Financial literacy and participation in financial markets: Evidence from Pakistan

Abstract/Description

  1. Introduction

1.1 Brief Background of the study

Financial literacy is a prime determinant that goes a long way towards enabling people to make knowledgeable choices around savings, investments, and day-to-day financial control. In new economies such as that of Pakistan, lack of financial literacy severely restricts involvement in organized financial markets (World Bank, 2020). In spite of numerous financial services and products, numerous people in Pakistan continue to use informal modes of savings or investments in gold because of a lack of knowledge about organized financial systems (Khurshid & Abdullah, 2020). Such a lack of knowledge is especially worrisome in the face of increasing significance of financial inclusion in national economic development.

Pakistan has been reported to have lower financial literacy compared to the rest of the region, increasing barriers to gaining access to basic financial services and financial products (Lusardi & Mitchell, 2014). Income, education, and age determine a person’s financial education and, subsequently, market participation (Fatima & Ahmed, 2019). Financial illiteracy contributes to aggregate levels of investment and the avoidance of more economic participation. Closing the gap by providing education and awareness programs is paramount to promoting increased financial inclusion and enabling people to make informed financial choices (Atkinson & Messy, 2012).

1.2 Research Problem and Objectives

In Pakistan, financial literacy levels are low with only 26% of adult residents showing sufficient financial knowledge (SBP, 2023). Financial understanding restricts participation in organized financial markets, and many individuals, especially rural ones, use informal savings strategies (International Growth Centre, 2023). Financial inclusion has increased, but there are obstacles, specifically concerning financial education, gender gaps, and socio-economic factors like income and education levels (SBP, 2023).

This study aims to investigate the relationship between financial literacy and participation in financial markets in Pakistan. Specifically, the research objectives are:

  1. To evaluate the impact of financial literacy on participation in financial markets.
  2. To examine the role of socio-economic factors, such as income, education, and gender, in influencing financial literacy and market participation.

1.3 Significance of the study

The research is important because it targets the essential subject of financial literacy in Pakistan, a factor directly related to people’s involvement in the formal financial markets. It informs policy and financial education interventions by discussing the connection between market participation and financial literacy. The research can help improve financial inclusion by allowing people to make better-informed economic and financial decisions, and engender economic development by raising access to the financial system.

1.4 Contributions of the study

The paper contributes to an increasing body of literature addressing financial literacy by presenting empirical results from Pakistan, a nation with limited financial literacy and substantial market participation barriers. Both market participation and financial literacy are considered to provide insight into how socio-economic factors such as income levels, education, and gender influence financial behaviors. Policy and financial institutions can provide useful recommendations based thereon to design appropriate financial education programs that will promote financial inclusion and improved market participation by disadvantaged regions of Pakistan.

2 Theoretical Framework & Hypothesis

2.1 Key Theoretical Lens used in the study

The study adopts Ajzen (1991) Theory of Planned Behavior (TPB) as its underpinning theory. TPB theorizes that personal behavior is influenced by the three fundamental factors of attitudes to behavior, subjective norms and perceived behavior control. TPB, with respect to financial literacy, posits that a subject’s attitude to financial decision-making is influenced by their knowledge of finances, and this goes a step further to influence their financial market conduct. Furthermore, subjective norms or perceived pressures to participate in financial activities also greatly influence financial decisions. Perceived behavioral control is an individual’s belief that he or she can carry out financial decisions, and this can be determined by their financial literacy. TPB is a highly suitable theory when explaining the role financial literacy takes in financial market participation, and a valid framework to analyze the facilitators and constraints to financial participation in Pakistan.

2.2 Explanation of core concepts and relationships

The research focuses on two basic concepts: financial literacy and market participation. Financial literacy refers to an individual's ability to understand and effectively use various financial abilities, such as managing budgets, saving, investing, and managing financial risks (Lusardi & Mitchell, 2014). It is essential to make appropriate decisions within the financial market, a situation this research addresses too. Financial market participation entails engaging in activities like investing in shares, mutual funds, and other organized financial assets. TPB asserts that financial literacy controls an individual's attitude towards market participation, expectation of the benefit of taking part in financial markets, and the ability to navigate sophisticated financial commodities. Socioeconomic factors, such as earnings, education, and gender, also moderate between literacy and market participation. This research investigates relationships to identify barriers to market participation and measures to improve financial literacy.

