Self-Efficacy, Religiosity, Financial Behavior, and Financial Well-Being

Abstract

Past literature has intensively investigated numerical factors in determining financial behavior and financial well-being. This study aimed to examine the impact of non-numerical cognitive factors toward financial behavior and financial well-being. The two non-numerical cognitive factors are self-efficacy and religiosity. Based on Bandura’s social cognitive theory, self-efficacy was adopted. Given the importance of religion in the decision making process of Muslims, it has been incorporated into this study. A total of 219 data from the Muslim community were used to test the research model. This study employed Structural Equation Modeling (SEM) to examine the interconnections among self-efficacy, religiosity, financial behaviour, and financial well-being. This study found that self-efficacy and religiosity were significantly related with financial behavior and financial well-being. However, there was no significant correlation between financial behaviour and financial well-being. This study suggests that self-efficacy and religiosity should be considered in supporting individuals’ financial decision making. Confidence in managing money and strong spiritual life can enhance Muslims in addressing financial matters.

Keywords: Financial behavior, financial well-being, religiosity, self-efficacy

Introduction

The director of the Malaysian Department of Insolvency (MDI) reported that a total of 294,000 Malaysians is embroiled in bankruptcy cases in a year Bernama (2018) and average of 18 people were declared bankrupt every day (The Star, 2022). In order to solve the problem, Debt Management and Counseling Agency (AKPK) under the Malaysia Central Bank has expanded its role to assist potential bankrupts (“AKPK expands role,” 2018). A lot of effort has been devoted by academicians and practitioners in exploring financial well-being. Early financial studies focused intensively on investigating the impact of financial literacy on personal financial decisions (Bay et al., 2014). However, a report by the Organization for Economic Development and Cooperation (OEDC) indicated that most countries have shown little improvement in financial literacy despite a heavy investment in it (Farrell et al., 2016). Farrell et al. (2016) called for further investigation of other factors that influence financial behavior.

Strömbäck et al. (2017) and Tang and Baker (2016) further claimed that too many researchers have focused on numerical cognition such as financial literacy and financial knowledge on personal financial decision, but little has been done on non-numerical cognition factors. Thus, in understanding individuals’ financial decisions from a different perspective, Strömbäck et al. (2017) and Tang and Baker (2016) had introduced psychological traits in their studies. This study further extended Strömbäck et al. (2017) and Tang and Baker (2016) recommendation by introducing non-numerical cognitive factors in the financial behavior literature. In the past, studies in finance that focused on non-numerical cognitive factors had received little attention (Muradoglu & Harvey, 2012). At present, non-numerical cognitive factors have been recognized and accepted as potential factors in the financial field (Farrell et al., 2016; Muradoglu & Harvey, 2012).

In recent years, two pertinent non-numerical cognitive factors have been examined in the personal financial decision literature. The first non-numerical cognitive factor is Bandura’s efficacy model (1977) which was highly suggested by past literature, for example by Sexton and Tuckman (1991), and Farrell et al. (2016). A lot of previous researchers had adopted Bandura’s (1977) self-efficacy theory in the area of health, education, and organizational behavior to understand individuals’ ability in performing a particular task (Danes & Haberman, 2007). Second, Klein et al. (2017) explained that religion is an important factor in shaping financial behavior, however, it has not been widely investigated within financial studies. Benjamin et al. (2016) indicated that religious identities affect individuals’ economic outcomes. For example, Muslims have been found to have less preference in financial risk-taking as compared to Christians (León & Pfeifer, 2017). Klein et al. (2017) suggested that religiosity should be taken into consideration in the study of financial behavior. Although a number of non-numerical cognitive factors have been examined against financial well-being (e.g., Strömbäck et al., 2017), the impact of self-efficacy and religiosity toward financial practices has received scant investigation.

Despite the gaps discussed above, a study (Van Praag et al., 2010) found that Muslims are less satisfied with the personal financial situation compared to Christians and Jews. Although the study investigated financial satisfaction within Israel, the finding prompted this study to further investigate this issue among Muslims in Malaysia. Van Praag et al. (2010) justified that the finding may have to do with the status of Muslims as a minority in Israel. Hence, it will be interesting to investigate Muslims in Malaysia because they are the majority in Malaysia. Furthermore, Shukry (2014) found that more than 50% of Muslims in Malaysia have no financial assets. Since material wealth might only be one aspect of well-being, this study further investigates financial well-being from a more comprehensive aspect. Therefore, this study combined the two non-numerical cognitive factors by examining both self-efficacy and religiosity toward financial behavior and financial well-being within the Muslim in Malaysia.

Literature Review

Bandura (1977) conceptualized a theory which explains and predicts behaviors that lead to specific outcomes. Predicting a behavior is shaped by stimuli that could be from the internal or external environment, thus Bandura (1977) had introduced self-efficacy. Bandura‘s self-efficacy theory has been extensively adopted by researchers in diverse disciplines. Within the financial field, self-efficacy has been used in predicting financial behavior (Farrell et al., 2016; Lim et al., 2014; Mindra et al., 2017). Additionally, past literature has introduced numerous new antecedents in predicting a behavior such as self-control (Strömbäck et al., 2017), financial literacy (Adam et al., 2017; Gutter & Copur, 2011), financial planning (Adam et al., 2017), and credit counseling (Kim et al., 2003). Self-efficacy has been adopted over the years in financial studies as an independent variable alongside with other antecedents in predicting financial behavior (Farrell et al., 2016), but religiosity has not been examined along with self-efficacy. Therefore, this study further reviewed the relationship between religiosity, self-efficacy, financial behavior, and financial well-being.

