Financial Literacy as a Key to Financial Inclusion: A Multidimensional Analysis and Insights from Below Poverty Line Households

Abstract

This study examined the multifaceted effects of financial literacy on the inclusion of economically disadvantaged populations. Structural equation modelling with smart partial least squares (PLS) was employed to analyze the effects of financial literacy on financial inclusion. This study reveals that financial literacy exerts a multi-dimensional influence on households’ financial inclusion below the poverty threshold. Additionally, it indicates that improved access to financial services is correlated with increased usage of these resources. This study shows that access to financial services and financial literacy play a significant role in increasing households’ use of financial products, thereby promoting greater financial inclusion. Executive Summary This study assessed the impact of financial literacy on financial inclusion among households living below poverty line (BPL) in Kerala. It is based on primary data collected through a structured questionnaire from a sample of 384 BPL households using random sampling. To assess the influence of financial literacy on inclusion, partial least squares structural equation modelling (PLS-SEM) was used. The results revealed that financial literacy has a significant impact on financial inclusion among BPL households. Access to financial services is positively related to the usage of financial services. This study also highlights that financial literacy and access to financial services are major factors contributing to financial usage by BPL households, thereby fostering financial inclusion. There is a gap in the literature regarding the impact of financial literacy on the inclusion of BPL households. This gap has been filled by this study through its multi-dimensional analysis of financial literacy and inclusion. Financial literacy has subdimensions, such as financial awareness, knowledge, attitude and behaviour. Similarly, financial inclusion has subdimensions, such as financial access, affordability, quality and usage. This study highlighted the significance of knowledge of financial services in fostering financial inclusion in rural areas and vulnerable sections of society.