3 Methodology

3.1 Research Design

The research is positivist in nature, measuring financial literacy and market participation objectively. This research is deductive with a beginning point of established theories (TPB) to test the hypotheses of financial literacy and socio-economic factors. The study is quantitative since numerical information is collected with reference to financial literacy, market participation, and socio-economic factors through a survey. This will provide the platform to test statistical procedures to assess inter-relation among the variables and make generalizable claims and draw conclusions that can be applied to shape policy and financial education within Pakistan.

3.2 Sample and Procedure

The population targeted comprises rural and urban Pakistani adults. A stratified random sampling technique is adopted to encompass different population groups by income level, education level, and gender. At least 500 respondents are chosen to ensure the data are reliable. The data were gathered online and face-to-face to make them accessible and inclusive.

3.3 Measures

Financial literacy is assessed by a standard measure that takes into account awareness of concepts such as saving, budgeting, investing, and managing financial risks (Lusardi & Mitchell, 2014). Financial market participation is assessed by the investments made by the respondents in stocks, mutual funds, or any formally organized savings and investment product. Controls related to socioeconomics are education, income, and gender. Attitudes and behaviors are assessed by a Likert scale.

3.4 Analytical Technique

The data are analyzed with Structural Equation Modeling (SEM) appropriate in terms of measuring complex relationships between latent and manifest variables (Hair et al., 2014). SEM allows testing of a number of interrelated dependencies concurrently and is appropriate to measure interrelatedness of financial literacy, socio-economic factors, and market involvement. SEM is particularly useful to quantify direct and indirect effects and to conduct a comprehensive evaluation of anticipated relationships in this research. SEM tests the theory with rigor and supports measurement and structural model analyses.

4 Key Findings

4.1 Summary of Final Results

The research demonstrated a considerable positive connection between financial literacy and market participation. Financial literacy levels were found to be linked to more participation in institutional forms of financial activities, like investment in equities and mutual funds. Socio-economic characteristics like income and education were found to moderate this connection, with the more educated and better-paid individuals showing more financial knowledge and market participation. Gender proved not to have a significant moderating influence, reflecting that financial literacy has the same effect on both sexes.

4.2 Insights drawn from data analysis

The evidence emphasizes the importance of financial literacy to enhance market participation in Pakistan. Financial literacy is essential to empower people to better understand the subtleties of formal financial systems. Socio-economic factors, namely income and education, reinforce the beneficial impacts of financial literacy, and this merits the provision of targeted financial education to disadvantaged population groups. The evidence also indicates that gender differences, if any, in this case do not have a considerable influence on financial decision-making. Policies targeted at financial literacy, therefore, are equally useful to all socio-economic classes.

5 Discussion & Contributions

5.1 Theoretical Implications

The research expands the Theory of Planned Behavior (TPB) by identifying the manner in which financial literacy impacts attitudes and perceived control over behaviors in market participation. This research extends the TPB by illustrating that socio-economic variables like income and education can both encourage and discourage financial behaviors that provide a more comprehensive insight into financial decision-making.

5.2 Practical Implications

The evidence indicates that boosting financial literacy, especially via targeted education programs to disadvantaged groups, can enhance participation in organized financial markets. Policymakers and financial institutions need to concentrate efforts towards providing accessible education to specific socio-economic classes to promote financial inclusion and enable people to make sound financial choices.

5.3 Limitations and future research Directions

The cross-sectional nature of this study constrains causation between financial literacy and market participation. It is possible that future studies use longitudinal studies to determine causal relationships. Further, investigation of the role of culture in financial behaviors of Pakistani citizens can offer more insight into financial inclusion barriers.