Research Methods

Malaysian Muslims were invited to participate in the research and data were collected using self-administered questionnaires. Hair et al. (2014) suggested a minimum sample size of 150 for models with less than seven variables. In total, 219 data were used to perform structural equation model (SEM). Table 1 shows the data distribution based on age, gender, education, marital status, type of employment, and income.

The questionnaire items were adapted from past literature (Table 2). The questionnaire was divided into four sections and a 5-point Likert scale was used. To check for the reliability and validity of the questionnaire, Confirmatory Factor Analysis (CFA) was performed. Composite Reliability (CR) and Average Variance Extracted were calculated. Some items were eliminated from the original measurement to achieve the minimum acceptable level. Although few AVE values are below the minimum acceptable level of 0.50, Fornell and Larcker (1981) stated that AVE above 0.40 can be accepted when the CR is higher than 0.60. Therefore, convergent validity was supported.

Results and Discussion

Table 3 shows the results of the correlation coefficient among the variables and the square root of AVE for the variables. The results indicate a non-violation of multicollinearity with all correlation coefficients (r) below 0.90. The results also indicate discriminant validity, with the square roots of AVE above the value of correlation coefficient.

Structural equation modeling (SEM) was performed to examine the research model. In order to show consistency of the estimate, bootstrap sample was generated. This study’s 2000 resample generated 95% confidence intervals. The model was found to be a good fit for the data (X2=370.44, df=196, o=0.001, X2/df=1.89, RMR=0.06, TLI=0.90, CGI=0.92, RMSEA=0.06). There was a significant direct effect of religiosity (p=0.05) and self-efficacy (p=0.007) on financial behavior. Religiosity and self-efficacy explained 20% (R2=0.20) of variance in financial behavior. The results concur with Kirchmaier et al. (2018) and Keister (2008). Similarly, religiosity (p=0.002) and self-efficacy (p=0.001) directly predict financial well-being. Both religiosity and self-efficacy explain 56% (R2=0.56) of variance in financial well-being. These findings, along with Van Praag et al. (2010), support the significant relationship between X and Y. Hence, H1, H2, H3, and H4 are supported. Unexpectedly, there was no direct effect of financial behavior on financial well-being (p>0.05). Thus, H5 is not supported. Although contrary to the findings of a few studies (Kim et al., 2003; Shim et al., 2010), these findings support Adam et al. (2017) who also found no relationship between financial behavior and financial well-being. The results are presented in Table 4 and Figure 1.

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Conclusion

Past studies have shown that financial literacy can affect financial behavior and financial well-being. This study advances the literature related to financial behavior in examining the impact of non-numerical cognitive factors on financial behavior and financial well-being. In contrast to other studies, this study did not focus on numerical cognitive. Based on suggestions by past literature, two non-numerical cognitive factors were introduced to further understand the relationship between financial behavior and financial well-being. Though numerical cognitive is essential, the influence of non-numerical cognitive is not to be undermined. Moreover, past literature had focused on how financial behavior differs according to the types of religion. However, this study has advanced the knowledge by adopting Keister (2008) measurement of religiosity in measuring individuals’ spiritual life toward financial management. The results of SEM revealed that both religiosity and self-efficacy had a direct effect on financial behavior and financial well-being. However, it was found that financial behavior and financial well-being are not related within the Muslim community. Past literature had extensively depended on financial literacy in predicting financial behavior and financial well-being. These findings highlight the importance of religiosity and self-efficacy in predicting financial behavior and financial well-being. This study suggests that financial self-efficacy and religiosity are also essential factors that should not be ignored.

Since not everyone is predisposed to the numerical factors and that not everyone is interested in financial matters, additional factors can be considered by government agencies in order to enhance individuals’ financial behavior and financial well-being. Religion has received a lot of focus in personal well-being, however, it is hardly adopted in personal financial well-being. This study suggests that individuals’ spiritual life and attitude toward money from the religious perspective are able to support them in managing their financial matters. Central banks in Malaysia should work in tandem with religious agencies in educating the Muslim on money or financial matters from the perspective of Islam. Therefore, more studies should be undertaken to further understand the specific religious teachings or principles required in understanding financial management from the Islamic perspective. Further, this study suggests that financial behavior and financial well-being can be improved with financial self-efficacy. Individuals’ confidence in managing financial matters can be gained with the help of an expert or counselor. Vancampfort et al. (2018) suggested five approaches to gain self-efficacy which are (1) motivational interviewing, (b) exploring past, present and future, (3) assisting in goal setting, (4) providing recommendations, and (5) providing information on benefits and how to overcome barriers. Further studies are needed to examine these factors that are associated with financial self-efficacy.

There are a few limitations of this study. Firstly, the data were self-reported. An individual has the tendency to report better financial behavior and financial well-being. Therefore, the data might be subject to social desirability bias and may not be representative of the population. Secondly, this study focused only on the Muslim community, using a non-probability sampling technique. Thus, the sample may not represent the population. In order to enhance the generalizability of the findings, similar studies can be replicated among the Muslim community using a probability sampling technique.

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