Debt literacy, attitudes towards credit and digital credit over-indebtedness.

Abstract

Generally, youths are credit constrained and considered financially disadvantaged. However, In Kenya, over the years, they have continued to be financially included as a result of the growth of digital financial services. Digitally delivered financial services such as digital loans have been able to provide access to the credit to the youth, and they are the majority users of the products. However, cases of late repayments, defaults on loans, increased debt stress, and reduced living standards, as shown in studies, are indicating to problems of over-indebtedness in the digital credit market, especially with the youth as the majority demography of users. Studies show that some of the problems associated with digital loans are users not understanding the cost of borrowing. This problem might be exacerbated by low levels of financial/debt literacy among the youth. Thus, as studies show, the remedy could be in borrowers having financial education. However, also studies having indicated rampant cross borrowing in the digital credit market, and borrowers are holding more than one loan at a time. Literature has shown that overindebtedness can be caused by many factors, including low levels of debt literacy, and having positive attitudes towards credit/debt. Further, previous studies on over-indebtedness focused on other credit products such as credit cards, conventional loans, mortgage debt, overdraft, payday loans and not on digital loans, which are delivered in a unique and non-conventional way. Due to the limitations of these prior studies, this study attempted to examine the effect of debt literacy and attitudes towards digital credit on the over-indebtedness of the youth digital borrowers. The study built its population and sampled from criteria of selection being a youth who have used digital credit at least once in Ruaraka Sub-county, and then using a systematic sampling method, 159 youth borrowers selected. The study employed a mix-method survey design where questionnaires were used to gather both quantitative and qualitative data from 150 youth digital borrowers. Further case studies were conducted on four non-random selected. The questionnaire was pre-tested on a sample of youth borrowers and changes made before the final survey was conducted. The tool was also examined for both validity and reliability. Using an SPSS data analysis software, the study conducted descriptive, bivariate and regression analyses to answer the research questions and test the hypotheses. Results of the descriptive analysis showed that the average age of youth borrowers in Ruaraka Sub-county was 25 and that many borrowers were men. The study also found that most of the farmers had a tertiary level of education and were either unemployed or students and led a single life. The average income of the youth borrowers was Ksh 17,690. Most of the youth borrowers were debt literate, but females, the younger, those with lower levels of education attained and income, demonstrated low levels of debt literacy compared to the others. The study also found out attitudes towards digital credit among the youth borrowers are moderately positive at 0.65. The bivariate relationships performed using chi-square tests showed that over-indebtedness differed across employment status, income, education, number of outstanding loans and self-assessed debt conditions. The results also showed that over-indebtedness differed across all indicators of attitudes towards digital credit. The regression results showed that knowledge on interest rates and borrowing without good reasons had a significant influence on digital credit over-indebtedness at 5% and 1% level of significance, respectively. This study concludes that youth digital borrowers who have knowledge of interest rates and borrow digital loans for good reasons are less likely to be over-indebted. The case studies analyzed showed disruption or loss in income, impulsive and loan self-defaulting also caused over-indebtedness. The study recommends that the government should have a framework for over-indebtedness in Kenya to understand the phenomenon better and have measures towards it. Programs on debt literacy should be out rolled to youth borrowers to help understand the cost of credit. Further research should also be carried out in this area to have a better understanding of the other causes of over-indebtedness in the digital credit market.