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Socio-Economic and Demographic Determinants of Indian Youth

Financial Literacy: Determinants of Financial Literacy

Article  in  International Journal of Asian Business and Information Management · October 2017

DOI: 10.4018/IJABIM.2017100102

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 International Journal of Asian Business and Information Management
Volume 8 • Issue 4 • October-December 2017

Socio-Economic and Demographic

Determinants of Indian Youth
Financial Literacy:
Determinants of Financial Literacy
Jehangir Pheroze Bharucha, H. R. College, Mumbai, India

ABSTRACT
The purpose of this study is, with the existing data about the level of financial literacy
at hand, to examine which factors actually determine the level of personal financial
literacy among the youth in India’s financial capital city. A total of 650 completed
and returned questionnaires have finally been used for the purpose of this study. The
data analysis uses descriptive statistics and multivariate analysis. The explanatory
variables are gender, district of residence, educational level, father’s educational level,
employment, marital status and parenthood. Findings of the study depict that having
children is the most positively correlated (+0.327) with financial literacy. Education
(+0.245) and employment (+0.140) are positively correlated with financial literacy. It
is also concluded that females are less likely to have a high level of financial literacy
(-0.271) compared to males.

Keywords
Financial Literacy, Programmes, Socioeconomic Variables

DOI: 10.4018/IJABIM.2017100102

Copyright © 2017, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.


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Volume 8 • Issue 4 • October-December 2017

INTRODUCTION
Financial Literacy
The contribution of governments and employers in managing investments on behalf of
individuals has reduced considerably in recent times. This has added to the individuals’
role in managing their own finances. In the last few years researchers all over the
world, have started to study and explore whether individuals are well-equipped to make
financial decisions and how to bridge the knowledge gap in financial education and
wellbeing. Although the focus of this research varies in terms of the concerns and the
context, it is worthwhile to know that the research shows that a large percentage of the
population does not have a good enough financial understanding to ensure long-term
financial stability for themselves and their family. Also, the instability of the global
marketplace is leading to a very high level of complexity in financial decisions. One of
its main implications include rising costs of goods and services that push people to be
able to make well-informed financial decisions (Lusardi & Mitchell, 2009). Exposing
the youth to all this is particularly important as they are at a vulnerable age. Evidence
from around the world presents a frightening picture; and recognizing the importance
of financial literacy, a growing number of countries have developed and implemented
national strategies for financial education in order to improve the financial literacy
of their populations in general, often with a particular focus on younger generations
(Grifoni & Messy, 2012).
Financial literacy refers to understanding finance and the capability to utilize
it to make sound personal financial decision. (Hogarth and Hilgert, 2002). More
specifically, it refers to the set of skills and knowledge that allow an individual to
make informed and effective decisions through their understanding of finances.
(Norman, 2010). According to Remund (2010), financial literacy is a person’s ability
to understand and use financial matters. Financial literacy is considered an important
adjunct for promoting financial inclusion, financial development and ultimately
financial stability. (Ramakrishnan, 2011). According to Mahdzan and Tabiani (2013),
increasing financial literacy and capability promotes better financial decision-making,
thus, enabling better planning and management of life events such as education,
housing purchase, or retirement. This is particularly relevant for the India as the
country has the competitive advantage of its demographic dividend which is waiting
to be exploited. The study investigates the socio-demographic variables that influence
the financial knowledge of the youth in India. A financially aware youth workforce
would be a great asset for India.
Greater Need in India
Financial literacy is of particular relevance to emerging economies. As these economies
try to accelerate growth rates, improvement in financial literacy would help enhance the
financial well-being of the people. Before the financial sector reforms commenced in
the early 1990s, the Indian monetary system basically catered to the needs of planned
development. Customers had little choice in financial investments. The underdeveloped
financial markets ensured that exposure to risk was also very little. In such a situation,
customers could use their basic skills to invest in simple financial products with returns

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that were assured and were not bothered at all about risks. The relevance of financial
education was limited and not needed.
Due to the process of globalization, India has undergone a significant transformation.
The economy has become more diversified with new avenues of growth. Thus, the
financial sector has also become more modernized and diversified. In an environment
where the range and complexity of financial products are widening the scope of entire
market, it is becoming crucial that individuals should develop a thorough understanding
of the world of finance so as to make better choices that are most appropriate to their
financial goals and needs (Kumar and Anees, 2013). The country’s central banker, the
Reserve Bank of India has been pushing forward programmes of financial literacy,
ably supported by several commercial banks in the country. In a country like India,
there is, of course, there is an even stronger case for promoting financial education in
the context of all the various programmes initiated to achieve inclusive growth. This
would reduce deprivation and vulnerability and expand opportunities for the poor.

