Institutional framing and financial inclusion: Testing the mediating effect of financial literacy using SEM bootstrap approach

Abstract

Purpose

The purpose of this paper is to establish the mediating effect of financial literacy in the relationship between institutional framing and financial inclusion among poor households in Uganda with a specific focus on Mokono district.

Design/methodology/approach

The study adopted a cross-sectional design. Data were analyzed using structural equation modeling (SEM), which adopted Analysis of Moment Structures to test for mediating effect of financial literacy in the relationship between institutional framing and financial inclusion.

Findings

The results revealed that financial literacy had a partial mediating effect in the relationship between institutional framing and financial inclusion. Furthermore, the results indicated that while institutional framing has a direct effect on financial inclusion, it also exerts an indirect effect through financial literacy. This supports the argument that institutional framing that structure the way how poor households interpret, evaluate, comprehend and make sound financial decisions and choices, is enhanced by knowledge and skills acquired through financial literacy by poor households.

Research limitations/implications

This study has been limited by adopting only cross-sectional design and quantitative research approach, therefore ignoring longitudinal design and qualitative research approach. Besides, the study uses SEM bootstrap approach and ignores MedGraph method, which is also recommended for testing mediation.

Practical implications

Since the results suggest that institutional framing of poor households are partially enhanced by financial literacy to increase financial inclusion, policy makers, practitioners and managers of financial institutions should ensure extending financial literacy programs closer to the poor in order to expand the scope of financial inclusion beyond the current sphere. Indeed, financial literacy programs will boost cognitive abilities of poor households resulting into better financial decisions and choices and, hence increase in demand and consumption of financial services.

Originality/value

The study significantly generates empirical evidence by testing the mediating role of financial literacy in the relationship between institutional framing and financial inclusion using SEM bootstrap approach. The study portrays the influential partial effect of financial literacy in enhancing institutional frames of poor households in order to cause improvement in financial inclusion. Indeed, financial literacy programs that entail acquisition of financial knowledge and skills boost cognitive abilities of poor households to easily interpret, evaluate, comprehend meanings, and take correct decisions and actions on financial matters. The mediating effect of financial literacy in the relationship between institutional framing and financial inclusion seems to be lacking in literature and theory. Thus, the paper is the first to relate the influential partial effect of financial literacy in the relationship between institutional framing and financial inclusion among poor households, especially in a developing country context.

Citation

Bongomin, G.O.C., Mpeera Ntayi, J. and C. Munene, J. (2017), "Institutional framing and financial inclusion: Testing the mediating effect of financial literacy using SEM bootstrap approach", International Journal of Social Economics, Vol. 44 No. 12, pp. 1727-1744. https://doi.org/10.1108/IJSE-02-2015-0032