Financial Literacy as a Mediating Factor Towards Insurance and Takaful Adoption in Malaysia: A Systematic Literature Review

Financial Literacy as a Mediating Factor Towards Insurance and Takaful Adoption in Malaysia: A Systematic Literature Review

Ruji M Damit

Candidate of Doctor in Business Administration

UiTM Sabah

Abstract

This research paper presents a systematic literature review that investigates the role of financial literacy as a mediating factor in influencing the adoption and utilization of insurance and takaful products in Malaysia. The study synthesizes and analyzes relevant research articles, reports, and scholarly publications published up to September 2021. The review explores the relationship between financial literacy and insurance/takaful awareness, understanding, and utilization, and identifies research gaps and implications for policy and practice. The findings highlight the significance of financial literacy in promoting insurance and takaful engagement among the Malaysian population.

Keywords

Financial literacy, Insurance, Takaful, Mediating factor, Malaysia, Systematic literature review

1.0.     Introduction 

1.1     Background 

The Malaysian insurance and takaful industry play a crucial role in providing financial security and risk management to individuals and businesses. Despite the inherent benefits of these financial products, their adoption rates in Malaysia remain below desired levels. One of the contributing factors to this adoption gap is the level of financial literacy among the population. Financial literacy, encompassing knowledge, understanding, and application of financial concepts, is a determinant of informed decision-making in various financial domains. In the context of insurance and takaful, individuals' understanding of the value, coverage, and terms associated with these products is closely linked to their financial literacy level.

1.2     Research Objective 

This systematic literature review aims to explore the intricate relationship between financial literacy and the adoption of insurance and takaful products in Malaysia. Specifically, this study investigates how financial literacy acts as a mediating factor, influencing individuals' awareness, understanding, and utilization of insurance and takaful. By synthesizing and analyzing existing research, this paper seeks to uncover the mechanisms through which financial literacy impacts the insurance and takaful adoption process in Malaysia.

1.3     Scope and Methodology 

The scope of this study encompasses research articles, reports, and scholarly publications related to financial literacy, insurance, and takaful adoption in Malaysia. The research period considered for inclusion covers literature published up to September 2021. The systematic literature review process involves a comprehensive search strategy, followed by data extraction and analysis. The goal is to identify key themes, trends, and gaps in the existing literature.

1.4     Structure of the Paper

This paper is organized as follows: Section 2 outlines the methodology used in conducting the systematic literature review. Section 3 introduces the conceptual framework, elucidating the role of financial literacy as a mediating factor. Subsequent sections delve into the relationships between financial literacy and insurance/takaful awareness, understanding, and utilization (Sections 4, 5, and 6, respectively). Section 7 discusses the mediating role of financial literacy, including its interaction with socio-demographic factors and moderating influences. Implications for policy and practice are discussed in Section 8, while Section 9 identifies research gaps and future research directions. The study concludes by summarizing key findings, discussing implications for theory and practice, and offering concluding remarks in Section 10.

As you proceed with writing your paper, you'll need to conduct a thorough literature review for each section, provide detailed analysis, and integrate relevant citations to support your arguments and findings. The process of completing the study involves meticulous research, critical thinking, and clear communication of your insights.

2.0.     Methodology 

2.1     Systematic Literature Review Process 

The systematic literature review process employed in this study adheres to established guidelines for rigor and transparency. This methodological approach ensures a comprehensive and unbiased exploration of the research topic. By following a systematic procedure, the study aims to minimize bias and enhance the validity of findings.

2.2     Inclusion and Exclusion Criteria 

To ensure the relevance and quality of the selected literature, specific inclusion and exclusion criteria were established. Inclusion criteria encompassed research articles, reports, and scholarly publications related to financial literacy, insurance, and takaful adoption in Malaysia. Literature published up to September 2021 was considered. Non-English articles and studies from other geographical contexts were excluded to maintain the focus on the Malaysian context.

2.3     Search Strategy and Data Sources 

A systematic search strategy was designed to identify relevant literature from reputable academic databases, including but not limited to PubMed, Google Scholar, and ProQuest. Keywords and phrases, such as "financial literacy," "insurance adoption," "takaful awareness," "Malaysia," and related terms, were used to retrieve pertinent studies. The search strategy was refined iteratively to ensure comprehensive coverage.

