FACULTY OF BUSINESS MANAGEMENT AN

PROFESSIONAL STUDIES
DEPARTMENT OF ACCOUNTING & FINANCE

FRS 20301 RESEARCH PROJECT 1

RESEARCH TITLE: FINANCIAL LITERACY AND FINANCIAL

BEHAVIOR: EVIDENCE FROM THE EMERGING INDONESIAN
MIDDLE CLASS

Student Name Fauzan Tri Pasya

Matric Number 012021090290

LECTURER NAME: MIOR FAIZMIE BIN YUSOF ZA’BA

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Table of Contents

Chapter 1........................................................................................................................... 2

Introduction..................................................................................................................2
1.1 Background of the study...................................................................................... 2
1.2 Problem statements.............................................................................................. 2
1.3 Research Objective and Questions.......................................................................3
1.4 Significance of the study......................................................................................4
1.5 Thesis Organisation..............................................................................................4

Chapter 2........................................................................................................................... 5

Theoretical and empirical literature.......................................................................... 5

2.1 Introduction..........................................................................................................5
2.2 Theoretical Literature...........................................................................................5
2.3 Empirical Literature............................................................................................. 6
2.4 Hypothesis Development..................................................................................... 7
2.5 Theoretical Or Conceptual framework................................................................ 8
2.6 Conclusion........................................................................................................... 9

Chapter 3........................................................................................................................... 9

Methodology................................................................................................................. 9
3.1 Introduction..........................................................................................................9
3.2 Sample Selection and Data Sources...................................................................10
3.3 Estimation Models............................................................................................. 10
3.4 Estimation Methods........................................................................................... 10
3.5 Variables............................................................................................................ 11
3.6 Conclusion......................................................................................................... 12

References................................................................................................................... 14

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 CHAPTER 1

INTRODUCTION

1.1 Background of the study

Financial literacy is a fundamental tool that can be the basis for a person to understand
more about personal financial management, making financial plans, or making financial
decisions, in short, financial literacy is knowledge or ability to manage finances (Chen and
Volpe, 1998). Financial literacy combines understanding of everyday situations such as
insurance, credit, savings, and loans (Chaulagain, 2015). Understanding of financial terms
and concepts such as investing and managing funds to increase wealth and financial security
is also a part of financial literacy. According to the Financial Services Authority (OJK),
financial literacy is a series of processes or activities to improve the knowledge, confidence,
and skills of consumers and the wider community so that they are able to manage finances
well. Financial intelligence is needed by every individual in order to continue to enjoy
prosperity (Sugiarto, 2017). However, the level of financial literacy in Indonesia is still far
behind from other ASEAN countries. The Financial Literacy Index survey conducted by
MasterCard in 2015 showed that Indonesia got an average score of 62 in 10th place, an
increase compared to the previous year where Indonesia was the lowest ASEAN country
along with the Philippines. However, this figure is still far below the country with the highest
average literacy rate, Singapore, with 71. (MasterCard Site, accessed May 2018).

1.2 Problem statements

Having good financial literacy is important to avoid and solve financial problems
which, in turn, are very important to live a prosperous, healthy and happy life.
Financial difficulties caused by low levels of financial literacy can increase isolation,
stress, depression, and low self-esteem, this can produce or exacerbate tension
(Wolcott and Hughes: 1999, 10). For middle class people, managing personal finances
is not a big deal. It is easy to do because there are difficulties faced, one of which is
the phenomenon of growing consumptive behavior. A number of surveys of the
behavior of the middle class in managing finances reveal surprising findings that

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 describe the level of financial literacy of this group. First, based on the Visa
International financial literacy survey 2012 in 28 countries with 25,500 respondents,
Indonesia is in the second worst position before Pakistan in the financial literacy
ranking score of this survey. far from the ideal amount of emergency funds
recommended by financial planners, which is a minimum of 6 times monthly
expenses. Another finding is that Indonesian respondents discuss finances with their
children only 5 days a year. Of course the amount of time is far from ideal. Second,
recently the Center for Middle Class Consumer Studies researched the behavior of the
middle class in 6 major cities which found that 75% of income was used for
consumption, and only 25% was saved and invested. Ideally, a minimum of 30% of
income is set aside for savings and investment, the rest is just for consumption and
debt repayments. Third, two surveys of the middle class in 2012 conducted by two
different institutions, Mark Plus and another leading weekly business magazine,
which inquired about ownership of financial products, revealed that mutual fund
investment is still small, less than 10% of assets, while the majority of deposits are
placed in savings.

