Does financial literacy “grease the wheels” of the loans market? A note

Abstract

PurposeWhat is the impact of financial literacy on the lending activity of banks? Based on the results of the S&P Global FinLit Survey for an extensive sample of countries, this paper aims to provide the first global test for the impact of country-level financial literacy on the lending activity of commercial banks.Design/methodology/approachThe authors use data on financial literacy by country from the S&P Global FinLit Survey that was completed in 2014 and lending activity and macroeconomic control variables data from the World Bank from 2015 to 2017 to estimate the cross-sectional effect of financial literacy on the importance of loans and of non-performing loans, using different estimation methods.FindingsThe results show that, first, financial literacy favors lending activity, contributing to enhance the importance of credit in the economy. Second, financial literacy prevents bad loans from building up, thus reducing credit risk and favoring the quality of the credit portfolio of banks. These results are robust to several controls for macroeconomic conditions and the quality of institutions. They are also robust to different estimation methods.Research limitations/implicationsThe evidence of the positive (negative) impact of population financial literacy on the quantity (poor quality) of loans suggests that the efforts to enhance the financial literacy of the population contribute to the sustainable development of the financial sector and economic growth.Originality/valueThe paper extends to an international and country-level the available evidence of the consequences of the existence (or lack of) of financial literacy for the lending activity of commercial banks, focusing on the amount of credit granted and the quality of such credit. Thus, the paper provides an exploratory analysis of the impact of country-level financial literacy on the lending activities of commercial banks.