THE EFFECT OF FINANCIAL LITERACY ON PERSONAL

FINANCE MANAGEMENT: A CASE STUDY ON

EMPLOYEES OF BANK OF BARODA (KENYA) LIMITED

BY
DAVE ANU JAYANTILAL

A Research Report Submitted To the Chandaria School of

Business in Partial Fulfillment of the Requirement for the Degree
of Master of Business Administration (MBA)

UNITED STATES INTERNATIONAL UNIVERSITY –

AFRICA

SUMMER 2017
 STUDENT’S DECLARATION
I, the undersigned, declare that this is my original work and has not been submitted to any
other college, institution or university other than the United States International University -
Africa in Nairobi for academic credit.

Signed: ___________________________ Date: _____________________

Dave Anu Jayantilal
ID No: 631285

This research report has been presented for examination with my approval as the appointed
supervisor.

Signed: ___________________________ Date: _____________________

Prof. Amos Njuguna

Signed: ___________________________ Date: _____________________

Dean, Chandaria School of Business

ii
 COPYRIGHT
© Copyright by Dave Anu Jayantilal, 2017

All rights reserved.

No part of this research project report may be produced or transmitted in any form or by any
means, electronic, mechanical, including photocopying, recording or any information storage
without prior written permission from the author.

iii
 ABSTRACT
The purpose of the study was to assess financial literacy and its effect on personal finance
management of employees of Bank of Baroda (Kenya) Limited. The study was guided by the
following specific objectives: to determine the effect of financial literacy on personal
investments, to determine the effect of financial literacy on personal savings, and to
determine the effect of financial literacy on personal debt.

A descriptive quantitative research design was used for the study, which focused on the 173
employees of the bank. Data was collected using structured questionnaires which were
distributed using convenience sampling to the employees of the bank. The sampling frame
that was used was the employee register. A sample of 64 employees from the population was
conveniently sampled who comprised of functional, middle and senior managers at the bank.
The completed questionnaires were keyed in the SPSS 24.0 statistical software and data
analyzed for descriptive statistics. Statistical inferences were drawn by the use of ANOVA
(Analysis of Variance) and cross tabulation between the dependent variables (Personal
Investments, Personal savings, and Personal Debt) and the independent variable (Financial
Literacy score).

The study found that the financial literacy positively affects personal finance management
among the employees of Bank of Baroda (Kenya) Limited which leads to a higher investment
practice, more diversified savings and a lower debt percentage. Lack of financial literacy was
indicated to hamper personal financial management of the employees in the bank. The study
found that employees working at managerial levels showed sound financial management in
terms of investments, savings, and debt management while employees at lower management
levels had low financial literacy scores and lack of financial management which contributed
to poor investment practice, poor savings management, and poor debt choices. The lack of
commitment of financial management among the employees affected personal financial
management, which affects their ability to invest and save their income.

The study recommends that the bank should come up with a financial literacy program which
is aimed at addressing the financial well-being of their employees. The bank should also

iv
introduce financial planning programs for employees on an annual basis to enable them to
develop future long and short-term financial plans. The bank should encourage saving habits
among employees by emphasizing the importance of a savings plan. The bank employees
should also observe financial discipline in terms of borrowings. The findings of the study are
of significance to commercial banks as it will bring into perspective the role of financial
literacy on personal finance management of bankers. This will enable banks to take
appropriate measures to ensure their staff is financially literate, which will in turn benefit the
organization as they will perform better.

v
 ACKNOWLEDGEMENT
I would like to express my gratitude to my supervisor, Prof. Amos Njuguna for his sage
advice, insightful criticisms, and encouragement aided the writing of this research report.
Thank you for always availing yourself for consultation, for your advice, and for giving me a
push towards the right direction.

I would also like to thank my colleagues of Bank of Baroda (Kenya) Limited Diamond Plaza
branch who supported me throughout my MBA study at USIU-A.

Finally, I would like to express gratitude towards my friends for being the support system I
needed during the research period.

vi
 DEDICATION
I would like to dedicate this research report to my parents Dave Vidhya and Dave Jayantilal
and my sister Dave Vishaka Hemendra for their immense support and motivation throughout
my academic life. I am grateful for the patience and understanding received from my fiancé
Dr. Rahi Varsani.

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 TABLE OF CONTENTS
STUDENT’S DECLARATION ............................................................................................. ii
COPYRIGHT ......................................................................................................................... iii
ABSTRACT ............................................................................................................................ iv
ACKNOWLEDGEMENT ..................................................................................................... vi
DEDICATION....................................................................................................................... vii
TABLE OF CONTENTS .................................................................................................... viii
LIST OF TABLES .................................................................................................................. x
LIST OF FIGURES .............................................................................................................. xii
LIST OF ABBREVIATIONS ............................................................................................. xiii

CHAPTER ONE ..................................................................................................................... 1

1.0 INTRODUCTION............................................................................................................. 1
1.1 Background of the Study .................................................................................................... 1
1.2 Statement of the Problem .................................................................................................... 6
1.3 General Objective ............................................................................................................... 7
1.4 Specific Objectives ............................................................................................................. 7
1.5 Significance of the Study .................................................................................................... 7
1.6 Scope of the Study .............................................................................................................. 9
1.7 Definition of Terms............................................................................................................. 9
1.8 Chapter Summary ............................................................................................................. 10

CHAPTER TWO .................................................................................................................. 11

2.0 LITERATURE REVIEW .............................................................................................. 11
2.1 Introduction ....................................................................................................................... 11
2.2 The Effect of Financial Literacy on Personal Investment Decisions ................................ 11
2.3 Effect of Financial Literacy on Personal Savings ............................................................. 16
2.4 Effect of Financial Literacy on Personal Debt .................................................................. 19
2.5 Chapter Summary ............................................................................................................. 24

CHAPTER THREE .............................................................................................................. 25

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3.0 RESEARCH METHODOLOGY .................................................................................. 25
3.1 Introduction ....................................................................................................................... 25
3.2 Research Design................................................................................................................ 25
3.3 Population and Sampling Design ...................................................................................... 26
3.4 Data Collection Methods .................................................................................................. 27
3.5 Research Procedures ......................................................................................................... 28
3.6 Data Analysis Methods ..................................................................................................... 29
3.7 Chapter Summary ............................................................................................................. 29

CHAPTER 4 .......................................................................................................................... 30
4.0 RESULTS AND FINDINGS .......................................................................................... 30
4.1 Introduction ....................................................................................................................... 30
4.2 General Information .......................................................................................................... 30
4.4 The effect of Financial Literacy and Investment Choices ................................................ 37
4.5 The Effect of Financial Literacy on Personal Savings ...................................................... 44
4.6 The effect of Financial Literacy on Personal Debt ........................................................... 51
4.7 Chapter Summary ............................................................................................................. 56

CHAPTER FIVE .................................................................................................................. 57

5.0 DISCUSSIONS, CONCLUSIONS, AND RECOMMENDATIONS .......................... 57
5.1 Introduction ....................................................................................................................... 57
5.2 Summary of Findings ........................................................................................................ 57
5.3 Discussions ....................................................................................................................... 59
5.4 Conclusions ....................................................................................................................... 63
5.5 Recommendations ............................................................................................................. 64
REFERENCES ...................................................................................................................... 66
APPENDICES ....................................................................................................................... 74
APPENDIX I: COVER LETTER ....................................................................................... 74
APPENDIX II: QUESTIONNAIRE ................................................................................... 75

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 LIST OF TABLES
Table 4.1 Do you invest? ........................................................................................................ 37
Table 4.2 Investment Choices ................................................................................................. 38
Table 4.3 Total score on the Financial Literacy test vs. Do you invest? ................................ 40
Table 4.4 Total score on the Financial Literacy test vs. Percentage of investment in
Government Securities? .......................................................................................................... 41
Table 4.5 Total score on the Financial Literacy test vs. Percentage of investment in Mutual
funds........................................................................................................................................ 41
Table 4.6 Total score on the Financial Literacy test vs. Percentage of investment in Equity
share market ............................................................................................................................ 41
Table 4.7 Total score on the Financial Literacy test vs. Percentage of investment in Life
Insurance ................................................................................................................................. 42
Table 4.8 Total score on the Financial Literacy test vs. Percentage of investment in Bonds. 42
Table 4.9 Total score on the Financial Literacy test vs. Percentage of investment in Foreign
exchange market ..................................................................................................................... 42
Table 4.10 Total score on the Financial Literacy test vs. Percentage of investment in Real
Estate ....................................................................................................................................... 43
Table 4.11 Total score on the Financial Literacy test vs. Percentage of investment in Gold . 43
Table 4.12 Total score on the Financial Literacy test vs. What/Whom do you use for
assistance before making an Investment ................................................................................. 43
Table 4.13 One Way ANOVA- Effect of Financial Literacy on Personal Investment
Decisions ................................................................................................................................. 44
Table 4.14 Do you save? ......................................................................................................... 45
Table 4.15 Personal Savings Choices ..................................................................................... 45
Table 4.16 Total score on the Financial Literacy test vs. Do you save .................................. 47
Table 4.17 Total score on the Financial Literacy test vs. Percentage of monthly income saved
................................................................................................................................................. 47
Table 4.18 Total score on the Financial Literacy test vs. Percentage of monthly income saved
in a savings account ................................................................................................................ 48
Table 4.19 Total score on the Financial Literacy test vs. Percentage of monthly income saved
in a SACCO ............................................................................................................................ 48

x
Table 4.20 Total score on the Financial Literacy test vs. Percentage of your monthly income
given to friends and family to save on your behalf ................................................................. 49
Table 4.21 Total score on the Financial Literacy test vs. Percentage of monthly income saved
in a private pension ................................................................................................................. 49
Table 4.22 Total score on the Financial Literacy test vs. Percentage of monthly income saved
in bank term deposits .............................................................................................................. 49
Table 4.23 One Way ANOVA on the Effect of Financial Literacy on Personal Savings
decisions .................................................................................................................................. 50
Table 4.24 One Way ANOVA on the Effect of Financial Literacy on Personal Savings
decisions on income saved in a Private Pension ..................................................................... 50
Table 4.25 Have you borrowed? ............................................................................................. 51
Table 4.26 Personal Debt Choices .......................................................................................... 51
Table 4.27 Total score on the Financial Literacy test vs. Have you borrowed....................... 53
Table 4.28 Total score on the Financial Literacy test vs. Percentage of borrowing from family
or friends? ............................................................................................................................... 53
Table 4.29 Total score on the Financial Literacy test vs. What Percentage of borrowing from
the employer / salary advance? ............................................................................................... 53
Table 4.30 Total score on the Financial Literacy test vs. Percentage of borrowing from using
a credit card for a cash advance or to pay bills or buy food? .................................................. 54
Table 4.31 Total score on the Financial Literacy test vs. Percentage of borrowing from a
personal loan taken from the bank .......................................................................................... 54
Table 4.32 Total score on the Financial Literacy test vs. Percentage of borrowing from a loan
taken from the SACCO ........................................................................................................... 55
Table 4.33 One Way ANOVA- Effect of Financial Literacy on Debt choices ...................... 55

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 LIST OF FIGURES
Figure 4.1 Respondent Gender ............................................................................................... 31
Figure 4.2 Respondent Age..................................................................................................... 31
Figure 4.3 Marital Status of Respondents ............................................................................... 32
Figure 4.4 Job Title of respondents......................................................................................... 32
Figure 4.5 Salary Scale of respondents ................................................................................... 33
Figure 4.6 Level of Education of respondents ........................................................................ 33
Figure 4.7 Field of Education of respondents ......................................................................... 34
Figure 4.8 Financial Literacy Training ................................................................................... 35
Figure 4.9 Mode of learning about Financial Literacy ........................................................... 35
Figure 4.10 Should workplace hold Financial Literacy Training ........................................... 36
Figure 4.11 Financial Literacy test score ................................................................................ 36

xii
 LIST OF ABBREVIATIONS
ANOVA: Analysis Of Variance
OECD: Organization for Economic Co-operation and Development
SACCO: Savings and Credit Co-Operatives
SPSS: Statistical Package for Social Science
UAE: United Arab Emirates

xiii
 CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the Study
Over the past decade, the stability of the world economy has declined and the recession has
caused increasing inflation, unemployment and reduction in income levels. The complexity
of financial decisions and economic recession has threatened the quality of individual lives
and work, and has made researchers to investigate ways to deal with them (Taft, Hosein,
Mehrizi and Roshan, 2013). The ability and knowledge to manage ones personal finance has
become increasingly important today.

Personal financial success is determined by the ability of individuals to manage their savings,
spending, and investments of their financial resources (Garman and Forgue, 2011).
According to Godwin, (1994); Parotta and Johnson, (1998) (as cited in Dowling, Tim and
Hoiles, 2009) defined financial management as a set of behaviors which includes cash
management, credit management, financial planning, investments, insurance, retirement
planning, and estate planning which requires understanding of basic concepts of finance and
economics, such as interest and inflation, and performing some computations, risk
diversification, awareness of financial products and ability to choose the one with one‘s own
best interest.

According to Nye and Hillyard (2013) financial literacy is a measure of the degree to which
one understands key financial concepts and possess the ability and confidence to manage
personal finances through appropriate short-term decision-making and sound, long-range
financial planning, while mindful of life events and changing economic conditions. Though
conceptually, financial literacy refers to skills, existing measures of financial literacy are
dominated by measures of objective knowledge. Lusardi (2008) asserts that basic financial
knowledge is the working of interest compounding, basics of risk diversification and the
difference between nominal and real values. She further asserts that financial literacy affects
financial decision making and ignorance about basic financial concepts can be linked to lack
of retirement planning, poor borrowing behavior and lack of participation in the stock

1
market. Financial literacy is measured by percent correct on knowledge tests where each
question has a right answer (Al-Tamimi and Kalli, 2009).

