credit repayment .86 .04
6 Business insurance .00 .33
7 Multiple credit .63 .04
8 Purchasing behavior .00 .05
9 Contingent Expenditure .00 .37
10 Liquidity management .00 .06
11 Business accounting .00 .00
12 Budgeting .00 .05
13 Old-age financial planning .00 .01
14 Increase in income and saving .00 .00
15 Formal financial transactions .01 .40
16 Separate accounting .00 .06
17 Use of self-capital in business .09 .07
18 Loan documents .00 .03
19 Assessment of income and expenditure .00 .01
20 Balancing income and expenditure .00 .05