Keywords

Financial Literacy, Financial Market, Pakistan Stock Exchange, Retail Investors, Households, Structural Equation Modelling, Partial Least Square

Track

Finance

Session Number/Theme

Finance - Session II

Start Date/Time

13-6-2025 4:10 PM

End Date/Time

13-6-2025 5:30 PM

Location

MCC – 12 AMAN CED Building

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Jun 13th, 4:10 PM Jun 13th, 5:30 PM

Financial literacy and participation in financial markets: Evidence from Pakistan

MCC – 12 AMAN CED Building

  1. Introduction

1.1 Brief Background of the study

Financial literacy is a prime determinant that goes a long way towards enabling people to make knowledgeable choices around savings, investments, and day-to-day financial control. In new economies such as that of Pakistan, lack of financial literacy severely restricts involvement in organized financial markets (World Bank, 2020). In spite of numerous financial services and products, numerous people in Pakistan continue to use informal modes of savings or investments in gold because of a lack of knowledge about organized financial systems (Khurshid & Abdullah, 2020). Such a lack of knowledge is especially worrisome in the face of increasing significance of financial inclusion in national economic development.

Pakistan has been reported to have lower financial literacy compared to the rest of the region, increasing barriers to gaining access to basic financial services and financial products (Lusardi & Mitchell, 2014). Income, education, and age determine a person’s financial education and, subsequently, market participation (Fatima & Ahmed, 2019). Financial illiteracy contributes to aggregate levels of investment and the avoidance of more economic participation. Closing the gap by providing education and awareness programs is paramount to promoting increased financial inclusion and enabling people to make informed financial choices (Atkinson & Messy, 2012).

1.2 Research Problem and Objectives

In Pakistan, financial literacy levels are low with only 26% of adult residents showing sufficient financial knowledge (SBP, 2023). Financial understanding restricts participation in organized financial markets, and many individuals, especially rural ones, use informal savings strategies (International Growth Centre, 2023). Financial inclusion has increased, but there are obstacles, specifically concerning financial education, gender gaps, and socio-economic factors like income and education levels (SBP, 2023).

This study aims to investigate the relationship between financial literacy and participation in financial markets in Pakistan. Specifically, the research objectives are:

  1. To evaluate the impact of financial literacy on participation in financial markets.
  2. To examine the role of socio-economic factors, such as income, education, and gender, in influencing financial literacy and market participation.

1.3 Significance of the study

The research is important because it targets the essential subject of financial literacy in Pakistan, a factor directly related to people’s involvement in the formal financial markets. It informs policy and financial education interventions by discussing the connection between market participation and financial literacy. The research can help improve financial inclusion by allowing people to make better-informed economic and financial decisions, and engender economic development by raising access to the financial system.

1.4 Contributions of the study

The paper contributes to an increasing body of literature addressing financial literacy by presenting empirical results from Pakistan, a nation with limited financial literacy and substantial market participation barriers. Both market participation and financial literacy are considered to provide insight into how socio-economic factors such as income levels, education, and gender influence financial behaviors. Policy and financial institutions can provide useful recommendations based thereon to design appropriate financial education programs that will promote financial inclusion and improved market participation by disadvantaged regions of Pakistan.

2 Theoretical Framework & Hypothesis

2.1 Key Theoretical Lens used in the study

The study adopts Ajzen (1991) Theory of Planned Behavior (TPB) as its underpinning theory. TPB theorizes that personal behavior is influenced by the three fundamental factors of attitudes to behavior, subjective norms and perceived behavior control. TPB, with respect to financial literacy, posits that a subject’s attitude to financial decision-making is influenced by their knowledge of finances, and this goes a step further to influence their financial market conduct. Furthermore, subjective norms or perceived pressures to participate in financial activities also greatly influence financial decisions. Perceived behavioral control is an individual’s belief that he or she can carry out financial decisions, and this can be determined by their financial literacy. TPB is a highly suitable theory when explaining the role financial literacy takes in financial market participation, and a valid framework to analyze the facilitators and constraints to financial participation in Pakistan.

