Financial Literacy and Indebtedness in Latin America

This thesis undertakes an assessment of financial inclusion microdata of five Latin American countries: Argentina, Colombia, Chile, Peru, and Mexico, with a specific focus on the financial knowledge section of these surveys. Each country’s survey had an array of questions to test the respondents’ command of financial concepts, which follow the framework provided by the OECD International Network on Financial Education Survey Toolkit. These questions are on the topics of inflation, simple interest, compound interest, diversification, and risk, among others. To study the dynamics between several demographic and socioeconomic factors with financial knowledge, I built a financial literacy index based upon three selected standardized questions, which allowed for the comparison of the results within and between countries. The method chosen for the estimation was a Linear Probability Model, applied to a pooled dataset to measure the impact of financial literacy on individuals’ self-reported indebtedness, trust in financial institutions, as well as the correlation of self-assessment of financial knowledge and their actual financial literacy. After controlling for factors such as age, gender, education, monthly income, and occupation, a positive correlation between self-reported indebtedness and low financial literacy was found in the data set. Furthermore, a statistically significant negative correlation between trust in financial institutions and low financial literacy was found. Finally, an individual’s self-assessment of their level of financial knowledge has been shown to be positively correlated with their actual financial education.

This thesis undertakes an assessment of the financial inclusion microdata of five Latin American countries: Argentina, Colombia, Chile, Peru, and Mexico, with a specific focus on the financial knowledge section of these surveys. Each country’s survey had an array of questions to test the respondents’ command of financial concepts, which follow the framework provided by the OECD International Network on Financial Education Survey Toolkit. These questions are on the topics of inflation, simple interest, compound interest, diversification, and risk, among others. To study the dynamics between several demographic and socioeconomic factors and financial knowledge, I built a financial literacy index based upon three selected standardized questions, which allowed for the comparison of the results within and between countries. The method chosen for the estimation was a Linear Probability Model, applied to a pooled dataset to measure the impact of financial literacy on individuals’ self-reported indebtedness, trust in financial institutions, as well as the correlation of self-assessment of financial knowledge and their actual financial literacy. After controlling for factors such as age, gender, education, monthly income, and occupation, a positive correlation between self-reported indebtedness and low financial literacy was found in the data set. Furthermore, a statistically significant negative correlation between trust in financial institutions and low financial literacy was found. Finally, an individual’s self-assessment of their level of financial knowledge has been shown to be positively correlated with their actual financial education.