No.17 Financial Literacy Among Microfinance Borrowers: Its Importance and Determinants from a Household Survey in Cambodia

Financial inclusion can play an important role in reducing poverty and improving people’s living standards in developing countries. Microfinance has significantly contributed to financial inclusion in Cambodia, but issues like the high debt burden among borrowers, especially those with inadequate financial literacy, have emerged. Borrowers with inadequate financial literacy often underestimate loan repayments and borrow at high interest rates for consumption and other unproductive uses. Understanding the level of financial literacy and the factors that influence it among microfinance borrowers in Cambodia is important for policy making. Using data and information from a household survey in 2021, our study examines the financial literacy landscape among microfinance borrowers in Cambodia and explores the factors influencing their financial literacy levels, focusing on personal and household characteristics. The findings provide insights for enhancing financial literacy and financial inclusion in Cambodia. From our analysis, we confirm (1) the importance of financial literacy in reducing access to informal finance, (2) a positive correlation between years of general education and financial literacy, (3) an association between poor households and lower financial literacy, and (4) a positive relationship between higher social capital (the social network within a community) and higher financial literacy.

Key words: Financial literacy, Social capital, Microfinance