1.3 Research Objective and Questions

The purpose of this paper is to study the financial literacy of people in indonesia who
are members of the rapidly growing global middle class in developing countries.

The research conducted within this paper aims to solve the following research questions:

RQ1. How high is the understanding of the financial literacy of the middle
class in Indonesia?

RQ2. Does the level of financial literacy have a positive effect on the
financial behavior of middle-level society in Indonesia?

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 1.4 Significance of the study

As the respondent previous research respondents related to financial literacy in

Indonesia but only in certain areas, it is necessary to conduct cross-cultural studies. Previous
research also needs to be repeated to increase the validity of the findings, especially related to
new findings. Other variables that can affect the continuity of use and the addition of a larger
sample also needs to be done because it can cause different results. This study aims to
determine how the level of financial literacy affects financial literacy and financial behavior
of students positively, as well as how much financial literacy is owned by the middle class.

1.5 Thesis Organisation

The remainder of this paper is organised as follows: Section 2 presents the related
theoretical and empirical literature toward continuance usage of Financial Literacy. Section 3
presents the study methodology,

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 CHAPTER 2

THEORETICAL AND EMPIRICAL LITERATURE

2.1 Introduction

Previous research that supports the positive effects of subjective financial literacy (e.g.
Croy et al., 2010; Hauff et al., 2020; Perry and Morris, 2005), results of our study contribute
to highlight the fact that subjective financial literacy can be a double-edged sword on
retirement saving/preparation. The standardized total effect of subjective financial literacy on
retirement saving intention is 0.115 in which the standardized direct effect is 0.142 and the
standardized indirect effect via risk tolerance and perception is 0.027. In other words, as
financial literacy increases by one SD, retirement saving intention will increase by 0.115
standard deviations in total in which 0.142 standard deviations are due to the direct effect and
0.027 standard deviations are due to the indirect effect. Although the direct (positive) effect is
the main effect, the indirect (negative) effect via risks also accounts for a significant
proportion (23.5%) of the total effects. Given the predominant positive effects of subjective
financial literacy on retirement saving intention and behaviors, we suggest that it is important
to outline when or in what conditions the negative effects are more likely to happen. In this
respect, we identify two possible perspectives that can act as contextual conditions of our
proposed negative mechanism: the first perspective concerns with an individual’s social
environment and the second perspective concerns with an individual’s values (i.e. future
orientation or long-term orientation).

2.2 Theoretical Literature

In this paper, we study the financial behavior and financial literacy of the urban middle
class in Asia. The middle class has often been neglected in empirical studies, as papers on
financial literacy have either looked at populations in industrialized countries(Lusardi and
Mitchell, 2014) or focused on the poor living in developing countries (Xu and Zia, 2013).
This is despite the important role that the middle class plays for growth and development
(Ravallion, 2010; Banerjee and Duflo, 2008). One reason why the middle class in emerging
markets has been argued as important for growth is that it has larger savings than the poor

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(Chun et al., 2017), mostly because the middle class tends to have stable employment
(Banerjee and Duflo, 2008). In this light, it is particularly important to study financial literacy
and financial decision making of the middle class. Good financial decisions making by the
middle class in emerging economies may have more far reaching consequences than financial
decision making by the poor. Furthermore, policies that target the urban middle class would
have to be very different to policies designed to target the poor parts of the population in
emerging markets.

To study this population group, we fielded a survey in Bangkok, Thailand, collecting

information of over 500 middle class people.This survey was designed especially to study the
financial behavior and financial literacy in emerging Asia. Bangkok provides a good platform
for this. Firstly, Thailand belongs to the group of emerging economies where a sizable middle
class with significant financial needs and wealth has emerged, meeting the global middle
class definition of Kharas (2010). 1 This group is largely concentrated in the Bangkok area,
where 23% of the Thai population lives, but which produces 44% of total GDP. Secondly, the
financial sector grew quickly and the economy expanded significantly, meaning that the
middle class had to adjust quickly to new financial products. Thirdly, the pension system in
Thailand is small and undeveloped, implying that members of the middle class working in the
private sector need to save for their retirement, without state support. Although sophisticated
financial products are easily available to everyone in Bangkok, the question is whether they
have sufficient financial literacy to take advantage of them.

