Analyzing the relationship between financial literacy and financial inclusion by microfinance banks in developing countries: social network theoretical approach

Abstract

PurposeThe main purpose of this study is to establish the mediating effect of social network in the relationship between financial literacy and financial inclusion of the poor by microfinance banks in developing countries.Design/methodology/approachThe study adopted a cross-sectional research design and data were collected from the poor who resides in rural Uganda. Structural equation modelling (SEM) through analysis of moment structures (AMOS) was used to analyze the data. Bootstrap approach with 5,000 samples was run to establish the mediating effect of social network in the relationship between financial literacy and financial inclusion of the poor by microfinance banks in developing countries.FindingsThe results showed that social network significantly and positively mediate the relationship between financial literacy and financial inclusion of the poor by microfinance banks in developing countries. In addition, financial literacy also has a direct significant and positive effect on financial inclusion. Overall, the findings suggest that the presence of social network fully mediate the effect of financial literacy on financial inclusion of the poor by microfinance banks in developing countries.Research limitations/implicationsThis study adopted a cross-sectional research design and data were collected using a semi-structured questionnaire. Future studies could adopt longitudinal research design to establish the dynamic characteristics of the samples under study over time. Besides, this study collected data from only poor households who were clients of microfinance banks located in rural Uganda. It ignored the other section of the population who were not the poor. Therefore, future studies could use the other section of the population who are clients of commercial banks.Practical implicationsThe advocates of financial literacy and managers of microfinance banks in developing countries should ensure using existing local structures such as community and village associations to conduct financial literacy training. The village associations help in mobilizing members who are close-knit based on the existing societal ties that can be used as a channel for disseminating vital financial literacy information. Indeed, financial literacy workshops, seminars, and business clinics can be easily conducted to individuals who are members of the village associations.Originality/valueThis paper integrates social network theory in the relationship between financial literacy and financial inclusion of the poor by microfinance banks in developing countries. Social network acts as a conduit through which financial knowledge and skills flow to increase the scope of financial inclusion of the poor in developing countries.