critical review

Journal of Econom ic and Adm

inistrative Sciences

Comparing What Drives Financial Behavior of Moslem- Debtor vs Debt-Free Groups in Pandemic

Journal: Journal of Economic and Administrative Sciences

Manuscript ID JEAS-08-2021-0165

Manuscript Type: Research Paper

Keywords: Financial behavior, Islamic Financial Literacy, Financial attitude, Path Analysis

Journal of Economic and Administrative Sciences

Journal of Econom ic and Adm

inistrative Sciences1

Comparing What Drives Financial Behavior of Moslem- Debtor vs Debt- Free Groups in Pandemic

Abstract

Islam recognizes debt as instrument for consumption smoothing, via Qardhul Hassan and other redistribution instruments. As pandemic sets difficulties to all, particularly to middle-low income Moslem group, some must survive using government financial relieves and debts while others are still able to maintain its financial situation out of debt. This paper aims to study this two groups and examine what makes up their financial decision and how the relationship is the primary interest of the paper. The findings emphasis the efficacy of literacy in determining financial behavior of debtor group, and relationship of literacy on attitude and financial inclusion as intervening variables towards behavior of debt-free group. For debtor group, it is less rationale than the debt-free group. Therefore, although literacy is siginificant and positive, it could not fence them from the prey of private and institutional lenders, particularly during a difficult financial situation like pandemic crisis. Debtor group believes on seeing others who they considered as the group, more than information and knowledge. Attitude is the main determinant for debtor’s behavior. Hence it emphasizes on the importance of a intergrated psychological and financial literacy programs in order to make paradigm shift. Policy recommendation is provided.

Key words: Financial Behavior, Islamic Financial Literacy, Financial Attitude, Path Analysis

1. Introduction

Theoretically, religiousity is the anchor for individual behavior (Mathras et al.,

2016; Shohib, 2020). Values and teachings based on Holy scriptures is the main driver

influencing one’s decision for believers (Hackett & Grim, 2012). For faithful individual,

religion provides all means and reasons for every decisions (Davies, Douglas J.; Thate,

2017). In spark of behavioral finance, religious individual behavior could not be

compared with non-religious group, thus that their decision in the same situation would

likely to be different. As the cornerstone, thus, religion is an effective institution to

influence one’s financial behavior in good and bad periods (Mirakhor, 2009). In terms of

financial difficulties, Islam is opposed to taking interest-rate bearing debt (El-Hawary et

al., 2007).

According to The Qur’an, Islamic does not nullify debt as financial tools. In fact,

Islam recognizes debt as instrument for consumption smoothing, particularly during

calamities. The debt is called Qardhul Hassan, however, must be interest-free and

creditors could not ask for collateral or repayment (although debtors are still obliged to

repay) (Mirakhor, 2012). In this junction, interest-rate bearing debt is prohibited in any

form (of neither deferred or cashpayment). It is because interest-rate is a counterpose

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towards social and economic development –i.e. it is a source for income disparity and

costs to inclusion. As to opposing interest-rate, Islam endorses instruments based on

risk-sharing behavior as an effective tool to manage one’s financial duress (M. U.

Chapra, 2006; Mohammed & Hasan, 2008; Mirakhor & Smolo, 2011; Othman &

Mirakhor, 2013). Thus, from an Islamic point of view, pandemic crisis could not be a

reason of a muslim to be entangled with debt.

Pandemic crisis sets many challenges to the economy, including depriving income

and consumption level. In developing world, debt trap has become a real issue for

majority as debt gives a sense of survivalship to this pro-longed health crisis (M. Chapra,

2014). For instance, in a suburbs Muslim area in Metro City, Indonesia, 51.2% out of 250

low income households are entangled in debt. This group has lost their source of income

at a significant rate, and must sustain daily need using unavoidable interest-rate bearing

debt. Their creditors are private loansharks and/or registered financial institutions.

While some of the group member has lost its collateralized assets, majority still continue

to borrow from financial institutions and individual lenders. This pandemic crisis will

drag this sub-prime group into further poverty traps (Dowling et al., 2020).

In contrast to the debtor group, there is a group of people who still take into

account religious financial values in order to make up their decision. They observe the

prohibition and instead exercise risk-sharing to the extent of their capability. For this

group, religious teachings are still the main driver for financial decision, particularly in

terms of risk-taking behavior (León & Pfeifer, 2017). With income being affected by the

crisis and all its restrictions, this group still maintain to control their financial situation.

