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Archives of Business Research – Vol. 10, No. 3
Publication Date: March 25, 2022
DOI:10.14738/abr.103.11915. Mujabi, S., Rulangaranga, D. M., Kitui, G. M., & Kehbuma, L. (2022). Borrower Financial Literacy and Credit Decision Rationality
Amongst People Who Take Loans from Money Lenders in the Major Urban Areas of Uganda. Archives of Business Research, 10(03).
122-135.
Services for Science and Education – United Kingdom
Borrower Financial Literacy and Credit Decision Rationality
Amongst People Who Take Loans from Money Lenders in the
Major Urban Areas of Uganda
Shafic Mujabi
Makerere University Business School, Kampala, Uganda
Donatus Mugisha Rulangaranga
Makerere University Business School, Kampala, Uganda
Geofrey Mayoka Kitui
Makerere University Business School, Kampala, Uganda
Langmia Kehbuma
Howard University, Washington DC.
ABSTRACT
This research study was carried out to establish the relationship between financial
literacy and credit decision rationality amongst people who take loans from money
lenders in the major urban areas of Uganda. Focusing on the relationship was based
on the need to establish whether credit decision rationality of these borrowers was
based on their level of financial literacy. The concept of financial literacy was
conceptualized by assessing the three key measures of financial literacy;- financial
knowledge, financial skills, and financial behavior. Based on this conceptualization,
three hypotheses were formulated and tested. The people that take loans from
money lenders in the major urban areas of Uganda were considered to form the
population of the study. A maximum sample of 385 [as recommended by Krejcie and
Morgan (1970)] was selected. A 93% response rate was realized. Correlation and
regression analyses were carried out to test the hypotheses. The results indicated
that financial literacy has a 19.4% influence on changes in credit decision
rationality of people that take loans from money lenders in the major urban areas
of Uganda. Additionally, the results indicated that financial behavior has the highest
significant association with and influence on credit decision rationality, followed by
financial skills. Financial knowledge also has influence on credit decision
rationality though the influence is not statistically significant. Based on these
results, it is recommended that, financial literacy be enhanced amongst Ugandans,
especially those that tend to take loans from money lenders. In the process of
enhancing financial literacy, there is need to put emphasis on attaining or instilling
appropriate financial behavior that can enable a person reduce his or her debt
burden.
Keywords: Credit decision rationality, financial knowledge, financial skills, financial
behavior, Rationale to take credit, money lenders in Uganda.
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Mujabi, S., Rulangaranga, D. M., Kitui, G. M., & Kehbuma, L. (2022). Borrower Financial Literacy and Credit Decision Rationality Amongst People Who
Take Loans from Money Lenders in the Major Urban Areas of Uganda. Archives of Business Research, 10(03). 122-135.
URL: http://dx.doi.org/10.14738/abr.103.11915
INTRODUCTION
Taking credit is most times considered to be inevitable as long as a person is in the category of
the “haves not” [1]. Ideally, in a social setting, there are people regarded as surplus spenders
and others regarded as in need of cash to spend most, if not all the time. Financial institutions
play a significant role to bridge the two groups of people. Those with surplus financial resources
deposit them into a financial institutions from where the people in need of extra cash to spend
find the financial resources and request to be provided with some. This request is technically
referred to as borrowing. Without financial institutions, therefore, it would be difficult for the
people in the category of deficit spending to get reasonable funds to finance their expenses [2].
Though there has been formation of financial institutions in a social setting, the legal regime
that is associated with borrowing has often times made it difficult for the borrowers to get the
needed funds within the needed time frame [3]. This has been frustrating to the borrowers
especially when the funds are needed to solve an impending social problem [4, 5] such as paying
for hospital bill or purchasing a lucrative piece of land. This psychological dissatisfaction of the
borrowers created a demand for alternative sources of funds to fund deficit spending [6].
Creation of SACCOs, MDIs and establishment of informal lending has been the outcome of the
psychological dissatisfaction of borrowers in the main stream financial institutions mainly
composed of commercial banks and other forms of banks. Informal lending takes a special place
of the three outcomes of psychological dissatisfaction identified because the former are legally
recognized institutions while the latter is not. Though un-recognized, the latter has a section of
people that it serves. In developing countries like Uganda, majority of deficit spenders may
prefer to approach an informal money lender instead of a bank. This could be attributed to the
effect of band wagon or possibly the simplicity with which money is secured from the informal
lenders [7].
