Academic journal article Academy of Strategic Management Journal

Islamic Financial Literacy: Construct Process and Validity

Academic journal article Academy of Strategic Management Journal

Islamic Financial Literacy: Construct Process and Validity

Article excerpt

INTRODUCTION

Financial literacy is a salient aspect required both in the economic, financial and social environment to make proper financial decisions. Bhushan and Medury (2013) described that financial literacy has become increasingly complex over the past few years with the introduction of many new financial products. Furthermore, Nidar and Bestari (2012) explained that the national economy will not lead to the global financial crisis provided that people understand the financial system. Miller et al. (2009) provided a number of reasons regarding the importance of financial literacy, especially on how to evaluate today's increasingly complex financial services and products and sound decision making, help deal with financial difficulties (such as accumulated savings, asset diversification and insurance purchases), also improve financial behaviour (punctual payment of bill, manage appropriate loans) and help improve the efficiency and quality of financial services.

The efforts to improve community's financial literacy have been widely carried out in the last decade and become an important agenda of various countries characterized by programs launched by their government and researches pertaining to the measurement of financial literacy. However, it is still relatively rare to find a research which discusses the measurement of financial literacy among Muslims. This aspect is considered important since some measures used in determining the existing financial literacy have not been appropriately adapted for Muslims regarding its distinction in financial principles.

Abdullah and Chong (2014) stated the 'financial crisis has also caused the world's new focus on Islamic finance ". Thus, the Islamic finance industry has been inundated with wide ranges of financial instruments and assets choices for not only Muslim but also non-Muslim investors. Furthermore, Kayed (2008) in his article questioned the research community's efforts to investigate the level of Islamic financial literacy among Muslims and highlighted the importance of dissemination of Islamic finance knowledge through the education system.

The need for researches on Islamic financial literacy is not only encouraged by the internal factor of the Muslim community itself as the obligation to obey the rules of Islam, but also due to external factors, such as the availability (supply) of complex financial instruments that raise awareness among the Muslim community to respond through financial decision making based on Islamic financial literacy.

The purpose of this study is to determine the construction of Islamic financial literacy along with its dimensions and indicators through qualitative methods and testing the validity of the instrument constructs empirically. The establishment of Islamic financial literacy constructs with its dimensions and indicators is required as a parameter to measure the level of financial literacy of the community at various groups. It is expected that this finding can be a reference for the government in policies making and other interested parties in order to realize the financial inclusion program.

LITERATURE REVIEW

The Development of Concepts and Definitions of Financial Literacy

Since the 1950s, financial literacy has been recognized in many countries around the world. The definition of financial literacy has also been broadly acclaimed by financial experts and researchers as it is available in a number of literatures, yet none of which presents similar definitions. In general, the frequently used definition of financial literacy as proposed by Hung et al. (2009) is about knowledge and skills in financial management, while others put emphasis to the aspects of financial concepts, information assessment and decision making (Lusardi and Mitchell, 2007); ability to evaluate and make valuation of financial instrument information (Mandell, 2008); interpreted as debt literacy (Lusardi and Tufano, 2009). …

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