Effect of debt literacy on the indebtedness of formal sector employees in Kenya

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.