Studies on financial literacy have hypothesized that financial literacy and savvy personal
financial management behavior are related. In Malaysia, a study conducted by Boon, Yee and
Ting (2011), studied the link between financial literacy and personal financial planning. The
primary data was collected from Klang Valley via a self-administered questionnaire survey,
and the relationship was examined using a cross tabulation method. The findings suggest that
in contrast to their non-financially literate counterparts, the readiness of the financially
literate individuals is reflected in their involvement in the multiple aspects of personal
financial planning. However, further study of public perception revealed that despite many
see the significance of setting financial goals and objectives in life, there remains a
knowledge gap at an individual level that hinders one from effectively managing their
financial affairs. It was also found that the public appeared to be hesitant to rely on
professional advice on financial practices to realize their goals. In a study conducted in
Russia by Klapper, Lusardi and Panos (2013) that examined the effect of financial literacy on
financial behavior, and financial and real outcomes in Russia. The study used an individual
level survey data collected from sample Russians in 2008 and 2009 to measure financial
literacy in terms of personal finance basics and financial service awareness, financial
behavior, outcomes across socioeconomic profiles. With respect to outcomes of financial
literacy, they found that high level of financial literacy was related to high spending capacity
and high amount of unspent income during the financial crises. The result of the above study
shows the relationship that financial literacy has with different financial management
behavior, such as financial management practices: financial planning, saving, credit
management, which enables individuals to maintain stable financial status even during the
time of financial crises. Olima (2012) conducted a study on Kenya Revenue Authority
employees to establish the effect of financial literacy on saving practices and social security
planning, and found that financial literacy impacts to a great extent on the personal financial
management because financial education programs guide program development and
refinement, estate planning, insurance, tax planning and other liabilities such as management
of credit. In a study conducted in Lithuania by Navickas, Gudaitis and Krajnakova (2014)

2
examined the level of financial literacy and its influence on personal finance management of
Lithuanian population, aged between 18 and 30. A descriptive analysis of data from an online
survey of 437 sample respondents from different parts of the country revealed low levels of
financial literacy, which is related to unsatisfactory personal financial management that they
argued, lead to spending a lot of money because of impulsive or unnecessary buying, which
eventually leads to lower saving rates and lower investment returns.

Studies on financial literacy also show that individuals lack the basic knowledge to make
sound financial decisions. A study conducted by the Organization for Economic Co-
operation and Development (OECD, 2005) indicated that financial illiteracy is widespread
across all age groups and geographical areas. This was confirmed by a study conducted in
America by Volpe, Chen and Liu (2006), which concluded that the Americans lacked the
ability to make good personal financial choices. The need to design and implement financial
literacy enhancement policies have also been recognized in developing and low-income
countries (Xu and Zia, 2012). In developing countries, financial education is offered along
with financial services assuming financial literacy would enhance the demand for improving
financial services such as savings account, microcredit, insurance, and optimal management
of household finance, which, in turn, is expected to result in better saving, low debt,
participation in income generating activities and wealth accumulation. Researchers have also
studied the effect of financial education on financial behaviors. Sayinzoga, Bulte and Lensink
(2013) on their study of financial education programs in rural Rwanda indicated improved
financial knowledge and behavior are translated into increase saving, loan uptake and
business startup which will lead to income generation and welfare improvement. Cole et al
(2014) in their experimental study of financial education and its effects on financial
knowledge, behavior and outcome in South Africa found positive effects of financial literacy
on financial knowledge and behavior.

Financial knowledge helps reducing social and psychological pressures and increasing the
welfare of the family in the personal life. Behrman et al (2012) suggested that by investing in
financial literacy, individuals, firms, and governments can enhance household wealth and

3
wellbeing based on the significant positive effect of financial literacy on wealth accumulation
their study found in Chile.

Financial literacy has an effect on employee performance at work. Several studies in the past
have attempted to study the relationship between financial literacy and employee efficiency
in organizations. According to Garman, Leech and Grable (1996), poor financial behaviors
have a negative effect on people‘s lives both at home and at work. Garman, et al. (1996)
further explain that personal financial problems surface first in the workplace. Some of the
costs that employers incur from employee‘s poor financial behaviors: absenteeism, tardiness,
fighting with other employees and managers, reduced employee productivity, low employee
morale, loss of revenue from sales not made, accidents and increased risk taking, lack of
employee focus on employer‘s goals, thefts from employers and company use of time to deal
with personal financial issues. As the amount of poor financial choices increase, the
consequences have an increasingly negative effect at work. Garman, et al. (1996) explains
that poor personal financial behaviors are often manifested as stress, which reduces employee
productivity. Employee stress from personal finances is a real issue that affects the
workplace. A survey was conducted by Garman, et al (1996) on 301 employees of IDS
Financial Services, the findings showed that the job performance of one-third of the
workforce is affected by personal financial stress. Thirty-eight percent of the employees
surveyed said that their job performance was affected by their worries about money. They
concluded that employees in the United States were stressed about their poor financial
behaviors that negatively impacted their job productivity. Brennan (1998) also concludes that
in work life higher financial literacy has higher efficiency and productivity in result and will
help employees to better understand benefits offered by the organization and improve their
satisfaction. According to Vitt et al (2000), the greatest advantage of financial literacy
education is reducing employees‘ financial problems and encouraging them to be responsible
for their own financing, which will in turn help increase efficiency in the organization.
Financial education can reduce absences in the organization and keep valuable employees
(Champion, 2001). Bernheim and Garrett (2003), suggest in their study that organizations
can strengthen their human resource management and promote positive private and work life
of their employees by increasing their employees‘ knowledge in the field of finance.

4
Similarly, Fox, Bartholomae and Lee (2005) concluded that increased financial literacy has a
positive impact on people‘s personal and business life. Kim (2007) adds that high financial
literacy decreases emotional stress and anxiety in the workplace. Financially unwell
employees are passive and not engaged at work (Gurchiek, 2008). When an employee is
focused on their financial problems, they are not focused on their work. They may be able to
still perform at some level, but they are not able to give their best.

According to Delafrooz and Laily (2011), lack of information and financial illiteracy, provide
a fertile base for mistakes in financial decision making. According to Kozup and Hogarth
(2008), financial illiteracy shows through indicators of financial instability such as; heavy
liabilities, very little savings, poor planning for the future (for example for considerable
foreseen expenses, precautionary savings for an eventual unforeseen deterioration of the
financial situation, retirement savings) and lack of optimal investment practices. Young
Adults have access to credit at an earlier age as compared to their parents. In America,
according to a study conducted by (Bankrate.com, 2015), 32% of people between the ages of
30 and 49 said they have more credit card debt. That compares with 21% for those between
18 and 29 years of age and 14% for those who are 65 years old or more. Younger consumers
are particularly challenged when it comes to trying to build savings. Many are juggling the
needs of young families, the costs of old student loan debt and the temptations of more
stylish ways to spend money. They, therefore, need an in-depth understanding of credit,
compound interest and what it means to have a poor credit score.

The Standard & Poor global financial literacy survey conducted in 2014, which used survey
questions that touched the concepts of risk diversification, inflation, numeracy and
compound interest, the results showed that at a global level only 38% of bank account
holders are financially literate. The research further shows that out of 60% of the population
in major emerging economies who own bank accounts only 30% are financially literate.
Despite having a bank account, low levels of financial literacy make it difficult for
individuals to utilize financial services which often lead to poor financial decisions especially
for the financially unfortunate. The survey was also conducted in Kenya, the results show
that only 38% of Kenyans understand that they need to diversify their risks, know about

5
inflation and know how to calculate interest. This is a matter of concern because of the
percentage of Kenyans who take loans to finance their day-to-day needs. In a research
conducted by (FinAccess, 2016), 57.3% of Kenyans take credit to finance their day-to-day
needs, while only 15.8% and 14.7% take loans to invest for business purposes and house/land
purposes respectively. In Kenya, FinAccess (2016) also showed that only 11% of Kenyans
hold a tertiary level of education, the research further showed that the percentage of Kenyans
that use investment products has declined from 2013 at 11.6% to 10.6% in 2016.

In order for banks to remain competitive in Kenya, they need to create an organization
culture where customers experience high levels of satisfaction from the services offered.
Employees in the banking industry need to learn financial literacy concepts to enable them to
succeed in the complex global environment. Owing to the importance of financial literacy at
the workplace and in personal life, there is need to conduct a study to investigate the effect of
financial literacy on personal financial management practices and how financial literacy
affects various personal financial management practices like savings, debt and investments.

1.2 Statement of the Problem

The role of financial literacy with regards to sound personal finance management practice is
a question many struggle with. Employees in the banking and finance sector are expected to
at least be somewhat capable of managing their personal finance better than their
counterparts in other industries. According to Wachira and Kihiu (2012), financial literacy
facilitates decision making process and provides for a greater control over ones financial
future, a more effective use of financial products and services and reduces vulnerability to
fraudulent schemes.

Despite the significance of financial literacy on personal finance management, limited studies
have taken place in Kenya. For instance, In Kenya, a study conducted by Nyamute and
Maina (2011) on the effect of financial literacy on personal financial management practices
of employees of financial and banking institutions found that financial literacy indeed
influences personal financial management practices and higher financial literacy leads to
better personal financial management practices. Olima (2013) conducted a study on the effect

6
of financial literacy on personal financial management on Kenya Revenue Authority
employees and found similar results. A similar study was conducted by Kimani (2014) on
SACCO members and found that financial literacy helps manage debt, personal finance and
retirement planning. A study similar to Nyamute and Maina (2011), was conducted by Obago
(2014) on the effect of financial literacy on management of personal finances among
employees of commercial banks in Kenya, the study revealed that most participants were
financially literate however, a larger percentage rated their personal finance management as
poor which was a result of poor financial discipline.

The researchers however did not test the actual financial literacy of respondents via
administered questionnaires to test the basic finance knowledge of respondents in terms of
questions that test the basic knowledge of respondents in terms of investments, savings and
debt therefore, a gap needs to be filled by conducting a study to determine the financial
literacy level of individuals and the effect of financial literacy on personal finance
management in terms of debt management, savings decisions and investment choices. A case
study of employees of Bank of Baroda (K) Limited will be used to determine the effect of
financial literacy on personal finance management.

1.3 General Objective

The general objective of this study was to determine the effect of financial literacy on
personal finance management.

1.4 Specific Objectives

1.4.1 To investigate the effect of financial literacy on Personal Investment choices.
1.4.2 To investigate the effect of financial literacy on Personal Savings.
1.4.3 To investigate the effect of financial literacy on Personal Debt Management.

1.5 Significance of the Study

This study may be significant to various stakeholders. This section elaborates the
significance of the study to financial institution employers, employees, curriculum

7
developers, policy makers and future academicians by indicating how each stakeholder may
benefit from the study.

1.5.1 Financial Institution Employers

With the results of this research, employers in the financial industry will be able to determine
the true financial literacy in their employees. Financially literate employees who better
manage their funds will also be in a better position to advise their clients in a more
financially sound manner. The employees will be more confident when dealing with the
personal banking division of their bank. This will in turn create confident customers who will
be loyal to the bank.

1.5.2 Curriculum Developers

Financial literacy courses could be introduced in schools and other learning institution's
curriculum to grow a nationwide awareness to personal financial management. This would
improve investment decisions, efficiency in personal finance management; spur economic
growth and financial market stability in the long run.

1.5.3 Financial Institution Employees

Individuals will understand the impact of financial literacy on the choices they make on their
investments; this would motivate them to gain more knowledge on personal financial
management and personal investments, thus enabling them to make rational decisions about
their finances to boost their wealth.

1.5.4 Policy Makers

The research findings can guide the Kenya Bankers Association to develop policies and
guidelines that need to be followed by all commercial banks in terms of training their
employees on financial literacy. This training will help employees better manage their
finances and also understand the risks involved in poor finance management both at a
personal and at an organizational level.

8
1.5.5 Future Academicians and Researchers
Finally, this study has formed a foundation that may help future researchers who may want to
undertake research in the area of financial literacy and personal finance management. The
study offers gaps that have not been covered in this study and future researchers can strive to
fill.

1.6 Scope of the Study

This study presents the relationship that exists between financial literacy and personal
finance management. The research focused on Bank of Baroda (K) Limited employees. The
choice of the area of study was Kenya where all the 13 branches of the banks are located.
The total population under study was 173 employees. The research was carried out between
January and May 2017.

1.7 Definition of Terms

1.7.1 Financial Literacy
Financial literacy, according to OECD (2005) is the combination of consumers/ 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.

1.7.2 Investment Decisions

Choices made by investors on how much funds to invest, what to invest in (security),
strategies to use when investing and how long to tie their money in securities (Brown, 2009).

1.7.3 Financial Products

Some of the basic Investment Opportunities available in the Kenyan Capital Markets; Equity,
Treasury Bonds, Corporate Bonds, Collective Investment Schemes, Asset Backed Securities
(Capital Markets Authority, n.d).

9
1.7.4 Finance Management
Financial management is an area of financial decision-making harmonizing individual
motives and enterprise goals Weston and Brigham (1972).

1.7.5 Personal Finance

Personal finance is the study of personal and family resources considered important in
achieving financial success. Personal financial management refers to the management of
money in its various forms to ensure short and long-term financial security. (Garman and
Forgue, 2011).

1.8 Chapter Summary

The chapter gave a brief and informative background on the issues of financial literacy
around the world. The chapter outlined the purpose, research objectives and scope of the
study, and existing gap this research would fill. In chapter two, a detailed literature review
from various sources would present the findings on the relationship between financial
literacy and investment choices, savings and personal debt. Chapter three provides a
systematic explanation of the research design used, population studied, the sampling
technique, the tools and methods for data collection and analysis used would be highlighted.
Chapter four presents the findings by using tables and graphs after analysis and lastly,
chapter five provides a discussion on the findings made, draw the conclusions and suggest
recommendations.

10
 CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 Introduction
This chapter examines literature related to the effect of financial literacy on personal finance
management. The section was guided by specific research objectives geared towards the
effect of financial literacy on personal investment decisions, personal savings and debt
management and how these factors are linked to effective personal finance management of
those in the banking profession.

2.2 The Effect of Financial Literacy on Personal Investment Decisions

2.2.1 Investments
Investment is an important part of an individual‘s personal financial plan. Individuals invest
to increase their future wealth. Cummings (2007) stresses that money hidden away does no
useful work for the owner and should be put to more profitable work. This means that for
savings to earn a return, an individual must invest their savings. According to Jones (2007),
an investment involves the commitment of funds to one or more assets that will be held over
an investment horizon. Investments range from savings accounts, money market funds, real
estate, equity and bond investments. Boone, Kurtz and Hearth (2006) stress that investing is
critical and is more important today than ever before as we live longer, personal incomes are
not rising very rapidly, the labor market is changing and self directed retirement plans are
now the norm. Investment involves a process according to Boone et al (2006), setting
investment goals, assessing risk and return, selecting the right investment and managing your
investment are the steps involved. To manage the investment process, individuals require
financial skills on investment identification, risk assessment, evaluation and implementation
of investments and monitoring of the investments.

