The role of financial literacy to proper usage of loans by borrowers of commercial banks.

Abstract

Financial literacy is relevant for everyone in a modern society regardless of income levels, education, rural or gender. For example, everyone needs to understand how to draw up and live within a budget, to understand why and how to save, to borrow responsibly and to avoid becoming over-indebted, to make informed choices between different financial products and service, and to plan ahead for old age. Unfortunately, many people in Uganda do not have the knowledge, skills and confidence to be able to do these things.(BoU report 2011). The researcher focused on investigating the role of financial literacy to proper usage of loans by borrowers of commercial banks a case study of Masaka Municipality. The objectives of the study included; to examine the how book keeping skills influence proper usage of loans, to assess the effects of cash management skills on proper usage of loans and to examine how budgeting skills affect proper usage of loans. The study was inspired by the theories of psychosocial theory and social learning theory developed by Lusardi&Mitchell, 2005 and Bandura, 1977respectively. In order to have an in-depth study, the study took a descriptive case study research design to establish the relationship between the independent variable (Financial literacy) and the dependent variable (proper usage of loans). Results of the study show that financial literacy affects proper usage of loans by borrowers of commercial banks in Masaka Municipality and therefore influences the usage of loans by borrowers. It can be said that among all factors, book keeping skills is the most important indicator of financial literacy and therefore it has to be practised by everyone in business. Recommendations include; the management of the business should carefully improve their cash management skills, bookkeeping skills and budgeting skills as it was found out that there is moderate relationship between these factors and proper usage of loans. The interest rate should be reduced and the grace period should be extended to at least a month from when loan should be repaid as it was revealed that high interest rates may lead to high default rate on loans by borrowers since it is also justified by Olomola (1999) who asserts that high interest rates can significantly increase borrowing transaction costs and can affect repayment performance.