Major Project Report

On

“THE ROLE OF FINANCIAL LITERACY IN

HOUSEHOLD FINANCIAL DECISION-MAKING: A
STUDY OF LOW-INCOME FAMILIES IN
DEVELOPING COUNTRIES”

SUBMITTED IN PARTIAL FULFILLMENT FOR THE

AWARD OF THE DEGREE OF

BACHELOR OF BUSINESS ADMINISTRATION

(2021-2024)

Submitted to: Submitted by:

Dr. Shruti Balhara Ayush Raj
BBA (General)
15621201721

BATCH: 2021-2024
DEPARTMENT OF BUSINESS ADMINISTRATION

Maharaja Surajmal Institute

AFFILIATED TO GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY
RECOGNIZED BY UGC U/S 2(f) NAAC Accredited ‘A’ Grade
C-4, JANAKPURI, NEW DELHI-110058
 ACKNOWLEDGEMENT

A project is never the work of an individual. It is moreover the

combination of suggestions, ideas, reviews, guidance, and contribution.
The success and final outcome of this project required a lot of guidance
and assistance.
I owe my hearty and profound sense of gratitude to my faculty guide and
my project coordinator “Dr. Shruti Balhara” (Assistant Professor MSI
JANAKPURI), under her expert guidance only the project was completed.
The goal of how idea and development can only be obtained by hard work.
I acknowledge my innermost gratitude to my project guide for their
cooperation and kind assistance during the framing of this project.
Finally, I would like to thank to all my well-wishers for their blessings and
cooperation. They boost me every day to work with a new and high spirit.

AYUSH RAJ

Enrollment No. – 15621201721

 CERTIFICATE

I, Mr./Ms. AYUSH RAJ, Roll No. 15621201721 certify that the Major
Project Report (Paper Code: 314) entitled “THE ROLE OF FINANCIAL
LITERACY IN HOUSEHOLD FINANCIAL DECISION-MAKING: A
STUDY OF LOW-INCOME FAMILIES IN DEVELOPING
COUNTRIES” is done by me and it is an authentic work carried out by me.
The matter embodied in this has not been submitted earlier for the award of
any degree or diploma to the best of my knowledge and belief.

Signature of the Student

This is to certify that Project Report entitled “THE ROLE OF

FINANCIAL LITERACY IN HOUSEHOLD FINANCIAL DECISION-
MAKING: A STUDY OF LOW-INCOME FAMILIES IN
DEVELOPING COUNTRIES” which is submitted by AYUSH RAJ in
partial fulfillment of the requirement for the award of the degree
Bachelor in Business Administration to Maharaja Surajmal Institute
Affiliated to Guru Gobind Singh Indraprastha University, C-4,
Janakpuri, New Delhi-110058 is a record of the candidate own work
carried out by him under my supervision. The matter embodied in this
report is original and has not been submitted for the award of any other
degree.

Signature of the Guide

Name of the Guide:

Designation:
 DECLARATION
I hereby declare that the project titled “THE ROLE OF FINANCIAL
LITERACY IN HOUSEHOLD FINANCIAL DECISION-MAKING:
A STUDY OF LOW-INCOME FAMILIES IN DEVELOPING
COUNTRIES” is an original piece of research work carried out by me
under the guidance and supervision of Dr. Shruti Balhara. The information
has been collected from genuine & authentic sources. The work has been
submitted in partial fulfillment of Graduation in Bachelors of Business
Administration.