Today, this group is able to survive with existing financial assets without having debt at

all.

Studying this two group and examining what makes up their financial decision

and how the relationship is the primary interest of the paper. Particularly during this

pandemic, that a responsible and cautious financial behavior is imperative in order to

survive and keep personal economy afloat. It is said that a more responsible asset

management is pivotal to climb up income ladder, otherwise poor behavior causes

difficulties thus tend to force a decline in the welfare status (Mudzingiri et al., 2018). It is

often observed that poor people making a poor decision in assets management (Moga

Dass & Fazli Sabri, 2017; Malik et al., 2020). Poor financial behavior is a common gate to

a vicious debt trap and endless poverty (Moro Visconti, 2012).

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2. Literature Review

In general, financial behavior is about money management (Jing Jian Xiao, 2015). In

a wider scope, it includes consumption, credit and saving activities, investment decision, and

cash management (Stolper & Walter, 2017). A person with positive behavior will be likely to

display better cash management, save more money, have better control on debt, and focus to

make asset more productive. A responsible financial behavior aims to maintain wealth by

measures against risks and uncertainty. Thus, this individual could predict and foresee what

will happen and if it happened, what could be the consequences of the action. Such

responsible financial behavior is influenced by good understanding of financial literacy, a

good financial attitude, and a positive locus of control (Strömbäck et al., 2017; Tang & Baker,

2016; Widyastuti et al., 2020).

The second factor is knowledge. There are various studies linking literacy and

behavior, that one’s understanding on financial products will empower them to have control

onto the assets management (Çera et al., 2020; Diepstraten & van der Cruijsen, 2019;

Rousseau & Venter, 2019; Yong et al., 2018). Financial literacy measures one understanding

and awareness on the financial products and risk management (OJK), 2013). Low financial

literacy would result in a perilous financial decision. A recent study by Indonesia

Financial Service Authority (OJK) shows that Indonesian financial literacy index is still

low (OJK), 2013), thus highlighting the linearity relationship between financial literacy

and the financial behavioral problem in Indonesia. The aspect involved comprehension

towards individual’s priority on the asset management given the limited financial resources

(Herdjiono & Damanik, 2016). There is no evidence, however, suggests education and

financial literacy must be correlated, and that welfare status (i.e. parental income) does not

significantly affects literacy (Chen, H., & Volpe, 1998; Lusardi & Mitchell, 2013; Mandell &

Klein, 2009). Therefore, being uneducated and poor are not the ex-ante factor for having

good financial literacy.

Despite such, financial literacy is indeed the contributing factor to the prosperity

(Margaretha & Pambudhi, 2015). Financial literacy enables individual to understand

instruments, future planning, insurance, wise consumption, and managing unprecedented

life events (Cohen & Nelson, 2011). A study by (Purwidianti & Tubastuvi, 2019) finds that

financial literacy has a positive but not significant effect on financial behavior amongst the

Small Medium Enterprises (SMEs). Such result is interesting, because SMEs owners are

usually classified as low income group. Studies by (S. A. Allgood & Walstad, 2012; Arifin,

2017) indicate that financial literacy affects significantly and positively on financial behavior.

It suggests, that the higher the level of financial literacy, the better one’s personal financial

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management behavior. Otherwise, lower of financial literacy signifies poor personal financial

management behavior.

This paper introduces one novel aspect that is Islamic financial literacy. Islamic financial

literacy covers the understanding and awareness of a Moslem towards Islamic financial

principles and instruments (Abdullah et al., 2017). It is operationally indicated by

understanding and priority of Islamic financial redistribution instruments, such as Infaq and

Sadaqat. By introducing this new variable, the paper aims to gauge more information

whether Islamic teachings will lead to a responsible financial behavior amongst Low Income

Moslem group.

