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THE NEXUS BETWEEN FINANCIAL LITERACY AND THE CREDIT STATUS IN INDONESIA
Hadi ISMANTO, M.M ? Harjum MUHARAM, PhD ? ? Irene Rini Demi PANGESTUTI, PhD ?
? ? Anna WIDIASTUTI, PhD Candidate ? ? ? ? Fathur ROFIQ, PhD Candidate ? ? ? ? ?
Abstract The ease of access to financial institutions leads to an increase in the number of
both consumptive and productive loans.

This increase must be balanced with the process of knowledge transfer about financial
management so that customers can manage finances well and can pay credit according
to a specified schedule. The objectives of this study are to discover factors influencing
financial literacy, and test the relationship between literacy and credit status, so that it
can become a guideline for banking policies in issuing credit. This research utilized 332
samples of credit clients in rural bank credit (RBC).

The testing was done with multinomial logistic regression. The research results reveal
that the factor which influences finance literacy is level of education. On the other hand,
income, amount of loan, and credit status do not have an influence on finance literacy.
The credit status (fluid and stalled) does not have a significant relationship towards
finance literacy.

Thus, the initial assumption that clients who have a fluid credit status will also have a
higher literacy level is not proven. There are no differences in stalled credit clients and
fluid credit clients in financial literacy. Assistant Professor, Fakultas Ekonomi dan Bisnis,
Universitas Islam Nahdlatul Ulama Jepara, Indonesia.

Associate Professor, Fakultas Ekonomika dan Bisnis, Universitas Diponegoro, Semarang,

Indonesia. Associate Professor, Fakultas Ekonomika dan Bisnis, Universitas Diponegoro,
Semarang, Indonesia. Assistant Professor, Fakultas Ekonomi dan Bisnis, Universitas Islam
Nahdlatul Ulama Jepara, Indonesia.

Assistant Professor, Fakultas Ekonomi dan Bisnis, Universitas Islam Nahdlatul Ulama
Jepara, Indonesia. Financial Studies – 3/2019 50 Keywords: financial literacy, credit
status, rural bank credit JEL Classifications: G40 1. Introduction survey conducted by the
Financial Service Authority in 2013, is divided into four criteria: 1) well literate at 21.84%,
2) sufficient literate at 75.69%, 3) less literate at 2.06%, and 4) not literate at 0.41%.

The financial literacy program that was proclaimed by the Financial Service Authority has
been frequently responded to by various spheres, whether national banking,
academicians, or various non-government organizations by making finance literacy
programs like smart behaviour programs that are carried out by banks through smart
behaviour agents divided into various regions in Indonesia.

The development of channelling banking funds in Indonesia every year has experienced
an increase, whether in public banks or community credit banks (Otoritas Jasa
Keuangan, 2017). The development of fund channelling programs by banks in Indonesia
needs to be balanced with a financial knowledge transfer process to clients, so that they
have a good understanding about managing finances and are more careful in using
finances as well as can pay their obligations as creditors.

Financial or individual literacy has substantive differences like education, age, and
gender (Rooij et al. 2011). Research conducted by Rooij et al. (2011) also revealed that
the majority of households in the Netherlands have limited financial literacy, as well as
every privatization program considers that individuals who do not have a financial
understanding will not invest in the stock market to prepare for their retirement.
Bahovec et al.

(2015) mentioned that excessive debt is a problem that endangers individual and
household financial prosperity. The research results found that a low level of financial
literacy is one of the factors that can influence debt behaviour and an increase in debt.
Research findings discovered that respondents with different levels of financial literacy
resulted in varying debt behaviour.

Thus, respondents with low finance literacy showed worse debt behaviour, such as more
consumer debt than consumers with medium and high levels of financial literacy
(Bahovec et al. 2015). Having a financial understanding is important in making financial
decisions. Research carried out by Rooij et al. (2011) found Financial Studies – 3/2019 51
that a high level of financial literacy results in a high potential for stock metinvestingand
higttplan orone’s etem period.

In a related article, Christelis et al. (2010) discovered that the tendency to invest in stocks
is greatly connected with cognitive ability, whether it is for direct or indirect stock
market participation through mutual funds and retirement accounts. Having a good
understanding of financial management is needed by company owners in developing
their companies.