Ayush Raj
Date:
 INDEX
Chapter Description Page No.
No.
1 TITLE PAGE 1
2 ACKNOWLEDGEMENTS 2
3 CERTIFICATE 3
4 DECLARATION 4
5 TABLE OF CONTENT 5-6
6 ABSTRACT 7
7 INTRODUCTION 8-12
8 LITERATURE REVIEW 13
8.1 The concept of Financial Literacy 14-19
8.2 The Importance of Financial Literacy 20-24
8.3 National Strategies for Financial Education 25-29
8.4 The measurement approaches of Financial Literacy 30-37
8.5 Financial literacy, socio-demographics, and Financial 38-40
Decisions

9 RESEARCH METHODOLOGY 41
9.1 Primary Research Methodology and Data 42-50

9.1.1Sample and Survey Questionnaire

9.1.2Binary Logistic Regression
9.1.3 Financial literacy workshop design
9.1.4 Pre-post design method
9.1.5 Quasi-Experimental design method
9.2 Secondary Research Methodology and Data 51-52

9.2.1 Methodological Principles and Specificities

9.2.2 Data and analysis
9.3 Methodological limitations 53

10 RESULTS 54-77

10.1 Evaluation of the level of financial literacy in Armenia

10.2 Relationship between financial literacy and financial
preferences
10.3 Effectiveness of financial literacy intervention
10.4 Relationship between financial literacy and financial
decisions of consumers
 10.5 Variations of results by socio-demographics

11 CONCLUSION 78-80
12 REFERENCES 81-82
13 RESEARCH QUESTIONNAIRES 83-86
14 BIBLIOGRAPHY 87

ABSTRACT
The importance of financial literacy has especially been underlined after the Global
Financial Crisis in 2008. Nowadays many international organizations and policy-
setting bodies such as OECD, the World Bank, and G20 as well as countries
themselves implement strategic actions to increase the level of financial literacy. The
latter is an important prerequisite also for financial stability, financial inclusion and
consumers’ rights protection. However, to understand the effectiveness of these
actions the impact of financial literacy on financial decisions of consumers needs to be
evaluated. Particular, it is important to understand those relationships in low-income
countries, as there is little evidence on such academic research in such countries,
especially the ones from post-Soviet space.

In the frame of this dissertation, the relationship between financial literacy, financial
preferences, and financial decisions of consumers regarding saving and debt
management is analyzed and evaluated by using binary logistic regression and quasi-
experimental research on primary data and descriptive analysis of secondary data.

The results, outline that financial literacy significantly affects the financial decisions
of consumers regarding saving. The impact of financial literacy on debt management
decisions of consumers is not significant. Financial literacy intervention in the form of
a workshop proved to be efficient in the short-run, while its long-term effectiveness is
controversial. The relationship between financial literacy and financial decisions is
different across socio-demographics. Thus, policymakers and all stakeholders should
consider the research findings to implement more targeted, differentiated, and efficient
policies toward respective target groups.
 INTRODUCTION
The developments in the area of finance and technology during recent years made
financial markets, financial products, and services increasingly accessible for people
having different socioeconomic backgrounds (Lusardi & Mitchell, 2013). The Global
Financial Crisis in 2008, which is rooted in the housing price bubbles, raised many
serious financial difficulties for the consumers who previously benefited from the
simple crediting procedures of the banks without considering their financial
capability. Although irresponsible financial decision-making is not the only reason for
these difficulties, it is argued that consumers will have fewer financial problems if
they are financially literate. To understand the financial literacy level among the
population, it is necessary to assess consumers’ capacity to make sound financial
decisions, however, the academy has not given much attention to the ways of
measuring financial literacy (Huston, 2010), meanwhile, the interest towards financial
literacy measurement by different countries and international organizations have been
increased gradually during last years. The latter is especially important for analyzing
the behavioral patterns of consumers related to their decisions while managing their
personal finances.

Financial literacy has received increased attention since the Global Financial Crisis in
2008 underlined the importance of basic financial knowledge and skills for
consumers. The value of financial literacy, as one of the main pillars of financial
inclusion, has been increasingly emphasized during the last decade. The knowledge,
skills, attitude and behavior incorporated in financial literacy are important for people
to make responsible and informed decisions, manage potential risks and improve their
financial well-being. Standard setting bodies, international forums and organizations,
such as World Bank, G20, Global Partnership for Financial Inclusion and others has
also recognized the significance of financial literacy for long-term financial stability
and consumers well-being (OECD, 2013a). Thus, improving financial literacy has
emerged as a strategic policy objective that complements governments’ financial
inclusion and consumer protection agendas of increasing number of countries.

