Can Financial Intermediary Development Improve Financial Literacy? Evidence from China

Abstract

The lack of financial knowledge and its serious consequences has brought about extensive discussion among academics since the 2008 financial crisis. This study investigates the importance of financial intermediation in financial literacy. Using Consumer Finance and Investment Education Survey data in 24 cities from 2010 to 2012 in China, we find that financial intermediary development helps to improve financial literacy. This positive impact is magnified in central and western China, and to females and to less-educated consumers. The results hold after controlling the problem of endogeneity by constructing regulation of bank cross-city branching as an instrumental variable. We further run a number of estimations to discover the influence mechanism. Our results show that the influence upon individuals occurs not after but before they make financial decisions, and that the precondition is when their current expenditure exceeds current revenues, which requires inter-temporary cash-flow adjustments. That is to say, only when individuals have formed an effective demand for financial knowledge, will financial intermediary development improve their financial literacy. The study sheds some light on the improvement of consumer financial literacy and financial inclusion.

Keywords: financial intermediation; financial literacy; commercial bank; financial inclusion; inter-temporary decision

JEL Classification: G21; D14; D91; O15