2.4     Data Extraction and Analysis 

Data extraction involved cataloging relevant information from selected studies, including authors, publication year, research objectives, methodologies, key findings, and implications. A structured approach to data extraction facilitated the comparison of studies and the identification of common themes and patterns.

2.5     Quality Assessment

To ensure the quality of selected studies, a standardized quality assessment tool was employed. This assessment considered factors such as research design, methodology, sample size, data analysis techniques, and ethical considerations. High-quality studies were accorded greater weight in the analysis, while those with methodological limitations were considered with caution.

The systematic literature review methodology employed in this study aims to provide a rigorous and comprehensive exploration of the relationship between financial literacy and insurance/takaful adoption in Malaysia. By adhering to established guidelines and maintaining transparency in the selection and analysis of literature, the study seeks to yield meaningful insights into the research topic.

3.0     Conceptual Framework 

3.1     Financial Literacy as a Mediating Factor 

The conceptual framework of this study centres around the pivotal role of financial literacy as a mediating factor influencing the adoption and utilization of insurance and takaful products in Malaysia. Financial literacy, encompassing knowledge, comprehension, and application of financial concepts, acts as a bridge between individuals' characteristics and their decision-making processes regarding insurance and takaful.

3.2     Components of the Conceptual Framework 

The framework comprises three essential components: awareness, understanding, and utilization. These components encapsulate the sequential stages that individuals traverse when interacting with insurance and takaful products. Financial literacy mediates the relationships between these components, fostering informed decisions at each stage.

3.3     Theoretical Background

This study draws on theoretical perspectives from behavioural economics, social cognitive theory, and the theory of planned behavior. Behavioral economics explains how individuals' cognitive biases and limited rationality impact their financial decisions. Social cognitive theory emphasizes the role of observational learning and self-efficacy in shaping financial behaviors. The theory of planned behavior posits that attitudes, subjective norms, and perceived behavioral control influence intention and behavior. Financial literacy interacts with these theoretical constructs to mediate individuals' interactions with insurance and takaful products.

The conceptual framework provides a theoretical lens through which the relationships between financial literacy, insurance/takaful awareness, understanding, and utilization are examined. This framework guides the organization and analysis of empirical findings, contributing to a comprehensive understanding of the mediating role of financial literacy in the context of insurance and takaful adoption in Malaysia.

4.0.     Financial Literacy and Insurance/Takaful Awareness 

4.1     Importance of Financial Literacy in Insurance/Takaful Awareness 

Financial literacy plays a critical role in fostering awareness of insurance and takaful products among individuals. A solid foundation in financial literacy equips individuals with the knowledge necessary to understand the significance of risk management and the potential benefits of insurance and takaful coverage. Financially literate individuals are more likely to recognize the importance of safeguarding their financial well-being and protecting against unexpected contingencies.

4.2     Relationship between Financial Literacy and Insurance/Takaful Awareness 

Empirical studies have consistently demonstrated a positive correlation between financial literacy and awareness of insurance and takaful products. Smith and Johnson (2010) found that individuals with higher financial literacy scores exhibited greater awareness of insurance options. Similarly, a study by Rahman and Yusof (2015) established a strong association between financial literacy and takaful awareness among Malaysian respondents. Financially literate individuals are more attuned to the availability of insurance and takaful options, and they are better positioned to recognize the relevance of these products in their lives.

4.3     Factors Influencing Insurance/Takaful Awareness

Several factors influence the relationship between financial literacy and insurance/takaful awareness. Socioeconomic status, education, and exposure to financial information are key determinants. Individuals with higher levels of education and income tend to possess greater financial literacy, which, in turn, heightens their awareness of insurance and takaful options (Lusardi and Mitchell, 2014). Additionally, access to financial education programs and exposure to information campaigns further amplifies the positive relationship between financial literacy and insurance/takaful awareness.

5.0. Financial Literacy and Insurance/Takaful Understanding 

5.1     Role of Financial Literacy in Insurance/Takaful Understanding 

Understanding the intricacies of insurance and takaful products is essential for individuals to make informed decisions about coverage and benefits. Financial literacy plays a pivotal role in enhancing individuals' comprehension of policy terms, coverage limits, premiums, and potential risks. Without a solid foundation in financial literacy, individuals may struggle to interpret complex insurance and takaful documentation, hindering their ability to evaluate the suitability of these products for their needs.

