Financial Literacy and Savings Behaviour in the Informal Economy - A Field Study among Microfinance Clients in Rural Tanzania

Abstract: Basic knowledge in finance, called financial literacy, is increasingly important all around the world due to elevated complexity of financial instruments. Research in developed countries shows that financial literacy is an important predictor of economic decision-making and individual savings behaviour. In less developed countries, research on financial literacy's effect on individual savings is limited to urban or nationwide contexts, leaving rural settings unexplored. In rural areas, educational attainment and income levels are often low and people rely on informal savings options such as savings groups. The expansion of microfinance introduces formal savings instruments and changes the way poor people in rural areas save money. By estimating OLS regressions on data collected from 291 microfinance customers of Mwanga Community Bank this unique study investigates whether financial literacy can positively affect the propensity to save money in a bank account among microfinance clients in rural Tanzania. In line with previous research, the results reveal low financial literacy levels among rural respondents. However, financial literacy in this context does not have a significant effect on the propensity to save money in a savings account.