Indonesia is currently experiencing a demographic dividend, where the total population of productive age is higher than the total of un-productive age. The most numerous groups in this productive age group are the millennials aged 20 to 40 years, which required them to have sufficient knowledge of Islamic financial literacy. Therefore, this study aims to measure the level of Islamic financial literacy of millennials in Aceh, Indonesia and to investigate its effects on managing cash and debt. The influence of demographic factors is also examined in this study namely gender, age, educational background, and income level. By using multiple linear regression analysis, the result shows that the level of Islamic financial literacy, educational background, and income level significantly affects cash and debt management. The results of this study can be references for the Islamic financial industry in Aceh and for its government. The millennial seems to be ready for the new provisions that will be implemented in relation to the Islamic financial industry in Aceh.
TopIntroduction
Indonesia is a developing country in the Southeast Asia that currently receives a demographic dividend. This demographic dividend is because of the total population of productive age is reaching two-third of the total population or approaching 183.4 million (BPS, 2019). Hayes et. al. (2015) defined that demographic dividend is the rapid economic growth which is characterized by changes in the structure of age population with the transition from high to low birth and death rates (Hayes, 2015). Some of these people are estimated to be born in the 1980s to the end of 1990 and better known as the millennial generation. This generation is known to have significant differences compared to previous generations, which are the ability to use advanced technology and has more unique consumptive behavior (Eastman, 2012).
Previously, Indonesia was ranked in 10th according to the MasterCard Index of Financial Literacy in 2015 for financial literacy index. It is indeed a big task to increase the financial literacy of society, but this must be improved to avoid the worse effects of poor financial decision. As revealed in the OECD report that lack of financial literacy is likely to be directly contributed to the 2007-2009 financial crisis (OECD 2019).
Among the essential outputs of financial literacy is the ability of having a financial planning. There are many financial instruments and products available in the market and people have more choices for making better financial and lifestyle plans. Therefores the ability of having a personal financial planning is needed to help them from making any bad financial decisions. Financial planning is a process of determining financial goals for short, medium, and long term then make it as a proper planning and implement it to achieve the goals. It is imperative because it is related to financial management, including spending, saving, investment, and credit. In daily practices, it can be seen from the way someone makes his own financial decisions in accordance with his priority. Although financial products and knowledge are vast and accessible, financial expertise is needed in developing strategies to manage their finance in order to achieve personal financial goals. Thus, because of its importance, not surprising that many people hire a financial adviser to help them in managing their money and to achieve their financial goals. Financial planning includes wealth management, financial goals, and management of income and liabilities.
Whereas for a Muslim, it is crucial to ensure that every plan and strategy should not conflict with the principles of Islam. Since in Islamic view, making plans is an important thing to do and actively supported to it besides ensuring that each element does not conflict with Islamic law or Shariah. Muslim must manage their finance in accordance with Islamic law because guidance in Islamic financial management comes directly from the divine Al-Quran. Thus, the practising of Islamic financial management for a Muslim is included as worship for Allah s.w.t. Therefore, having Islamic financial literacy is an effort for prosperity in the world and hereafter. Islam does not forbid someone to have debts, even in it is highly encouraged to pay debts before dying because the debt will be paid in the hereafter with the good deeds they have. On the other hand, Muslims are also encouraged to pay off their debt immediately if they afford to do so.
Due to their consumptive behaviour, millennials must anticipate their spending by increasing the financial literacy, so they can manage personal finance wisely and as needed. Yet the financial literacy has no place in the formal curriculum in Indonesia. As a result, many people have poor financial literacy. One of the essential outputs of financial literacy is the ability of financial planning. As working-age people, millennial in Indonesia generally hold money that must be managed. But due to a lack of financial literacy, they might not manage the cash and debt properly. Whereas for a Muslim, it is crucial to ensure that every plan and strategy should not conflict with the principles of Islam.