Research by Kotzè and Smit (2008) found that personal finance education is very
important to help individuals in managing their financial matters effectively. Research
carried out by Eresia-Eke and Raath (2013) empirically revealed that the majority of
small businesses showed signs of growth. This research did not show that there was a
statistically sigicant ion an ’s inance eracy t overall business development.

However, owners who did not have a good grasp of finances would hire individuals who
had studied and understood about finances to help manage the o rginancial matters, so
that the business could develop well. Entrepreneurs who have good finance literacy will
not only help the company develop, but they will also easily gain access to finances
from financial institutions.

Over the years, banking access in Indonesia has experienced changes. Ease of banking
access by SMEs that was considered as non-bankable became easier due to government
encouragement through various cheap credit programs. This was a blessing for SMEs
who already had a good understanding of financial management, so that they could pay
their obligations.

Increasing the flow of funds for SMEs also had an effect on the increase of stalled credit
according to the banking data that was issued by the 2017 Financial Protection
Authority. This increase in stalled credit must be managed, in order that banks can
remain in a safe condition. This needs related research on credit that is given to bank
clients. 2. Literature review 2.1.

Measuring financial literacy Understanding financial literacy is very useful in making

consumer financial decisions, whether it is collectively or individually, and also in facing
market competition (Hastings et al. 2012). Measuring financial literacy basically
combines conceptual and operational aspects, including the awareness, knowledge, and
ability of an Financial Studies – 3/2019 52 individual or society that are the subjects in
accessing a financial institution to do a budgeting activity, manage savings, take out a
loan, or make investments according to the level of financial understanding one
possesses (Atkinson and Messy 2011).
Lusardi and Mitchell (2011) stated that it is important to evaluate how people
understand about finances, but in practice it is difficult to explore how individuals
process economic information and make decisions about household finances. Lusardi
and Mitchell (2011) designe d eps mtUnitStsociety’s inancial literacy by using the four
main principles of simplicity, relevance, brief, and ability in differentiation.

According to the Australian Securities and Investments Commission - ASIC (2011), in

understanding in-depth and knowing the leveofan ’s inancial eracy,a ark includes one’s
nowledgoftvalue good tprscale one’s life; budgeting, savings, and how to manage
money; credit management, the importance of insurance and protection against risks;
investment basics; retirement; retirement planning; taking advantage of purchasing and
comparing products; knowing where to go to look for advice and acquiring additional
guidance and support; as well as how to recognize the potential for conflict in usage
(priority).

Meanwhile, according to the Financial Service Authority (2014), Indonesian society’s

inancial eracy di vided into four parts, which are well literate, sufficient literate, less
literate, and not literate. 2.2. Relation between financial literacy and bank credit clients
The level of financial literacy that a person has will influence the amount of credit taken
from a bank/ financial institution. Financial litindicates individual’s vel st owards
fconceptand can seen rone’s y o pret financial data accurately (Gathergood, 2012).

An SME entrepreneur is fwitvery decision aktachieve in business. For instance, an

entrepreneur must be able to decide saving and o one’s Underandingf literacy becomes
crucial in making decisions related to financial matters. As Lusardi and Mitchell (2006)
stated that those who have a high financial literacy and basic understanding of financial
concepts can support their business expansions well.

Financial literacy improves an in dividualabilitt independently arre one’s perinances,her

Financial Studies – 3/2019 53 witone’s sonal or aranghousehold ems, including in
managing loans. Bahovec et al. (2015a) detected individual financial literacy users and
analysed the relationship between different levels of financial literacy and
socio-demographic characteristics.

Financial literacy reveals how an individual understands financial concepts and shows
the ability to interpret financial data accurately. Having extensive knowledge about
finances will affect the success in overcoming problems to access and manage loans. For
example, financial literacy can assist in decision making such as ming paymime.
Ganagent can imove one’s credit value for potential loans to support the business
performance (Adomako and Danso 2014). Bosma and Harding (2006) explained that
several companies have failed due to a lack of financial literacy, inefficient business
acquisitions, and negligence of entrepreneurial activities.

Various research supports the viewpoint that entrepreneurs who do not consider age
will not be able to consistently do decision making activities by considering resource
income, allocation, and utilization. In general, these activities have financial
consequences. Therefore, to be effective, an entrepreneur must have a sufficient level of
financial literacy.

