Financial Literacy and its Effect on Loan Repayment Performance. The Case of Weltane Ambo Saccos Union of West Shoa Zone, Oromia Regional State, Ethiopia

Master's Thesis, 2021

103 Pages


Table of Contents


List of Tables

List of Figures


1.1 Background of the study
1.1.1 Background of Weltane Ambo SACCOs Union
1.2 Statement of the problem
1.3 Objectives of the study
1.3.1 General Objectives
1.3.2 Specific Objectives
1.4. Research Questions
1.5 Significance of the study
1.6 Scope of the study
1.7 Limitation of the study
1.8 Organization of the paper

2.1 Theoretical reviews
2.1.1 Financial literacy
2.1.2 Importance of financial literacy
2.1.3 Findings on financial literacy
2.2 Cooperative Education
2.3 Saving and credit cooperatives
2.4 Effect of finance literacy on loan repayment
2.5 Loan Default Rate in SACCOs
2.6 The 5 Cs of Credit
2.7 Empirical reviews
2.8 Conceptual framework

3.1 Description of The study Area
3.2 Research design
3.3 Study area and population
3.4 Source and nature of data
3.5 Determination of sample size
3.7 Sampling techniques
3.8 Data collection instruments
3.9 Data collection procedures
3.10 Data Analysis
3.10.1 Multiple Regression Model Specification

4.1 The results of descriptive analysis
4.2 Financial literacy and Loan repayment
4.3 Focus Group Discussion
4.4 Correlation Analysis
4.5 Regression Analysis
4.6 Discussion
4.6.1: Influence of finance literacy on loan repayment
4.6.2: Influence of Budgeting literacy in loan repayment
4.6.3: Influence of debt management literacy on loan repayment WASACOsU




APPENDIXES II Questions for Focus Group Discussion


Although this work is a result of my own effort, I wish to thank God who has given me the will and the guidance throughout this time. I extend sincere gratitude to my competent professional Advisor Getachew Gobena (Asst. Professor) who has guided me all this time in all the stages of my research. May God bless you sir. I would like to thank all my lecturers at Ambo University for their valuable support and encouragement.

Special thanks also go to my friends and classmates of Ambo University for their idea sharing; my beloved family for your love and encouragement throughout the research process, and for those whose names have not appeared here, I will always remember your contributions. Your contributions are engraved deep in my heart and you will be in my mind always THANK YOU and God bless you all.

I am indebted to Weltane Ambo saving and credit Cooperative Union workers and members at each level for their assistance during the data collection time. Without their cooperation the data would not have been collected in time.

List of Tables

Table 1. Target Population

Table 2. Back ground of the respondent

Table 4. Members respond on Factor structure of loan repayment

Table 5. Respondents’ responses on Weather loan utilization and repayment are Effect or not effect?

Table 6. Respondents response on their SACCOs Activity

Table 7. Respondents Response on Their SACCOs loan Request

Table 8. SACCOs strategic alliance with other institution

Table 9. Possession of Financing Skill

Table 10. Members respond on their SACCOs loan

Table 11. Status of Members on SACCOs repayment

Table 12. Budget literacy of respondents

Table 13. Respondent’s response on SACCOs budgeting activity

Table 14. Possession of status of respondents budgeting Literacy of SACCOs

Table 15. Respondents respond on importance of financial literacy and personal financial planning

Table 16. Experience of respondents

Table 17. Respondents respond on whether their SACCOs having mechanism for forecasting profit and losses and engaging in the process of budgeting normally

Table 18. Possession of Debt management literacy

Table 19. Extent to which debt management skills affect loan repayment behaviour

Table 20. Respondents Respond on their some attitude and Behaviour statements

Table 21 . Correlation between finance skills and loan repayment

Table 22 Correlation between Budgeting literacy and loan repayment

Table 23 Correlation between Debt management literacy and loan repayment

Table 24 model summary

Table 25. ANOVA

Table 26. Model Coefficients

List of Figures

Figure 1 . Conceptual framework

Figure 2. Map of the study area

Figure 3. Respondents Respond on having pass book from their SACCOs

Figure 4. Respondents respond on investment

Figure 5. Does Loan duration affect the payment of loan?

Figure 6. Indication of loan duration affects loan repayment

Figure 7. To what extent the SACCOs having Strategic alliance with other institution