2.3 Empirical Literature

Recent studies, the authors have confirmed that locus of control affects financial
behavior and that locus of control plays an important role in increasing financial behavior
(Radianto et al., 2021). Perry and Morris (2005) stated that an individual’s locus of control
plays a significant role in forming financial behavior. A person with an internal locus of
control is someone who believes that they can overcome financial problems in daily life and
tends to maintain good financial management, such as saving money and making payments
on time. In the literature, studies examining the locus of control and its relationship to
financial behavior show that individuals with internal locus of control will have better
financial behavior or, on the contrary, the financial behavior of individuals with external

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locus of control will deteriorate (Perry and Morris, 2005; Kholilah and Iramani, 2013; Arifin,
2017). However, Grable et al. (2009) found that locus of control negatively affected financial
behavior. In addition, Perry and Morris (2005) and Britt et al. (2013) have also found
evidence that the external locus of control negatively affects individuals’ financial behavior.

The authors reported that financial knowledge and financial attitude have a positive and
significant effect on financial management behavior (Agustina and Mardiana, 2020). In
another study, it is reported that students with higher financial knowledge scores show more
positive financial attitudes and more positive financial behaviors (Aydin and Selcuk, 2019).
On the other hand, Kholilah and Iramani (2013) found negative effects of financial
knowledge on financial behaviors. We believe that financial literacy, which has a significant
impact on an individual investor’s financial decisions, will change the strength of the
relationship between personal characteristics and financial behavior. In addition to the main
effects we estimate, our research anticipates that the financial literacy of an individual will
have a moderated effect on the relationship between locus of control and the financial
behavior of the individual investor.

Early withdrawals from retirement accounts, Lee and Hanna (2020) find that
individuals who rate themselves as financially literate (i.e. high subjective financial literacy)
are likely to make hardship withdrawals from their retirement accounts than those who rate
themselves as less financially literate. In this respect, we imply from these two studies (i.e.
Croy et al., 2010; Lee and Hanna, 2020) that, in addition to the existing positive effects, high
levels of subjective financial literacy could also lead to reduced retirement saving intention
and behaviors. Therefore, our study aims to address the following research question: Why do
individuals who perceive themselves as financially literate reduce their intention to plan and
save for retirement?

2.4 Hypothesis Development

A hypothesis is a proposition, a statement about a phenomenon that can be observed and

which can be stated to be true or false, which is formulated for empirical testing (Cooper and
Schindler, 2008:64). According to Chaulagain's research (2017), there is a significant
relationship between financial attitude, financial behavior, and financial literacy. Lusardi and

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Mitchell (2007) argue that counting and Financial literacy is an important life skill and will
always be closely related to financial decision making. This financial decision will not be
separated from the formation of characteristics or behavior and from the financial attitude of
an individual. Based on the description of previous research that has been attached above, the
relationship between the variables, namely the independent variable (X) to the dependent
variable (Y1 and Y2), as well as the description of the framework of thought above, the
following are the hypotheses in this study:

Ho1: Financial Literacy does not have a positive effect on Financial Attitude

Ha1: Financial Literacy has a positive effect on Financial Attitude

Ho2: Financial Literacy has no positive effect on Financial Behavior

Ha2: Financial Literacy has a positive effect on Financial Behavior

2.5 Theoretical Or Conceptual framework

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 2.6 Conclusion

To our knowledge this is the first study that examines the impact of financial literacy
among the middle class living in an urban area in Asia. In contrast to the poor in developing
countries, most middle class members, especially those living in urban areas, have access to a
wide range of saving products and borrowing channels. However, little is known about how
effectively the middle class uses these financial services, and to what extent a lack of
financial literacy is an obstacle. In this paper we first show that the average level of financial
literacy of the middle class in Bangkok is similar to developed countries. However,
knowledge about stock market diversification is lacking, with only 24% answering this
question correctly. Moreover, we are able to show that financial literacy has two main
benefits. First, financially literate individuals are more likely to own as assets other than a
savings account and are more likely to own a fixed deposit account. They are also less likely
to own life insurance, which gives notoriously low returns. Hence this study shows that
middle class respondents with higher financial literacy are more likely to use the wide range
of financial services that is offered to them. Second, they use credit cards in a more informed
way: they are more likely to know the interest rate on credit card and have less difficulty
paying off credit card debt. Finally, these links from financial literacy to financial behavior
are causal, as demonstrated through IV regressions.