Financial eracy a ofeducation improvingone’s potential financial decisions in the

household. Eventually, it will increase savings and prosperity as credit clients from a
financial institution. From an explanation by Cole et.al. (2009), with data obthrh tor’s ta
Finance wit sample of 3,360 households, Indonesia received a score of 52% for
understanding the questions put forth based on the methodology of Lusardi and
Mitchell (2006). This enables financial literacy or an understanding of financial
knowledge in Indonesia to be better. 2.3.

Interrelatedness of financial literacy and loan accessibility Having financial literacy for a
business owner or business manager is crucial to make company capital structure
decisions. The importance for small and medium sized businesses is that it reflects the
low agency costs that are used for loan source diversification to improve the business
asset value. Nkundabanyanga et.al.

(2014) discovered that many SME owners have limited information about bank products,
low personal financial management, weak knowledge, a lack of abilities, and less
expertise in finances, which makes the budgeting, Financial Studies – 3/2019 54 record
keeping, and financial planning become weak. This research used small and medium
entrepreneurs in Uganda.

The financial literacy and management ability were also very low, so that requests for
financial products were also small. Access to loans for small and medium business
owners is determined by financial literacy. Receiving access to loans for businesses by
having opportunities and entrepreneurs who are full of creative ideas will help improve
revenue distribution and business growth (Nkundabanyanga et al., 2014). Loan access is
one of the ways to improve the SME business capital structure.

Possessing a capital stuctis imant ion or company’s rh development, such as SMEs that
can be supported by manager/ owner characteristics. In the condition where it is difficult
to gain access to financial resources, financial literacy is beneficial for business growth
and competition, so that it facilitates SMEs in accessing funds from financial institutions
(et., .

The condition which facilitates a finance source in a business environment is by

developing a long-term relationship with a bank and being supported by good
knowledge to evaluate the benefits and drawbacks of the financial resources. Loans are
a financing source in adding an asset and as a revenue source for a financial institution
or bank. t e issued by on society’s s.

A low level of financial literacy will be related with low savings in the household. This is
reported by households as being the main factor in engaging borrowing (Ombongi,
2015). An individual with a low literacy level can borrow without considering the size of
the loan, so that the burden of debt and interest rate that will be paid can experience
outstanding payments, so that it makes the financial institution have low performance.

Financial education teaches about how knowledge, abilities, and ethics are needed to
adopt a good money management practice by channelling, receiving, saving, borrowing,
and investing money appropriately. This can assist in adding loans from clients and
reducing the form of debt and outstanding balance, so that the financial institution
performance can also be improved (Ombongi, 2015).

Regarding the level of financial knowledge, especially about loans towards financial
institutions or banks, entrepreneurs need to know the interest rate level that is offered
by the bank. Besides knowing the interest rate level, they also need to know how to
make debt payments, in order that the bank does not channel more funds than is
Financial Studies – 3/2019 55 needed which stalls the credit (Bengi and Njenje, 2016).

Several banks allocate resources to support training for business clients to improve their
financial record keeping and credit management ability. Financial literacy is an initial
source of knowledge to measure loans that originate from initial funds that are used to
build a business (Mutegi et.al., 2015). This study focuses on the effect of the level of
customer literacy on credit status.

Credit status of bank customers shows the ability of customers to pay credit instalments.
The study wants to examine the effect of the level of financial literacy on the credit
status, where no previous research had found the effect of financial literacy on the credit
status of customers. 3. Data and methodology Research design: The research design
used in this study is quantitative analysis.
The researcher collected information through questionnaires and direct interviews with
clients of rural bank credit (RBC) in Central Java, Indonesia. There were 332 RBC client
samples taken. The study aims to analyse the influence of the level of financial literacy
on education, the influence of the level financial status on income, the influence of the
level financial status on amount of loan, and the influence of the level financial status on
credit status on RBC in Central Java.

The analysis in this research used a Logistic Regression Analysis model, so that the
predictor variables (level of education, income, amount of loan, and credit status) were
known, and a real influence on the level of finance literacy as a response variable was
seen. Besides that, a further analysis in the form of a correlation analysis was done to
find out the tendency or strong relationships between variables (financial literacy,
education, income, and size of loan) with the level of credit return fluidity.