Figure 8. Respondents respond on financial literacy training

Figure 9. Respondents’ knowledge on Budgeting steps

Figure 10. Respondent’s knowledge on interest rate

Figure 11. Financial Recording

Figure 12. Knowledge of respondent on interest rate

Figure 13. Respondents respond on their current debt position


INFEInternational Network on Financial Education

ICA..International Cooperative Alliance

LRLoan repayment

MFL.Members Financial Literacy

NGOs...Non-Governmental Organization

OECD. Organisation for Economic Co-operation and Development

SACCOS.Saving and Credit Cooperatives

WASACCOsU…...….Weltane Ambo Saving and Credit Cooperatives Union


Financial literacy is the possession of knowledge, skills and attitudes that enable an individual to use money effectively by making sound informed financial decisions, it plays a critical role in Savings and Credit Co-operative Societies (SACCOS). SACCOS are vital financial institutions that encourage thrift to give loans to members; however, Loan Repayment (LR) poses a threat to SACCOS’ sustainability. The main objective of this study was to analysis effect of financial literacy on loan repayment. Specifically, the study - (i) examine the effect of financial budgeting literacy on loan repayment in the study area. (ii) Evaluate the effect of debt management literacy on loan repayment in the study area. (iii) Assess the current loan repayment status of WASACCOsU. The study adopted descriptive quantitative research design. A sample of 116 from a population of 319 which comprised of Weltane Ambo SACCOs Union was calculated using Yamane’s formula. Purposive and simple random sampling techniques were used in choosing population and issuing questionnaires respectively. A survey, interview and Focus Group Discussions (FGDs) were data collection methods. Multiple regressions and Correlation were used to analyse quantitative data while qualitative data were analysed using table, frequency, graph and charts. Data was analysed using SPSS software Version 20 and presented in form of tables and graphs. Correlation and regression analysis techniques were used to study the relationship and the effects of financial literacy factors on loan repayment among WASACCOsU. The findings revealed a high positive correlation between member attitude, budgeting and debt management literacy and loan repayment. Moreover R-squared was 78.2% meaning that the financial literacy factors accounted for greater percentage of loan repayment variations. The study recommended that SACCOs should initiate more financial literacy education to members and training to committee members and employees to reach all members and encourage all members to attend such trainings. The SACCOs should also employ high qualified trainers to offer quality training to the members. The study recommendations are resourceful to both private and public sectors especially local governments and WASACCOsU to come up with strategic policies that will encourage loan repayment among SACCOs.

Keywords : Budgeting Literacy, Financial Literacy, Loan Repayment, WASACCOsU.




Chapter one comprises the research background, the problem statement, research objectives and lastly is the study questions of the research. Additionally, the chapter discusses the significance as well as the limitations and the scope of the research.

1.1 Background of the study

Savings and Credit Cooperatives (SACCOs) in Ethiopia are playing an active role both in rural and urban areas. Their numbers has increased from time to time and they considered having immense potential in financing the short term loan (Tesfamariam, 2015).SACCOs are unique financial institutions operating in the financial market. Their uniqueness is brought about by the fact that members come together voluntarily; they put their savings in a pool which then enables them to access loans to solve their individual needs. Saving and credit cooperatives societies (SACCOs) are form of cooperatives offering financial services in form of loans but loan repayment poses a threat. SACCOs improve member’s financial knowledge through members’ education on member’s financial literacy (MFL). (Metto,2020).

According to Hailekiros Nigus Adhana (2020) the terms financial education, financial capability, and financial literacy are interchangeably used in the literature, and so are the reasons for not having a concise definition and concept. Correspondingly, many other studies itemized different concepts as dimensions of financial literacy. Moreover, another most recent study framed financial literacy in terms of three aspects; financial knowledge, financial behaviour and financial attitude.

Financial literacy remains an interesting in both developed and developing economies, and has elicited much interest in the recent past with the rapid change in the finance landscape. It helps in empowering and educating consumers so that they are knowledgeable about finance in a way that is relevant to their lives and enables them to use this knowledge to evaluate products and make informed decisions. Financial literacy facilitates the decision making processes such as payment of bills on time, proper debt management which improve credit worthiness of potential borrowers to support livelihoods, economic growth, sound financial systems and poverty reduction (Wachira, 2012)

Financially literate people are able to plan or budget, they at least have a trace of their financial activities because of their book keeping literacy, they are able to manage debts to avoid bad debts and prevent non repayment of loans and also have the courage to go for financial negotiation when they feel that they need better terms from the financial providers. Hence, they greatly participate in the market (Wanjiku, 2017)

Financial literacy on the other hand is the ability to apply the knowledge and make effective decisions on money management, book keeping budgeting and negotiation without fear. These aspects enable ones to invest wisely. A financially literate person is the one who has the financial knowledge, skills and confidence required in making financial decisions that are of key important to them (Wanjiku, 2017).Combination of awareness, knowledge, skills, attitude and behavior necessary to make sound financial decisions and ultimately achieve individual financial wellbeing” (OECD INFE, 2011).

Lack of financial literacy can act as a barrier to saving: if people do not manage their money well they may not have enough left to save after day-to-day expenses, or may accumulate debt they cannot repay. Lack of financial skills also means people do not plan ahead, or understand how financial products can help meet savings goals.(Tuyisenge et al., 2015).This project try to analyse the effect of financial literacy on the repayment performance in case of Weltane Ambo SACCOs Union.

1.1.1 Background of Weltane Ambo SACCOs Union

Weltane Ambo SACCOs was found in West shoa zone Oromia regional state, Ethiopia. It was organized in 2003 E.C. The main objectives of this SACCOs was increase the members finance to develop them by participating them in investment, increase saving culture of members and studying important projects for members to help them. Its vision was by 2020 the origin of investment and capital for the Primary SACCOs found in the Union and made members whose life is proper. Know time the union maintaining the activities like compulsory saving, voluntary saving and children saving from members. It serve the members by giving short term , medium term and long term loan for members the Union give insurance service. For primary SACCOs and individual members; giving training for committee members.

1.2 Statement of the problem

According to Tesfamariam(2015) from many challenges of SACCOs one is lack of financial education. Lack of financial literacy can act as a barrier to saving: if people do not manage their money well they may not have enough left to save after day-to-day expenses, or may accumulate debt they cannot repay. Put another words, lack of financial skills also means people do not plan ahead, or understand how financial products can help meet savings goals and attempts may be limited by their lack of or narrow knowledge. In other ways, the poor loan repayments have a harmful impact on institutions capital, earning as well as in realizing its objectives and may even lead to a financial institution collapse. For instance, failure to manage loan repayment performance results in losses and high delinquency management costs (Benson et al., 2016)

Gogo & Oluoch (2017) by the effect of savings and credit co-operative societies’ financial services on demand for credit by members - a survey of deposit taking SACCOs conclude that It is also necessary that SACCOs society share financial knowledge by offering advisory services, especially to members who may have inadequate financial training. In this regard, it is not surprising that without sufficient financial knowledge; customers of Ambo SACCOs Union members even might earn a negative return on their capital and of course unable to repay their loan .

