Abstract:
Over-indebtedness can cause socioeconomic and psychological damages on the
borrowers. It can also affect the employers and the economy negatively. On the other
hand, there is a relationship between debt literacy and borrowing which imply debt
illiteracy can reduce the financial wellbeing of the borrowers. The general objective
of the study was to examine the effect of debt literacy on the indebtedness of formal
sector employees in Kenya. The study adopted descriptive research design which was
mainly survey, cross sectional and correlational. The study targeted a population of
about 2.5 million formal sector employees. Two-stage cluster sampling technique
was used where 12 counties were selected from 47 and thereafter, respondents were
sampled randomly. The study used primary data collected by use of self-administered
questionnaire. Three hundred eighty four (384) questionnaires were circulated where
337 were returned. Of the returned, 292 questionnaires were considered usable. Using
ANOVA the debt literacy score of the employees significantly predicted
indebtedness. Further, age of the employees significantly predicted indebtedness.
Pearson‟s correlation analysis found the constructs and sub-constructs were found
uncorrelated. Further, OLS regression models revealed that all the debt literacy
indicators have a significant effect on indebtedness. Therefore, all null hypotheses
were rejected. Regression results also found that aggregated debt literacy only
explained respondent‟s DSR and DIR conservatively meaning the coefficient of nondetermination
was material. Similarly, OLS Moderated Multiple Regression (MMR)
models found age of the respondents had significant moderating effect on the
relationship between debt literacy and indebtedness. Therefore, null hypothesis five
was rejected. Using the significance values, all the constructs of debt literacy were
found significant and were retained in the revised conceptual frameworks. The DSR
model was found statistically better than the DIR model. The study helps to buttress
life cycle theory of literacy and also borrowing. Further the government, policy
makers, employers and scholar are expected to benefit from the findings of the study.
The study provides employees with strong insights that debt literacy is important for
sound financial outcome including optimal indebtedness. On the other hand, the
government need to introduce financial education and personal finance in colleges.
The mass media should write more on diverse area of financial interest to their readers
while organised finance bodies should give free professional debt advice and
counselling services. Lenders should screen experience borrowers better so as reduce
adverse selection, tame over-indebtedness in their clientele, and simultaneously
minimise non-performing debts, and strive to give utmost good faith advice when it
is sought by prospective borrowers. The study faced numerous limitations: underreporting
of debt owing and over-reporting of disposable incomes may have occurred
which was mitigated by use of the sturge‟s rule, use of ordinal and interval scales to
measure the variables was another challenge which was mitigated by use of reliability
tests, data was collected from formal sector employees only meaning the findings may
have limited applications and the questionnaire statements were adopted from studies
done in developed countries; such statements may not exactly reflect the Kenyan
setting. In addition, the effect of debt literacy on the indebtedness of informal sector
employees needs to be studied while the lenders‟ perspective needs to be sought.