When borrowers choose the worst credit sources; borrower cognitive ability and credit decision rationality in the context of informal credit sector in Uganda

Shafic Mujabi, Mahadih Kyambade (), Yusuf Waiswa, Eldred Kyomuhanji Manyindo and Massy Nabasirye
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Shafic Mujabi: Makerere University Business School
Mahadih Kyambade: Makerere University Business School
Yusuf Waiswa: Makerere University Business School
Eldred Kyomuhanji Manyindo: Makerere University Business School
Massy Nabasirye: Makerere University Business School

SN Business & Economics, 2025, vol. 5, issue 6, 1-23

Abstract: Abstract This study examines the phenomenon of borrowers selecting suboptimal credit sources, focusing on the roles of borrowers’ cognitive ability and credit decision rationality within the informal credit sector in Uganda. Using a sample of 384 credit customers, data were collected through structured questionnaires and analyzed using Smart PLS, a robust tool for structural equation modelling. The findings reveal a significant and positive relationship between numerical ability and credit decision rationality as well as between the preference for numerical information and credit decision rationality. Notably, the preference for numerical information demonstrates a greater capacity than numerical ability to influence credit decision rationality. These results highlight that borrowers with higher numerical abilities and strong preference for numerical information are more likely to make rational credit decisions. Additionally, this study identifies key factors contributing to poor credit decisions, such as information asymmetry and limited financial literacy. These insights underscore the necessity of targeted financial education programs and improved transparency within the informal credit sector to enhance borrowers' decision-making capabilities. This study contributes to the literature by integrating cognitive and behavioral aspects into Rational Choice Theory, offering a comprehensive understanding of credit behavior in developing countries. These implications suggest that policymakers and financial institutions should prioritize cognitive skill development and financial literacy initiatives to mitigate the risks associated with informal borrowing.

Keywords: Credit decision rationality; Numerical ability; Preference for numerical information; Credit attitudes (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s43546-025-00837-4

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