REVIEW OF LITERATURE
The review of available literature shows that the studies pertain to countries other
than India and this appears to be a somewhat neglected area by Indian researchers and
policy makers. Having said this, research from around the world on financial literacy
raises serious concerns about the ability of individuals to secure their financial well-
being (Agarwalla et al, 2014). There is evidence that individuals tend to under-save,
fail to invest wisely and are often indebted (Mitchell 2011, Poterba et al. 2007). Many
recent empirical studies using panel data on household portfolios find that low level
of financial sophistication is associated with poor risk diversification, inefficient
portfolio allocations, and low wealth accumulation. (Jappelli and Padula,2013). Xu
and Zia (2012) have provided a good summary of findings of various financial literacy
studies across the world. Two comprehensive reviews of recent research on financial
literacy are Lusardi and Mitchell (2009) and Fernandes et al (2014).
A financial literacy survey of the general population in United Kingdom by Schagen
and Lines (1996) indicated that most participants were confident in their financial
dealings, the notable exceptions being single parents and students. Beal and Delpachitra
(2002) carried out a comprehensive financial literacy survey of Australian youth and
showed that students with higher financial literacy scores were more likely to be male,
have greater work experience, have a higher income and have a lower aggregate risk
preference. Financial literacy is strongly related to sociodemographic characteristics
and family financial sophistication. (Lusardi et al, 2010). Cude (2010) showed that
individuals with a high degree of financial literacy are highly successful in their
professional as well as personal life; and higher levels of education, risk appetite,
higher age, more work experience, family income, parental occupation and attending
in training classes will increase financial literacy (Cude, 2010). It is generally observed
that on an average, women perform worse than men in the tests of financial knowledge
and have less confidence in their financial skills (OECD, 2013)
Ansong and Gyensare (2012) made a study in Ghana which concluded age and
work experience are positively related to financial literacy but level of study, work
location, father’s education and access to media are not significantly correlated with
financial literacy. A study in Iran by Taft et al (2013) concluded that age and education
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are positively correlated with financial literacy and married men are more financially
literate. The spending habit and year of study have a significant positive relationship
with the financial literacy, whereby the age and gender are negatively associated with
financial literacy concluded Shaari et al. (2013) after studying financial literacy among
384 university students in Malaysia. Nidar and Bestari (2012) on the basis of a study
of 400 students in Indonesia observed that level of education, faculty, personal income,
knowledge from parents, parents’ income, and ownership of insurance factors have
significant impact on personal financial literacy. Heenkenda (2014) in Sri Lanka found
a strong association between socio-economic-demographic characteristics and the level
of financial literacy. A study by Mwangi (2012) found that financial literacy is low
in Kenya. Households’ access to financial services is not based on levels of financial
literacy but rather on factors such as income levels, distance from banks, age, marital
status, gender, household size and level of education (Mwangi, 2012). In Mauritius,
most students had a medium level of knowledge and skills in financial literacy and
in savings and borrowings and there was no significant difference in the financial
literacy level based on gender, age, language, race and income levels (Ramasamwy et
al, 2013). Almost an identical result was discovered by Fatoki (2014) for South Africa.
People grown up in families with the higher financial knowledge and well-being
are less depressed, show less aggressive and anti-social behavior and have more self-
confidence (Fox et al., 2005). People with low financial literacy are more likely to
have problems with debt (Lusardi and Tufano, 2009). Lusardi and Mitchell (2014)
conclude that the interventions to increase financial literacy are barely successful.
Fernandes et al. (2014) draw attention to the significant association between measured
financial literacy and financial behavior.