The preference of where to borrow from constitutes the concept of “credit decision rationality”.
Circumstantial evidence provides support for deficit spenders to seek help from the informal
lenders. It is however not obvious whether this decision (credit decision rationality) is also
based on the level of financial literacy of the borrower. It could be possible that the borrower
(deficit spender) could be financially literate [21]. It is also possible that the borrower could be
financially illiterate and makes a decision to borrow from a money lender based on only what
he (or she) hears from the peers. This quest necessitated a research study to be conducted to
establish the extent to which credit decision rationality in Uganda is hinged on the financial
literacy of the borrower with specific focus on informal lending [8].
LITERATURE REVIEW
Credit decision rationality focuses on reasonable choice making process to take credit decision.
The reasonableness is conceptualized in the aspect of rationality. When a person decides to take
credit, there is always the aspect of the source of credit and how accessible that credit is.
Though accessibility may be an important factor, it is possible that a potential borrower
chooses security of future financial dealings. This is associated with legal protection of the
borrower, should anything go wrong in the borrower-lender relationship [21].
Focusing on the aspect of relationship, it is possible that a lender may be provided with ready- to-take funds but refuse the funds because such funds may have a potential of damaging
possible future relations [9]. One possible scenario in this direction is that of borrowing from
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Archives of Business Research (ABR) Vol. 10, Issue 3, March-2022
Services for Science and Education – United Kingdom
informal lenders especially considering that informal lending is not backed by a recognizable
legal regime [10]. It is on this basis that it is referred to as informal. Lack of the legal regime
governing the lending process makes it difficult to enforce especially when the borrower and
the lender are not known to each other [11, 12].
Though it is difficult to enforce, the lenders tend to issue out contracts of sale or purchase to
their clients. This therefore means that the informal lender poses as a buyer and the money
advanced as loan is considered to be the purchase consideration. Because of the urgency of the
situation, the borrowers tend to accept these terms of service. The total interest amount is
always embedded within the purchase contract value. It is on this basis that the borrower
manages to access financial assistance in form of informal loans from the informal lenders [13].
The arrangement that requires to sign a sale agreement of personal property creates a sense of
fear on the side of the borrower especially when the property included in the sale agreement is
the only property that the borrower has. It is at this point that a borrower may take a decision
to withdraw from accessing the money from the informal lenders [11]. Though this may be a
good decision, the urgency of the money as determined by the problem to be attended to by the
borrower may not allow the borrower to refuse the money. The borrower is likely to receive
the money with hope that he (or she) shall be able to raise substantial amount of funds to repay
the informal loan before the expiry of the loan period. Ideally, the expiry of the loan period
brings into effect the sales agreement and the informal lender gets the right to access the
property of the borrower since the sale agreement would have given him (or her), as the
informal money lender, the legal power to possess the property of the borrower [9].
If the informal lender exercises the power of the sale agreement, the borrower loses the
property [13]. This makes requesting for loans from the money lenders a challenging thing to
consider for many potential borrowers. The catch point is however on the swift processing of
the loan request. The swiftness notwithstanding, there is need to appreciate that there are
times when the urgency of a problem is self-created. This means that the need for money may
be differed especially when failure to respond to the need does lead to loss of life. This kind of
reasoning is key in taming the insatiable need and or demand for money [12].
The personal financial discipline to know when to take a loan and when not to take a loan is
therefore an important behavioral trait for everyone to acquire [14]. This is especially relevant
when the behavior can save someone from getting into a debt trap. This kind of behavior is
sometimes referred to as prudence in financial dealings. Through careful personal planning,
many financial challenges are likely not to be faced [22].
In the dimension of personal finance, prudence is the concept of concern since it helps to
differentiate a successful person from an unsuccessful person. A person who applies the
principles of prudence is expected to know his (or her) financial needs and plan his (or her)
available financial resources carefully to respond to those needs. This forms a combination of
personal financial knowledge and the needed behavior to effectively handle personal finance
[15].
Combination of the knowledge of personal finance and the discipline to manage personal
finance enables one to develop the personal financial management skills. When this is achieved,
then financial decisions are expected to be made from an informed point of view [16]. This kind