The financial burden for individuals with limited opportunities can be especially
devastating resulting in issues related to poverty trap. Given the current financial
developments, it is easier for people living in low-income countries to become victims
of financial fraud and scams because of low level of adequate financial literacy
(Lyons & Scherpf, 2004). In addition, the diversification of ways to take debt in form
of credit, overdraft, in place loans at shops etc. from different sources such as banks,
credit organizations, pawn shops, informal sources require better debt management
knowledge, skills and abilities. Considering this context one of the one of the main
reasons for unmanageable debt for consumers become the number of sources of credit
(Widdowson & Hailwood, 2007).
Problem Statement

Given the development trends globally around financial literacy, financial education,
and financial inclusion, exploring the behavioral patterns of consumers about financial
literacy is especially important in developing countries considering different social
and economic issues, such as poverty, unemployment, low personal income, financial
exclusion, not well-developed financial institutions, poor developed stock markets,
dependence from developed countries, etc. There is little evidence on the relationship
between financial behaviors and literacy in general (Consumer Financial Protection
Bureau, 2015), however, research fails to answer this topic-related questions in
developing countries, especially from post-Soviet space even more.

Thus, for effective policy making, especially in the areas of financial stability,
financial inclusion and consumers rights protection, it is needed to explore the
interdependence of financial literacy and consumers’ decisions and create simple
heuristics to explain those connections. It is also valuable to analyze how
demographic factors such as gender, age, education, income affect those connections.

Goal Statement and Research Questions

This research aims to explore how financial literacy influences consumers’ financial
decisions related to savings and debt management in developing countries especially
in post- Soviet space by the example of Armenia. The research also aims to analyze
the short-term and long-term effects of financial literacy intervention on the behavior
of individuals related to savings and debt management by highlighting the variations
among different socio-demographic groups. In frame of this study, 6 months is
considered to be the minimum effective period of time to evaluate the long-term
effects. Given the mentioned challenges and goals of the research, the following
research questions for this study are formulated:

1. To what extent increase in financial literacy of consumers living in Armenia

impact their financial decisions related to saving and debt management?

2. To what extent financial literacy is related to financial preferences of

consumers?

3. To what extent financial literacy intervention in form of workshop is an

efficient method to impact financial literacy, preferences and behavior in
short-term and long- term (after 6 months)?

4. To what extent socio-demographic differences affect the relationship

between financial literacy and financial decisions of consumers?
Significance of the problem

Financial illiteracy can hinder to the welfare and prosperity. Financial difficulties of
individuals and families can have a negative impact on both micro and macro levels of the
economy in a country. In line with the global technological and financial developments there
is a shift of responsibilities for financial well-being and decision making from the
Government and private sector to households and individuals. Thus, the value of financial
literacy and financial education become more vivid (OECD/INFE, 2013). Especially after
the Global Financial Crisis in 2008 financial literacy has been widely recognized as a key
skill for the life as well as locomotive for economic development and financial sustainability
(OECD/INFE, 2009). Given the current economic developments, when the debt burden on
households has a tendency to increase, while wealth and income decreases, the issue of
financial literacy and effective financial decision-making become significantly bigger.

Practical and Theoretical Value

The most significant theoretical value of this research will incorporate findings related
to the consumers’ behavioral patterns based on the level of financial literacy. The
latter is important to understand not only from the perspective of the Economics
discipline, but also from the perspective of Psychology. The research findings might
bring new theoretical dilemmas related to the behavioral patterns of people with
limited opportunities and contribute to the development theories.