SETTING OF THE STUDY

Research Methodology
Logistics multiple regression models have been used to examine the relationship
between the levels of financial literacy and different demographic characteristics.
Initially, a pilot study was carried out to get more precise insight into the various
aspects of the determinants of financial literacy. This helped the researcher to outline
the research problem more clearly. For the final study, a structured questionnaire was
distributed to 1125 respondents using the technique of stratified random sampling.
Given the huge socio-economic disparities in Mumbai, the sample was drawn almost
equally from Mumbai city district, western suburbs and the central suburbs. After
preliminary analysis of the data, the usable sample was reduced to 650. The percentage
of usable responses is worked out at 59.55%. Out of the 650 usable responses, 46.78%
were female and 53.22% were male. All the respondents were in the 18-30 years age
group with 35.84% being in the age range of 23- 26 years. Frequency, percentage,
mean and standard deviation have been used. Scores converted into percentages
were tested using ANOVA. The level of financial literacy is then used in the logistic
multiple regression model as the dependent variable, which is explained by the seven
independent variables. The explanatory variables included gender, district of residence,
educational level, father’s educational level, employment marital status and parenthood.

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Limitations of the Study

• The sample was drawn from Mumbai. The findings may not be applicable to the
rural areas and further studies taking a wide sample from the whole of India may
be warranted.
• This study does not make an attempt to compare financial literacy levels of students
from different disciplines. It may be valuable to make comparisons against several
disciplines and years of study.
• Furthermore, there has been no attempt in the current research to explicitly link
financial literacy with financial behaviour. It is possible that though a person may
have a low score in certain aspects of financial literacy, he may demonstrate high
financial success.
• The conclusions of this study apply to the youth population of Mumbai. But the
regional profile in India is diversified. Also, there exists a wide divergence in
literacy levels across States. In several States and union territories, the literacy
rates are well above the national average. Thus, the financial literacy rates would
also differ between different age categories of the population, between states,
between rural and urban areas and across regions.

DATA ANALYSIS AND INTERPRETATION

It is found that financial literacy is low. The overall financial literacy score as a whole
is calculated as 60.4%. This figure has partially been swollen because of the good
scores achieved in the field of debit cards/credit cards and insurance. In any case,
the low correct response rates, particularly to certain questions indicated that many
young people lack knowledge of basic financial concepts. Not a single respondent
could correctly answer all questions; however, 52 respondents (8%) of our total
respondents could answer 48 out of the 50 questions correctly. Thus, our findings show
that lack of financial knowledge is widespread among the young. Only 27% percent
of the respondents could correctly answer the question on call money and only 20%
correctly answered the question on compound interest. A good 64% correctly answered
various questions pertaining to mutual funds. Only about one-third of the youth of
Mumbai possess basic knowledge of interest rates and risk diversification. Only 34%
of people in the age group 18 to 30 years possess basic knowledge of interest rates
and risk diversification.
The highest mean score is obtained in the field of knowledge of debit cards and
credit Cards with a mean score of 75.06%. This is followed in the second rank by
knowledge of insurance with a mean score of 67.96%. The mean score in the realm of
basic knowledge of the Indian financial system is seen to be 62.56%. It is unfortunate
that the respondents have very low financial literacy scores in the field of basic money
management (47.96%) and savings and investment know-how (48.10%). The findings
overall generally show that knowledge of money management and investment know-
how is lower than their knowledge of debit cards/ credit cards and insurance.

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Statistical Summary of Variables

In this section the relationship between the respondent’s level of financial literacy
and the respondent’s gender, education, father’s education, marital status, employment
and whether the respondent has offspring is examined. Table 1 represents the means,
standard deviations and the number of observations of the independent variables.
All Statistics Calculated Using Sample Weights
While the overall level of financial knowledge was low among the respondents there
were significant differences according to gender, marital status, education, employment
status and whether the respondent had offspring.
The following Table 2 tabulates the differences in means between different
subgroups of our sample using t-tests. The significance of these differences is also
indicated in the table.