Mohamad Fazli Sabri and Nurul Farhana Zakaria (2015) in their study on young Malaysian individuals find that respondents who had moderate levels of financial literacy, financial capability and financial well-being scored high in effort, money attitudes and had a low level of financial strain. Demographic characteristics such as gender, household income, financial literacy, retention-money attitude, financial strain and financial capability had significant influence on financial wellbeing. However, they don’t use finance, budget and debt management variables to explain effect of financial literacy on loan repayment performance.

This study area also face financial literacy problems on loan repayment performance which includes loan default, budgeting, non-repayment ,debt management , knowledge on interest rate etc. Hence, this study focus and attempt to analyse the effect of financial literacy on loan repayment. As discussed by (Wanjiku & Muturi, 2017) there was negative relationship between financial literacy and loan repayment. There was significant and negative relationship between financial literacy and loan repayment. But this research was not on SACCOs Union. The aim of this research was to see the effect of financial literacy on loan repayment in the study area by using independents like debt management, budgeting and finance literacy.

This in itself is a problem to the economy itself since SACCOs may not have enough funds to issue to their clients and help in the economic development. The growth of these SACCOs is also threatened by non-repayment since they may not be in a position to issue loans and even when the problem is prolonged these SACCO Union may fail to raise enough funds for the working capital. Even though, some studies have been conducted related to financial literacy in other country, not much research has covered the effect of financial literacy on loan repayment in the study area even in Ethiopia SACCOs more. Therefore; this study was fill the gap on analysis of financial literacy and its effect on the loan repayment of Weltane Ambo SACCOs Union.

1.3 Objectives of the study

1.3.1 General Objectives

The main objective of the study was to assess the effect of financial literacy on loan repayment performance in case of Weltane Ambo SACCOs Union.

1.3.2 Specific Objectives

The specific objectives will include;

1. To examine the effect of financial budgeting literacy on loan repayment in the study area.
2. To evaluate the effect of debt management literacy on loan repayment in the study area.
3. To examine effect of finance literacy on loan repayment in the study area.
4. To assess the current loan repayment status of WASACCOsU.

1.4. Research Questions

1. How debt management literacy influence on loan repayment in WASACCOsU?
2. To what extent does budgeting literacy affect loan repayment in the study area?
3. What is the current loan repayment status of WASACCOsU?
4. What is the status of financial literacy of WASACCOsU?

1.5 Significance of the study

The study has several significances, for the SACCOs in identifying effect of financial literacy on loan repayment performance and for the members to understand about their financial knowledge on their saving and loan repayment. For others the project findings and recommendation may be helpful for further research. The study will be important to the academicians and researchers who can use it as a springboard for other researches/studies. It gives guide lines for policy makers, SACCOs and stakeholders about existing financial literacy and its effect on loan repayment performance. It helps institutions to use as inputs for preparing training for their employees and members of the society.

1.6 Scope of the study

Geographically the study was conducted in Weltane Ambo SACCOs Union. Accordingly this study covered 5 SACCOs from the Weltane Ambo SACCOs Union because it is impossible to cover all SACCOs due to time and financial constraints. This research was carried out to investigate if financial literacy could be more successful in helping SACCOs members (Weltane Ambo SACCOs Union) manage well their finances and be able to repay the loan they take from SACCOs. The study was designed to analyse financial literacy and its effect on loan repayment in Weltane Ambo SACCOs only. The research involves SACCOs experts and borrowers to get complete information.

1.7 Limitation of the study

The research was limited mainly due to geographical, temporal and content scope. Geographically the study covers only Weltane Ambo SACCOs Union and may not help in making clear exploration of the results to other parts. The study was not completed without confronting limitation during the study. The study is limited to specific SACCOs those are five sample selected Primary SACCOs of Weltane Ambo SACCOs Union only. This study may not be guaranteed to cover beyond the study area because of the lack of finance. And it only covers the analysis of financial literacy and its effect on loan repayment in the study area.

1.8 Organization of the paper

The study was cover five chapters. The chapter one included introduction part, background of the study, statement of the problem, objective of the study, research question, hypothesis testing, significance of the study, scope of the study and limitations of the study. The chapter two contains the literature review and in the chapter three about the research methodology of this study. Chapter four contains Data analysis and interpretations part and chapter five is about Findings conclusion and recommendation.




This section comprises the analysis of existing literature concerning topic of the study. It contains the standing views of the past scholars who studied in the area. It reveals the interrelation amongst the independent variables and also their relationship with the dependent variable. A critical review of the obtained literature is also revealed. The conceptual framework presenting the model framework of the variables was created to illustrate in precise the inter relationship with the dependent variable. This chapter provides the reviews, critical review of the study and finally the summary of the studies conducted in relation to the problem under investigation.

2.1 Theoretical reviews

The concept of financial literacy is new for academics and scholars are yet to arrive at consensus (Kamakia et al. 2017). Individuals and organizations who initiated research on financial literacy insisted using their own definition and measurement (Remund 2010). Hence, the way it is defined in the literature greatly varies from study to study (Rasoaisi and Kalebe 2015). Even a glimpse look in several preliminary studies would substantiate the assertion that the concept of financial literacy seriously lacks a precise definition. Several conceptual definitions, each with differing dimension of financial literacy, have been documented by those previous researches (Oscar and Andreas 2017). Nonetheless, having an established definition is central to ensure comparability and relative consistency across findings of studies (Pokrikyan 2016).

Besides, devising a single standard definition and common view on its components are very fundamental to construct a standard measurement of financial literacy (Nicolini and Haupt 2019). In light of this, therefore, the term financial literacy could be systematized as conceptual definition and operational definition, i.e., measurement issue (Remund 2010). According to Ali and Meysam (2018), the terms financial education, financial capability, and financial literacy are interchangeably used in the literature, and so are the reasons for not having a concise definition and concept. Correspondingly, many other studies itemized different concepts as dimensions of financial literacy. Huston (2010) asserts financial literacy as a composition of financial knowledge and application of the knowledge.