2.2 Explanation of core concepts and relationships

The research focuses on two basic concepts: financial literacy and market participation. Financial literacy refers to an individual's ability to understand and effectively use various financial abilities, such as managing budgets, saving, investing, and managing financial risks (Lusardi & Mitchell, 2014). It is essential to make appropriate decisions within the financial market, a situation this research addresses too. Financial market participation entails engaging in activities like investing in shares, mutual funds, and other organized financial assets. TPB asserts that financial literacy controls an individual's attitude towards market participation, expectation of the benefit of taking part in financial markets, and the ability to navigate sophisticated financial commodities. Socioeconomic factors, such as earnings, education, and gender, also moderate between literacy and market participation. This research investigates relationships to identify barriers to market participation and measures to improve financial literacy.

3 Methodology

3.1 Research Design

The research is positivist in nature, measuring financial literacy and market participation objectively. This research is deductive with a beginning point of established theories (TPB) to test the hypotheses of financial literacy and socio-economic factors. The study is quantitative since numerical information is collected with reference to financial literacy, market participation, and socio-economic factors through a survey. This will provide the platform to test statistical procedures to assess inter-relation among the variables and make generalizable claims and draw conclusions that can be applied to shape policy and financial education within Pakistan.

3.2 Sample and Procedure

The population targeted comprises rural and urban Pakistani adults. A stratified random sampling technique is adopted to encompass different population groups by income level, education level, and gender. At least 500 respondents are chosen to ensure the data are reliable. The data were gathered online and face-to-face to make them accessible and inclusive.

3.3 Measures

Financial literacy is assessed by a standard measure that takes into account awareness of concepts such as saving, budgeting, investing, and managing financial risks (Lusardi & Mitchell, 2014). Financial market participation is assessed by the investments made by the respondents in stocks, mutual funds, or any formally organized savings and investment product. Controls related to socioeconomics are education, income, and gender. Attitudes and behaviors are assessed by a Likert scale.

3.4 Analytical Technique

The data are analyzed with Structural Equation Modeling (SEM) appropriate in terms of measuring complex relationships between latent and manifest variables (Hair et al., 2014). SEM allows testing of a number of interrelated dependencies concurrently and is appropriate to measure interrelatedness of financial literacy, socio-economic factors, and market involvement. SEM is particularly useful to quantify direct and indirect effects and to conduct a comprehensive evaluation of anticipated relationships in this research. SEM tests the theory with rigor and supports measurement and structural model analyses.

4 Key Findings

4.1 Summary of Final Results

The research demonstrated a considerable positive connection between financial literacy and market participation. Financial literacy levels were found to be linked to more participation in institutional forms of financial activities, like investment in equities and mutual funds. Socio-economic characteristics like income and education were found to moderate this connection, with the more educated and better-paid individuals showing more financial knowledge and market participation. Gender proved not to have a significant moderating influence, reflecting that financial literacy has the same effect on both sexes.

4.2 Insights drawn from data analysis

The evidence emphasizes the importance of financial literacy to enhance market participation in Pakistan. Financial literacy is essential to empower people to better understand the subtleties of formal financial systems. Socio-economic factors, namely income and education, reinforce the beneficial impacts of financial literacy, and this merits the provision of targeted financial education to disadvantaged population groups. The evidence also indicates that gender differences, if any, in this case do not have a considerable influence on financial decision-making. Policies targeted at financial literacy, therefore, are equally useful to all socio-economic classes.

5 Discussion & Contributions

5.1 Theoretical Implications

The research expands the Theory of Planned Behavior (TPB) by identifying the manner in which financial literacy impacts attitudes and perceived control over behaviors in market participation. This research extends the TPB by illustrating that socio-economic variables like income and education can both encourage and discourage financial behaviors that provide a more comprehensive insight into financial decision-making.

5.2 Practical Implications

The evidence indicates that boosting financial literacy, especially via targeted education programs to disadvantaged groups, can enhance participation in organized financial markets. Policymakers and financial institutions need to concentrate efforts towards providing accessible education to specific socio-economic classes to promote financial inclusion and enable people to make sound financial choices.

5.3 Limitations and future research Directions

The cross-sectional nature of this study constrains causation between financial literacy and market participation. It is possible that future studies use longitudinal studies to determine causal relationships. Further, investigation of the role of culture in financial behaviors of Pakistani citizens can offer more insight into financial inclusion barriers.