Impact of Financial Literacy on Financial Risk Tolerance of Youth in Puttalam District of Sri Lanka

Abstract

This study examines how financial literacy affects financial risk tolerance among the youth in Puttalam District of Sri Lanka, which is known for lack of access to formal financial education opportunities. Financial literacy (knowledge, skills, behavior, and attitudes) is become increasingly vital for sound financial decision-making, especially among young people within the developing countries. The research explores the impact of each component of financial literacy on two central aspects of financial risk tolerance, namely risk perception and risk preference. The adoption was made on a quantitative research design based on the deductive process. Primary data were collected using a validated, structured Likert-scale questionnaire which was administered through convenience sampling to representative sample of 358 youth in Puttalam District. The analysis of the data was performed through SPSS software, to determine the impact of financial literacy on financial risk tolerance. Research results demonstrate that there is significant relationship of financial literacy with financial risk tolerance. Higher levels of financial knowledge and positive attitudes regarding finance resulted in a greater financial risk tolerance while among youth revealed a more willingness to participate in calculated risk. Other financial skill also found significant contributors to the risk tolerance. Further, the study observed that the financial behaviors has no significant impact on financial risk tolerance of youth. The research suggests that improving youth financial literacy can boost engagement in formal financial systems and improve long-term financial resilience. The study addresses research gaps in developing countries and focuses on behavioral aspects of financial decision-making, particularly for rural, underrepresented groups in Sri Lanka. Furthermore, this study supports youth-focused financial education in rural Puttalam and offers practical insights for policymakers while extending financial behavior theory to rural youth in a developing country. Finally, this research highlights the necessity for improving financial literacy among the youth to develop prudent financial behavior and capacities for taking risks, which are consistent with the long-term economic objectives and the national financial inclusion strategies.