Remund (2010) also views financial literacy as the bundle of understanding financial concepts, and possessing the ability and confidence to manage personal finances through sound financial decisions, while remaining vigilant to life events and dynamic economic conditions. Moreover, another most recent study by Swiecka et al. (2020) framed financial literacy in terms of three aspects; financial knowledge, financial behaviour and financial attitude. Nonetheless, the definition given by the Organization for Economic Cooperation and Development (OECD) is, by various scholars, regarded as broad and encompassing (Karaa and Kuğu 2016). It outlines financial literacy as a “combination of knowledge, behaviour, and attitude necessary to make sound financial decisions and ultimately achieve individual financial wellbeing” (OECD 2011).

As explained by Kimiyaghalam and Safari (2015), the conceptual definition of financial literacy could also be summarized from the extant literature as a composition of four dimensions; knowledge of financial concepts, ability in managing personal finance, skill in making financial and confidence on future financial planning, According to several preliminary studies financial literacy is key for financial wellbeing of a society (Rasoaisi and Kalebe 2015). From the personal finance perspective, only financial literate consumers, as outlined by Bhushan and Medury (2013), will sail through tough economic times as they might have accumulated savings, purchased insurance and diversified their investments.

Financial literacy theory argues that the behaviour of people with a high level of financial literacy might depend on the prevalence of two thinking styles according to dual-process theories: intuition and cognition. Dual-process theories embrace the idea that decisions can be driven by both intuitive and cognitive process. Dual process theories have been applied to several fields, including reasoning and social cognition. Financial literacy has attracted attention in both developed and developing economies, and has elicited much interest in the recent past with the rapid change in the finance landscape. Financial literacy covers the combination of investors' understanding of financial products and concepts and their ability and confidence to appreciate financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being.

Financial literacy empowers investors by educating them to acquire relevant knowledge and skills in financial management. Financial knowledge helps to overcome most difficulties in advanced credit markets. Financial literacy allows the investors to encounter difficult financial times, through strategies that mitigate risk such as accumulating savings, diversifying assets, and purchasing insurance. More importantly, financial literacy enhances decision making processes such as payment of bills on time, proper debt management which improves the credit worthiness of potential borrowers to support livelihoods, economic growth, sound financial systems, and poverty reduction. Financial literacy leads to more effective use of financial products and services, greater control of one's financial future and reduced vulnerability to overzealous retailers. Facing an educated lot, financial regulators are forced to improve the efficiency and quality of financial services.

Financially literate investors are able to create competitive pressures on financial institutions to offer more appropriately priced and transparent services, by comparing options, asking the right questions, and negotiating more effectively. Investors are able to evaluate and compare financial products, such as bank accounts, saving products, credit and loan options, payment instruments, investments, insurance coverage, so as to make optimal decisions argues that financial literacy helps to inculcate individuals with the financial knowledge necessary to create household budgets, initiate savings plans, and make strategic investment decisions. Proper application of that knowledge helps investors to meet their financial obligations through wise planning, and resource allocation so as to derive maximum utility.(Ongesa Nyamboga et al., 2014)

Finance may be defined as the art and science of managing money. The major areas of finance are: (1) financial services and (2) managerial finance/corporate finance/financial management (Olima, 2013).In today’s world, financial processes are becoming more and more complicated, involving investment funds, a wide range of banking products, insurance systems, reforms of pension systems and so on, which creates a pressing need for educators to introduce financial literacy courses at all levels of modern education. On the one hand, modern financial services improve our quality of life (bank cards, mobile banking applications, insurance and so on); on the other, people are generally not ready to use these services responsibly because they lack the necessary knowledge and skills (Sudakova, 2018).

The recent trend in finance and economic science shaped financial literacy not simply convenient, but an important tool for the survival. The fact is that lack of financial literacy may result to poor financial choice among alternatives investment decision that might lead to unsought financial and economic consequences to the individual, the financial system and the whole economy at large. So, financial literacy is a basic concept of understanding money and its use in daily lives which encompass the way people manage their income and expenditure (Shehu & Musa Ibrahim, 2019).

To this end, cooperatives are becoming very important weapons for creating broad access to financial services to benefit poor people and other disadvantaged groups and thereby promote FI. SACCOs are self-help, financial cooperatives, established throughout the world to serve their members with accessible and affordable financial services. Grounded in cooperative values, SACCOs often exhibit a strong sense of social purpose and in many countries endeavour to serve those unsaved or underserved by the mainstream banking sector. Unlike banks, they are owned entirely by their members and operate according to the democratic principle of one member one vote (Tilahun Emana Advisor & Mandefro, 2014).

SACCOs should provide services with favourable terms namely interest rates on savings, interest rates on loans, loan period, repayment schedule and loan size among other financial services to the existing small enterprises which are not start ups so that they can grow and add value to their owners and employees, create a savings culture and improve the national economy in general (Frank et al., 2015). Levels of financial literacy are low in many developing countries, and evidence has shown that limited knowledge of financial concepts is associated with suboptimal financial behaviour, such as low rate of formal savings, poor usage of bank accounts, amongst others. Some governments are launching national financial education strategies to improve the financial behaviour of their citizenry, and companies are integrating financial education into product offerings to help clients make better choices (Zia & Randall, 2015).

2.1.1 Financial literacy

There is on-going discussion among researchers on the concept and definition of financial literacy. Financial literacy, financial education and financial knowledge often have been used interchangeably in academic literature as well as in media. Kozina & Ponikvar (2015) defined financial literacy as components of human capital that is used in financial activities to increase an individual`s financial wellbeing. Additionally, Krechovska (2015) stated that the definition of financial literacy includes ability to secure personal income, capability to make decisions on expenditures, understanding consequences of personal decision on current and future income and orientation on the job market.