Another variable is financial attitude. There are six concepts surrounding attitude,

namely, obsession, power, effort, inadequacy, retention, security (Herdjiono & Damanik,

2016). Obsession entails one’s paradigm or mindset on money management. Power refers to

money as the medium for control and problem solving. Effort implies that money is earned

by work. Inadequacy reflects the feeling of having not enough money. Retention tends to

save money and not spend it all. Lastly is security, that refers to traditional mindset that

money should be kept at own house. There are also studies indicated the dominance of

financial attitude in affecting financial behavior (Ameliawati & Setiyani, 2018; Yap et al.,

2018; Yong et al., 2018). It is found that moral, cultural, and personal values are components

of financial attitude that affect one’s financial decisions (Yap et al., 2018), and that attitude

has greater influenced to behavior than literacy (Yong et al., 2018). Financial attitude also

makes an important contribution in achieving success or failure in the financial aspect. As a

convention, one who demonstrates positive attitude will be more likely to display a

responsible and sustainable financial behavior for the future (Ameliawati & Setiyani, 2018).

The third variable is locus of control (or peer-reference). Locus of control is a

psychological concept that captures individual beliefs on the causal relationship between

their own behavior and life events (Cobb-Clark et al., 2016). There are two types that are

external and internal locus of control (Arifin, 2017). Internal locus of control describes the

presence of a controller within a person, and external locus of control is the environment and

peer references that influence one’s behavior (Thi et al., 2015). In other words, internal locus

of control is motivation withthin the self to achieve his/her vision. A good environment and

peer reference are the external forces which shape a certain attitude and thence behavior

(Budiono, 2020).

Another variable to take into account is Financial inclusion. Financial inclusion is a

process for access to financial services used in a timely and adequate manner (Rajan, 2013)

and is considered an important tool to promote inclusive growth and reduce poverty

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(Morgan & Long, 2020). There are four indicators reflecting inclusion, namely; Access,

Availability, Uses and Welfare (Adam et al., 2021). By access, it means the ability to access

financial services available at financial institutions, of course, there are no barriers to

opening and using financial services (Bankable Frontier Associates, 2010), whereas

availability is a banking service process that must be done easily and is available to users

(Suci & Rikumahu, 2021). Uses are a measurement of the combination of financial products

used by a person or family. In other words, inclusion entails a more detailed combination of

measurements of the regularity, frequency, and duration of using financial product services

(Bankable Frontier Associates, 2010)(Suci & Rikumahu, 2021). And finally, welfare, a

financial service that is used properly and appropriately will make its users prosperous

(Adam et al., 2021).

Financial behavior is the variable of interest of this paper. Financial behavior tries to

uncover and explain how individual make his/her decision. It also explains inconsistency of

one’s financial behavior (Arifin, 2017). It has two perspectives: cognitive psychology and its

limits of arbitrage. Cognitive control refers to how individual manage his/her assets in terms

of their financial knowledge or literacy (Purwidianti & Tubastuvi, 2019). There are four

measurement indicators of financial behavior, namely; Consumption, Cash-flow

Management, Saving and Investment, and Credit Management (Dew & Xiao, 2011).

This study attempts to improve the current research on financial behavior by scaling

up what makes up financial decision of debtor and debt-free groups in the frame of

Pandemic crisis. Current study by those of (Dollar & Kraay, 2002; Dowling et al., 2020;

Kraay & McKenzie, 2014; Kraay & Raddatz, 2007) focuses on the poverty traps of the

subprime group. A comparative study is important to understand and highlight factors

enabling one to fall into debts while others are still maintaining religious principles amidst

all onsets and difficulties. While financial aid is necessary to relieve economic burdens

during Pandemic, this research also aims to provide policy recommendation based on the

findings on programs that could integrate crisis and long terms solutions to poverty

alleviation.

3. Methodology

This study employs Structural Equation Modeling Partial Least Square (SEM-PLS).

SEM-PLS is a second-generation multivariate data analysis method (SEM) that is intended

for data-rich and theory-skeletal study (Hair, J. F., Hult, G. T. M., Ringle, C. M., & Sarstedt,

2013). SEM-PLS is employed because it has advantage of no assumptions about data

distribution (Swastika, 2020; Wong, 2013). Furthermore, it is also attributed to a number of

advantages, among others, are: (1) applicable to non-normal data, (2) small sample sizes

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(Wong, 2013), and (3) formative indicators (Hair, J. F., Hult, G. T. M., Ringle, C. M., &

Sarstedt, 2013) which is suitable for the research. As for analysis software, the research

employed the SmartPLS Version 2.0.M3 (http://www.smartpls.de).