Theories developed in the early years explain investment decisions based on the traditional
finance theories such as the portfolio theory, capital asset pricing model, arbitrage theory,
and the efficient market hypothesis, which claimed investors, are rational thinkers, however
according to the behavioral finance theory, individuals are actually irrational and make
investment decisions based on emotional bias. Behavioral finance theory is actually based on

11
how people will behave towards the different market phenomenon, what makes them choose
the type of investment. Several literatures in the past have studied the levels of personal
investment literacy among individuals from various backgrounds.

2.2.2 Financial Literacy and Personal Investments

Beal and Delpachitra (2003), stress that having financial literacy knowledge about the risks,
investment portfolio, returns and diversification of the portfolio enable fund managers to
make more informed investment decisions about their money and minimize the chances of
being misled on financial matters. In a study conducted by Volpe, Chen and Liu (2006), the
study aimed to identify the important questions in personal financial literacy and the
deficiencies in the employee's knowledge in the areas. The researchers surveyed benefit
administrators in 212 U.S companies, and found that the participants rated retirement
planning, and personal finance basics as two important topics, where there are deficiencies in
employee knowledge, the researchers also observed deficiencies in other important aspects of
personal finance management such as investment and real estate knowledge. The researchers
also noted that in contrast to the deficiencies, the employees seemed to be well informed
about company benefits.

Researchers such as Gusio and Jappelli (2008) have concluded in one of their studies that
portfolio diversification is a sign of high financial literacy and a lack of diversification of
investments is a sign of financial illiteracy. The researchers argue that financially illiterate
investors would choose only bonds over a portfolio of a combination of bonds and equity, as
they do not understand the relationship between portfolio diversification and market returns.
They also do not understand the benefits and risks involved in choosing different types of
investment avenues in the financial markets. Financially illiterate investors assume no
correlation between diversification and the returns gained at the end of the investment period
Gusio and Jappelli (2008). Investors mostly show overconfidence, herding behavior and
disposition effect because they are illiterate and so, they are unable to make any decisions
and they would rather copy other investors in the market assuming they will benefit the same
way. When other investors sell the stock they sell, when they see little profit in their stock
they immediately dispose it and do not wait for an increase in price, they show

12
overconfidence while choosing stocks to invest and in the process may fall trap to wrong
decisions. A study conducted by Grinblatt, Keloharju and Linnainmaa (2011) concludes
similar findings and have also added that investors with high intelligence quotient coupled
with financial literacy levels and average cognitive ability always use portfolios to group
their investments before investing. Doing so protects them from the risky nature of
investments. It is also important to note that portfolios with mutual funds are the most
preferred by these types of individuals.

In a research conducted by Cole and Shastry (2009), found that household participation in
financial markets is limited. They found that education has important effects on investment
income. Individuals with one more year of schooling are 3% more likely to report positive
investment income. Kimball and Shumway (2010) found that investors with low levels of
financial literacy are more likely to assume and get emotionally involved in investment
choices they make in the financial markets. Thus, they apply strategies based on their own
emotions and perceptions, which would eventually fail them at some point in their
investment cycle. Grinblatt et al. (2011) also found that the financially illiterate investors are
momentum investors. This speaks volumes about the strategies that they use; strategies based
on emotions. Investing with emotions can only expose an investor towards risky investments.
A large number of individuals rely on financial advisors, friends and family for financial
investment advice. In a study of a representative sample of the Dutch population, Van Rooji,
Lusardi, & Alessie (2011) find that many families shy away from the stock market because
they have little knowledge of stocks and the stock market.

Murithi, Narayanan, & Arivazhagan (2012), in their study of investor behavior in India,
found that the investors are aware of the concept of portfolio allotments and risk return of
investments- an aspect of financial literacy relevant to investors. They also found that most
of their respondents were at least graduates or above. However, despite being educated their
portfolio was not diversified, and their investment decisions were majorly low risk, this is
evidenced by the majority, i.e. 80% preferred to save in banks, invest in gold or mutual funds
than other high risk avenues such as real estate or equity. The researchers also concluded that
the investors make investment decisions after discussing with their family members or

13
friends. This shows the influence of social groups on individual investments. Schmidt and
Sevak, (2006) found that there are large gender gaps in current and planned retirement
income and that saving behavior has a significant gender gap. The study showed that there is
a significant difference in risk-taking among men and women, such that women are more
risk-averse compared to men. The authors showed that, in general, males are more risk-
taking when they want to attract their future partner, and females are more risk- averse in
their child- bearing periods.

A research conducted by Bhattacharjee (2014), assessed the financial literacy and its
influencing factors in India by using a questionnaire to survey investors in three villages of
Barpeta district of Assam The researchers collected data on basic and advanced personal
financial knowledge which was focused on; financial products and services, and instruments
as indicators of financial literacy. The results indicated that, the majority of respondents have
basic financial knowledge about savings accounts and basic financial instruments like life
insurance policies, public provident fund and national saving certificate. However, advanced
knowledge pertaining to financial market instruments, existence of capital market, and
mutual funds were found low. The study also showed that demographic factors such as age,
income, nature of employment and place of work, play a major role in determining the level
of financial knowledge. An increase in age, income and education showed more impact on
financial literacy, and there was no significant effect of gender on financial literacy. The
findings in this study were found to be consistent with Murithi et al (2012), where they
concluded that investors in India have basic knowledge of personal finance, however lack
advanced knowledge. In a study conducted by Bhushan (2014), respondents having low
financial literacy primarily invest in traditional and safe financial products and do not invest
much in those financial products which are comparatively riskier and can give higher returns.
Thus, it can be said that the financial literacy level of individuals affects investment
preferences towards financial products.

A study in the UAE was conducted by Hassan Al-Tamimi and Anood Bin Kalli (2009), to
assess the relationship between financial literacy of individual investors in the UAE and their
investment decisions. In order to test the hypothesis, a positive significant relationship

14
between financial literacy and investment decisions of UAE investors, a regression model
was used. It was found that financial literacy affected significantly the investment decisions
of the individual investors. The results were similar to a study conducted by Abdeldayem
(2016) in Bahrain, which used a questionnaire survey and approach of Lusardi and Mitchell
(2006), the results demonstrated that participants in high financial literacy group expressed
higher preferences for life insurance, mutual fund, stocks, bonds, pension funds, credit card,
mortgage and foreign exchange market as compared to those in the low financial literacy
group. Participants in low financial literacy group showed higher preferences for bank
deposits, saving account and post office savings. Hence, this indicates that the Bahraini
investors who have low financial literacy mainly prefer to invest in traditional and safe
financial products and do not invest significantly in complex financial products which are
comparatively riskier and can give a higher return. This indicates that the investment
decisions of Bahraini investors rely on their financial literacy level.

In Kenya, a study conducted by Nyamute and Maina (2011) which examined the personal
financial management practices that encompass investment practices of both employees who
are financially literate and those that are not. In the study, the survey data was obtained from
192 employees using a structured questionnaire. The results showed that there was no
significant difference between the financially literate and the non financially literate as far as
investment practices are concerned. In another study conducted in Kenya on Seventh Day
Adventist Church staff (SDA), Mutuku (2015) found that a large percentage of SDA staff
considered financial concepts such as returns, investments, risks, holding periods, trends in
interest rates among others in making investment decisions. The results, however, indicated
that investors need to be financially literate in order to make sound investment decisions.

The findings above all point out the importance of financial literacy and its relation to
investment decisions. Having financial literacy not only helps you at a household level, but
also at work when the bank employees are expected to advise customers on loans or other
basic term deposit products.

15
2.3 Effect of Financial Literacy on Personal Savings
2.3.1 Savings
Saving is a big part of personal finance management. Individuals need to save for the
following reasons; to improve consumption patterns over their lifetime, to provide for their
retirement and old age, to finance expected large expenditures, for example the purchase of a
house, or their children‘s education and to finance for unexpected losses of income.
Modigliani and Brumberg (1954), worked out a theory of spending based on the general idea
that people make choices about their spending at each age, limited only by the resources
available over their lives. This theory suggests that individuals follow a hump-shaped saving
pattern over their lifetime. During high earning periods of employment, individual savings
increase while, during low earning periods (for instance, prior to employment, or during
retirement), individuals use up savings to fund their needs. A saving culture is beneficial not
only to the individual, but also to the economy as a whole.

2.3.2 Financial Literacy and Savings

It is believed that high levels of financial literacy have a positive impact on saving amongst
individuals, because increased literacy implies that individuals who have a better
understanding of their financial situation would be in a better position to plan their future
finances, hence make more informed financial decisions. Analyzing individual behaviors in
developed countries reveal that financial literacy has critical implications for retirement
arrangement and saving decisions. Several previous studies have shown that people who plan
for retirement do, in fact, accumulate more retirement savings. For instance, Lusardi (1999),
showed that a 1992 HRS question asking people how much they thought about retirement (a
lot, some, a little, or hardly at all) was a strong predictor of retirement had a double the
wealth of those who had not thought about their retirement. Similar findings have been
measured in the 2004 HRS (Lusardi and Beeler, 2007).

Bernheim, Garret and Maki (2001) and Bernheim and Garrett (2003) show that people who
had early exposure in monetary studies in their high school, tertiary college or in the
workplace saved more. Similarly, Lusardi and Mitchell (2006, 2011) argued that those
possessing low financial literacy is likely not to plan for retirement, thus end up

16
accumulating much less wealth in their prime years. Lusardi and Mitchell (2006, 2011) also
show that less financially literate are less likely to save for retirement. This argument has
been supported by Lusardi and Mitchell (2011) and Banks et al. (2010) who observe that
more financially sophisticated individuals are more likely to be retirement ready and have a
higher retirement income.

Low financial literacy combined with lack of information affects one‘s ability to maintain
savings as a way of securing comfortable retirement life (Delafrooz and Lily, 2011). Lusardi
and Mitchell (2011) find in the U.S. that absence of getting ready for retirement is across the
board and associated with financial literacy, premise for divorce, poor mental wellbeing and
an assortment of other negative and miserable encounters (Kinnunen and Pulkkinen (1998)
and the cause of emotional stress, depression and hopelessness (Murphy, 2013). In Kenya, a
study conducted by (Nyamute and Maina, 2011) which examined the personal financial
management practices that encompass saving practices of both employees who are
financially literate and those that are not. In the study, it was perceived that those that were
financially literate were assumed to have undergone some level of financial training such as
bankers, accountants, auditors amongst others. The survey data was obtained from 192
employees using a structured questionnaire. The results showed that most respondents
embrace a savings culture which is displayed by them setting aside some money out of each
payment they receive. It was also found that most financially educated persons were always
looking for opportunities to save money, setting aside money for future needs and saving out
of each payment they received unlike those that are less financially educated. Similar results
have been seen in a study on developing nations by Klapper and Panos (2011) which
examined the impact of financial literacy on the retirement saving in Russia. They discovered
that higher financial literacy is positively related to retirement planning.

Murithi et.al (2012), in their study of investor behavior in India, found that 76% of their
respondents have a habit of saving, however, out of that 36% of their respondents saved
between 0-10% of their monthly income, 32% of their respondents saved between 10-20% of
their monthly income, 24% of their respondents saved between 20-30% of their monthly
income and only 8% saved above 30% of their monthly income. The study further found that

17
a majority of the respondents preferred to save in banks, that is 80%, while very few
preferred to invest in more complex investment avenues such as real estate, equities and
government securities. The results showed that the majority of the respondents saved a very
low percentage of their income. A study conducted by Bhushan (2014), showed that
respondents in the high financial literacy group have a higher awareness level for all financial
products, and statistically significant difference in awareness level was found in bank fixed
deposits, savings account, public provident fund, mutual funds, stock market investments and
bonds. Mahdzan and Tabiani (2013) conducted a study similar to Boon et al (2011) on the
impact of financial literacy on individual savings in Malaysia. For the purpose, a survey data
from 200 respondents with diverse demographic and economic characteristics were analyzed
using regression analysis, which showed that financial literacy, both basic and advanced
knowledge are related to higher saving. The study suggested that the government should
promote financial education in order to improve the saving in the population. In a study
conducted in Thailand, Suwanaphan (2013) concluded, based on the analysis of sample
survey of 400 sample academic support staffs of Change Mi University in Thailand, which
showed an overall low financial literacy negatively affected saving behavior or leads to
overspending. The researcher further concluded similar to the Malaysian researchers that the
government should promote financial education in order to improve the saving in the
population.

In a study conducted by Standard & Poor (2014), about global financial literacy, it was found
that at a global level, only 57% of adults around the world save money, but only 27% use
banks or other formal financial institutions. Others used less safe means to save money, such
as informal saving groups. The research further found out that amongst the 57% of adults
who saved, only 42% of bank account owners worldwide use their accounts to save. This
shows the need to improve financial literacy to ensure individuals better understand the
importance to save and to have their income grow. For example, in China, half the account
owners use their accounts to save money, but only 52% of them are correctly able to respond
to questions about interest. In a more recent study conducted by OECD (2016), the
international survey of adult financial literacy competencies, which interviewed 51,650
adults from 30 developed and developing countries, found that only 42% of adults across all

18
participating countries and economies are aware of the additional benefits of interest
compounding on savings, and only 58% could compute a percentage to calculate a simple
interest on savings.

Schmidt and Sevak, (2006) argued that women generally have lower earnings; they tend to
have a lower level of saving and wealth, as opposed to men. There is significant evidence
that financial literacy affects savings and investment behavior at both cross country as well as
individual levels (Bhabha, Khan, Qureshi, Naeem, & Khan, 2014). Research done by Bhabha
et al. (2014) on the effect of financial literacy on savings and investment behavior of working
women in Pakistan showed that the working women possess a better understanding about
basic financial concepts, they however, lack knowledge about advanced financial concepts.
They conclude that the savings and investment behavior of women in Pakistan depends on
financial literacy. In a study conducted in Kenya by Hinga (2014), among 110 employees of
the Postal Corporation of Kenya, the study concluded that higher education leads to higher
savings, the study also established that income is positively related to individual savings, that
the more one earns, the more they are likely to have increased their savings.

There is significant evidence that financial literacy affects savings, and that personal savings
will also affect the national savings (Marquis, 2002). Jappelli and Padulla (2013), examined
reports from 39 nations and found that financial literacy is a determinant of the level of
national savings and that its impact is potential as it gives 3.6% increase in national savings.
It is therefore important for employees and furthermore the national government to
encourage savings and promote savings culture through financial literacy workshops.