CHAPTER 3

METHODOLOGY

3.1 Introduction

The type of research used in this research is quantitative research with survey method.
According to Cooper and Schindler (2008) survey method is a research method used to
examine certain populations and samples whose data collection is in the form of primary data
and uses research instruments that are carried out systematically and structured with the aim
of testing predetermined hypotheses. The type of data used is one-shot or cross-sectional,
namely data collected at a certain time, in order to answer research questions (Cooper and
Schindler, 2008). This research consists of 3 variables, 1 independent variable and 2

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dependent variables. The independent variable is financial literacy. While the dependent
variable is financial attitude and financial behavior. The objects used in this study are active
students in middle class society

3.2 Sample Selection and Data Sources

An online questionnaire was prepared in English and Indonesian. These instructions are
distributed to middle class people in several big cities in Indonesia, each citizen is expected
to complete the questionnaire. The target population is the Indonesian population who are
adults and working. The questionnaire was distributed online to the target population in
Indonesia using Google Form.

3.3 Estimation Models

We conducted a trial with individuals who had the same characteristics as the target
group and the final version of the questionnaire was the basis for interviewer training. Survey
participants were intercepted in public places throughout major cities in Indonesia and
randomly selected. The area in which each team operates is decided before the start of the
survey; they consist of six different main areas in Indonesia

3.4 Estimation Methods

First, we recognize and explain the negative mechanism between subjective financial
literacy and retirement saving in addition to the positive relationship that has been widely
studied. By incorporating two important psychological risk constructs into the model, we
provide a better understanding of how these two risks mediate the relationship between
subjective financial literacy and retirement saving intention.

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 3.5 Variables

The variables to be studied in this study are classified into two, namely: the dependent
variable and the independent variable. According to Sekaran and Bougie (2013), a variable is
anything that has and gives varying values.

3.5.1. Dependent Variables

According to Kerlinger (2006), the dependent variable or the dependent variable is a

variable that is influenced or is the result of an independent variable. The dependent variable
in this study is represented by the symbols "Y1 and Y2". The dependent variables in this
study are :

1. Financial Attitude (financial attitude) (Y1)\

According to Pankow (quoted in Zahroh, 2014:13), financial attitude is defined as a state of
mind, opinion, and assessment of finances. These things will be grouped based on the
answers of respondents who answered 10 short statements about their financial attitudes
using a 4-point Likert Scale. Respondents' answers can be in the form of five choices from
the available alternatives, namely :
SA : Strongly Agree (4)
A : Agree (3)
D : Disagree (2)
SD: Strongly Disagree (1)
Indicators of respondents' financial attitudes will adopt research from Brant A. Marsh
(2006) which states that financial attitudes are seen from the orientation of finance and the
habit of planning an individual's budget, the individual's attitude in dealing with the
development of money and financial services, the individual's habit of providing financial
security, and the individual's attitude in managing personal finances.

2. Financial Behavior (financial behavior)

Baker and Nofsinger (2011) define financial behavior as the way humans actually
behave in a financial decision. In this study, the financial behavior variable will be examined
based on the answers from respondents who answered 10 short statements regarding their

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financial behavior using a 5-point Likert Scale. Respondents' answers can be in the form of
five choices from the available alternatives, namely:
SA : Strongly Agree (4)
A : Agree (3)
D : Disagree (2)
SD : Strongly Disagree (1)
This study will adopt indicators from Marsh (2006) that an individual will be said to have
good financial behavior when the individual can organize or allocate income according to
needs, individuals can manage expenses in a planned manner, individuals own, run, and
know about savings, and individuals can regulate consumption and minimize wastage.

3.5.2. Independent Variables

According to Karlinger (2006), independent variables or independent variables are
variables that influence or cause changes in the emergence of the dependent variable. The
independent variable in this study is represented by the symbol "X". The independent
variables in this study are :

1. Financial Literacy
Bushan and Medury (2013) state that financial literacy is the ability to make judgments
and make effective decisions related to money management. In this study, the financial
literacy variable will be examined from the survey results that have been distributed. The
survey contains 20 short statements on the basics of finance adopted from Chen and Volpe
with the answer choices agree or disagree. Each statement will get a score of 1 if it is
answered correctly and a score of 0 if it is answered incorrectly.

3.6 Conclusion

In this paper we first show that the average level of financial literacy of the middle class
in Indonesia is similar to developed countries. However, knowledge about stock market
diversification is lacking, with only 24% answering this question correctly. Moreover, we are
able to show that financial literacy has two main benefits. First, financially literate
individuals are more likely to own as assets other than a savings account and are more likely
to own a fixed deposit account. They are also less likely to own life insurance, which gives

12
notoriously low returns. Hence this study shows that middle class respondents with higher
financial literacy are more likely to use the wide range of financial services that is offered to
them. Second, they use credit cards in a more informed way: they are more likely to know the
interest rate on credit card and have less difficulty paying off credit card debt. Finally, these
links from financial literacy to financial behavior are causal, as demonstrated through IV
regressions.

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