This study underwent the following steps:

(1) model specification;

(2) outer model evaluation. This is done by checking the quality of outer model through:

(a) validity tests, which are; Convergent Validity, Discriminant Validity, and Average

Variance Extracted (AVE), and (b) reliability tests using Composite Reliability

Coefficient and Cronbach's Alpha;

(3) inner model evaluation. The t-statistics and R-Square for measuring the relationships

amongst the variables and goodness of fit of the model.

The first model, i.e. the debtor group, is taking answers from 150 respondents, using

purposive sampling (Kadilar & Cingi, 2012) with the following criteria: (1) respondent must

currently indebted, and (2) income under USD 140/month (or roughly Rp.

2.000.000/month) as it is below the minimal wage. The questionnaires are in form of Likert

Scale of 1-5 (1 is extremely disagree, and 5 is extremely agree), distributed in papers and

were collected in person (or door-to-door) from the second week to the forth week of

January 2021. This mechanism will allow respondents to answer privately and ask questions

to researcher if they had doubts in the questionnaires. Prior data collection, the

questionnaires have been tested to 20 respondents with 45 indicators. From the first trial, it

is evaluated that only 21 indicators that are valid and reliable, thus is used as instruments for

the study.

The second model, i.e. the debt-free group, surveyed 87 individuals. Like the first group,

these people are selected under this criteria: (1) not having interest-rate bearing debt to

private/institutional institution. Whereas first group is filtered by its income level, we

dropped the question to the second group by the income level because it is not easy to find

debt-free respondents under the same level of income in this current situation. Instead, the

chosen respondents are maintained within the middle class income category. In the debt-free

group, the majority aged 22 to 35 years. With a variety of jobs, the majority of jobs are

Employees, Entrepreneurs, and Civil Servants.

We developed two similar questionnaire, with adjustments to terminologies and

more parsimonious questions to the debtor-group. By parsimonious questionnaires, we have

pre-surveyed the debtor group and found that none of them are excluded from financial

institutions. All members of this group are in fact have accounts in banks or microfinancial

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institutions, as they seek for credit. As for this group, the questionnaires have been pre-

tested with 45 indicators excluding financial institutions. For the second group, the

questionnaires are developed under the same indicators with advancements on

terminologies on inclusion and Islamic financial literacy. As a result of pretesting, the final

questionnaires consists of also 45 valid indicators. By carefully crafting the questionnaires

and sticking to indicators, we hope to be able to compare these two different group within a

similar framework.

The distribution or data collection process is also executed differently. For the first

group, questionnaires were distributed in papers and were collected in person (or door-to-

door). This mechanism will allow respondents to answer privately and ask questions to

researcher if they had doubts in the questionnaires. For the debt-free group, we used Google

Form and distributed it to agreed respondents within a period of time. It is assumed that the

second-group will feel more privacy and independent under such mechanism. The

questionnaires are in form of statement where respondents could choose 1 to 5 (1 is

extremely disagree, and 5 is extremely agree) likert scale.

4. Result & Discussion

This study conducts validity and reliability tests to measure how well these indicators

reflect the inner model. Validity test is to measure the quality of indicators reflecting the

variables in this study (Taherdoost, 2018). This validity test employs the Convergent Validity

and Discriminant Validity tests. Convergent Validity assess reflective validity to represent

the variables. It can be seen from the Outer Loading value and is considered valid when

loading factor result is above 0.5 (Ghozali & Latan, 2015). Discriminant Validity Test is to

measure the extent to which the latent variable differs from other latent variables.

Discriminant validity means that the latent variable can explain more variance in the

observed variable associated with it than a) measurement error or similar unmeasured

external influence; or b) other constructs within the conceptual framework (Taherdoost,

2018). Discriminant validity can be done using the AVE value. AVE is the main average value

of the load box of a set of indicators (Hair et al., 2017)).

The reliability test consisted of composite reliability and Cronbach alpha test.

Composite reliability results will be satisfactory if the value is above 0.7. As shown in Table 3,

that the composite reliability value for all constructs is above 0.7 which determines that all

constructs in the estimated model are reliable. And for the lowest composite reliability value

is 0.771 for the FA construct. The recommended value of the Cronbach’s Alpha Test is above

0.6 for reliable construction. In the table above, the Cronbach’s Alpha values for all

constructs are above 0.6 (Ghozali & Latan, 2015). The lowest value is 0.502 for the Peer-

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Reference construct. This reliability test can also be strengthened by the results of the

Cronbach’s Alpha Test.

