Financial Literacy and Its Impact on Loan Repayment Decisions: Evidence from Rural Households in Sri Lanka

Abstract

The study examines the impact of financial literacy on loan repayment decisions of rural sector households in Uva Province of Sri Lanka. Data were collected from 975 households located in 10 Divisional Secretariats (DS) in both Badulla and Monaragala districts. Probit Regression Analysis was employed to analyse the collected data and the analysis confirms that higher financial literacy increases the probability of paying back the loans of the rural households. Apart from that, the study finds that there is a non-linear relationship between age and loan repayment decisions, while factors such as being married, receiving remittances, being non-disabled and the debt to income ratio also significantly affect loan repayment decisions of rural households in Sri Lanka. Consequently, the study strongly recommends improving the financial literacy of rural households in Sri Lanka, by arranging appropriate training and educational programmes, with the impact of such programmes helping to stabilise the financial system.