This correlation analysis was done to support the previous logistic regression analysis
results. Research model: The financial literacy of rural bank credit clients used indicators
that were issued by the Financial Service Authority and research by Chen and Volpe
(1998), by looking at the averages of the correct answers that were then grouped into
four categories, including not literate (< 30%), less literate (30% < 60%), sufficient
literate (60% < 80%), and well literate (>80%) to facilitate the observations.

The loan amounts were used as a predictor variable because individuas y flitwill luence
Financial Studies – 3/2019 56 budgeting, managing loans, or doing investments
(Atkinson and Messy, 2011). The research variables used were financial literacy (FL) as
the dependent variable and education (Edu), income, Amount of loans (AoL), and credit
status (CS) as independent variables. The model that was used is: FL = ...(1) Explanation:
Li = Response variable, here Financial Literacy (1= Not Literate, 2 = Less Literate, 3 =
Sufficient Literate, 4 = Well Literate); 0 = Constant; 1 = 1st predictor variable coefficient;
2 = 2nd predictor variable coefficient; ß 3 = 3rd predictor variable coefficient; ß 4 = 4th
predictor variable coefficient; Edu = 1st predictor variable, here the level of education;
Income = 2nd predictor variable, here income; AoL = 3rd predictor variable, here
amount of loan; CS = 4th predictor variable, here credit status. 4.

Results This research used a credit client financial literacy indicator by asking about their
understanding of general finance, insurance, banking, capital model, simple calculating,
and client financial attitude. The general finance literacy asked about investments,
inflation, and client financial management. The results in Table 1 reveal that the
education, income, and credit status variables have a relationship with the level of
financial literacy.
The education variable in Table 1 reveals that a college or university degree education
level is considered the highest well literate compared with other education levels at 37
percent. The highest less literate literacy level is at the elementary school level. This
shows that thigtlevel clienteducatlevel,tbetttf literacy level will be.

The client income variable indicates that a client income level of more than 25 million
has a well literate financial literacy level of 60 percent. This reveals that clients who have
a good financial understanding will find it easier to produce high incomes. The client
loan amount variable for rural bank credit in Table 1 displays that the majority of them
have a sufficient literate level of 59 percent.

The loan amounts with the highest well literate individuals are clients who have loans of
more than 50 million. The level of financial Financial Studies – 3/2019 57 literacy from
each of the loan amount levels is almost the same so that clients who borrow 1-5 million
are distributed with about the same finance literacy level as the larger loan amounts.

This means that there is no connection between clients with small or large amounts of
loans and the level of financial literacy. The credit status variable reveals that the
majority of the clients have a sufficient literate at 59 percent. Credit clients with a stalled
status mostly have a sufficient literate level of 79 percent, and 4 percent of credit clients
have a well literate level.

The condition above is the same as credit clients with a fluid status, as the majority of
them have a financial literacy level of sufficient literate at 57 percent, and 19 percent of
credit clients with a fluid status have a well literate level. There is relatively no difference
in the fluid or stalled credit status. The distribution of financial literacy levels in fluid
clients and stalled clients are similar so that there is no relationship between the
financial literacy level and the client credit status.

Table 1 Cross tabulation in the finance literacy level Less Literate Sufficient Literate Well
Literate Total Chi- Square Freq % Freq % Freq % Gender 76 23 196 59 60 18 332 - Male
40 20 120 61 38 19 198 - Female 36 27 76 57 22 16 134 Education 76 23 195 59 61 18
332 30.45* - Elementary school 32 40 42 52 7 9 81 - Middle school 34 19 113 64 30 17
177 - High school 3 9 22 65 9 26 34 - College or University 7 18 17 45 14 37 38 - Master
to up 0 0 1 50 1 50 2 Income 76 23 196 59 60 18 332 20.534** - 1-5 million 62 25 147 59
42 17 251 - 6-10 million 8 17 32 68 7 15 47 - 11-15 million 3 25 5 42 4 33 12 Financial
Studies – 3/2019 58 Less Literate Sufficient Literate Well Literate Total Chi- Square Freq
% Freq % Freq % - 16-20 million 0 0 5 83 1 17 6 - 21-25 million 1 17 5 83 0 0 6 - >25
million 2 20 2 20 6 60 10 Amount of loan 76 23 196 59 60 18 332 6.629 - <=10 million
47 24 118 59 35 18 200 - 11-20 million 15 27 31 56 9 16 55 - 21-30 million 5 19 18 69 3
12 26 - 31-40 million 3 19 9 56 4 25 16 - 41-50 million 1 11 7 78 1 11 9 - >50 million 5
19 13 50 8 31 26 Credit status 76 23 196 59 60 18 332 4.982*** - Stalled 4 17 19 79 1 4
24 - Fluid 72 23 177 57 59 19 308 P-Value: *p<0.001, **p<0.05, ***p<0.10 Table 2
conveys that the -2 log likelihood experienced a reduction in the chi-square of 52.169
and the p-value of 0.000 when the independent variable was added.

