Financial Literacy as a Protective Factor Against Household Over-Indebtedness: Evidence from Vietnam's Low-Income Communities

Abstract

The escalating prevalence of household over-indebtedness in developing economies has prompted considerable scholarly attention towards understanding protective mechanisms that can mitigate financial distress amongst vulnerable populations. This research investigates the protective role of financial literacy in preventing over-indebtedness amongst low-income households in Vietnam, employing a mixed-methods approach that combines structural equation modelling (SEM) with fuzzy-set qualitative comparative analysis (fsQCA). Drawing upon data from 847 low-income households across Vietnam's major urban centres, this study develops and tests a comprehensive theoretical framework that integrates financial capability theory with behavioural economics perspectives. The findings demonstrate that financial literacy serves as a significant protective factor against over-indebtedness, with the relationship being moderated by access to formal financial services and mediated by improved financial planning behaviours. The SEM analysis reveals that financial literacy accounts for 34.7% of the variance in over-indebtedness prevention, whilst fsQCA identifies three distinct configurational pathways through which financial literacy operates. These findings contribute to the theoretical understanding of household financial vulnerability by demonstrating the multifaceted nature of financial literacy's protective function and provide practical implications for policy interventions aimed at reducing financial distress amongst vulnerable populations in emerging economies.