2.4 Effect of Financial Literacy on Personal Debt

2.4.1 Financial Literacy and Debt
Evidence shows that those who are less financially literate are more likely to have problems
with debt, less likely to save, more likely to engage in high-cost mortgages, and are less
likely to plan for retirement. Without a certain level of financial literacy, consumers might
not purchase the financial products and services they need and might be ill-equipped to fully
appreciate their rights and responsibilities as financial consumers, and to understand and

19
appropriately manage the variety of risks. Excessive indebtedness presents an important and
widespread problem that endangers the financial well being of many individuals and
households. A poor level of financial literacy is one of the factors that may influence debt
behavior and contribute to an increase in indebtedness. Debt management is pegged on the
ability of one to be financially literate hence their ability to make informed personal financial
decisions on how to minimize their debts. Excess high debt levels are a propellant to one
being susceptible to investment fraud, delinquency on credit cards and bankruptcy all of
which are pointers to financial illiteracy in individuals (Kim, 2000).

Research has indicated that many different factors influence attitude toward a particular
behavior. The attitude has been defined as the degree to which a person has a favorable or
unfavorable evaluation or appraisal of the behavior in question. Among attitudes that
influence financial behavior are debt tolerance, money specific attitudes, unrealistic
optimism, and level of financial knowledge. Psychological constructs, such as cognitive
dissonance and locus of control have also been found to influence attitudes toward financial
behaviors, more specifically credit borrowing. Of the attitudinal factors that are associated
with debt, tolerance may be one of the most important. Davies and Lea (1995) found that
individuals who expected to make more money in the future were more tolerant of debt.
When coupled with unrealistic optimism that many individuals have about their financial
futures, this influences the level of debt tolerance to the point at which individuals tolerate
levels of debt that have a negative impact on other aspects of their lives. This point is further
illustrated through the findings of Davies and Lea (1995). They suggested that individuals, as
a result of their young age and early stage in their career, are more tolerant of debt than the
general population due to optimism that they will be in a good position to reconcile their
debts in their later stages of their career. There is a strong positive correlation between
attitudes toward debt and the amount of debt people incur. This finding is consistent with
dissonance theory, which would suggest that people who have a positive or accepting view of
debt tend to take on more debt because in doing so they are not contradicting their beliefs. By
accepting one‘s debt, one is able to avoid feeling like a hypocrite or being seen as one (Hogg
and Terry, 1999).

20
The key Studies in the past have attempted to study the relationship between financial
literacy and personal finance management in terms of personal debt. Personal financial
management and personal debt have an impact on people‘s lives. This affects their personal
lives and their work lives. Personal debt can directly affect whether a person can get a loan
for their home, car or a child‘s education (Dean, Joo, Gudmunson, Fischer and Lambert,
2013).

Personal debt can even have effects that go as far as causing people to have anxiety and
depression. Some people who have a significant amount of debt, and are having trouble
repaying report that they experience thoughts of suicide (Meltzer, Bebbington, Brugha,
Jenkins, McManus, & Dennis, 2011). The number one cause of stress for Americans is their
worry about money (Prawitz & Cohart, 2014). Debt problems cause stress and anxiety that
reduce employee productivity (Zimmerman, 2006). Gurchiek (2008), states that thirty million
employees in the United States are financially distressed. Personal finance causes five times
more concern than health issues. Stress results in lower employee productivity.

Hilgert, Hogarth, and Beverly (2003) reported that most Americans fail to understand basic
financial concepts, particularly those relating to bonds, stocks, and mutual funds. In a survey
of Washington state residents, Moore (2003) found that people frequently failed to
understand the terms and conditions of consumer loans and mortgages. Consistent with the
findings of Moore (2003), Miles (2004) reported that UK borrowers have a poor
understanding of mortgages and interest rates. Lusardi and Mitchell‘s (2007, 2011) module
on planning and financial literacy for the 2004 Health and Retirement Study (HRS) provides
further evidence of financial illiteracy. They find that many older (50+) individuals cannot do
simple interest-rate calculations, such as calculating how the money would grow at an
interest rate of 2%, and do not know about the workings of inflation and risk diversification.
Similar results are seen in a sample of early Baby Boomers (ages 51–56): most respondents
displayed low numeracy and a very limited knowledge of the power of interest compounding
(Lusardi and Mitchell, 2007). Campbell (2006) reports that individuals with lower incomes
and lower education levels—characteristics that are strongly related to financial literacy—are
less likely to refinance their mortgages during a period of falling interest rates.

21
Individual productivity at the workplace is considerably affected by financial problems
employees face (Kim and Garman, 2004). Employees in financial institutions are
increasingly suffering from stress and this is as a result of money problems. This included
financial problems from behaviors such as over indebtedness, overspending, unwise or poor
credit habits, poor spending decisions and money management as well as lack of sufficient
money to make ends meet. This is irrespective of the fact that most of the employees in
financial institutions enjoy salaries and remuneration packages that are the envy of many
employees in other sectors. Atkinson and Kempson (2004) found that youngsters (aged 18 to
24) in Britain are progressively over-borrowed, prompting financial challenges as a result of
financial illiteracy. Workers end up in financial crisis invariably from the need to spend their
income on immoderate goods, for example, marked clothes and cell phones, with the end
goal of fitting into a society where these goods have turned into a need, instead of an
extravagance.

Lusardi and Tufano (2015) found that people with low financial literacy were more likely to
have problems with debt. This is because the less financially savvy incurred high transaction
costs, paying higher fees and using high-cost borrowing, the less knowledgeable also
reported that their debt loads were excessive, or that they were unable to judge their debt
positions. Stango and Zinman (2006) concluded that those unable to correctly calculate
interest rates out of a stream of payments ended up borrowing more and accumulating less
wealth. Overall, these results suggest that individuals may underestimate the interest rate at
which they are borrowing, confirming the evidence reported in Stango and Zinman (2006)
that individuals are systematically biased toward underestimating the interest rate out of a
stream of payments. Financial literacy is well seen to reinforce traits like timely payment of
bills and avoidance of over indebtedness and thus it is able to assist consumers maintain
access to loans in tight credit markets (Miller, Godfrey, Levesque and Stark, 2009).

Norvilitis et al. (2006) identified unrealistic optimism as a precipitant of irresponsible

borrowing. Norvilitis et al. (2006) reported that 73% of participants in his research believed
that it would take them less time than the average household to get out of debt. By contrast,
only 6% thought that it would take them longer than the average household to get out of debt,

22
and 21% believed it would take them an average amount of time. These results also revealed
that 33% of the sample surveyed expected to earn more than the average household in the
future; 43% thought that they would earn average salaries, and 23% thought that they would
earn less than average salaries. These figures illustrate the unrealistic optimism that many
households have regarding their financial future, including their estimated future income,
which for many households has great influence on the amount of debt that they are able to
tolerate. Furthermore, unrealistic optimism towards future finances is a matter of lack of
financial knowledge which has also been found to influence borrowing by many individuals
(Norvilitis et al., 2006). Their research contended that financial knowledge is one of the
strongest 20 predictors of debt and is also one of the most amenable to change.

Mottola (2013) found that those with low financial literacy were more likely to engage in
costly credit card behavior. Moreover, both self-assessed and actual literacy is found to have
an effect on credit card behavior over the life cycle (Allgood and Walstad 2013). A study by
Gerardi, Goette, and Meier (2013) matched individual measures of numerical ability to
administrative records that provide information on subprime mortgage holders‘ payments
they found that numerical ability was a strong predictor of mortgage defaults.

In the Kenyan scenario, a study conducted by (Nyamute and Maina, 2011) examined the debt
management practices from 192 employees using a structured questionnaire. The results
showed a high debt management from both groups, financially literate and not financially
literate. The results also showed that the non financially literates were found to be more
sensitive in sorting out their bills in time. Increased individual responsibility for retirement
planning and soaring levels of consumer debt have brought about questions of whether
households have sufficient financial knowledge to make adequate inter-temporal
consumption decisions and to manage their investments (Brown and Graf, 2012).

A study conducted in Croatia by Bahovec, Barbić and Palić (2015), the findings of this
research suggest that respondents, with respect to varying levels of financial literacy exhibit
different debt behavior. Thus, respondents with a low level of reported financial literacy, i.e.
financially illiterate respondents are expected to demonstrate worse debt behavior, i.e. are

23
more indebted than consumers with medium and high levels of financial literacy. The level
of disposable income per household member was found to be statistically insignificant in
relation to different levels of financial literacy. On the other hand, levels of financial literacy
were found to be statistically significantly different with respect to a respondent‘s gender.
The results of this research conform to previous research and support the significance of
financial literacy in determining a consumer‘s debt behavior.

According to Dean et al. (2013), personal debt is not determined by race, sex or even income.
People with higher levels of income have even higher debt, especially when it comes to
automobile debt. This review is relevant to employees across all income levels. Personal
financial debt is more the result of attitudes and behaviors than it is the result of not having
enough money. The findings show that having debt leads to acquiring more debt.

2.5 Chapter Summary

This chapter provides a theoretical background on all the study‘s objectives, thus under the
relationship between financial literacy and demographic factors such as age, income, gender
and occupation the chapter provides numerous researches to show that there is a relationship
between financial literacy and all the demographic factors mentioned above. The chapter
outlined the existing debate on the relationship between financial literacy and financial
education and also provided enough literature to suggest there exists a relationship between
financial literacy and investment decisions such as choice of investment vehicle.
Chapter Three, will focus on the research design and methodology (how the data were
collected, analyzed and presented).

24
 CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.1 Introduction
The objective of this study is to investigate the effect of financial literacy on the level of
personal financial management of the employees of Bank of Baroda (K) Limited. This
chapter presents the research methodology and design that was used in the study. The chapter
discusses the research design, the target population, the sample section and sampling
techniques used. The data collection, research procedures, and analysis methods will also be
explained.

3.2 Research Design

According to Sreejesh, Mohanpatra and Anushree (2014), a research design can be defined as
a framework or blueprint for conducting business research project in an efficient manner. It
details the procedures necessary for collection, measurement and analysis of information
which helps the researcher to structure/or solve business research problems.

The research design chosen for this study was a descriptive research design. According to
Matthews and Kostelis (2011), a descriptive research attempts to answer immediate questions
about a current state of affairs. They further explain that a descriptive research design
includes research that provides exploratory data about the specific variables being examined.
According to Rovai, Baker, and Ponton (2013), a descriptive research design or study
(sometimes called observational study or survey is meant to generate an accurate record of
what is happening in a specific situation with a given population. The researcher does not
exert control over the phenomena of interest. Instead, phenomena are observed (measured) as
they occur in a situation or at a given point or points in time. The descriptive research design
will be used to investigate the extent to which financial literacy is associated with other
variables (debt management, savings and investment decisions) such that predictions can be
made based on the level of association. Investment choices, savings decisions and debt
choices will be the dependent variables while, financial literacy will be the independent
variable.

25
3.3 Population and Sampling Design
3.3.1 Population
According to Siegel (2011) a population is a collection of units (people or objects) that you
are interested in knowing about. The population in this research study was focused on
employees of Bank of Baroda (Kenya) Limited. As of 05.04.2017, there are 173 employees
in the bank.

3.3.2 Sampling Design

According to Kumar (2008), a sample is defined as a limited proportion of a statistical
populace whose physical characteristics are considered in order to gain information on the
complete group that has been selected for the study. Kumar (2008) further adds that when
dealing with people, a sample can be defined as a set of respondents (people) selected from a
larger population for the purpose of a survey. A sampling design is, therefore, the method
used to select a sample during a study.

3.3.2.1 Sample Frame

The sampling frame is the ordered list of individuals in a population (Burt, Barber and Rigby,
2009). Cooper and Schindler (2008) add that a sampling frame needs to be comprehensive
and should contain the population participants only. The sampling frame for this study used
will be the Bank of Baroda (Kenya) Limited employee list register, as at April 2017, the
employees are 173.

3.3.2.2 Sampling Technique

According to Cooper and Schindler (2014), sampling techniques are the methods used in
drawing samples from a population usually in such a manner that the sample facilitates
determination of some hypothesis concerning the population. The study employed non
probabilistic sampling. Non-probability sampling is that sampling procedure which does not
afford any basis for estimating the probability that each item in the population has of being
included in the sample (Kumar, 2007). Non probabilistic sampling offers two advantages,
convenience and cost.

26
Convenience sampling was used to select the employees from the population. According to
Welman and Kruger (2001), homogeneous subjects are best handled by using an effective
sampling technique such as convenience sampling. This technique will allow the researcher
to get a higher response rate as the respondents will be easily available in the bank. Time will
also be saved as the researcher will not have to travel long distances in search for
respondents. In addition, the technique proved to be inexpensive and the respondent was able
to meet the set budget target for the research as no elaborate setup was required. In this study,
the employees were chosen based on convenience to the researcher.

3.3.2.3 Sample Size

A sample is a representative portion of the whole population (Brown, 2009). Cooper and
Schindler (2014) articulate that the extent of how large a sample should be a function of the
variation in the population parameters under study and the estimating precision needed by the
researcher. A sample size ensures that the information is detailed and comprehensive. Due to
limitations in terms of time and cost, the whole population will not be studied.
Target population is 173 members. The sample size will be derived using Yamane (1967)
formula. According to Saunders, Lewis and Thornhill (2012), this formula provides a
simplified formula to calculate sample sizes, and it also gives a sample size with known
confidence and risk levels. The formula used is shown below:
n = (N) / (1+Ne²)
Where;
n = Sample Size
N= the size of the population
e = the probability error of 10%

Therefore, n= {(173) / [1 + (173*0.1²)]} = 63.53

The sample size for this study will therefore be 64 respondents.

3.4 Data Collection Methods

The studied applied the use of the primary data collection technique. The responses were
achieved through self-administered questionnaires. The research instrument was carefully

27
designed by the researcher. According to Cohen, Manion, and Keith (2011), questionnaires
are reliable because they encourage honesty due to anonymity. They also tend to be
economical in terms of time and money; it is also possible to use electronic means such as
email to get back questionnaire responses. The questionnaire used closed ended questions to
facilitate the use of quantitative data analysis. The questionnaire also had scale questions
(percentage scale) to measure the degree of rating by respondents.

The questionnaire was divided into five sections. The first section focused on demographic
information in relation to the respondents. The second section was focused to test the
financial literacy of the respondents. The third section focused on the investment choices
made by the respondents. The fourth section focused on the savings choices made by
respondents. The fifth section focused on the debt choices made by the respondents.