Financial literacy is a practice concerned with individuals understanding of finance decisions concerned with money reserves, retirement preparation or planning decisions. It further encompasses how individuals use their income to meet their daily basics and having a plan that will make sure they meet their needs until the next earning. In other way it equips one to better utilize resources and it assists in making effective financial decision regarding spending , saving and managing debt Fidelis Omari Abere( 2018).

Financial literacy refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources. Making the right financial choices is very important decision in the life of individuals with long-term financial consequences. Management of financial of a firm is not an easy task Financial literacy provides knowledge and understanding of financial concepts and the skills, motivation and confidence to apply such knowledge and understanding in order to make effective decisions across a range of financial contexts and to improve the financial well-being of organization like a SACCOs (Mwangi & Cheluget, 2018). Mutegi et al. (2015) affirms that financial literacy facilitates the decision making processes such as payment of bills on time, proper debt management which improves the credit worthiness of potential borrowers to support livelihoods, economic growth, sound financial systems, and poverty reduction. It also provides greater control of one's financial future, more effective use of financial products and services, and reduced vulnerability to overzealous retailers or fraudulent schemes.

2.1.2 Importance of financial literacy

Financial literacy is assumed in the recent years, as financial markets have become increasingly complex and it is very crucial for promoting financial inclusion and financial stability. Financial literacy is particularly relevant for people who are resource-poor and who operate at the margin and are vulnerable to persistent downward financial pressures. The challenges of household cash management under difficult circumstances with few resources to fall back on could be accentuated by the lack of skills or knowledge to make well-informed financial decisions. Financial literacy can help them prepare ahead of time for life cycle needs and deal with unexpected emergencies without assuming unnecessary debt. To understand financial planning, a person should be financially literate to know the importance of preparing household budgets, cash-flow management and asset allocation to meet financial goals.

Financially literate people are able to plan or budget, they at least have a trace of their financial activities because of their book keeping literacy, they are able to manage debts to avoid bad debts and prevent non repayment of loans and also have the courage to go for financial negotiation when they feel that they need better terms from the financial providers. Hence, they greatly participate in the market (Calcagno & Monticone, 2015).

The results confirm those of a study on financial literacy on loan repayment where respondents agreed that credit management skills assisted them in making wise decisions which would in turn assist them in repaying their loans (Tuyisenge et al., 2015). These results contradict a result carried out by Tuyisenge, Mugambi and Kimeringe which showed that the respondents in their study confirmed that book keeping literacy assisted them to repay their loans in time without difficulties. (Nirmal & Bikram, 2015)

Knowledge of financial concept include understanding of the financial concepts such as understanding the purpose of a budget or the elements of a savings plan, understanding of the loan terms and conditions, difference between various type of financial institutions. Skills to translate behaviour include how to make a spending plan, opening a savings account, calculation of interest rate, or obtaining information of the products and services offered by a particular financial institution. Attitude include the change in the perspective of the people; commitment to stick to a spending plan, discipline to save regularly or confidence to seek information from formal sector rather than relying more on informal sector. Improved financial knowledge, skills and attitudes contribute to translate the financial behaviour which, in turn, leads to financial outcome. (Nirmal & Bikram, 2015)

Such outcomes might be achievement of the financial goal (reaching a savings target, establishment of emergency saving funds, decreasing debt, or addition/procurement of new assets), reduction of the financial stress (reduction in pressure due to relentless financial demands and worries), and financial satisfaction (sense of financial control and financial well-being). All these decisions relates to the financial stability, welfare of both individual and the institution. Improved financial literacy might also be indicated by the reduction in the amount of time spend on financial matters or the number of times that personal financial issues interface with work of other tasks(Nirmal & Bikram, 2015).

According to the American Institute of Certified Public Accountant, the primary goals of financial education is to equip individuals with the capability to navigate a complex array of financial products, including pensions and mortgages, and to make sound financial decisions. The importance of doing so has been underscored in recent years by the financial crisis and the continued shifting of retirement planning responsibilities from the public sector to individuals. Peoples’ contribution towards retirement savings accounts determines the quality of life they will expect when retired. In order to take advantage of the new system it is important to be knowledgeable about investing, understand financial language; understand personal risk tolerance, taxation regulations and many more. The financial market today is flooded with sophisticated and complex financial products.

Technological innovations, competition, economic developments and increased access to financial markets are some reasons for the rising complexity of financial products. Financial products sold in bundles often consisting of products or services that are not needed for the customer, nor are they understood by him, but for which the customer still pays money. Although financial advisors’ services exist, not many people use them, due to irrational confidence in personal financial knowledge.

In low-income countries, however, financial outreach is much more limited, and more sophisticated consumer products are typically accessible only to a small percentage of the population. The role of financial literacy in increasing access to and take-up of financial services therefore receives more focus. Another important distinction is that people in low-income countries rely more on microenterprise for their livelihood. Acquiring managerial capital, or business skills and knowledge, is thus a more relevant component of financial capability than for the typical wage-earning worker in a developed country (AICPA, 2003).

2.1.3 Findings on financial literacy

A research done by OECD in 2016, across 30 countries including 17 OECD countries, participated in this international survey of financial literacy, using the OECD/INFE toolkit to collect cross-comparable data. In total, 51,650 adults aged 18 to 79 were interviewed using the same core questions, in 30 languages. This report provides high-level highlights of the survey’s findings focusing on relevant aspects of financial knowledge, behaviour, attitudes and inclusion, and insights into the financial literacy of the population. On an average, just 56% of adults across participating countries and economies achieved a score of at least five out of seven (considered to be the minimum target score), compared with an average of 63% across OECD countries, indicating that many adults around the world are currently unable to reach the minimum target score on financial knowledge.

