Examining the role of institutional framework in promoting financial literacy by microfinance deposit-taking institutions in developing economies. Evidence from rural Uganda

Author:George Okello Candiya Bongomin, John C. Munene
Position:Faculty of Graduate Studies and Research, Makerere University Business School (MUBS), Kampala, Uganda
Pages:16-38
SUMMARY

Purpose This paper aims to examine the role of institutional framework of regulative, normative, and cultural-cognitive in promoting financial literacy by microfinance deposit-taking institutions in developing economies with a specific focus on rural Uganda. Design/methodology/approach Data were collected from a total sample of 400 respondents who are clients of promotion of rural initiatives development enterprises microfinance deposit-taking institution using a questionnaire and analysis of moment structures (AMOS) was adopted to analyze the data to examine the role of institutional framework of regulative, normative, and cultural-cognitive in promoting... (see full summary)

 
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Examining the role of institutional
framework in promoting nancial
literacy by micronance deposit-
taking institutions in
developing economies
Evidence from rural Uganda
George Okello Candiya Bongomin and John C. Munene
Faculty of Graduate Studies and Research,
Makerere University Business School (MUBS), Kampala, Uganda
Abstract
Purpose This paper aims to examine the role of institutionalframework of regulative, normative, and
cultural-cognitive in promoting nancial literacy by micronance deposit-taking institutions in developing
economieswith a specicfocus on rural Uganda.
Design/methodology/approach Data were collected from a total sample of 400 respondents who
are clients of promotion of rural initiatives development enterprises micronance deposit-taking
institution using a questionnaire and analysis of moment structures (AMOS) was adopted to analyze the
data to examine the role of institutional framework of regulative, normative, and cultural-cognitive in
promoting nancial literacy by micronance deposit-taking institutions in developing economies with a
specic focus on rural Uganda.
Findings The results indicated that institutional framework of regulative, normative, and cultural-
cognitive signicantlyand positively promotes nancial literacy by micronance deposit-taking institutions
in developing economies, especiallyin rural Uganda. The existence of institutional framework of regulative
(codied rules and laws), normative (shared beliefs/values and norms), and cultural-cognitive (shared
conception and interpretation)promotes nancial literacy by micronancedeposit-taking institutions in rural
Uganda. The structural equation model constructed by use of AMOS revealed that the institutional
framework of regulative,normative, and cultural-cognitive explains 27 per cent of the variationon the role of
micronancedeposit-taking institutions in promoting nancialliteracy in rural Uganda.
Research limitations/implications This study was purely cross-sectionalwith data collected at a
specic pointin time. Therefore, future studies through longitudinalresearch design can be adopted to test for
the hypotheses derived under this study. In addition, only quantitative data collected by use of a semi-
structured questionnairewas used in this study. Further studies may consider the useof interviews to get in-
depth responsesfrom the respondents.
Practical implications Advocates of nancial literacy programs in developing economies should
consider the existenceof institutional framework of regulative, normative,and cultural-cognitive, which helps
in promoting nancial literacy by micronance deposit-taking institutions. Indeed, the existence of state
legislation to teach people about how to manage their money can promote nancial literacy. Besides,
normative behavior among individuals within a social setting can leadto increased likelihood that they will
engage and participate in a particular nancial literacy drive. Correspondingly, cognition, especially uid
intelligence that changes as peopleage may also help individuals to invoke several dimensions of cognitive
skills to make informednancial decisions.
Originality/value The current study adds to the existingbody of knowledge by examining the role of
institutional framework of regulative, normative, and cultural-cognitive in promoting nancial literacy by
micronance deposit-takinginstitutions in developing economies. There is deciencyin the link between the
JFRC
28,1
16
Received19 December 2018
Revised18 June 2019
Accepted7 August 2019
Journalof Financial Regulation
andCompliance
Vol.28 No. 1, 2020
pp. 16-38
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-12-2018-0158
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
institutional framework under the theory of institutions and nancial literacy, especially in developing
economieswhere there is great need for nancial literacy among the poor.
Keywords Financial education, Institutional framework, Analysis of moment structures,
Financial decision, Fluid intelligence, Micronance deposit-taking institutions, Developing economies
Paper type Research paper
1. Introduction
Currently, with the increasing efforts toward scaling-up the level of nancial inclusion,
especially in developing economies, nancial institutions have designed and developed
sophisticated nancial products(Lusardi and Mitchell, 2014; Organization for Economic Co-
operation and Development (OECD)/INFE, 2012). This means that consumers of such
products, particularlythe illiterate, require nancial knowledge and skills to understand and
make informed decisionsbefore consuming these products.
According to the OECD/INFE (2015),nancial literacy is a combination of awareness,
knowledge, skill, attitude, and behavior necessary to make sound nancial decisions to
achieve individualnancial well-being. While North (1990) refers to institutionsas the rules
of the gameof a society or the humanly devised rules or constraintsthat structures
political, economic, andsocial interaction. They are made up of the formal constraints (rules,
laws, and constitutions)and informal constraints (norms of behaviors, conventions, and self-
imposed codes of conduct) and their enforcement characteristics (North, 1991). Similarly,
Scott (2001) conceives institutions to consist of regulative (legal), normative (social), and
cultural-cognitive elements that together with associated activities and resources, provide
stability and meaningto social life.
The OECD/INFE (2012) observes that the poor are faced with growing challenges in
making nancial decisions and choices that often tend to complicate rather than simplify their
lives. This is supported by the fact that they require a lot of information and skills in choosing
among the growing number of nancial products and services available in the nancial
market. Agarwal (2007) and Porteous and Helms (2005) show that lack of awareness and
understanding of nancial products and services caused by ignorance and low levels of
nancial literacy has led to nancial exclusion of majority of the poor in developing countries.
Consequently, the World Bank (2009) suggests that nancial literacy, which helps
individuals to make wise and sound nancial decisions can improve the savings rates and
credit worthiness of the poor. Thus, as nancial literacy may be achieved through socialization
among the poor within the social arrangements, the institutional framework comprising of the
regulative, normative, and cultural-cognitive can help in setting up structures that may
promote nancial literacy (Scott, 2001). Particularly, the regulative framework can serve the
purpose of creating awareness about nancial literacy and designing basic monetary concepts,
which may help the poor to gain control of their personal nances (Bernheim et al., 2001).
Similarly, the shared beliefs among individuals in the same setting guided by the existing norm
can increase the likelihood of the poor to participate in nancial literacy programs. In addition,
Willis (2009) also observes that as individuals mature, cognition, especially uid intelligence,
can increase nancial knowledge and skills of individuals.
While several studies such as Lusardi et al. (2017),Lusardi and Tufano (2009a,2009b),
Lusardi and Mitchell (2014),Atkinsonand Messy (2012),Okello et al. (2017),Grohmann et al.
(2017),Skimmyhorn (2016),Klapper et al. (2015),Lusardi and Tufano (2015),Prina (2015),
Jamison et al. (2014),Xu and Zia (2012),Cole et al. (2011,2009), Van Rooij et al. (2011) and
Lusardi (2009) have examined the role of nancial literacy in helping individuals to make
wise and sound nancial decisions in both developed and developing economies, no
Role of
institutional
framework
17

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