3.5 Research Procedures

The questionnaire that was formulated by the researcher was based on the three research
objectives. The instruments were tested using a pilot test to establish the validity before the
real administration was carried out. According to Cooper and Schindler (2008), pre-testing of
the questionnaire improves the consistency of the collected data during the research. The
pilot test was conducted by randomly selecting the respondents from the target population;
however, they were not part of the sample. The study used a sample of 10 respondents to test
the reliability of the questionnaires.

The accuracy of data to be collected largely depends on the data collection instruments in
terms of validity and reliability (Mugenda and Mugenda, 2003). Validity as noted by
Robinson (2002) is the degree to which result obtained from the analysis of the data actually
represents the phenomenon under study. Reliability refers to a measure of the degree to
which research instruments yield consistent results after every repeated trial (Mugenda and
Mugenda, 2003).
Once the pre test was complete, the researcher administered the questionnaires individually
to the target population. The researcher then explained to the population the need for the
study and the importance of truthful responses from the respondents. The researcher then

28
carried out a follow-upon the data collection by personally emailing, calling and if necessary
visiting the respondents at their branches to encourage a high response rate for the study. The
researcher kept track of all questionnaires handed out to the branches to ensure all
instruments that were handed out, were collected.

3.6 Data Analysis Methods

Data analysis is the application of reasoning to understand the data that has been gathered
(Zikmund, Babin, Carr, and Griffin, 2013). The structured questionnaires were coded for all
questions in respect to each research objective to ensure that processing of the data was
easily done. The data collected was analyzed using quantitative method and descriptive
analysis. According to Cooper and Schindler (2008), descriptive analysis involves the
process of transforming raw data into charts, tables with frequency distribution, percentages
to enable full interpretation of data. The Statistical Package for Social Sciences (SPSS) was
used to analyze the data. Cross tabulation method was used to describe the relationship
between the variables. Inferential statistics were used to to examine the degree of variance
between variables where alpha was at the level p<0.05.

The study employed the use of statistical frequencies like percentages to analyze the various
differences in the population demographics. Mean and standard deviation were used in the
study to determine the strength of various financial decisions shows by the respondents in
each section.

3.7 Chapter Summary

This chapter described how the study will be conducted. The chapter discussed the research
methodology and design to be used in this study, including the population, sampling design
and size, data collection and analysis methods. In the data analysis and presentation, both
quantitative and qualitative methods of analysis will be used. The population consisted
employees of Bank of Baroda (Kenya) Limited. The data will be collected using a structured
questionnaire. Chapter four covers the findings of the study in line with research questions.
Chapter five will cover conclusions and recommendations.

29
 CHAPTER 4
4.0 RESULTS AND FINDINGS
4.1 Introduction
The purpose of this study was to determine the effect of financial literacy on personal finance
management decisions made by the employees of Bank of Baroda (Kenya) Limited. This
chapter presents the study results and findings in the form of figures and tables. The first
section will introduce the chapter. Section 4.2 will discuss the response rate, section 4.3 will
present the background information of respondents, section 4.4 will present the results on the
effect of financial literacy on personal investment decisions, section 4.5 will present the
results on the effect of financial literacy on personal saving, section 4.6 present the results on
the effect of financial literacy on personal debt, section 4.7 will present the chapter summary.

Sixty four self-administered questionnaires were distributed to the target population and only
sixty were returned, representing a response rate of 93.75%,

4.2 General Information

The study first analyzed the background information of the respondents who were involved
in the study. The various demographic aspects were considered in the study such as gender,
age range, marital status, job title, level of education and field of education.

4.2.1 Gender of Respondents

The respondents were asked to indicate their gender, figure 4.1 shows that 63% of the
respondents were male and 37% were female. The results could be explained by the fact that
there are a higher number of male employees with Bank of Baroda (K) Ltd.

30
 40%
Male
Female
60%

Figure 4.1 Respondent Gender

4.2.2 Age Distribution

The majority of respondents belonged to the age group of 31 years to 40 years, followed by
35.6% who belonged to 21 years to 30 years. This implies there are more youth employed
with the bank between the ages of 21 years to 40 years as indicated in figure 4.2.

5%
8%
21 years to 30 years
37%
31 years to 40 years
41 years to 50 years
51 years to 60 years
50%

Figure 4.2 Respondent Age

4.2.3 Marital Status

The results in figure 4.3 showed that 73.3% of the respondents were married while 26.7%
were single.

31
 25%

Single
Married

75%

Figure 4.3 Marital Status of Respondents

4.2.4 Job Title

The results in figure 4.4 showed that 35.6% who respondents were clerks, 6.7% department
head, 17.8% management trainee, 24.4% officers, 8.9% senior manager, 4.4% branch head
and 2.2% manager. This shows that the majority of employees in the bank are at entry level
jobs- Clerks.

Clerk
14% 15%
2%
Department Head
Management Trainee
14% 9%
Officer
10% Senior Manager
Branch Head
36% Manager

Figure 4.4 Job Title of respondents

4.2.5 Salary Scale

The results in figure 4.5 indicated that those earning below Ksh 50,000 were 6.7%, while the
highest earning over Ksh 400,000 were only 2.2%. This shows that those at entry level,

32
which comprises as the majority of respondents earn between 51,000-100,000Kes as basic
salary.

2%

7% 0-50,000 Kes
5%
10% 51,000-100,000 Kes
101,000 to 150,000 Kes
32% 151,000 to 200,000 Kes
18%
201,000 to 250,000 Kes
251,000 to 300,000 Kes
300,000 to 400,000 Kes
3% 23% Over 400,000

Figure 4.5 Salary Scale of respondents

4.2.6 Level of Education

The results in figure 4.6 displayed that only 2.2% were educated till primary school, 6.7% till
high school, 57.8% had an undergraduate degree, 24.4% had a Diploma or certificate and
24.4% had a post graduate degree. The results could be explained by the fact that a majority
of the Kenyan population at least holds an Undergraduate degree.

2%

5%
20% Primary School
High School
6% Undergraduate Degree
Diploma or Certificate

67% Postgraduate Degree

Figure 4.6 Level of Education of respondents

33
4.3.7 Field of Education
Figure 4.7 showed that those without a university level of education made up 8.9% of the
population. Those that are educated with an undergraduate and above made up 91.1% of the
population. The table shows that a majority of the respondents i.e. 22.2% studied finance at
the university level, followed by B. Com Accounting at 11.1%, Economics at 8.9%,
Business Management at 6.7%, Banking at 4.4% Business & Finance at 2.2%. This shows
that a majority of those employed with the bank have undergone formal education in the field
of Finance.

Finance
B Com (Accounting)
2%
2% Business Management
6% Business & Finance
2% 6% Human Resource Management
2% 26% Commerce
Arts
8% Plant Pathology
Political Science
2% Economics
2% ACCA
6% 15%
Strategic Management
4% Banking
6% Economics & Mathematics
4% 9%
Supply Chain Management
Sciences

Figure 4.7 Field of Education of respondents

4.3.8 Financial Literacy training

The respondents were asked whether they have undergone any financial literacy training.
Figure 4.8 shows that 70% of the respondents reported having undergone financial literacy
training while 30% of the respondents did not.

34
 30%
Yes
No
70%

Figure 4.8 Financial Literacy Training

4.3.9 Source of Financial Knowledge

The figure 4.9 showed that a majority of employees‘ i.e. 26.7% source of financial
knowledge was from the their workplace, followed by Investment Groups at 20% and Media
at 13.3% while the remaining respondents gained their financial knowledge from other
sources.

Workplace
7%

33% Media
19%

Investment Groups

29% 12% Others

College

Figure 4.9 Mode of learning about Financial Literacy

4.3.10 Financial Literacy training at work

Figure 4.10 showed that the majority of the respondents i.e. 91.1% agreed that workplace
should hold annual financial education and literacy seminars.

35
 7%

Yes
No

93%

Figure 4.10 Should workplace hold Financial Literacy T raining

4.3.11 Financial Literacy test

The respondents were asked to provide answers to a financial literacy quiz. The quiz tested
on multiple areas of finance such as simple interest, inflation, compound interest, security
market and debt calculations. Figure 4.11 shows that 18.3% respondents scored below 50%,
33.3% of the employees managed to score at least a 50%, 35% of respondents scored 63%,
13.3% of respondents scored 75%, 18.3% of respondents scored 88% no employee managed
to score 100%. This shows the in terms of financial literacy, the majority of respondents have
scored above average. The data also shows that 18.3% of the respondents are financially
illiterate as they managed to score only three correct answers out of the eight asked.

13%
3%
25%
18% 8%
7% 38%

50%
14% 15%
63%

75%

35% 88%

Figure 4.11 Financial Literacy test score

36
4.4 The effect of Financial Literacy and Investment Choices
4.4.1 Investment Choices made by employees
The first objective of the study was to assess the effect of financial literacy on personal
investments. The first section of the chapter looks at the descriptive statistics, where the
respondents were asked to answer a series of questions to understand their investment
choices. The respondents rated the investment options as applicable to their own personal
choices on a percentage scale of 0% to 100% with intervals of 10% where no investment
made was rated as 0% and the highest investment made was rated between 90% and 100%.
Table 4.1 shows the percentage of respondents who invest and table 4.2 shows the percentage
of investment the respondents make in the different choices given. The second section
focuses on the cross tabulation between financial literacy scores and personal investment
decisions. Finally, the third section focuses on the analysis of variance (ANOVA) between
financial literacy and personal investment decisions.

The respondents were asked whether they make any investments. The table shows that 80%
of the employees make investments.

Table 4.1 Do you invest?

Response Frequency Percent
Yes 48 80.0
No 12 20.0
Total 60 100.0
Mean 1.2
Standard Deviation 0.40338

The table shows that descriptive analysis on the percentage of investments the respondents
reported in the questionnaire

37
Table 4.2 Investment Choices
Number of Mean Median Standard Deviation
respondents
What percentage of your 15 6.7333 8.0000 2.76371
investment do you make in
Government Securities
What percentage of your 18 8.4444 9.0000 1.54243
investment do you make in
Mutual funds
What percentage of your 24 7.8750 8.0000 2.36482
investment do you make in
Equity share market
What percentage of your 33 8.1818 9.0000 2.20021
investment do you make in
Life Insurance
What percentage of your 14 7.2143 8.0000 3.04274
investment do you make in
Bonds
What percentage of your 12 8.1667 10.0000 2.75791
investment do you make in
the Foreign exchange market
What percentage of your 28 6.2857 6.0000 1.90238
investment do you make in
Real Estate
What percentage of your 7 8.5714 10.0000 2.29907
investment do you invest in
Gold
What/Whom do you use for 44 3.0000 4.0000 1.49417
assistance before making an
investment?
7.1636

Table 4.2 shows a summary of the descriptive statistics on the choice of investments. The
variables exhibited an average mean of 7.1636 showing that the respondent‘s financial
literacy score affected the investment decisions they made. The research participants
preferred to invest mostly in life insurance where the mean was 8.1818 with a median of
9.0000 and a standard deviation of 2.20021. The median is higher than the mean which
shows that the responses are negatively skewed with most responses being lower percentage
choices. The standard deviation is high; this shows a significant variance in the responses of
the respondents who chose the percentage of the investment they made in life insurance.

38
The research participants also preferred to invest in real estate where the mean was 6.2857
with a standard deviation of 1.90238. This shows a low variance in the responses of the
respondents who chose the percentage of the investment they made in life insurance.
The research participants also preferred to invest in equity where the mean was 6.2857 with a
median of 8.0000 and a standard deviation of 2.36482. The median is higher than the mean
which shows that the responses are negatively skewed with most responses being lower
percentages. The standard deviation shows a high variance in the responses of the
respondents who chose the percentage of the investment they made in equity.
On the other hand, the least number of respondents preferred to invest in gold with a mean of
8.5714, median of 10.0000 and a standard deviation of 2.29907. The median is higher than
the mean which shows that the responses are negatively skewed with most responses being
lower percentages. The standard deviation shows a high variance in the responses of the
respondents who chose the percentage of the investment they made in equity.

Investment in government securities had a mean of 6.73, a median of 8.0000 and a standard
deviation of 2.763.The median is higher than the mean which shows that the responses are
negatively skewed with most responses being lower percentages. The extremely high
variance signifies that the respondents largely varied in their responses on the percentage of
investment that made in government securities.

Investment in Mutual funds had a high mean of 8.444, a median of 9.000 with the least
standard deviation of 1.54243. The median is higher than the mean which shows that the
responses are negatively skewed with most responses being lower percentages. The
extremely low standard deviation signifies that the respondents did not largely vary in their
responses on the percentage of investment that made in mutual funds.

Investment in bonds had a mean of 7.2143, a median of 8.0000 and a standard deviation of
3.04274. The median is higher than the mean which shows that the responses are negatively
skewed with most responses being lower percentages. The extremely high standard deviation
signifies that the respondents largely varied in their responses on the percentage of
investment that made in bonds.

39
Investment in the foreign exchange market had a mean of 8.1667, a median of 10.0000 and a
standard deviation of 2.763. The median is higher than the mean which shows that the
responses are negatively skewed with most responses being lower percentages. The high
standard deviation signifies that the respondents largely varied in their responses on the
percentage of investment that made in the foreign exchange market.

A large number of respondents preferred to take advice before they made any investment
with a mean of 3.00 and a low standard deviation of 1.49417, this signifies that the
respondents did not vary in their responses on their preference to consult before making
investments.

4.4.2 Cross tabulation between Financial Literacy scores and Investment decisions

Table 4.3 Total score on the Financial Literacy test vs. Do you invest?
Yes No Total
Total score on Financial Literacy 13% 0 2 2
test 25% 3 2 5
38% 4 0 4
50% 6 3 9
63% 16 5 21
75% 8 0 8
88% 11 0 11
Total 48 12 60

The results indicate that the respondents that scored 13% on the financial literacy test did not
invest at all, whereas; all the respondents who scored the highest 88% invest. This shows that
indeed financial literacy affects whether individuals make any investments.

40
Table 4.4 Total score on the Financial Literacy test vs. Percentage of investment in Government
Securities?
71%- 61%- 31%- 21%- 1%-
Total
80% 70% 40% 30% 10%
25% 0 1 0 1 0 2
38% 0 0 0 0 1 1
Total score on 50% 0 1 0 0 0 1
Financial Literacy test 63% 2 1 0 1 1 5
75% 0 1 1 0 0 2
88% 0 0 0 2 2 4
Total 2 4 1 4 4 15

The results showed that those that scored 63% and 88% showed more interest in investing in
government securities as compared to those that scored below 50% on the test.