RESULTS AND CONCLUSION OF MULTIVARIATE ANALYSIS

A multivariate analysis has been done to understand which factors were really linked
to financial literacy after controlling for many other characteristics. Three different
specifications were examined. Specification I considered only basic socio-demographic

Table 1. Statistical Summary of Variables

Mean Standard deviation N

Basic money management: Correct Responses 0.48 0.53 650
Savings and investment know how: Correct Responses 0.48 0.50 650
Debit cards/credit cards/ ATM: Correct Responses 0.75 0.46 650
Insurance: Correct Responses 0.68 0.18 650
Basic knowledge of Indian financial system: Correct Responses 0.63 0.29 650
Youth population: Mumbai City 0.55 0.36 262
Youth population Western Mumbai 0.63 0.31 245
Youth population: Central Mumbai 0.53 0.42 143
Male 0.68 0.47 346
Female 0.52 0.50 304
Unmarried Undergraduate students and not working 0.16 0.47 124
Unmarried Undergraduate students and working 0.48 0.43 152
Unmarried Post-graduate students and not working 0.37 0.49 043
Unmarried Post-graduate students and working 0.50 0.48 118
Working married having no children 0.57 0.38 102
Working married having children 0.69 0.50 111
Father’s education: less than HSC 0.62 0.34 103
Father’s education: Graduate 0.38 0.50 360
Father’s education: post graduate/doctoral 0.13 0.46 187

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Table 2. Differences in Means (%)

Basic money Savings and Debit cards/ Insurance Basic knowledge

management investment credit cards/ of Indian
know how ATM financial system
Gender 12.3*** 8.5*** 10.2*** 9.8*** 12.4***
Male vs. female
Place of residence: 5.7*** 6.8*** 4.6*** 7.3*** 7.1***
Mumbai City vs.
Western Mumbai
Western Mumbai vs. 3.2*** 4.1*** 5.8** 4.3*** 6.5***
Central Mumbai
Mumbai City vs. 7.4*** 6.7*** 5.3*** 8.0*** 10.2***
Central Mumbai
Education: graduate 14.8*** 10.7*** 3.9*** 9.9*** 10.5***
vs. HSC or lower
Education 13.2*** 6.1** 2.8*** 8.3*** 7.8***
postgraduate
vs. graduate
Family background 11.7*** 5.8*** 6.1*** 7.6** 10.9***
characteristics
Father’s education:
graduate vs. less
than HSC
Father’s education: 4.7*** 6.8** 9.5* 17.2*** 5.9***
post graduate vs.
graduate
N = 650
* p<0.1; ** p<0.05; *** p<0.01

characteristics. Specification II included socio-demographic characteristics as well as

family characteristics. Specification III included socio-demographic characteristics,
family characteristics, employment status, marital status, and whether the respondent
had off springs.
Several important conclusions emerge from the multivariate analysis. Even after
consideration of many socio-demographic variables, family background, educational
attainments, employment status, marital status and other variables, females still are
substantially less financially literate than their male counterparts. This result showed
that sex is a strong predictor of financial literacy, even after accounting for many other
characteristics, and the differences are statistically significant. District of residence
in Mumbai is another predictor of financial literacy, with the respondents in suburban
Mumbai displaying a lower knowledge on certain indicators. However, the differences
are not statistically significant after accounting for all the other variables taken in
Model III. There is a strong positive relationship between educational attainment
and financial literacy, in particular for those who are graduates and post graduates.
Estimates from Model III indicate they are more likely to answer certain questions
correctly compared to the other respondents. Thus, educational attainment is clearly
a strong determinant of financial literacy and the relationship is nonlinear. Family
characteristics are also important determinants of financial literacy. In particular,

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father’s education is a strong predictor of financial literacy: Those whose fathers were
post graduates and settled in high level occupations are more likely rightly answer
several questions correctly in Specification II. However, this effect did not exist when
controlling for other specifications like employment status, marital status and whether
the respondent had children. The low pseudo R-squared value in the regressions
indicates that some of the variation is unaccounted for, given the many factors are
likely to influence the accumulation of financial knowledge.
In order to understand the predictive power of gender, district of residence,
educational attainment, family characteristics, employment status, and marital status
and whether the respondents had off springs, multiple regression analysis was carried
out. The regression model was constructed to understand which among the independent
variables are related more to the dependent variable, and to explore the forms of
these relationships. The regression analysis estimates the conditional expectation
of the dependent variable i.e. the level of financial literacy of the respondents given
the independent variables i.e. gender, district of residence, educational attainment,
family characteristics, employment status, marital status and whether the respondents
had offspring.
The equation that describes how the dependent variable y i.e. level of financial
literacy is related to independent variables like x 1, x 2, x 3, …, x 7 i.e. gender, district
of residence, education, family characteristics, employment status, marital status,
offspring and an error term € is the multiple regression model.
The regression model is as follows:

