How Does Financial Inclusion Optimize Bank Savings? a Moderating Function of Financial Literacy

Abstract

— The importance of financial literacy, savings, and financial inclusion to financial development has long been recognized. Financial inclusion represents effective access to financial services, while financial literacy represents people basic knowledge on financial management. A good score of literacy and inclusion is expected to improve people's engagement in banking services. This research examines how financial literacy mediates the relationship between financial inclusion and bank savings. By using province-level data taken from the Indonesian Financial Authority and Indonesian Central Bank, this paper finds empirical evidence that the positive impact of financial inclusion to total savings is mediated by financial literacy. These findings reflect the power of financial education not only in improving people’s awareness of financial services but also stimulating people to act and save their money on the formal institution instead of saving their money under the pillow. Moreover, it induced financial institutions to strive for broader and more extensive services that led to higher financial inclusion. This result supports the collaborative importance of both financial inclusion and financial literacy.