The impact of financial literacy on access to formal financial products in Namibia

Motivation

The level of financial inclusion has increased markedly in Namibia in recent years. Currently, 78% of the population is considered to be financially included. More importantly, this increase has largely derived from vulnerable groups, including low-income earners living in rural areas. Although there has been an increase in the rate of financial literacy, there is no formal empirical analysis showing the extent to which improved access to formal financial services is associated with financial literacy.

Purpose

This article deepens the empirical analysis of financial literacy by simultaneously considering their effects on savings, bank account ownership, and access to credit and insurance in Namibia. We further disaggregated the analysis to consider heterogeneity between men and women, as well as between rural and urban populations.

Approach and methods

We used data from the Namibia Financial Inclusion Survey of 2017 and the instrumental variable probit model to minimize the bias from possible endogeneity caused by potential measurement error, unobserved variable bias, or reverse causality.

Findings

The study showed that financial literacy significantly increases the likelihood of people using formal financial products. Failure to adequately control for the associated bias would lead to substantial overestimation of the impact of financial literacy. Estimates from the disaggregated analysis showed that the impact of financial literacy differs significantly between rural and urban populations, as well as between men and women. The effects are higher for males than for females and for rural than urban sub-samples.

Policy implications

The positive effect of financial literacy on formal financial products suggests that policy options that promote financial literacy are crucial for improving access to formal financial products, particularly for men and the rural population. These policies could include the introduction of financial literacy programmes in schools in order to enhance personal financial knowledge and participation in the formal financial sector. Emphasis should be placed on the raising of awareness, especially among disadvantaged communities, as to the benefits of owning and operating different financial products and on the inclusion of financial literacy programmes on public television.