Table 4.5 Total score on the Financial Literacy test vs. Percentage of investment in Mutual funds
51%- 31%- 21%- 11%- 1%- Total
60% 40% 30% 20% 0%
Total score on 25% 0 0 1 1 0 2
Financial Literacy test 38% 0 0 0 0 1 1
50% 0 0 1 1 0 2
63% 1 1 1 1 2 6
75% 1 0 0 0 1 2
88% 0 0 2 2 1 5
Total 2 1 5 5 5 18

The results showed that those that scored 63% and 88% showed more interest in investing in
mutual funds as compared to those that scored below 50% on the test.

Table 4.6 Total score on the Financial Literacy test vs. Percentage of investment in Equity share market
81%- 61%- 51%- 31%- 21%- 11%- 1%- Total
90% 70% 60% 40% 30% 20% 10%
Total score on 25% 0 0 0 1 1 0 0 2
Financial 38% 0 0 0 0 0 0 1 1
Literacy test 50% 0 0 0 0 1 0 0 1
63% 1 0 1 0 1 1 3 7
75% 1 1 0 0 1 0 2 5
88% 0 0 0 0 5 2 1 8
Total 2 1 1 1 9 3 7 24

The results showed that those that scored above 50% showed more interest in investing in the
equity share market as compared to those that scored below 50% on the test.

41
Table 4.7 Total score on the Financial Literacy test vs. Percentage of investment in Life Insurance
81%- 71%- 41%- 31%- 21%- 11%- 1%- Total
90% 80% 50% 40% 30% 20% 10%
Total score on 25% 0 0 0 0 1 0 0 1
Financial 38% 0 0 0 0 0 1 1 2
Literacy test 50% 0 0 0 1 1 1 1 4
63% 1 1 1 1 1 4 3 12
75% 0 0 2 1 0 0 3 6
88% 0 1 0 0 2 1 4 8
Total 1 2 3 3 5 7 12 33

The results showed that those that scored above 50% showed more interest in investing in the
equity share market as compared to those that scored below 50% on the test.

Table 4.8 Total score on the Financial Literacy test vs. Percentage of investment in Bonds
91%- 81%- 51%- 41%- 31%- 21%- 11%- 1%-
Total
100% 90% 60% 50% 40% 30% 20% 10%
25% 0 0 1 0 0 0 0 0 1
Total
38% 0 0 0 0 0 0 0 1 1
score on
50% 0 0 0 1 0 0 0 0 1
Financial
63% 0 1 1 0 1 1 0 1 5
Literacy
75% 0 0 0 0 0 1 1 0 2
test
88% 1 0 0 0 0 0 0 3 4
Total 1 1 2 1 1 2 1 5 14

The results showed that those that scored above 50% showed more interest in investing in
bonds as compared to those that scored 50% and below on the test.

Table 4.9 Total score on the Financial Literacy test vs. Percentage of investment in Foreign exchange
market
61%-70% 41%-50% 1%-10% Total
38% 0 0 1 1
Total score on Financial 63% 2 0 5 7
Literacy test 75% 1 0 2 3
88% 0 1 0 1
Total 3 1 8 12

The results showed that those that scored 25% and 50% did not make any investment in the
foreign exchange market, whereas those that scored 63% and above showed more interest in
investing in the foreign exchange market.

42
Table 4.10 Total score on the Financial Literacy test vs. Percentage of investment in Real Estate

81%- 71%- 61%- 51%- 41%- 31%- 21%- 1%-

Total
90% 80% 70% 60% 50% 40% 30% 10%
25% 0 0 1 0 0 0 1 0 2
Total
38% 0 1 1 0 0 0 0 0 2
score on
50% 1 0 1 0 0 2 1 0 5
Financial
63% 0 0 0 2 2 0 2 1 7
Literacy
75% 0 0 0 1 1 1 0 1 4
test
88% 0 0 0 0 5 1 2 0 8
Total 1 1 3 3 8 4 6 2 28

The results showed that those that scored 50% and above showed more interest in investing
in the real estate market as compared to those that scored below 50% on the test.

Table 4.11 Total score on the Financial Literacy test vs. Percentage of investment in Gold
61%- 31%- 11%- 1%- Total
70% 40% 20% 10%
Total score on Financial 25% 0 0 0 2 2
Literacy test 63% 0 0 1 1 2
75% 1 0 0 0 1
88% 0 1 0 1 2
Total 1 1 1 4 7

The results showed that very few of the respondents made any investment in gold.

Table 4.12 Total score on the Financial Literacy test vs. What/Whom do you use for assistance before
making an Investment
Financial Financial Media Friends Investment Total
Statements Analyst Groups
Total score on 25% 1 1 0 0 1 3
Financial 38% 1 0 0 1 1 3
Literacy test 50% 1 0 1 1 3 6
63% 4 1 1 8 1 15
75% 2 0 1 3 0 6
88% 4 1 2 4 0 11
Total 13 3 5 17 6 44

The results showed that a majority of respondents who scored 50% and above at least
invested a significant percent in securities. This shows that those who are financially literate
invest significantly in most of the options provided. The results also showed that a majority

43
of the respondents preferred to consult with friends or family before making investment
decisions. Those that scored 88% preferred to consult financial statements, however the most
alarming observation was found to be that of the majority that scored 63% preferred to
consult friends or family to make investments as compared to analyzing financial statements,
following media or consulting with a financial analyst. The results also showed that very few
consulted a financial analyst.

4.4.3 Analysis of Variance summary of the effect of Financial Literacy and Choice of
Investments
A one-way ANOVA between subjects was conducted to compare the effect of Financial
Literacy on Personal Finance Management in Personal Investment choices, Personal Savings
and Personal Debt variables. There was a significant effect of Financial Literacy on Personal
Investment choices, where employees were asked whether they invest at the p<0.05 level [F
(6, 53) = 3.264, p = 0.008].

Table 4.13 One Way ANOVA- Effect of Financial Literacy on Personal Investment Decisions
Sum of Squares Df Mean Square F Sig.
Do you invest? Between Groups 2.590 6 .432 3.264 .008
Within Groups 7.010 53 .132
Total 9.600 59

4.4.4 Post Hoc Summary Comparisons of Financial Literacy score and Choice of
Investments
Post hoc comparisons using the Turkey test indicated that employees that scored 13% on the
question of whether they invest were significantly different from those that scored 38%, 75%
and 88%. The results suggest that financial literacy affects whether employees choose to
invest or not.

4.5 The Effect of Financial Literacy on Personal Savings

4.5.1 Choices of Personal Savings made by employees
The respondents were asked if they save and the percentage of the income they save. Table
4.14 shows the observation. The respondents were then asked to answer a series of questions
to understand their savings choices. The respondents rated the savings options as applicable

44
to their own personal choices on a percentage scale % with intervals of 10% where no
investment made was rated as 0% and the highest investment made was 90% to 100%. Table
4.15 shows the percentage of their savings the respondents make in the different choices
given.

Table 4.14 shows that 95% of respondents save, while only 5% of the respondents do not
save.
Table 4.14 Do you save?
Frequency Percent
Yes 57 95
No 3 5
Total 60 100.0
Mean 1.0500
Standard Deviation 0.21978

The table shows that descriptive analysis on the percentage of savings the respondents
reported in the questionnaire.

Table 4.15 Personal Savings Choices

N Mean Median Standard Deviation
What percentage of your 57 3.3509 3.0000 1.42040
monthly income do you save?
What percentage of your 32 9.1875 10.0000 2.00704
monthly income do you save in
a savings account?
What percentage of your 47 8.8085 9.0000 1.67641
monthly income do you save in
a SACCO?
What percentage of your 9 8.0000 9.0000 2.82843
monthly income do you give to
friends and family to save on
your behalf?
What percentage of your 24 8.2083 8.5000 2.10546
monthly income do you save in
a private pension?
What percentage of your 19 8.2632 9.0000 2.15618
monthly income do you save in
bank term deposits?
7.688343

45
Table 4.15 shows a summary of the descriptive statistics on the choice of savings. The
variables exhibited an average mean of 7.688343 showing that the respondent‘s financial
literacy score affected the savings decisions they made. The research showed that
respondents that saved had a mean of 3.3509 and a standard deviation of 1.42040. The low
standard deviation shows a low variance in the responses given by the respondents on the
percentage of the savings they make.

The research showed that from those that saved, the participants preferred to save mostly in a
savings account where the mean was 9.8575, a median of 10.000 and a standard deviation of
2.00704. The median is higher than the mean which shows that the responses are negatively
skewed with most responses being at a lower percentage. The high standard deviation
signifies that the respondents largely varied in their responses on the percentage of the
savings they made in a savings account.

The research participants also preferred to save in savings and credit co-operatives (SACCO)
where the mean was 8.8085, with a median of 9.000 and a standard deviation of 1.67641.
The median is higher than the mean which shows that the responses are negatively skewed
with most responses being at a lower percentage. The low standard deviation signifies that
the respondents did not largely vary in their responses on the percentage of the savings they
made in a SACCO.

The research participants also preferred to save in private pension where the mean was
8.2083, a median of 8.5000 and a standard deviation of 2.10546. The median is higher than
the mean which shows that the responses are negatively skewed with most responses being at
a lower percentage. The high standard deviation signifies that the respondents largely varied
in their responses on the percentage of the savings they made in private pensions.
On the other hand, the least number of respondents preferred to save by giving to friends of
family with a mean of 8.0000, a median of 9.000 and a very high standard deviation of
2.82843. The median is higher than the mean which shows that the responses are negatively
skewed with most response being at a lower percentage. The extremely high standard

46
deviation signifies that the respondents largely varied in their responses on the percentage of
the savings they made by giving the funds to family or friends.

A very small percentage of respondents preferred to save in bank term deposits where the
mean was 8.6232, median of 9.000 and a standard deviation of 2.15618. The median is
higher than the mean which shows that the responses are negatively skewed with most
response being at a lower percentage. The extremely high standard deviation signifies that
the respondents largely varied in their responses on the percentage of the savings they made
in bank term deposits.

4.5.2 Crosstab between Financial Literacy scores and Savings decisions

Table 4.16 Total score on the Financial Literacy test vs. Do you save
Yes No
Total score on Financial 13% 1 1 2
Literacy test 25% 5 0 5
38% 4 0 4
50% 9 0 9
63% 20 1 21
75% 7 1 8
88% 11 0 11
Total 57 3 60

The results show that a high majority of respondents save.

Table 4.17 Total score on the Financial Literacy test vs. Percentage of monthly income saved
1%10% 11%- 21%- 31%- 41%- 61%- Total
20% 30% 40% 50% 70%
Total score on 13% 0 1 0 0 0 0 1
Financial Literacy 25% 2 0 1 2 0 0 5
test 38% 0 3 1 0 0 0 4
50% 2 3 2 1 1 0 9
63% 11 3 3 2 1 0 20
75% 4 1 1 1 0 0 7
88% 2 3 2 1 2 1 11
Total 21 14 10 7 4 1 57

47
The results show that a very high number of respondents only save between 1% to 10% of
their income.

Table 4.18 Total score on the Financial Literacy test vs. Percentage of monthly income saved in a savings
account
91%- 61%- 31%- 21%- 11%- 1%- Total
100% 70% 40% 30% 20% 10%
Total score on 13% 1 0 0 0 0 0 1
Financial Literacy 25% 0 0 1 0 0 1 3
test 38% 0 1 0 0 0 1 2
50% 0 0 0 0 1 3 4
63% 0 0 1 0 3 10 14
75% 0 0 0 1 1 0 2
88% 0 0 0 0 0 5 6
Total 1 1 2 1 5 20 30

The results showed that those that scored above 50% showed more interest in saving in their
savings account as compared to those that scored 50% and below on the test.

Table 4.19 Total score on the Financial Literacy test vs. Percentage of monthly income saved in a SACCO
91%- 41%- 31%- 21%- 11%- 1%- Total
100% 50% 40% 30% 20% 10%
Total score on 13% 1 0 0 0 0 0 1
Financial Literacy 25% 0 0 0 0 1 2 3
test 38% 0 0 1 0 1 1 3
50% 0 0 1 1 1 3 6
63% 0 2 2 3 3 9 19
75% 0 0 0 1 3 3 7
88% 0 0 1 2 1 4 8
Total 1 2 5 7 10 22 47

The results showed that those that scored above 50% showed more interest in saving in a
SACCO as compared to those that scored 50% and below on the test.

48
Table 4.20 Total score on the Financial Literacy test vs. Percentage of your monthly income given to
friends and family to save on your behalf
91%- 31%- 21%- 11%- 1%- Total
100% 40% 30% 20% 10%
Total score on 25% 0 1 0 0 0 1
Financial Literacy 50% 0 0 1 0 0 1
test 63% 0 0 1 1 2 4
75% 1 0 0 1 0 2
88% 0 0 0 0 1 1
Total 1 1 2 2 3 9

The results showed that a majority of respondents did not prefer to save by giving their funds
to their family or friends to save on their behalf.

Table 4.21 Total score on the Financial Literacy test vs. Percentage of monthly income saved in a private
pension
91%- 41%- 21%- 11%- 1%- 0% Total
100% 50% 30% 20% 10%
Total score on 13% 1 0 0 0 0 0 1
Financial Literacy 25% 0 0 1 0 1 0 2
test 38% 0 1 0 1 0 0 2
50% 0 0 3 2 0 1 6
63% 0 2 2 1 2 0 7
75% 0 1 1 1 1 0 4
88% 0 0 0 0 2 0 2
Total 1 4 7 5 6 1 24

The results showed that those that scored above 50% showed more interest in saving their
private pension as compared to those that scored below 50% on the test.

Table 4.22 Total score on the Financial Literacy test vs. Percentage of monthly income saved in bank
term deposits
71%- 61%- 41%- 31%- 21%- 11%- 1%- Total
80% 70% 50% 40% 30% 20% 10%
Total score 25% 0 1 0 0 0 0 1 2
on Financial 38% 0 0 0 0 1 0 0 1
Literacy test 50% 0 0 1 0 0 0 2 3
63% 0 0 0 1 1 1 2 5
75% 0 0 0 0 0 0 2 2
88% 1 0 1 0 1 2 1 6
Total 1 1 2 1 3 3 8 19

49
The results showed that those that scored above 50% showed more interest in saving in bank
term deposits as compared to those that scored below 50% on the test.