Table 2. Reliability Test: Composite Reability dan Cronbanchs Alpha Composite Reliability

Cronbachs Alpha

Note

FA 0.774466 0.638588 Reliable FB 0.746795 0.613964 Reliable FL 0.766727 0.651627 Reliable

LOC 0.794344 0.661750 Reliable Source: The result of data processing

Table 3. Reliability Test: Composite Reability dan Cronbanchs Alpha for Debt- Free Group

Composite Reliability

Cronbachs Alpha

Note

FA 0.771 0.634 Reliable FB 0.853 0.813 Reliable FI 0.900 0.874 FL 0.929 0.918 Reliable

Motivasi 0.838 0.716 Reliable Peer-

Reference 0.788 0.502

Reliable

Source: The result of data processing

From the Outer Model Measurement above, it could be inferred that the convergent

validity is adequate. According to Fornell and Larcker criterion, despite that the FB and FL

showed to have AVE value less than 0.5, their composite reliability and cronbachs alpha are

higher than the threshold (Fornell & Larcker, 1981).

Table 4. Hypothesis Testing Hypothesis Beta-

Coefficient (β) t- Statistic P- value Note

FL  FB 0,226 2,175 0,001 Accepted

FA  FB 0,272 3,045 0,016 Accepted

LOC  FB 0,344 2,774 0,003 Accepted

As the result implies, the effect of all independent variables towards the dependent

variable is significant, as stated in the result of the t-statistic which is greater than 1.96 (at

the 5% significance level).

Figure 1. Hypothesis Testing for Debtor Group

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The result shows that the effect of financial literacy on financial behavior is

significant, with a t-statistic value of 2.175 ( 1.96), and has positive direction with beta ≥

coefficient of 0,226. It also demonstrates the effect of financial attitude on financial behavior

is significant, with a t-statistic value of 3.045 ( 1.96), and has positive direction with beta ≥

coefficient of 0,272. Lastly, the effect of locus of control on financial behavior is significant,

with a t-statistic value of 2.774 ( 1.96), and has positive direction with beta coefficient of ≥

0,344. The coefficient of determination (R-Square) shows that FA, FL and LOC can be used simultaneously to explain FB by 44,32%. It indicates that the model can be used for the

research.

As for the second group, we improved Goodness of Fit of the model by introducing

intervening variables. Therefore, in order to examine the determinants of financial behavior

amongst the debt-free group, Path Analysis is executed. Path analysis allows the research to

test direct relationships between variables and indirect relationships between variables in

the model (Ghozali & Latan, 2015). The following equation is translated from the research

path diagram, as follows:

FI = 0.574 IFL + .......... (eq. 1)𝜀

FA = 0.277 IFL + 0.204 P-R — 0.215 M + .........( eq. 2)𝜀

FB = 0.452 FA + 0.216 FI + ............ (eq. 3)𝜀

FB = 0.216 FI + 0.452 FA + 0.124 FB.FI.FL + ..............( eq. 4)𝜀

FB = 0.216 FI + 0.452 FA + 0.125 FB.FA.FL + ............( eq. 5)𝜀

FB = 0.216 FI + 0.452 FA + 0.092 FB.FA.PR + ............( eq. 6)𝜀

FB = 0.216 FI + 0.452 FA — 0.215 FB.FA.M + .............( eq. 7)𝜀

Furthermore, measuring the size of the mediating or intervening variables can carry out the

calculation of VAF (Variance Accounted For), with formula:

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VAF = Indirect effect

Total effect

The rule of thumb for VAF value is when VAF ≥ 80%, it indicates the role of the variable as a

full mediator/intervening. When VAF value is 20% – 80%, it can be said that the

mediator/intervening is categorized as a partial mediator. However, if the VAF < 20%, it can

be concluded that there is almost no mediating effect. In this study the VAF value is as

follows;

VAF (Financial Inclusion) = = 0. 33 = 33 % 0.124

(0,124 + 0.249)

VAF (Financial Attitude) = = 0. 88 = 88 % 0.092

(0,092 ― 0.113 + 0.125)

The results of the VAF assessment above, that for Financial Inclusion is 33%, meaning that

the financial inclusion variable can be categorized as a partial mediator. Partial mediation

indicates that there is direct and indirect linkage of independent variables to the dependent

variable, i.e. financial behavior. As for the financial attitude variable can be categorized as a

full mediator.

