Impacts of Financial Literacy on the Loan Decisions of Financially Excluded Households in the People's Republic of China

Abstract

Government leaders around the world are designing national strategies to improve financial inclusion for populations traditionally excluded from the financial markets. Financial literacy is a key tool being used to bring economically vulnerable populations into the financial mainstream. Data from the 2013 China Household Finance Survey (CHFS) were used to investigate the impacts of various dimensions of financial literacy on the usage of bank and non-bank loans among rural, illiterate, and migrant populations in the People's Republic of China. The findings show that the most vulnerable groups may be less likely to benefit from financial literacy, especially when it comes to usage of formal bank loans. Other factors such as those related to social networks and infrastructure may matter more than financial literacy. Results were found to vary across measures of financial literacy and financial inclusion. The findings suggest that barriers to access likely need to be overcome so that financial literacy can be more effective. The current study provides important insights for policy makers and international organizations designing national strategies to improve financial inclusion via financial literacy, especially for populations that have been traditionally excluded. Researchers are encouraged to reexamine previous definitions and measures of financial literacy and inclusion to develop a better understanding of the relationship between the two dimensions.

Building financial resilience through financial and digital literacy in South Asia and Sub-Saharan Africa

“…Vulnerable populations that have been financially excluded from key financial services are often forced to turn to suboptimal coping strategies, as mentioned earlier. DFS can significantly reduce transaction costs in terms of both time and money, as well as expand one's access to a larger social network, which can be relied upon for resources when a shock hits (Jack and Suri 2014;Lyons, Grable, and Zeng 2017). DFS can thus be particularly effective in helping to build resilience, especially in South Asia and Sub-Saharan Africa.…”

“…Nevertheless, more research is required to better understand the pathways by which financial inclusion affects resilience, as well as to identify the policy levers needed to overcome existing barriers to financial inclusion so that financial resilience can be achieved. This is particularly pertinent because demand for financial services remains low in developing countries and across marginalized populations due to barriers related to factors like infrastructure, transaction costs, liquidity constraints, social inequalities, informational asymmetries, and behavioral biases (Lyons, Grable, and Zeng 2017). In this study, we concentrate on the extent to which financial and digital literacy can be leveraged as effective policy tools to foster resilience-building behaviors, the latter of which has rarely been investigated.…”

Determinants of credit demand of farmers in Lam Dong, Vietnam

“…Similarly, in the report of financial literacy around the world, Klapper et al (2015) state that access to formal credit often confines to people "who tend to be more financially savvy." The results are also fortified by insights from the study of Lyons et al (2019) on the impact of financial literacy on the loan decisions of financially excluded households in the PRC. Simply put, financial literacy is expected to foster greater probabilities to adopt formal credit while vice versa for informal ones (Klapper et al, 2013).…”

“…This outcome supports our findings to depict farmers who are more financially savvy, lack of collateral, and with a reasonable income, have more probability of borrowing from both formal and informal credits. Furthermore, Lyons et al (2019) point out that the impact of financial literacy on different types of population (i.e. economically vulnerable one) is dissimilar.…”

Credit Constraints and Fraud Victimization: Evidence from a Representative Chinese Household Survey

“…Another concern is that the relationship between credit constraints and fraud victimization may be driven by the omission of financial literacy. On the one hand, a higher level of financial literacy is associated with a higher likelihood of obtaining bank loans (Lyons et al, 2019;Xu et al, 2019) and a lower likelihood of engaging in high-cost borrowing and using informal financial services (Disney and Gathergood, 2013;Lusardi and Scheresberg, 2013). A higher level of financial literacy also helps people better understand financial products and make better financial decisions about taking advantage of formal financial services.…”