Y= β 0 + b1x 1 + b2x 2 +b3x 3 + b 4x 4 + b5x 5 + b 6x 6 + b 7x7+€

Where,

0 = Beta coefficient (constant)

b 1 = Coefficient of Gender
b 2= Coefficient of district of residence
b 3= Coefficient of education
b 4 = Coefficient of education background of father
b 5 – Coefficient of Employment status
b 6 = Coefficient of Marital status
b 7=coefficient of whether the respondent has children
Y =coefficient of financial literacy
€=error term

In this model b0, b1, b2 are the parameters and € the Greek letter epsilon is a random
variable. Y (financial literacy) is a linear function of x 1, x 2, …, (The β 0 + b 1x1 + b 2x2
part) plus an error term €. The error term € the Greek letter epsilon accounts for the
variability in y that is not explained by the liner effect of the independent variables.
The estimated result of the multiple regression line can be written as below:

Y= 0.956 - 0.217x1 -0.054x 2 + 0.245 x 3 - 0.189x4+0.140x 5+ 0.117x 6 + 0.327x 7 +€

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Thus, it is seen from our model among all the variables having children is the most
positively correlated (+0.327) with financial literacy. This shows that as people shift
to the later stages of the family life cycle and have offspring’s, they have to shoulder
more responsibilities and hence give more importance to managing their finances. It
is also concluded that females are less likely to have a high level of financial literacy
(-0.271). However, education (+0.245) and employment (+0.140) are positively
correlated with financial literacy.
Table 3 shows the model summary.
It appears from this study that there is some amount of gender differences in
financial literacy in India (see Table 4). Overall, men had better understanding of
financial matters than women. Young women know much less than do young men
about basic financial concepts. Differences between women and men persisted
continuously throughout Mumbai City, Western Mumbai and Central Mumbai. The
analysis of variance further confirms that gender significantly affected overall financial
literacy Individual ANOVA run for each dimension however revealed that there were
significant gender differences for savings and investments know-how only. Thus, it
may be important to develop programmes targeted specifically to women, since they
display much lower financial knowledge. Overall, the youth in Mumbai city appear
less confident when it comes to managing money, reflecting their relative lack of
experience. However, they appear to be reasonably well informed about plastic money
and about insurance. They appear keen to learn more.
It is discovered in this survey that financial literacy is influenced by parents. A
weak but statistically relevant correlation was noticed between those who got a good
score and they had highly qualified parents who were into high-level professions.
There is a correlation seen between the employment status of the respondents and
their level of financial literacy. Yet, the individual analysis of variance reports

Table 3. Model summary

R 0.7309 a
R square 0.5342
Adjusted R square 0.5292
Std error of the estimate 0.7810
No of observations 650
a. Predictors: (Constant) gender, district of residence, education, father’s education, employment, marital status, has offspring’s.
b. Dependent variable: financial literacy

Table 4. ANOVA

Sum of squares Df Mean Square F Sig

Regression 2.128 9.0009 4.5005 21.357 0.0010
Residual 7.633 1.4751 02107
Total 9.861 10.476
a. Predictors: (Constant) gender, district of residence, education, father’s education, employment, marital status, has offspring’s.
b. Dependant variable: Financial Literacy

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statistically significant age group difference among personal finance, borrowings

savings and debit/credit cards themes only. The parenthood of the respondents was
positively related to his /her level of financial knowledge at 1% significance level.
This implies that as people have offspring’s, there is a corresponding improvement
in his/her financial literacy level. The ANOVA findings confirmed that marital status
affected the individual’s financial knowledge as a whole. However, marital status
significantly impacted on personal savings and debit/credit cards only. There was a
positive correlation coefficient (0.48) indicating that there was a statistically significant
(p < .001) linear positive relationship between marital status and financial literacy.
Putting these findings together indicates that the financial literacy differential
relates to differences in gender, marital status, employment status, having children
and to some extent in educational attainment. Research is needed to help understand
this so that remedial action can be undertaken. While all the youth are in need of and
deserve to learn financial survivorship skills, this is particularly important for the
youth residing in Western and Central Mumbai.

