Household Size and Financial Capability: Evidence from an Informal Financial Economy

Abstract Purpose : Financial capability is the knowledge, attitudes and behaviors that allow individuals to manage money, plan ahead and absorb financial shocks is a key determinant of household welfare in economies with weak formal safety nets. Household size is theorized to erode financial capability through resource dilution, yet competing theory suggests that economies of scale and informal risk-sharing institutions may offset this effect. This study tests these competing predictions in Hargeisa, Somaliland, an urban Horn-of-Africa economy characterized by extended households, high remittance dependence and ubiquitous rotating savings associations (hagbad/ayuto). Methods : A quantitative cross-sectional design was used. Structured questionnaires were administered to 5,762 households across all nine districts of Hargeisa using stratified multistage cluster sampling consistent with University of Hargeisa Multi-Sectoral Survey (UMSS) standards. Household size was the focal predictor; a composite Financial Capability Index (0–100), derived from financial knowledge, attitude and behavior sub-scales, was the outcome. Income, education, employment status, gender, age, bank-account ownership and credit-application history were entered as covariates in a multiple linear regression estimated in SPSS v.26. Results : Mean financial capability was 60.87% (SD = 17.55), with 78.18% of households scoring in the low-to-moderate range. Household size was not a statistically significant predictor of financial capability (β = 0.013, p = 0.148), and mean scores were virtually identical across household-size categories (1–10 members: 60.81%; 11–20 members: 61.17%; 21+ members: 60.94%). Gender (p = 0.001), active bank-account ownership (p < 0.001), recent credit application (p < 0.001) and lack of formal education (p < 0.001) were significant predictors. The model explained 71.1% of variance in financial capability (adjusted R² = 0.710; F = 1,107.73, p < 0.001), with no evidence of multicollinearity (all VIF < 1.2). Conclusion : Contrary to resource-dilution and life-cycle predictions, household size does not erode financial capability in Hargeisa. This pattern is consistent with an institutional-buffering mechanism in which informal risk-pooling (hagbad/ayuto), diaspora remittances and income pooling across working-age members offset the dilution effect typically observed in individualistic, formally-insured economies. Policy and institutional resources are better directed toward education, gender-responsive design and behavior-focused interventions than toward household-size-targeted programs. Originality/value: This is the first large-scale, multivariate study to test household size as a primary, rather than incidental, predictor of a multidimensional financial capability index in a remittance-dependent, informally-institutionalized Horn-of-Africa economy, and the first to interpret a null household-size effect through an explicit institutional-buffering framework rather than treating it as an absence of finding.