Across participating countries and economies, on average just one in two (51%), respondents achieved the minimum target score of at least six out of nine on financial behavior. The average across participating OECD countries is only slightly higher, at 54%. More than four out of five people in France achieved the minimum target score of six out of nine on financial behavior (85%). This compares favorably to the average across all participating countries and contrasts starkly with Hungary, where one in four achieved such a score. On average, just 50% of adults across participating countries and economies achieved the minimum target score for financial attitude (that is, one that shows a tendency to favor the longer term), compared with an average of 55% across OECD countries.

In Jordan; Hong Kong, China and Poland, fewer than three in ten people indicated an attitude that tends to favor the longer term. In contrast, in Albania, Hungary, Portugal, Canada, Norway and New Zealand, more than six in ten did so (OECD, 2016). Robert A (2016) worked on Assessing the Level and Impact of Financial Literacy on African Americans. Findings of this study support efforts to make financial education mandatory in high schools and colleges. The State of Ohio, with support from parents, should make personal finance or finance-related courses mandatory for graduation since this study brought to light a strong connection between financial education and knowledge in financial matters, positive attitudes and behaviors toward financial matters. It also suggested that the overall financial literacy level of African-Americans is generally low.

The study established that knowledge in personal finance is affected by certain demographic characteristics such as gender, experience, and work history. Findings of this study has the potential of assisting policymakers, regulators, and educators in devising appropriate mechanism to increase the level of financial literacy not only among African-Americans but also amongst other ethnic groups. Lisa Xu B (2012) in Ghana, one of the higher-income countries in the region, only 56 percent of adults use any kind of financial product. This figure rises to 81 percent in Lesotho, but falls to just 22 percent in Mozambique. It is interesting to note that Pakistan has a very similar access profile to Tanzania; both countries have high levels of financial exclusion, and use of informal products is about three times more prevalent than use of formal products.

Financial literacy data from the Fin Scope surveys is limited in that it generally focuses only on awareness of financial products and providers, and not on other dimensions of financial literacy, such as numeracy or capability. Finding related to the demographic breakdown of this survey and, other correlates of financial literacy results shows that: Women have lower levels of financial literacy; financial literacy is indirectly related to age, directly related to higher levels of income and educational attainment. In low-income countries, surveys show that: Financial literacy is correlated with having a bank account and more demand for insurance products. The World Bank Development Research and the Fin Scope surveys (2014) finds that in Africa, there exists disparities by gender in terms of access to financial services, which could also translate into disparities in levels of financial literacy.

In Malawi, for instance, 17 percent of females hold bank products compared to percent of males. A similar difference is found in many other countries, including Mozambique, South Africa, and Zambia, although the picture varies by type of service and country. When they do have access to finance, females are often more likely than males to rely on informal versus formal services. One of the key questions that arise in developing countries is whether financial literacy and financial access are linked. In fact, in most countries surveyed by Fin Scope (2014), the primary reason cited for not having a bank account is lack of income or the inability to maintain a minimum balance, rather than lack of knowledge.

In Malawi (2014), only 19 percent of the population has a formal bank account of which less than 10 of percent respondents cite financial literacy-related reason, such as not knowing how to apply for an account (It is possible, however, that perceptions of minimum required balances, for instance, may be incorrect). At the same time, almost 80 percent had either never heard of savings accounts or did not know what they were, and the figure is lower for current or checking accounts. Income-related reasons are also predominant in Rwanda, Namibia, and Tanzania; although a higher percentage of adults in Tanzania (21 percent) reports that they did not know how to open an account.

While two-thirds of those surveyed cited affordability as the main reason for not purchasing insurance, more than a quarter of individuals also reported reasons such as not knowing what insurance is, how it works, or how to buy it. In Malawi, almost 50 percent of adult’s did not know the purpose of insurance products. Many people rely on family and community support or loans to cover costly medical and burial expenses. Half of those surveyed in both Nigeria and Mozambique had never heard of insurance or insurance products at all (Lisa B 2012). Xu and Zia (2012) in their paper review financial literacy levels across the globe, state that the survey results of Sub-Saharan Africa indicate that a large proportion of the population in countries such an Mozambique, Malawi and Nigeria lack awareness of basic financial products and concepts such as savings accounts, interest on savings, insurance and loans.

Countries are giving special consideration to develop their citizens’ literacy to finance. For instance in America, the growing need to provide Americans with financial education and capability has given birth to FLEC in 2003. Mandated with the power to increase consumer financial literacy and provide new consumer protections throughout the United States, the commission began work few years after its promulgation. For example, to increase research in the area of financial education and literacy, the Financial Literacy and Education Commission in 2008 developed a priority list of key research areas called research priorities (FLEC, 2011). The finding by Mohamad F.S (2011) has implications for parents, university administrators, financial counselors, financial planners, educators, and students themselves. These findings could be used to develop financial education programs that would provide students with the knowledge and skills to better manage their finances and improve their financial well-being. It is clear from the results that perceived financial well-being differs by gender and ethnicity.

This is important information for financial counselors and planners. Understanding these differences will help practitioners tailor advice and planning to the different needs of males and females, Chinese and Malay college students. Educators and university administrators should make sure that financial educational programs not only improve financial knowledge and promote responsible financial behaviors among college students, but also establish support structures that will help students increase their financial well-being Candice A.T (2009) finds that students graduating from high school should have financial life skills they need to survive in their world. By instituting a Personal Finance class in a high school, the youth of today can have knowledge and skills to manage their finances and be aware of financial concepts as they relate to their everyday life.

