Examining the role of institutional framework in promoting financial literacy by microfinance deposit-taking institutions in developing economies. Evidence from rural Uganda
| Pages | 16-38 |
| DOI | https://doi.org/10.1108/JFRC-12-2018-0158 |
| Date | 09 December 2019 |
| Published date | 09 December 2019 |
| Author | George Okello Candiya Bongomin,John C. Munene |
Examining the role of institutional
framework in promoting financial
literacy by microfinance 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 financial literacy by microfinance deposit-taking institutions in developing
economieswith a specificfocus 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 financial literacy by microfinance deposit-taking institutions in developing economies with a
specific focus on rural Uganda.
Findings –The results indicated that institutional framework of regulative, normative, and cultural-
cognitive significantlyand positively promotes financial literacy by microfinance deposit-taking institutions
in developing economies, especiallyin rural Uganda. The existence of institutional framework of regulative
(codified rules and laws), normative (shared beliefs/values and norms), and cultural-cognitive (shared
conception and interpretation)promotes financial literacy by microfinancedeposit-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
microfinancedeposit-taking institutions in promoting financialliteracy in rural Uganda.
Research limitations/implications –This study was purely cross-sectionalwith data collected at a
specific 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 financial literacy programs in developing economies should
consider the existenceof institutional framework of regulative, normative,and cultural-cognitive, which helps
in promoting financial literacy by microfinance deposit-taking institutions. Indeed, the existence of state
legislation to teach people about how to manage their money can promote financial literacy. Besides,
normative behavior among individuals within a social setting can leadto increased likelihood that they will
engage and participate in a particular financial literacy drive. Correspondingly, cognition, especially fluid
intelligence that changes as peopleage may also help individuals to invoke several dimensions of cognitive
skills to make informedfinancial 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 financial literacy by
microfinance deposit-takinginstitutions in developing economies. There is deficiencyin 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 financial literacy, especially in developing
economieswhere there is great need for financial literacy among the poor.
Keywords Financial education, Institutional framework, Analysis of moment structures,
Financial decision, Fluid intelligence, Microfinance deposit-taking institutions, Developing economies
Paper type Research paper
1. Introduction
Currently, with the increasing efforts toward scaling-up the level of financial inclusion,
especially in developing economies, financial institutions have designed and developed
sophisticated financial 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 financial knowledge and skills to understand and
make informed decisionsbefore consuming these products.
According to the OECD/INFE (2015),financial literacy is a combination of awareness,
knowledge, skill, attitude, and behavior necessary to make sound financial decisions to
achieve individualfinancial well-being. While North (1990) refers to institutionsas “the rules
of the game”of a society or “the humanly devised rules or constraints”that 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 financial 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 financial products and services available in the financial
market. Agarwal (2007) and Porteous and Helms (2005) show that lack of awareness and
understanding of financial products and services caused by ignorance and low levels of
financial literacy has led to financial exclusion of majority of the poor in developing countries.
Consequently, the World Bank (2009) suggests that financial literacy, which helps
individuals to make wise and sound financial decisions can improve the savings rates and
credit worthiness of the poor. Thus, as financial 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 financial literacy (Scott, 2001). Particularly, the regulative framework can serve the
purpose of creating awareness about financial literacy and designing basic monetary concepts,
which may help the poor to gain control of their personal finances (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 financial literacy programs. In addition,
Willis (2009) also observes that as individuals mature, cognition, especially fluid intelligence,
can increase financial 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 financial literacy in helping individuals to make
wise and sound financial decisions in both developed and developing economies, no
Role of
institutional
framework
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