Furthermore, the T-statistic and R-Square test, but in this study using Q-square

because there pf mediator variables. T-statistic with conditions (greater than 1.96).

Figure 2. Hypothesis Testing for Debt-Free Group

3.597*

Peer- Reference

Motivation

Financial inclusion

Financial Attitude

Financial Behavior

9.249*

1.805*

2.085*

1.608*

2.001* 0.53**

Islamic Financial Literacy

Note : *t-statistic ** Q-square

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The result shows that the variable Islamic Financial literacy on Financial Attitude

has a significant influence (t-value of 2.085 ≥ 1.96), Islamic financial literacy on financial

inclusion has a significant effect (t-value of 9.249 ≥ 1.96). Peer-Reference and Motivation

variables have no significant positive effect (t-value Peer-Reference 1,608≤ 1.96, while

Motivation 1,805≤ 1.96). Meanwhile, the intervening variable has a significant effect

(financial inclusion has t- value of 2,001 ≥ 1.96 and financial attitude has t-value of 3,597≥

1.96). The formula of Q-square;

Q-square = 1 — {(1— R-square1) (1— R-square2 )},

Q-square = 0.53 or 53%.

This indicates that the model is feasible for this study.

Discussion

This study examines and compares determinants of financial behavior amongst

groups of Muslim that currently indebted and does not have debt/financing. The results

demonstrate that, amongst indebted group, attitude, Islamic financial literacy, and peer-

reference, all have a significant effect and positive relationship on the dependent variable,

i.e. financial behavior. It implies that all three independent variables are positive and

statistically significant affecting the group’s financial behavior.

The finding shows that Islamic financial literacy contributes their financial behavior.

It is in line with research Purwidianti and Tubastuvi, that financial literacy has a positive

effect (Purwidianti & Tubastuvi, 2019; S. Allgood & Walstad, 2016). Nevertheless, Islamic

financial literacy is the lowest determinant in comparison to other variables, i.e. despite

understanding the prohibition and risk-sharing endorsement; it would not prevent the

debtor group from taking lending from private and financial institutions. The dominant

factor is attitude, followed by locus of control (motivation and peer-reference), and then

Islamic financial literacy. Studies by (Yap et al., 2018; Herdjiono & Damanik, 2016) also

suggest the similar findings. Financial attitudes are a state of mind, opinion, and someone's

assessment of personal finances where behavior is generally influenced by the environment

and social interactions. Attitude serves as the dominance variable, thus explained why this

group behave such. In the field of social physcology, recent study shows two character of

poverty (Susilowati et al., 2015). First, the poor are those who are resigned to poverty, and

secondly, who want a better prosperous life. Strong relationship between attitude and

behavior, as shown by the result of this study, resembles the tenets of resignation to poverty,

that they believe poverty is a destiny and this group tends to be apathetic. Therefore, this

group suffers from debt and credit for survival (subsistence) reasons.

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The finding of this research also unveils another important character of the debtor

segment. External reference, be it is from family members or neighbors, is the main

influencer for the group to accept interest-rate bearing debt. This finding goes along with the

act of imitation, and that creates a social phenomena where acknowledging debt, or to some

extent being overdebt, is acceptable in the current position. This is in line with the study by

(Dwiastanti, 2017) and others. External locus of control, or the “social anchor” affects

financial behavior (Thi et al., 2015). For example, if their family members or neighbor did

not prioritize savings, thus he/she would not have savings. The same analogy applies for

accepting interest-rate bearing debt as usual basis and not breaching the faith. This finding

stresses the importance of community screening before a prudent evaluation on member

financial decision.

This finding confirms, that this group tend to be less rationale. At the moment of

crisis, less rationality tend to force this group into a vicious debt cycle that might hamper

aggregate economy once the full recovery initiated. The debtor group who are now in a

vicious debt trap must continue serving the interest payment to capital owners for infinite

times as Ponzi scheme involved, and it is in line with studies of (Kraay & McKenzie, 2014;

Moro Visconti, 2012). In another words, government subsidies in form of cash assistance

would not be effective to improve consumptions as it is potentially used to pay the debt. Such

situation would not alleviate poverty and growth, if the assistance programs did not change

the group characters (Kraay & Raddatz, 2007).