This reveals that the model with the independent variable provides better accuracy to
predict the financial literacy level. Table 2 Model fitting information Model Model Fitting
Criteria Likelihood Ratio Tests -2 Log Likelihood Chi-Square df Sig. Intercept Only
330.546 Final 278.377 52.169 10 .000 Table 3 shows that the overall model prediction
ability is 62.3 percent.

Financial Studies – 3/2019 59 Table 3 Classification Observed Predicted Less Literate

Sufficient Literate Well Literate Percent Correct Less Literate 10 66 0 13.2% Sufficient
Literate 2 193 1 98.5% Well Literate 1 55 4 6.7% Overall Percentage 3.9% 94.6% 1.5%
62.3% Table 4 displays the contributions of every independent variable towards the
model.

The variables which contribute towards the model is education, while the other variables
do not contribute to the model. These research results convey that the variables which
have a relationship towards finance literacy is the education level variables. Meanwhile,
client income, amount of loan, and credit status are not connected with financial literacy.

Table 4 Likelihood ratio tests Effect Model Fitting Criteria Likelihood Ratio Tests -2 Log
Likelihood of the Reduced Model Chi-Square df Sig. Intercept 305.144 26.767 2 .000
Education 298.992 20.615 2 .000 Income 281.862 3.485 2 .175 Amount of loan 278.826
.449 2 .799 Credit status 283.559 5.182 2 .075 The chi-square statistic is the difference in
-2 log-likelihoods between the final model and a reduced model.

The reduced model is formed by omitting an effect from the final model. The null
hypothesis is that all parameters of that effect are 0. 5. Discussion The research findings
show that the education level is one of the factors that have a relationship with financial
literacy. The education level of the society shows a level of understanding of various life
issues, including financial management.

These results are in line with Agarwal et al., (2015); Alsemgeest, (2015); and Dwiastanti,
(2015) that the high level of one's education is positively and significantly related to the
cognitive aspects of financial literacy. Financial Studies – 3/2019 60 In this study, 18
percent of respondents were well-literate.
It means that in general customers with elementary to postgraduate education
understand investment as well as their benefits and risks to be accepted, able to
manage personal finances, and understand the use of credit cards. All customers with
elementary school to postgraduate education are at a sufficient-literate level. In
addition, lower levels of education are also dominated by sufficient-literate customers.

However, there are also many less-literate customers, that is, almost a quarter of them.
They only know financial institutions and their products and services without the skill to
use them. The results of this study also show that none of the customers included in the
category of not-literate.

Moreover, the results also document the level of financial literacy of Rural Bank
customers, which is mostly at the sufficient-literate level and this is owned by almost all
levels of education. Thus, customers with low education tend to have poor financial
literacy, even though it will harm them. Different results can be seen in income, loan
amount, and credit status, where the three do not have an influence on the level of
customflit his suppored trs statistics from the calculation of Likelihood Ratio Tests which
show 0.175 that income levels have no relation to the financial literacy level.

Each individual may have a condition that contradicts the benefits of financial literacy,
by managing finances or looking for additional sources of funds to improve personal
well-being either personally or family. Customers with high income reaching 25 million
tend to be between the less-literate and sufficient-literate levels. Indonesia is ranked
fourth in the world with the highest level of consumer optimism.