4.5.3 Analysis of Variance summary of the effect of Financial Literacy on Personal

Savings
A one-way ANOVA between subjects was conducted to compare the effect of Financial
Literacy on Personal Finance Management in Personal Savings variable. There was a
significant effect of Financial Literacy on Personal Savings, where employees were asked the
percentage of their savings that they save in a savings account at the p<0.05 level [F(6, 53) =
2.826, p = 0.018]. A significant effect of Financial Literacy on Personal Savings was also
found among employees who save a percentage of their savings in a private pension, at the
p<0.05 level [F (6, 53) = 2.280, p = 0.050].

Table 4.23 One Way ANOVA on the Effect of Financial Literacy on Personal Savings decisions
Sum of Squares Df Mean Square F Sig.
Between Groups 42.156 6 7.026 2.826 .018
Within Groups 131.777 53 2.486
Total 173.9333 59

Table 4.24 One Way ANOVA on the Effect of Financial Literacy on Personal Savings decisions on
income saved in a Private Pension
Sum of Squares Df Mean Square F Sig.
Between Groups 43.947 6 7.325 2.280 .050
Within Groups 170.236 53 3.212
Total 214.183 59

4.5.3 Post Hoc Summary Comparisons of Financial Literacy score and Personal Savings
Post hoc comparisons using the Turkey test indicated that employees scored 13% on the
question of whether they save was significantly different from the employees who scored
88%. On the question of the percentage of savings the employees save in a savings account,
the employees who scored 13% were significantly from those that scored 50%, 63%, 75%
and 88%. On the question of the percentage of savings the respondents made in private
pension the respondents who scored 13% were significantly different from those that scored
88%. The results suggest that financial literacy affects savings decisions in saving in a
savings account and saving in personal pensions.

50
4.6 The effect of Financial Literacy on Personal Debt
4.6.1 Choices of Personal Debt made by employees
The respondents were asked whether they have borrowed. Table 4.25 shows that 90% of
respondents have borrowed, while only 10% have respondents have not borrowed.

Table 4.25 Have you borrowed?

Frequency Percent
Yes 54 90.0
No 6 10.0
Total 60 100.0

The respondents were then asked to answer a series of questions to understand their
investment choices. The respondents rated the investment options as applicable to their own
personal choices on a percentage scale % with intervals of 10% where no investment made
was rated as 0% and the highest investment made was 90% to 100%. Table 4.8 shows the
percentage of their investment the employees make in different choices given.

Table 4.26 Personal Debt Choices

N Mean Median Standard
Deviation
What percentage of your 11 9.7273 10.0000 0.64667
borrowing comes from family
of friends?
What percentage of your 54 7.1111 7.0000 1.78745
borrowing comes from the
employer / salary advance?
What percentage of your 5 9.2000 9.0000 0.44721
borrowing comes from using a
credit card for a cash advance
or to pay bills or buy food?
What percentage of your 24 6.9583 7.0000 1.54580
borrowing comes from a
personal loan taken from the
bank?
What percentage of your 48 8.000 8.0000 1.50177
borrowing comes from a loan
taken from the SACCO?
8.1993

51
Table 4.26 shows a summary of the descriptive statistics on the choice of debt. The variables
exhibited an average mean of 8.1993 showing that the respondent‘s financial literacy score
affected the debt choices they made. The research showed that a large percentage of the
respondents borrowed. The research also showed that from those that borrowed, the highest
number of participants borrowed from employer or salary advance. The research showed that
the participants preferred to borrow from their employer or salary advance where the moon
was 7.111, and a standard deviation of 1.78745. The high standard deviation signifies that the
respondents largely varied in their responses on the percentage of debt they borrow from
their employer or a salary advance.
The research participants also preferred to borrow mostly from SACCO. With a mean of
8.0000 and a standard deviation of 1.50177, which shows a high variance in the responses of
the respondents who chose the percentage of the borrowing they made from SACCO. The
research participants also preferred take a personal loan from the bank where the mean was
6.9583, median 7.00 and a standard deviation of 1.54580. The median is higher than the
mean which shows that the responses are negatively skewed with most response being at a
lower percentage. The high standard deviation shows a high variance in the responses of the
respondents who chose the percentage of their borrowings as a personal loan from the bank.

Very few of the research participants preferred to borrow from friends or family where the
mean was 9.7273, median 10.00 and a standard deviation of 0.64667. The median is higher
than the mean which shows that the responses are negatively skewed with most response
being at a lower percentage. The low standard deviation shows a low variance in the
responses of the respondents who chose the percentage of their borrowings from friends or
family. A very low percentage of the research participants preferred to borrow using a credit
card for a cash advance or to pay bills where the mean was 9.2 and a standard deviation of
0.44721. The low standard deviation shows a low variance in the responses of the
respondents who chose the percentage of their borrowings as bank overdraft.

52
4.6.2 Crosstab between Financial Literacy scores and Personal Debt choices

Table 4.27 Total score on the Financial Literacy test vs. Have you borrowed
Yes No
Total score on Financial 13% 2 0 2
Literacy test 25% 5 0 5
38% 3 1 4
50% 6 3 9
63% 19 2 21
75% 8 0 8
88% 11 0 11
Total 54 6 60

The results showed that a majority of the respondents have borrowed.

Table 4.28 Total score on the Financial Literacy test vs. Percentage of borrowing from family or friends?
21%-30% 11%-20% 1%-10% Total
Total score on Financial 13% 0 0 2 2
Literacy test 25% 0 0 1 1
38% 0 0 1 1
63% 1 1 3 5
75% 0 0 1 1
88% 0 0 1 1
Total 1 1 9 11

The results showed that those that majority of those that scored 63% borrowed more from
family or friends.

Table 4.29 Total score on the Financial Literacy test vs. What Percentage of borrowing from the
employer / salary advance?
71%- 61%- 51%- 41%- 31%- 21%- 11%- 1%- Total
80% 70% 60% 50% 40% 30% 20% 10%
Total 13% 0 1 1 0 0 0 0 0 2
score on 25% 0 2 1 1 1 0 0 0 5
Financial 38% 0 0 2 0 1 0 0 0 3
Literacy 50% 0 0 1 0 4 0 1 0 6
test 63% 0 1 3 0 3 7 5 0 19
75% 1 0 0 0 2 4 1 0 8
88% 0 0 1 0 3 2 1 4 11
Total 1 4 9 1 14 13 8 4 54

53
The results showed that those that scored above 50% showed more interest in borrowing
from their employer/a salary advance as compared to those that scored 50% and below on
the test.
Table 4.30 Total score on the Financial Literacy test vs. Percentage of borrowing from using a credit card
for a cash advance or to pay bills or buy food?
11%-20% 1%-10% Total
Total score on Financial 25% 2 0 2
Literacy test 75% 0 2 2
88% 0 1 1
Total 2 3 5

The results showed that those that scored 25% showed that they have used their credit card
for a cash advance or to purchase food or pay bills. The results showed that a majority of
respondents preferred not to use a credit card.

Table 4.31 Total score on the Financial Literacy test vs. Percentage of borrowing from a personal loan
taken from the bank
61%- 51%- 41%- 31%- 21%- 11%- 1%- Total
70% 60% 50% 40% 30% 20% 10%
Total score on 13% 0 1 1 0 0 0 0 2
Financial 25% 0 1 1 2 0 0 0 4
Literacy test 38% 0 0 1 1 0 0 0 2
50% 0 0 2 1 1 1 0 6
63% 1 0 2 0 3 0 1 7
75% 0 0 0 1 0 1 0 2
88% 0 0 1 0 0 0 1 2
Total 1 2 8 5 4 2 2 24

The results showed that those that scored 50 % and above showed more interest in taking out
a personal loan as compared to those that scored below 50% on the test.

54
Table 4.32 Total score on the Financial Literacy test vs. Percentage of borrowing from a loan taken from
the SACCO
51%- 41%- 31%- 21%- 11%- 1%- Total
60% 50% 40% 30% 20% 10%
Total score on 13% 0 0 1 1 0 0 2
Financial 25% 0 1 0 3 1 0 5
Literacy test 38% 0 0 2 1 0 0 3
50% 2 0 1 0 1 1 6
63% 1 2 4 2 6 4 19
75% 1 0 0 2 1 2 6
88% 0 1 1 1 4 1 8
Total 4 4 9 10 13 8 48

The results showed that those that scored 50% and above showed more interest in borrowing
from their SACCO as compared to those that scored below 50% on the test.

The cross tabulation between the financial literacy scores and the debt choices show that
those who scored below 63% borrowed more from the employer or salary advance, they also
borrowed more percentage of their borrowings by taking a personal loan from the bank and
borrowing from SACCO. This shows that the respondents who scored below 63% had a high
appetite for debt.

4.6.3 Analysis of Variance summary of the effect of Financial Literacy on Personal Debt
A one-way ANOVA between subjects was conducted to compare the effect of Financial
Literacy on Personal Finance Management in Personal debt choice variable. There was a
significant effect of the Financial Literacy on the choice of debt instruments; borrow from
employer/salary advance at the p<0.05 level for the choice of debt instrument condition [F (6,
48) = 3.768, p = 0.004].

Table 4.33 One Way ANOVA- Effect of Financial Literacy on Debt choices
The percentage of your debt from employer/salary advance?
Sum of Squares Df Mean Square F Sig.
Between Groups 61.787 6 10.298 3.768 0.004
Within Groups 131.194 48 2.733
Total 192.982 54

55
4.6.4 Post Hoc Summary Comparisons of Financial Literacy score and Personal Debt
Post hoc comparisons using the Turkey test indicated that employees that scored 13% and
25% were significantly different from those that scored 88%. The results suggest that
financial literacy affects debt instrument choice.

4.7 Chapter Summary

The study results have been discussed in the chapter and the researcher has offered
discussions to elaborate the results for the readers. Statistical frequencies and inferential
statistics have been used for the purposes of analysis. The next chapter will present the study
summary, discussions, conclusions and recommendations.

56
 CHAPTER FIVE
5.0 DISCUSSIONS, CONCLUSIONS, AND RECOMMENDATIONS
5.1 Introduction
This section concludes the study and is divided into various sections: 5.1 introduction, 5.2
summary of findings, 5.3 discussions, 5.4 conclusions, and section 5.5 recommendations for
improvement and recommendations for further studies.

5.2 Summary of Findings

This study was driven to examine the effect of financial literacy on personal finance
management of employees of Bank of Baroda (Kenya) Limited. The study was guided by the
following specific objectives: to determine the effect of financial literacy on personal
investment choices; to determine the effect of financial literacy on personal savings; and to
determine the effect of financial literacy on personal debt.

In this study, the descriptive approach was used to examine the effect of financial literacy on
personal finance management. The target population of this study were all 176 staff members
at Bank of Baroda (Kenya) Limited as at January 2017 employee database. The sampling
frame for this study was a list of all staff members employed with Bank of Baroda (Kenya)
Limited obtained from the Human Resource Department of the bank. The study used simple
random sampling to select different employees from the study stratum. To estimate the
sample size, the study used the Yamane Formula which gave a study sample of 64
employees. Primary data were collected through self-administered questionnaires. SPSS was
used to analyze the data. Statistical frequencies like percentages were used to analyze the
various differences in population demographics. Means and standard deviations were used to
determine the strength of the various financial literacy scores, as well as, measured the
difference in terms of responses given by the population. Analysis of Variance was used to
determine the existing relationships of the study variables. The findings were then presented
in tables and pie charts.

The study showed that the majority of the employees were financially literate holding at least
an undergraduate degree. However, they performed poorly on questions that test their

57
knowledge in areas such as, time value management of money, the relationship between
bond price and interest rate and finally the concept of interest rate compounding. The study
showed that the employees only understood basic financial concepts such as simple interest,
the inverse relationship between inflation and interest rates and the risk revel comparison
between investing in bonds, stocks and mutual funds. From the study, it can be observed that
the respondents were not fully conversant with advanced financial concepts despite working
in a bank. They failed to understand the inverse relationship between bond prices and interest
rates.

A majority of the respondents failed to determine the time value of money. The question was
adopted from a study conducted by Lusardi and Tufano (2015), where the respondents also
failed to recognize the time value of money. The individuals may have underestimated the
interest rate at which they had borrowed. The results are also consistent with the findings of
Stango and Zinman (2009) that individuals are systematically biased towards understanding
the rate of interest out of a stream of payments.

A majority of respondents did not manage to answer the question on interest compounding.
The question was adopted from a study conducted by Lusardi and Tufano (2015), the results
are similarly poor where applicants failed to understand the concept of interest on interest
and applying ‗the rule of 72‘ heuristic.

The scores on financial literacy test and the responses given by respondents on their
investment, savings and debt practices showed that financial literacy indeed had an effect on
the personal finance management of the respondents in terms of investments, savings and
debt management. The ANOVA test also concluded that there was a significant relationship
between investment practices, savings, and debt practices and the scores on the financial
literacy test, i.e. choice of respondents whether they invest, the percentage of their savings
they save in a savings account and in private pension and finally the percentage of debt they
have from a salary advance.

58
5.3 Discussions
This section comprises of discussions on the specific research objectives of the study based
on the research results and findings in comparison to the literature review.

5.3.1 Effect of Financial Literacy on Investment Choices

The study showed that a majority of the employees showed that they invest this is in line
with the study conducted by Cole and Shastry (2009), who note that education has important
effects on investment where, individuals with one more year of schooling are more likely to
report positive investment income.

The ANOVA test, however, did not find a significant relationship between most of the
investment choices, although a significant relationship was found between financial literacy
score and whether the respondents invest. The results are similar to a study conducted in
UAE by Hassan Al-Tamimi and Anood Bin Kalli (2009), who tested the relationship
between financial literacy of individual investors in the UAE and their investment decisions.
They found that financial literacy significantly affected the investment decisions of the
individual investors.

The study showed that a majority of the employees preferred to invest in life insurance,
bonds, equity and mutual funds. These results are similar to the study by Abdeldayem
(2016), in his study conducted in Bahrain where they found that the respondents in high
financial groups expressed higher preferences in investing in life insurance, mutual funds,
equity, bonds and pension funds as compared to those that belong to the low financial
literacy group.

From the observations of the study, it was noted that the respondents who scored above
average on the financial literacy test were seen to employ the diversification concept in their
investment decisions. This observation is in line with a study conducted by Gusio and
Jappelli (2008) who have concluded in one of their studies that portfolio diversification is a
sign of high financial literacy and a lack of diversification of investments is a sign of

59
financial illiteracy. The researchers argue that financially illiterate investors they do not
understand the relationship between portfolio diversification and market returns.