The practical value of the work will be the actual use of findings by the policymakers.
This is extremely important for developing effective financial literacy interventions.
Understanding behavioral patterns of consumers will help policymakers on national
and international level to implement more informed macroeconomic policies and
build development interventions. The variations by social-demographic factors will
also ensure proper targeting of the policy interventions.

Research Methods

To answer the research questions aimed in this work mainly quantitative

research methods are applied, particularly the research comprises of primary and
secondary data analysis. The primary research aims to identify the relationship
between financial literacy and financial decisions of consumers. It also
highlights the variations across different target groups. The secondary research
supports the primary research findings by providing descriptive analysis and
additional evidence on findings. The primary research focuses on three main
dimensions presented below:

1. The relationship between financial literacy and financial

preferences,

2. The short-term impact of financial literacy intervention on financial

knowledge and financial preferences of consumers.

3. The long-term impact of financial literacy on financial decisions of

consumers related to saving and debt management, understanding
variations by socio- demographics.

The primary data is collected using a survey, which is done in 24 villages from 6
regions of Armenia (Shirak, Gegharkunik, Lori, Tavush, Ararat, Kotayq). The
villages are included in frame of financial literacy project implemented by CBA,
thus the choice of villages is not random. In total 504 respondents participated in
the survey by filling the special questionnaire designed in frame of this research.
Based on these data the binary logistic regression models are built to describe
the relationship between the level of financial literacy and formal or informal
financial preferences of people regarding saving, debt management and
shopping around while choosing financial services (binary variables).

By the second step a quasi-experimental research study is designed to address

the next two objectives of primary research and bring out the answers for
research questions in frame of this study. For this purpose, the 24 villages are
randomly assigned to the Treatment and Control groups. For the Treatment
villages a special financial literacy workshop is developed and implemented,
while in control villages no financial literacy intervention is done. To evaluate
the short-term impact of financial literacy intervention on financial knowledge
and financial preferences of consumers, non-experimental pre-post design are
used in treatment villages. This method suggests doing pretest before and
posttest after the financial literacy workshop and based on the data analysis
evaluate the effectiveness of financial literacy intervention in terms of change in
the level of financial literacy and financial preferences among participants.
Given the fact that the same people filled in both pretest and posttest, for the
data analysis and evaluation the paired t-test method is mainly used, which
enables you to compare two groups when the observations are related.

In order to understand the impact of financial literacy on financial decisions of

consumer in long-term, after 6 months of workshops a phone survey are done
among the respondents from both Treatment and Control groups. Considering
the time limitations of the study, 6 months’ period is assumed to be the
minimum effective period to evaluate a change in consumer’s decisions. Based
on the data from the initial survey and phone survey the impact of financial
literacy on financial decisions of consumers regarding saving and debt
management are evaluated. Considering the fact, that the villages are not
assigned randomly for the analysis and evaluations Nonequivalent Groups
Design approach are used and the differences of treatment and control groups
are examined by using Analysis of Covariance (ANCOVA) statistical method.
In addition, based on this data the socio-demographic variations are analyzed by
using descriptive statistics.

Structure of the Dissertation

The structure of the dissertation includes literature review on the important

aspects of financial literacy and financial decisions of consumers. Particularly,
the concept of financial literacy, its importance and measurement is discussed,
in addition the experience of different countries in terms of policies related to
financial literacy and financial education is presented. In the last part of
literature review various studies are discussed, which focus on the relationship
of financial literacy and financial behaviors of consumers mainly related to
saving and debt management, as well as socio-demographics. In the second
chapter of the dissertation the methodology of the research is described,
particularly including various aspects of primary and secondary research. The
methodological limitations are also addressed in this chapter. The last chapter
includes the results of primary and secondary analysis and evaluation of data to
answer research questions. At the end the conclusions and recommendations are
derived and research questions are answered. The dissertation also incorporates
the lists of tables, figures and abbreviations as well as appendixes presented
separately.
LITERATURE REVIEW
RESEARCH METHODOLOGY
RESULTS