Household Financial Literacy: The Case of Nonperforming Consumer Credit in Kenya

Abstract

Household financial literacy is integral in the financial planning process of formulating, executing, and monitoring personal decisions into a consolidated plan that directs households to realize their overall financial and life goals. These includes meeting monthly living expenses, and goals in investment, educational, retirement, tax and legacy planning. However, the Kenyan credit market is encountering an increase in defaults and non-performing loans(NPLs), negatively impacting on household financial planning process. This study examined the effect of financial literacy on nonperforming household credit in Kenya using a fixed effects least squares dummy variables panel data approach. Nonperforming household credit was used as a proxy for financial literacy. Using data from the Central Bank of Kenya, the study analyzed sectoral credit distribution to agricultural, real estate, and household sectors, with the agricultural sector used as the reference period in the formulation of the dummy variables. The results found an inverse relationship between nonperforming loans and lending interest rates and a positive correlation with the gross domestic product growth rate. This indicates that the Kenyan financial system is still underdeveloped and operating in the short-run asymmetric condition, whereby commercial banks cannot fulfill their fiduciary requirements, but continue loading consumers with loans without regard to applicable financial planning practice standards for personal financial planning to enable households  meet their financial and life goals. Despite reported economic growth, the increasing level of nonperforming consumer credit necessitates a review of the country's monetary and fiscal policies to ensure that economic growth is consistent with the prevailing macroeconomic indicators of unemployment, interest rates, and nonperforming credit. To increase household financial literacy, the study suggests curriculum development to incorporate personal financial planning education in tertiary institutions and Universities like the American Certified Financial Planning (C.F.P.) to augment courses provided by the Kenya Accountants and Secretaries National Examinations Board (KASNEB).

Keywords:Household financial literacy, Nonperforming loans, Household credit, Least squares dummy variable

DOI: 10.7176/RJFA/14-20-05

Publication date: December 31^st 2023