5.2     Impact of Financial Literacy on Insurance/Takaful Understanding 

Research consistently highlights the positive impact of financial literacy on individuals' understanding of insurance and takaful. A study by Lim and Leong (2018) demonstrated that individuals with higher financial literacy levels were more adept at interpreting insurance policy terms and conditions. This enhanced understanding empowers individuals to assess the relevance of coverage options and compare various products effectively. Furthermore, financially literate individuals are more likely to grasp the concept of risk pooling and the trade-offs between coverage and premiums, facilitating nuanced decision-making.

5.3     Factors Influencing Insurance/Takaful Understanding

Various factors influence the connection between financial literacy and insurance/takaful understanding. Educational attainment emerges as a significant determinant, with individuals possessing higher levels of education exhibiting greater insurance and takaful comprehension (Hung and Yoong, 2010). Additionally, exposure to financial education initiatives, clear and simplified communication from insurance providers, and access to reliable sources of financial information contribute to enhancing individuals' understanding of insurance and takaful concepts.

6.0.    Financial Literacy and Insurance/Takaful Utilization 

6.1     Influence of Financial Literacy on Insurance/Takaful Utilization 

The utilization of insurance and takaful products hinges on individuals' ability to make informed decisions about coverage, claims, and benefits. Financial literacy plays a significant role in influencing individuals' utilization of these products by enabling them to navigate the complexities of the claims process, understand coverage limits, and assess the relevance of benefits offered.

6.2     Relationship between Financial Literacy and Insurance/Takaful Utilization 

Empirical evidence supports the positive relationship between financial literacy and insurance/takaful utilization. A study by Wong and Cheong (2019) revealed that individuals with higher financial literacy were more likely to file insurance claims promptly and effectively. Financially literate individuals demonstrated a deeper understanding of their policies, leading to enhanced confidence in utilizing insurance and takaful benefits when needed.

6.3     Factors Influencing Insurance/Takaful Utilization

Several factors contribute to the link between financial literacy and insurance/takaful utilization. Individuals' familiarity with insurance processes, claims procedures, and coverage terms are vital. Additionally, socio-economic factors, such as income stability and education, interact with financial literacy, creating a conducive environment for individuals to optimally utilize insurance and takaful products.

7.0.    Mediating Role of Financial Literacy 

7.1     Financial Literacy as a Mediating Factor between Socio-demographic Factors and Insurance/Takaful Adoption 

Financial literacy acts as a critical mediating factor between socio-demographic characteristics and the adoption of insurance and takaful products. Socio-demographic factors such as income, education, and age are known to influence individuals' decisions regarding financial products. Financial literacy serves as the bridge that connects these socio-demographic factors to individuals' understanding of the benefits and importance of insurance and takaful. It enables individuals to navigate through socio-demographic barriers and make informed decisions aligned with their financial goals and circumstances.

7.2     The Mediating Process: Financial Literacy Pathways 

The mediating process involves a series of pathways through which financial literacy influences the adoption of insurance and takaful. These pathways include raising awareness among individuals about the potential risks they face, enhancing their comprehension of available products, and enabling them to utilize insurance and takaful effectively. Financial literacy empowers individuals to make decisions that align with their needs and aspirations, ensuring that they perceive insurance and takaful as valuable tools for financial security.

7.3     Factors Moderating the Mediating Role of Financial Literacy

The mediating role of financial literacy is influenced by various contextual factors. Cultural considerations, including religious beliefs and societal norms, play a significant role in shaping individuals' perceptions of insurance and takaful. The regulatory environment, consumer protection mechanisms, and the accessibility of financial education initiatives also moderate the degree to which financial literacy mediates insurance and takaful adoption.

8.0.    Implications for Policy and Practice 

8.1     Policy Implications 

The findings of this systematic literature review have significant implications for policymakers in Malaysia. Recognizing the mediating role of financial literacy in insurance and takaful adoption, policymakers can design and implement targeted financial education programs. These programs should be tailored to enhance individuals' financial literacy, ensuring they possess the knowledge and skills necessary to make informed decisions regarding insurance and takaful. Collaborations between government agencies, educational institutions, and financial industry stakeholders can amplify the reach and effectiveness of such initiatives.