Jamie W (2015) in his work on the effect of financial education on financial literacy and financial behaviour notes that a person’s income is significantly related to the long-term financial behaviors. Government of most of the poverty ridden African developing countries, where high unemployment, low education enrolment, high vulnerability to socio economic shocks, low rate of personal and national savings, low investment are taking policy measures towards improving financial literacy. Existing evidences, suggest that financial inclusion policies implemented in African countries, notably through MFIs, expansion of commercial bank branches and introduction more technology driven products could leverage financial inclusion effort through a targeted client financial literacy education (Robert et al.,2013; Cole et al., 2014; Gine et al., 2014; Alex and Amos,2015) The findings suggest that there are benefits to financial education, but the extent of the benefits may depend on the time horizon for changing financial behaviours. Financial education has the most positive relationship with financial literacy and long-term behaviors and a mixed relationship with short-term behaviors.

(Jamie F 2015). Financial literacy helps to identify exactly what the need is and helps to avoid purchase of unneeded financial products. In conclusion, the financial knowledge status of African-Americans as revealed in this study strongly supports the need for workable financial education programs that would teach financial concepts to students and consumers to boost their financial competency for making informed decisions about financial products.

2.2 Cooperative Education

A Co-operative is about people. It is in line with this assertion that the International Co-operative Alliance (I.C.A) defined co-operative as “an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise” (ICA, 2012).From the definition, a co-operative society can be described as an enterprise formed, owned and controlled by association of users applying rules of democracy and making equitable contribution to the capital required and accepting a fair share of the risk and benefits of the undertaking in which the members actively participate (Birchall, 2010, 2004; Mazzarol, 2009, Mazzarol et al., 2011).Principally, the definition focuses on members' participation, which essentially require education and sufficient information on co-operative issues (Thapa, 2014).In addition, according to Miner (2016), Wilson (2014), Umukoro (2013) and Bhowmik (1997), co-operative education empower members and generally promote co-operative awareness that can easily convince the public to join the society.

According to ICA (2012), co-operative education is the lifeblood of co-operatives, drives co-operative development, co-operative performance and is important across all areas of co-operation. As a principle, it is regarded as the foundation of all the co-operative principles, without which the other co-operative principles cannot be applied effectively. To the Rockdale pioneers, the association’s members critically needed co-operative education because they lacked formal education and knowledge of co-operatives was non-existent. Subsequently, the critical position of co-operative education was upheld by its retention as a cardinal principle of cooperation in the 1995 International Co-operative Alliance (ICA) version.

To date co-operative authors consider education necessary to the continuity of the association as result of sustained members’ patronage. In addition, for continuity of the organization co-operators should be educating new generation as it arises on co-operation (Fish, 1993). Co-operative education is the means by which the principles of co-operation are enabled to function (Miner, 2016; Wilson, 2014; Kinyuira, 2015). It ranges from training programs for members, employees and the public about co-operatives origins, developments and trends. Imparting co-operative education is the responsibility of cooperatives societies, education institutions, NGOs, government agencies responsible for co-operative matters, and the international co-operative Alliance. Subsequently the main target audience for co-operative education is members, elected representatives, managers and employees, to equip them with the skills, knowledge and confidence to enable them use, participate in and control the co-operative more effectively.

In addition, co-operative awareness can be propagated through many channels such as workshops, lectures and seminars (Probst, 2001). Miner (2016) and Fish (1993) explain various channels used in propagating co-operative awareness including meetings, newsletters, leaflets, posters, personal contacts, radio and television. Recently the social media social media (websites updates, email messages, face book, twitter, what’s app groups etc.) has become more prominent channels of information and education. Sekeran and Danforth (1980) believe that all outstanding co-operative leaders place strong emphasis on the principle of continuous education. Such leaders implement continuous education in two dimensions, education about the principles, practice, and goals of the business on one hand and relevant and honest product information on the other.

In all cases when a cooperative has collapsed, observers have cited the decline of cooperative education as a major factor in the failure. In most of the reports, findings indicate that the co-operative idea was ignored, and new members were enrolled without being taught about the cooperative, cooperative economics, or their responsibilities as members (Kinyuira, 2018)

2.3 Saving and credit cooperatives

Savings and Credit Cooperatives (SACCOs) in Ethiopia are increased from 5,437 in 2006 to 14,453 in May 2014 showing a compound growth rate of 28% per year. The aggregate number of membership during the same period increased from 0.38 million to 1.7million and their capital increased from one billion birr to 5.2 billion birr. These figures indicate that financial cooperatives have had the support of the people in undertaking activities contributing to their economic development. SACCOs are considered to have immense potential in financing short term loans for agricultural production technologies and undertake off-farm income generating activities in areas where both the state and the private sector have failed. Serious efforts are being made to strengthen capital resource of SACCO’s base through increasing members’ subscription and mobilization of savings in rural and urban areas (Tesfamariam,2015).

Growth of SACCOs is measured through assessment of increase in membership and increase in savings. SACCOs depend on the savings of members to offer loans and make profits. Thus, for a SACCO to grow it needs to increase its lender, this is dependent on the savings of members. Increase in membership in SACCOs reflects to increase in savings. Once a member joins a Sacco, he or she must save in order to qualify for a loan. Therefore, if membership increases, savings of the SACCO increases and as result, the lender increases. Loan portfolio management is also an important factor when measuring growth of SACCOs. A Sacco must be able to recover the loans from its members to avoid loses. A Sacco can only grow if it is able to recover loans and make profit therefore growing the lender. (Muithya & Ombati, 2019)

2.4 Effect of finance literacy on loan repayment

Inadequate financial analysis according to Sheila (2011) is a cause of loan default. This is when in the loans department the officers do not take a careful study of the applicants to ensure that he/she has a sound financial base such that the risk of loss is mitigated in case of default. Sheila (2011) also points out that in Uganda; the issue of inadequate loan support is another cause of loan default. He says that it is very important that the loan personnel collectively ascertain the position in which the borrower finds himself/herself so that in case he needs support, it’s availed to him or her.