FINAL REMARKS
The financial preparedness of a nation’s youth is essential to its well-being and of
vital importance to a country’s economic future. A person having the right financial
knowledge and understanding will be able to successfully steer through tough situations
and difficult times and would not be adversely affected by global depressions and
problems. This positive attitude will help them to practice proper personal financial
management as working adults (Dahlia, Rabitah & Zuraidah, 2009). It is the need
of the hour today, to increase financial literacy and awareness especially among the
youth. Many of the females did not have a firm grasp particularly over questions on
money management and on the Indian financial system. It may be important to develop
programs targeted specifically to women, since they display much lower financial
knowledge. Knowledge of money management and investment know-how is lower
than their knowledge of debit cards credit cards ATMs and insurance.
The respondents who reside in Mumbai City are more likely than those who
reside in Mumbai suburban regions to answer most of the categories of financial
literacy questions correctly. There are differences in financial literacy according to
educational levels with post graduate students who were also working scoring better
than the others and the differences are statistically significant. Family characteristics
are also important determinants of financial literacy. Correct response rates increase
substantially for higher levels of educational attainment. The low pseudo R-squared
values in our regressions indicate that some of the variation is unaccounted for, given
the many factors are likely to influence the accumulation of financial knowledge. The
model shows that among all the variables having children is positively correlated
(+0.327) with financial literacy. This shows that as people shift to the later stages of
the family life cycle and have off springs, they have to shoulder more responsibilities
and hence give more importance to managing their finances. Education (+0.245) and
employment (+0.249) are positively correlated with financial planning. Although
the youth in Mumbai city appear less confident when it comes to managing money,
reflecting their relative lack of experience, they appear keen to learn more.

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The influence of gender on financial literacy is similar to the influence recorded

for India by Agarwalla (2013). In terms of age, this study supports De Clercq et al.,
(2009) and Thapa and Nepal (2015) while it refutes their findings in case of gender
and the findings related to gender is consistent with Ramaswamy et al (2013). Findings
of education level are pretty similar to earlier studies such as Hilgert et al (2003),
Shaari et al (2013) and Fatoki (2014).
Recommendations of the Study
Understanding financial literacy among young people is thus of critical importance for
policymakers in several areas; it can aid those who wish to devise effective financial
education programs targeted at young people as well as those writing legislations
to protect younger consumers. (Lusardi et al 2010). Promoting financial literacy, in
particular, needs to become a high national priority in India. The government should
consider making financial literacy a pre-requisite for all graduates and post-graduates
and all must get at least qualifying grades before they are awarded their degree by the
respective universities.
It is important to ensure that financial literacy programmes are delivered in a
comprehensible manner and in a way and at a time when the user needs it. Also,
financial literacy and life skill products and services must be both entertaining and
educational if they are going to be effective in today’s media driven environment. The
youth would have to understand that even having a high level of financial literacy is not
enough rather it is the matters, but what is most important is practical application of
such knowledge to real-life situations. It is crucial for the young to develop a disciplined
habit of managing their money. This study would like to recommend that from the
family to educational institutions to the workplace, each of the institutions can play a
greater role in helping the youth learn how to make sound financial decisions that will
help them throughout their lives. However, the task of imparting financial knowledge
and competency requires the support of all stakeholders in the private, public and NGO
sectors. All stakeholders concerned should promote coordinated financial education.

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Jehangir Bharucha is Senior Vice Principal at H R College, Mumbai, India and faculty at Lincoln University
College, Kualalumpur, Malaysia. A holder of two PhD degrees, he has been invited several times by leading
universities in the United States and United Kingdom to teach courses related to the Indian economy. He
is perhaps best known for his Masterclass courses at Kennesaw State University, City University of New
York and other institutions worldwide.

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