The study also shows that a majority of the respondents took assistance from financial
statements, a financial analyst, media, friends and family or investment groups when making
financial decisions, those who scored below 13% on the test did not use any assistance.
However the most alarming finding is that a majority of respondents chose to inquire from
family/friends rather than an investment expert. These results are similar to the study
conducted by Rooji et al. (2007) who found that financial literacy affects financial decision
making because individuals with low literacy are more likely to rely on other people as their
main source of financial advice are less likely to make informed investment decisions. This
observation is also in line with a similar finding by Murithi, Narayanan, & Arivazhagan
(2012), in their study of investor behavior in India, found that the investors make investment
decisions after discussing with their family members or friends. This shows the influence of
social groups on individual investments.

5.3.2 Effect of Financial Literacy on Personal Savings

The study shows that a majority of respondents reported that they save. The ANOVA test,
however, did not find a significant relationship between most of the savings choices,
although a significant relationship was found between financial literacy score and the
percentage of savings the respondents make in a savings account. The results are similar to
the findings of a study conducted in Kenya by Nyamute and Maina (2011), who found that
those that saved more were also found to be financially literate.

The study showed that those that scored the highest on the financial literacy test showed a
higher saving practice as compared to those that scored poorly on the test. The observation is
in line with a study conducted by Mahdzan and Tabiani (2013) who also noted that among
the respondents those that scored best on both basic and advanced financial literacy tests
showed higher saving practice.

60
The study showed that those that from the respondents that did not save, they had a score
below 50% on the financial literacy test. These results are in line with the findings of a study
conducted by Suwanaphan (2013), who found that an overall low financial literacy score
negatively affected savings behavior.

The study also showed that respondents with higher financial literacy have a higher
awareness level of financial products such as fixed deposits, pension and savings accounts.
The majority of respondents who scored above average on the financial literacy test saved
more in a savings account, term deposits and private pension. This observation is in line with
a study conducted by Bhushan (2014) who noted similar observations.

It was observed that a majority of the respondents at least held an undergraduate degree from
a university. Bernheim et al (2001) and Bernheim and Garrett (2003) in their studies show
that people who had early exposure in monetary studies in their high school or tertiary
college or in the workplace save more. A similar conclusion was also made by Hinga (2014)
who in his study observed that higher education lead to higher savings.

The majority of the respondents only managed to save a very low percentage between 1%-
10% of their income, where the most preferred to save in the SACCO. The results of the
study are similar to a study conducted by Murithi et al (2011), who studied investor behavior
in India and found that despite a majority of the respondents saved, they only managed to
save a very small percentage of their income.

The study shows that a very low percentage of the respondents saved in a private pension.
The study also showed that the respondents that scored below 50% did not invest in any
private pension scheme. These results are in line with the findings of Lusardi and Mitchell
(2006, 2011) who argue that those possessing low financial literacy are likely not to plan for
retirement, thus end up accumulating much less wealth in their prime years. Furthermore,
Lusardi and Mitchell (2011) and Banks et al. (2010), observed that more financially
sophisticated individuals are more likely to be retirement ready and have a higher retirement
income.

61
5.3.3 Effect of Financial Literacy on Personal Debt
The study shows that a majority of the respondents reported that they have debt. The
ANOVA test found a significant relationship between the debt choices of borrowing from
employer or salary advance and financial literacy score. The study also showed that those
that had a lower than average score on the financial literacy test had poor debt management.
The findings are in line with a study conducted by Lusardi and Tufano (2015), who found
that people with low financial literacy were more likely to have problems with debt as they
incurred high transaction costs, paying higher fees and using high-cost borrowing, the less
knowledgeable also reported that their debt loads were excessive, or that they were unable to
judge their debt positions. Bahovec, Barbić and Palić (2015) also showed similar findings in
their research and added that varying levels of financial literacy exhibit different debt
behavior. Thus, respondents with a low level of reported financial literacy, i.e. financially
illiterate respondents are expected to demonstrate worse debt behavior, i.e. are more indebted
than consumers with medium and high levels of financial literacy.

A majority of the respondents failed to answer the question on interest rate compounding on
a loan. These results are in line with the findings of various researchers like Moore (2003)
who found that people frequently failed to understand the terms and conditions of consumer
loans and mortgages. Miles (2004) further reported that UK borrowers have a poor
understanding of mortgages and interest rates.

A majority of the respondents failed to answer the question on the effect of the time value of
money in terms of debt management. These results are similar to a study conducted by
Stango and Zinman (2006) who noted that individuals may underestimate the interest rate at
which they are borrowing, therefore, individuals are systematically biased towards
understanding the rate of interest out of a stream of payments.

The study showed that that those with lower financial literacy scores, those that scored below
average on the financial literacy test have utilized a credit card for a cash advance or for
payment of bills or food. The results are similar to Mottola (2013), who in his research found
that those that a less financially literate tend to engage in costly credit card behavior.

62
The study showed that a majority of the respondents have borrowed from the SACCO. It was
noted that a majority of the respondents who have borrowed from the SACCO have also
scored above average on the financial literacy test. It has been noted that despite having a
strong score on the test, the employees showed poor debt management. This observation is in
line with a study conducted by Dean et al. (2013), who observed that personal debt is not
determined by race, sex or even income. People with higher levels of income have even
higher debt, especially when it comes to automobile debt. Personal financial debt is more the
result of attitudes and behaviors than it is the result of not having enough money

5.4 Conclusions
5.4.1 Effect of Financial Literacy on Personal Investment Choices
The study showed that those that were financially literate invested in various investment
avenues as compared to the less financially literate. This shows that the financially literate
understand the importance of portfolio diversification. The study, therefore, concludes that
financial literacy affects investment choices of individuals.

5.4.2 Effect of Financial Literacy on Personal Savings

The second objective of the study was to determine the effect of financial literacy on
individual savings. The findings of the study indicated that the majority of employees saved.
It was also noted that employees that scored 50% or higher on the financial literacy test saved
more than those that scored poorly on the test. It was also noted that those that were
financially literate tended to save in various sources as compared to those that were
financially challenged. This could be explained by the fact that their knowledge and
experience in the finance field helps them understand the consequences of not diversifying
their savings. The study, therefore, concludes that financial literacy affects savings choices of
individuals.n

5.4.3 Effect of Financial Literacy on Personal Debt

The findings show that a majority of the employees have debt. The financially literate,
however, was seen to borrow from fewer sources as compared to the non-financially literate
counterparts. This could be explained by the lack of personal debt management that the low

63
literates have. This also shows the high debt appetite of the less financially literate. The
study, therefore, concludes that financial literacy affects debt choices of individuals.

5.5 Recommendations
5.5.1 Recommendations for Improvement
The study recommends that the employer should make a plan to take their employees through
yearly financial literacy training programs as this will not only be beneficial to the personal
lives of employees, but also the organization as the employees will be in a better position in
managing their funds and be in a position to advise their customers on the funds they keep
with the bank, or on a loan they need to take out from the bank. Financial literacy and sound
financial management practice has been observed with the respondents working at
managerial levels, and thus the similar practices should be employed by employees at lower
levels. This will be beneficial to the organization as well as the employee.

5.5.1.1 Personal Finance Management of Employees in terms of Personal Investments

The study recommends that employees should use their financial literacy knowledge and
experience gained in the banking sector to employ investment practices of their personal
finances. The study also recommends that the employees practice diversification technique
when investing.

5.5.1.2 Personal Finance Management of Employees in terms of Personal Savings

The study recommends that the respondents should be consciously saving in various avenues
rather than a single avenue.

5.5.1.3 Personal Finance Management of Employees in terms of Personal Debt

The study recommends that the respondents should manage their debt in a realistic manner
and understand the cost of their borrowing by use of financial knowledge in understanding
the time value of money and its effect on the borrowings.

64
5.5.2 Recommendation for further studies
The study was limited by financial aspects. Further studies into financial literacy and its
impact on personal finance management practices can be done to cover a greater scope, for
example, in Nairobi county or even Kenya and help identify even more intriguing results
from the study at a country or at the least county wise level.

65
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 APPENDICES
APPENDIX I: COVER LETTER
Dave, Anu Jayantilal,
United States International University-Africa
P.O.Box. 14634-00800
Nairobi, Kenya.
04th April 2017
Dear Respondent,

RE: REQUEST FOR YOUR PARTICIPATION IN A RESEARCH STUDY

I am a graduate student at the United States International University - Africa in Nairobi,
conducting a study on ―Effects of Financial Literacy on Personal Finance Management: A
case study on employees of Bank of Baroda (K) Limited‖. This is in partial fulfillment of the
requirements of the Masters of Business Administration degree program at the United States
International University - Africa.

Attached with this letter is a questionnaire that also contains a series of finance based
questions to help collect data for the research. I request you to answer the questions and fill
in the questionnaire to the best of your knowledge and understanding. Please make sure you
answer all questions.

Your participation is critical for this study. Information provided by you will be highly
confidential and will only be used for academic purposes. Please note down your address and
contact details if you wish to receive a copy of the final report.

Sincerely,

Anu Dave

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APPENDIX II: QUESTIONNAIRE
Section A
Demographic Information
1. What is your gender?
a. Male f. 251,000-300,000 Kes
b. Female g. 300,000-400,000 Kes
c. Other h. Over 400,000 Kes
2. What is your age group? 6. What is the highest level of education
a. Under 21 years you have attained?
b. 21 years to 30 years a. Primary school
c. 31 years to 40 years b. High school
d. 41 years to 50 years c. Undergraduate degree
e. 51 years to 60 years d. Diploma or certificate
3. What is your marital status? e. Postgraduate degree
a. Single f. Other (Please state) ……………
b. Married 7. If you have chosen C, D, E or F, then
c. Divorced what was your main field of study?
4. Please state your current job title …………………………………
a. Clerk 8. Have you undertaken financial literacy
b. Department Head training?
c. Management Trainee a. Yes b. No
d. Officer 9. If so, where?
e. Senior Manager a. Workplace
f. Branch Head b. Media
5. In which income category do you fall c. Investment groups
into (Total income from all your sources)? d. Others (Please state)
a. 0-50,000 Kes 10. Would you propose to your workplace
b. 51,000- 100,000 Kes to hold annual financial education and
c. 101,000-150,000 Kes literacy seminars?
d. 151,000-200,000 Kes a. Yes b. No
e. 201,000-250,000 Kes

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Section B
In this section, there will be a total of eight 4. If interest rates rise, what will typically
questions that will test your basic happen to bond prices?
understanding of finance related questions a. Rise
and you are required to fill in your b. Fall
answers in the spaces provided. c. Stay same
Part 1: Financial literacy questions d. Don‘t Know
1. Suppose you have Ksh. 10,000 in a 5. You purchase an appliance which costs
savings account earning 7 percent interest Ksh 10,000. To pay for the appliance you
a year. After five years, how much would have the following two options:-
you have? i) Pay 12 monthly installments of
a. More than Ksh. 10,700 Ksh. 1,000 each
b. Exactly Ksh. 10,700 ii) Borrow at 20% annual interest rate
c. Less than Ksh 10,700 and payback Ksh. 12,000 a year
d. Don‘t Know from now.
2. Imagine that the interest rate on your Which is more beneficial to you?
savings account is 6 percent a year and a. Option (i)
inflation is 7 percent a year. After one b. Option (ii)
year, how much would the money in the c. They are the same
account buy? d. Don‘t know
a. More 6. Suppose you owe Ksh 10,000.00 on a
b. Exactly the same loan and the interest rate you are charged
c. Less is 20% per year compounded annually. If
d. Don‘t Know you didn‘t pay anything off, at this interest
3. Which is more financially risky over the rate, how many years would it take for the
long term (i.e. 10 years-20 years)? amount you owe to double?
a. Bonds a. 2 years b. 3 years
b. Stocks c. 4 years d. 5 years
e. 6 years f. I don‘t know

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7. Purchasing a single company stock is safer than purchasing a stock mutual fund.
a. True b. False
8. A 10-year mortgage typically requires higher monthly payments than a 30-year mortgage,
but the total interest over the life of the loan will be less.
a. True
b. False

Part 2: The following section will gather information on your choice of investments.
1. Do you invest?
a. Yes b. No
2. On a percentage level of 0%-100%, how much of your income do you invest in the
following? (Please tick in the related space provided).
91% - 100%

81% - 90%

71% - 80%

61% - 70%

51% - 60%

41% - 50%

31% - 40%

21% - 30%

11% - 20%

1% - 10%
Investment

0%
1 2 3 4 5 6 7 8 9 10 11
1 Government securities           
2 Mutual funds           
3 Equity share market           
4 Life insurance           
5 Bonds           
6 Foreign exchange market           
7 Real estate           
8 Gold           
9 Others           

3. What/Whom do you use for assistance before making an investment?

a. Financial statements b. Media
c. Friends or Family d. Financial Analyst/Expert
e. Investment groups f. Other (please specify) ……………………….

77
Part 3
You will be required to answer as per your understanding on savings decisions that you
make.
1. Do you save?
a. Yes
b. No
2. What percentage of your monthly income do you save?
a. 0% b. 1%-10% c. 11%-20% d. 21%-30%
e. 31%-40% f. 41%-50% g. 51%-60% h. 61%-70%
i. 71%-80% j. 81%-90% k. 91%-100%
3. What percentage of your monthly income do you save in the following?
91% - 100%

81% - 90%

71% - 80%

61% - 70%

51% - 60%

41% - 50%

31% - 40%

21% - 30%

11% - 20%

1% - 10%
Savings

0%
1 2 3 4 5 6 7 8 9 10 11
1 Savings Account           
2 SACCO           
Give to friends and family
3           
to save on your behalf
4 Personal Private Pension           
5 Bank term deposits           
6 Others …………............           

78
Part 4
You will be required to answer as per your understanding on debt choices that you
make.
1. Have you borrowed?
a. Yes
b. No
2. What is the percentage of your borrowing from the following sources?

91% - 100%

81% - 90%

71% - 80%

61% - 70%

51% - 60%

41% - 50%

31% - 40%

21% - 30%

11% - 20%

1% - 10%
Borrowing

0%
1 2 3 4 5 6 7 8 9 10 11
Borrow from family or
1           
friends
Borrow from the employer /
2           
salary advance
3 Use a bank overdraft           
Use credit card for a cash
4 advance or to pay bills/buy           
food
Take out a personal loan
5           
from a bank
Take a loan from the
6           
SACCO
7 Others …………………...           

Thank you for your time and consideration!

If you would like to receive a copy of the final report, please leave your address and contact
details here:

THANK YOU!

79