Unfortunately that is not the case even when the support is given it is not adequate which leaves the business crumbling and hence leading to default. The research also pointed out that illiteracy and inadequate skills was another cause of default. Majority of the clients are engaged in traditional, low paying businesses and rarely diversify their businesses and skills. This implies that they do not have enough knowledge about alternative marketable skills that can benefit them when their businesses do not function properly. Secondly, most of them do not know how to read, write and make simple calculations. As a result, they do not know how to account for their businesses even when the lender makes an error, the borrowers are held liable to the loan.

Again disappearance of loan clients was seen as another cause. Olweny, Namusonge and Onyango (2012), carried out a study to assess the influence of socio-cultural background on individual investor risk tolerance at Nairobi Securities Exchange. The attributes included education level, financial knowledge measured by specialization, marital status, previous stock market experience and ethnic background. Leadership and training of the group was another variable that may lead to effective group loan repayment. The leadership/training variable is an exogenous variable formed as an index. The survey questions related to whether or not the group members felt that the group leader was effective and whether or not the sectoral or village leadership had an integral part in loan monitoring and had met to discuss options and strategies for members who were unable to repay on a given repayment date

2.5 Loan Default Rate in SACCOs

Loan default refers to the total amount of money given out in different loan products to different types of borrowers but are not received. This may be comprised of salary loans, group guaranteed loans, individual loans and corporate loans (Shao & Yeager, 2007). Loan default occurs if customers with loans do no repay those loans as per the stipulated time. Loan default in SACCOs is a serious financial stressor since the risk of loan determines future revenues and ability to increase outreach and serve existing customers. The credit information system establishes a set of procedures used to collect accounts receivables which are getting overdue (Van Horne, 1989).

Methods used could include letters, telephone calls, visits by the firm’s officials for face to face reminders to pay and legal enforcements. Nganga (2011) asserts that credit information system is a guide that ensures prompt payment and regular collections. The rationale is that not all clients meet their obligations, some just take it for granted, others simply forget while others do not have a culture of paying until persuaded to do so. Therefore, emphasizing strict collection procedures keeps debtors’ alert, reduces portfolio at risk and consequently reduces losses due to bad debts, hence greater profitability.

Krestlow (2013) emphasizes the need for using various methods in the collection efforts on due accounts. In agreement with other scholars, Kreslow (2013) has noted that in the determination of the method to apply, the cost and funds available for the purpose must be considered. The benefits of additional collection efforts are likely to decrease with increasing expenditure levels. Kargi (1996) states that collection efforts are directed at accelerating recovery from slow payers and decreases bad debts losses. This therefore calls for vigorous collection efforts. According to Kargi (2011) deposit taking SACCOs’ profitability is inversely influenced by the levels of loan advanced. Therefore, non-performing loans can expose them to great risk of illiquidity and distress. Therefore, the extent to which credit information system may influence loan default rate in deposit taking SACCOs need to be carefully investigated.

2.6 The 5 Cs of Credit

Entrepreneurs often need credit to start their businesses. A bank weighs each factor to determine if it will give a loan to a potential business owner. Here are the 5 Cs a loaning institution considers before agreeing giving a person or new business credit:

- Capacity: Measures a borrower’s ability to repay a loan by comparing income to recurring debts.
- Capital: Refers to a borrower’s reputation or track record for repaying debts. This is sometimes referred to as credit history.
- Character: Any funds the borrower puts toward the potential investment.
- Collateral: Any property or other asset that a borrow offers as a way to secure a loan. If the borrower shops the promised loan payments, the lender can seize the collateral as payment.
- Conditions: The conditions of a loan, such as its interest rate and amount of principal, influence a lender’s decision to make a loan to the borrower. (“Industry Structure,” 1991)

2.7 Empirical reviews

According to Tuyisenge et al., (2015) the financial decisions have to make increasing as a consequence of changing in the market and economy. Individuals need to insure that they accumulate savings to cover much long periods of retirement. Moreover, increasing education cost makes it important to members to plan and invest adequately. Even when individuals use the services of financial intermediaries and advisors, they need to understand what is being offered or advised. The individual is responsible for the financial product he or she decides to purchase, and the individual will face all the consequences of the choice. While these trends are most obvious in developed countries, similar issues are also emerging in many developing economies. So, everyone can need financial literacy to improve his saving ability and repaying the money timely.

According to Fergusson et al.( 2013) study on loan delinquency and the factors influencing non performing of loan repayment to traders SACCOs loan delinquency finds that the major factor having high percentage that influences loan delinquency and repayment performance include non-profitable loan activity; this is due to lack of business and financial knowledge which lead to loss of business which results to loan repayment problem. Gaudence (2018) financially literate people are able to plan or budget, they at least have a trace of their financial activities because of their book keeping literacy, they are able to manage debts to avoid bad debts and prevent non repayment of loans and also have the courage to go for financial negotiation when they feel that they need better terms from the financial providers However the problem of non-repayment is rising day by day.


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Financial Literacy and its Effect on Loan Repayment Performance. The Case of Weltane Ambo Saccos Union of West Shoa Zone, Oromia Regional State, Ethiopia
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analysis, case, weltane, ambo, saccos, union, west, shoa, zone, oromia, regional, state, ethiopia
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Dereje Girma (Author), 2021, Financial Literacy and its Effect on Loan Repayment Performance. The Case of Weltane Ambo Saccos Union of West Shoa Zone, Oromia Regional State, Ethiopia, Munich, GRIN Verlag,


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