In contrast with the debtor group, the result from debt-free group indicates that

Islamic financial literacy, has a positive and significant effect on financial attitude and

financial inclusion. It means attitudes and participation to Islamic financial products is

highly influenced by knowledge. On variables; motivation and peer-reference, there is

positive but insignificant effect on Financial Attitude, indicates that there is no statistical

evidence that this group’s attitude is being influenced by personal and external forces. Then

for the intervening variables namely, Financial Inclusion and Financial Attitude, have a

significant and positive effect on the dependent variable that is Financial Behavior.

Such finding highlights an important message that being knowledgeable on financial

products and services, thus having good literacy, would improve a responsible financial

behavior, i.e. being cautious to debt. This finding is in line with previous studies, that

financial literacy has a positive effect on behavior (Purwidianti & Tubastuvi, 2019; S. Allgood

& Walstad, 2016). Being informed and knowledgeable also improves one’s decision on

inclusion and shapes one’s attitude on financial situation. This reveals another important

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character of the group that more information and knowledge will likely to determine more

inclusion and prevent individual from debt during difficult situation.

It is also found that, despite having positive relationship, financial attitude is not

significantly influenced by peer reference. This result is in line with previous study

(Dwiastanti, 2017), that indicates peer reference and motivation have a positive but

statistically insignificant relationship towards financial attitude. Nonetheless, it contrasts

with earlier findings of the debtor group and also other study by (Thi et al., 2015) that

stresses the importance of “social anchor” affecting one’s attitudes. Thus, there are at least

two implications for such rationale group that first, lush and desires could not push them to

carelessly react upon a difficult financial situation like today. Secondly, as they are putting

logic and knowledge above everything, they are completely independent for their judgment

thus less likely to be influenced by others. For such group, inner and external locus of control

plays positive but insignificant role to determine their judgment on financial issues.

This study captures what drives financial behavior between two different groups:

debtor and debt-free groups. The findings emphasis the efficacy of literacy in determining

financial behavior of debtor group, and relationship of literacy on attitude and financial

inclusion as intervening variables towards behavior of debt-free group. For debtor group, it

is less rationale than the debt-free group. Therefore, although literacy is siginificant and

positive, it could not fence them from the prey of private and institutional lenders,

particularly during a difficult financial situation like pandemic crisis. Debtor group believes

on seeing others who they considered as the group, more than information and knowledge.

Attitude is the main determinant for debtor’s behavior. Hence it emphasizes on the

importance of a comprehensive psychological and financial literacy programs in changing

this group.

Islamic financial literacy indeed effective in determining debt-free group. Aversing to

interest-rate bearing debt does not push the group away from financial institution’s

products, such as savings and investments, as well as services. Literacy improves their

attitudes, while internal and external locus of controls are insignificant. Empirically, attitude

thus play as the key that makes up behavior’s of debt-free group, as it is also for debtor

group.

5. Conclusion

This research finds that during a crisis, attitude is an important attribute for financial

behavior. Attitude and peer-references are two major factors in explaining how debtor take

interest-rate bearing debt. This is in line with previous research by (Abbas et al., 2020; Çera

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et al., 2020; León & Pfeifer, 2017; Thi et al., 2015). It also explains debtor looks upon

emotional factors before deciding to take a loan from money lenders. However, the debt-free

group shows the significance of literacy, attitude, and inclusion in shaping a responsible

behavior in order to survive in the pandemic.

This study suggests the following policy recommendations. Government must not only

focus on relieving economic burden of the poor via cash subsidies, because the findings

indicate that cash would only provide a false sense of power and access to financial

institutions, yet still fall into deeper debt trap mechanism. As Moslem dominates the

population, Indonesian government must endorse and promote Islamic financial literacy

into an integrated crisis programs. It is because the finding implies that Islamic financial

literacy could effectively serve as the safeguard for Moslem groups in this crisis. Good

literacy, in general, empowers an individual in managing assets and risks. Shifting paradigm

to correct motivation and awareness should be the immediate target for government relieve

social package as COVID19 Relieve cash is pouring into the groups. The debtor group should

have psychological support from the academics, religious scholars so that literacy and

inclusion would make more sense and pivotal in shaping a sustainable and responsible

financial behavior.

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