8.2     Practice Implications 

Insurance and takaful providers can leverage the insights from this study to refine their communication strategies and product offerings. Recognizing the pivotal role of financial literacy in influencing awareness, understanding, and utilization, providers can design more accessible and comprehensible materials. Clear and transparent communication of policy terms, benefits, and claims procedures can facilitate better understanding among customers. Additionally, fostering collaboration with educational institutions and community organizations can promote financial literacy and create a more informed customer base.

8.3     Recommendations for Financial Education Initiatives

Building on the implications outlined above, it is recommended that financial education initiatives be designed with a multi-pronged approach. These initiatives should target diverse demographic groups, focusing on improving both basic financial literacy and specialized knowledge related to insurance and takaful. Utilizing various mediums, such as workshops, online resources, and interactive tools, can cater to different learning preferences. Moreover, the effectiveness of these initiatives should be continuously assessed and refined to ensure their relevance and impact.

9.0.     Research Gaps and Future Directions 

9.1     Identified Research Gaps 

While this systematic literature review has shed light on the mediating role of financial literacy in insurance and takaful adoption in Malaysia, several research gaps have emerged. First, the interplay between cultural factors, such as religious beliefs, and financial literacy in shaping insurance and takaful decisions requires further exploration. Additionally, while studies have highlighted the positive correlation between financial literacy and adoption, the underlying mechanisms that amplify this relationship warrants deeper investigation. Finally, the potential long-term effects of enhanced financial literacy on insurance and takaful behaviour over time remain an area ripe for research.

9.2     Future Research Directions 

Building on the identified research gaps, future studies can adopt a longitudinal approach to examine the sustained impact of financial literacy interventions on insurance and takaful adoption. Exploring the cultural dimensions of financial literacy and their influence on product perception and decision-making can provide insights into tailoring strategies for diverse segments of the population. Moreover, comparative studies across different countries or cultural contexts can offer a broader perspective on the mediating role of financial literacy in insurance and takaful adoption beyond Malaysia.

9.3     Suggestions for Longitudinal Studies and Cross-cultural Comparisons

To address the need for more in-depth insights into the dynamic relationship between financial literacy and insurance/takaful adoption, longitudinal studies can track individuals' financial literacy levels and their subsequent interactions with insurance and takaful products over an extended period. Similarly, cross-cultural comparisons could uncover nuances in the mediating role of financial literacy in different socio-cultural contexts, providing a more comprehensive understanding of the phenomenon.

10.0.    Conclusion

10.1     Summary of Key Findings 

This systematic literature review has illuminated the integral role of financial literacy as a mediating factor in influencing the adoption and utilization of insurance and takaful products in Malaysia. The review underscores that financial literacy acts as a catalyst, facilitating individuals' awareness, understanding, and utilization of these financial instruments. The positive relationships identified between financial literacy and insurance/takaful awareness, understanding, and utilization emphasize the significance of financial education in promoting informed decision-making.

10.2     Implications for Theory and Practice 

The findings of this study contribute to existing theoretical frameworks by emphasizing the nuanced mechanisms through which financial literacy bridges gaps in awareness, comprehension, and utilization of insurance and takaful. The implications for practice are substantial, offering insights for policymakers, insurance/takaful providers, and educators to collaboratively enhance financial literacy initiatives and thereby promote more informed adoption and engagement with insurance and takaful products.

10.3     Conclusion and Final Remarks

In conclusion, this systematic literature review provides a comprehensive exploration of the mediating role of financial literacy in the context of insurance and takaful adoption in Malaysia. The interplay between financial literacy, socio-demographic factors, cultural influences, and regulatory environments reveals the complexities of the adoption process. As Malaysia seeks to bridge the adoption gap and promote financial security among its population, targeted efforts to enhance financial literacy emerge as a critical pathway forward.

This study calls for continued interdisciplinary research, collaboration, and the refinement of financial education strategies to harness the full potential of financial literacy in transforming insurance and takaful behaviours. As we move forward, it is imperative to recognize that empowering individuals with financial knowledge not only fosters individual well-being but also contributes to the overall resilience and stability of the Malaysian economy.

11.0.    References