This consumer optimism is about the prospect of local employment, personal financial
conditions and the desire to shop. This consumptive index shows that the Indonesian
people in general, including the Central Java community, tend to need additional funds
for their daily needs. With the existence of consumer loans provided by the Rural Credit
Banks, this further increases their consumption and this contrasts with the benefits of
financial literacy. Therefore, the amount of one's income does not affect the level of
financial literacy. This study is in line with Agarwal et al.,

(2015) that the amount of income does not depend on the financial literacy level.
Financial literacy can be a key to success in making financial decisions and in taking
credit (Gathergood, 2012 and Hastings et al., 2012). However, this study shows different
results that there is no Financial Studies – 3/2019 61 relationship between the amount of
credit and understanding of financial literacy.

It might happen because respondents chose to trust financial advisors or someone who
had better financial experience as expressed by (Disney, Gathergood, and Weber, 2015).
The results of this study support researches of (Villa and Diagne, 2012) and Agarwal et
al., (2015).. Various life factors may cause respondents to take large amounts of loans
even though their financial literacy is bad.

Life factors include daily needs, divorce, and layoffs. Therefore, they need additional
funds by borrowing money from banks to support their daily lives. The average number
of loans taken by respondents in this study is less than ten million (<10 million).
Regarding the number of loans, one important thing is the type of collateral.

Therefore, this study proves that the high or low credit loans by respondents do not
affect the level of financial literacy as long as the respondent has collateral which can be
used to take large amounts of loans. Large levels of debt that are not based on financial
management knowledge can be caused by household needs or even marital status, and
lifestyle that cannot be linked to the level of education or the amount of income.

This is commonly called the symptoms of financial depression as described in the study
of (Berger, Collins, and Cuesta, 2015). Loans in the amount of 41-50 million are included
in the Sufficient Literate category with a score of 77.8%. With a sufficient literate
condition, respondents are brave enough to take a large amount of credit.

This might occur because the collateral factor owned is one of the successes of the
respondents in getting a large amount of credit beyond the ability to manage credit and
the success of credit payments. This study found that credit status has a relationship
with financial literacy. The findings of this study can be taken into consideration by
banks in providing credit to customers. Credit and debt management are interrelated
activities.

Bad debt management will result in the LDR (Loan to Deposit Ratio) of financial
institutions, in this case the Rural Banks (BPR), exceeding the safe limit of the LDR value
determined by Bank Indonesia (BI). Respondents who answered questions related to
banking literacy scored high; 75 percent of customers are in the Well-Literate category
but they have credit status as stalled credit customers. Barua dan Sane (2014) shows
that literacy rates cause a reduction in the number of days and months in late credit
payments.

Therefore, it is necessary in increasing financial education to improve the ability of

customers who have low literacy levels. The Financial Studies – 3/2019 62 results of this
study document that 59 percent of Indonesian bank credit customers are at sufficient
literate level and 79.2 percent of them are customers with bad credit.
This figure is quite high because more than three quarters of customers are stalled
credit even though they have good financial literacy. Thus, whatever the customer's
credit status, fluid or stalled, is not affected by the customer's financial literacy level. 6.
Conclusions Bank lending to small and medium-sized communities has become a trend
of banking business today.

Therefore, there must be a real effort by banks to provide an understanding of financial

management to their customers so there is no increase in stalled credit. Low financial
understanding can lead to errors in financial management. The findings of this study
indicate that credit status (fluid and stalled) does not have a significant relationship to
financial literacy.

Therefore, there is no difference between stalled credit customers and fluid credit
customers in financial literacy. The average level of financial understanding of credit
customers is at the level of sufficient literate. This is in accordance with the customer's
financial attitude where the average respondent has a good attitude in financial
management.

Other findings show that education and religiosity have significant relationships towards
financial literacy. Thus, respondents who have a higher level of education show a better
level of literacy. The results of this study support previous researches where the higher
education has a significant positive relationship to the cognitive aspects of financial
literacy.

Acknowledgments Appreciation is given to the Directorate of Research and Community

Service, the General Directorate of Research Improvement and Development, the
Indonesian Ministry of Research, Technology, and Higher Education, which has provided
funding with the number of decree 3/E/KPT/2018 and LPPM Unisnu Jepara Indonesia.
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