The relationship between access to finance and growth of SMEs in developing economies

Abstract

Purpose The purpose of this paper is to establish the moderating effect of financial literacy in the relationship between access to finance and growth of small and medium enterprises (SMEs) in developing economies. Thus, this study seeks to establish whether financial literacy moderates the relationship between access to finance and growth of SMEs in a developing economy like Uganda. Design/methodology/approach Cross-sectional research design was used in the study and data were collected from 169 SMEs located in Jinja and Iganga central markets. ModGraph (excel programme) was used to test for the moderating effect of financial literacy in the relationship between access to finance and growth of SMEs in developing economies. Findings The findings reveal a positive and significant moderating effect of financial literacy in the relationship between access to finance and growth of SMEs in developing economies. In addition, financial literacy and access to finance also have significant and positive effects on growth of SMEs in developing economies. Research limitations/implications The study collected data from only SMEs located in Uganda, and there is an opportunity to test this finding in other developing economies. Furthermore, the findings from the study are based on quantitative data collected through use of semi-structured questionnaires. Besides, the study was purely cross-sectional; hence, it ignores the characteristics of SMEs, which could be investigated using a longitudinal study design. Practical implications The study highlights the importance of financial literacy in promoting access to finance, which is necessary for the growth of SMEs in developing economies. Owners of SMEs could attend financial literacy programmes provided by entrepreneurial skill development organizations to enable them to acquire financial knowledge and skills to make wise and better financial decisions and choices. Originality/value The study contributes to existing international entrepreneurship literature by indicating the moderating effect of financial literacy in the relationship between access to finance and growth of SMEs in developing economies. The study shows that for SMEs to access finance to grow there is a need for financial literacy that promotes effective and efficient use of loans/credits. SMEs in developing economies need financial literacy, which helps them make wise financial decisions and choices before accessing financial services like loans.

How Does Financial Literacy Promote Sustainability in SMEs? A Developing Country Perspective

“…Access to finance: Access to finance was measured using the approach described by Bongomin et al [94]. Ten items were used to measure access to finance.…”

The Role of a Manager’s Intangible Capabilities in Resource Acquisition and Sustainable Competitive Performance

“…To measure financial literacy, studies have used questions related to interest rate and inflation, etc. However, in the business context and especially in SMEs, studies have preferred measures related to financial management, working capital, and financial reporting (e.g., [77]). Thus, to measure financial literacy, we relied on 13 items used by Yang, Ishtiaq, and Anwar [49].…”

Enterprise Risk Management Practices and Firm Performance, the Mediating Role of Competitive Advantage and the Moderating Role of Financial Literacy

“…It is doubtless that organizations with risk-related practices can smooth their income volatility and decrease the impact of financial crises to enhance their performance (Ashraf et al 2017). Meanwhile, especially in SMEs, top management needs to have enough financial knowledge to smooth operation in the dynamic markets (Bongomin et al 2017). In the current churning market, ERM practices and financial literacy are required to acquire a sustainable competitive position and high profitability.…”

“…Hence, we relied on more suitable measures related to SMEs. To measure financial literacy of a top management team, we used 13 items that have validated in the prior study conducted by Bongomin et al (2017) in SME sector. A sample item indicates "The firm is able to correctly calculate interest rates on my loan payments".…”