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

Jianmu Ye,Kmmcb Kulathunga

doi:10.3390/su11102990

Abstract

Role of the knowledge-based resources in promoting sustainability in small and medium enterprises (SMEs) is currently a topic of debate. Financial literacy has been identified as a vital knowledge resource for financial decision making, but insufficient attention has been given to how SMEs’ financial literacy affects their sustainability. Drawing upon a knowledge-based perspective, peaking order theory and dual process theory, we constructed an integrated model to examine the impact of financial literacy, access to finance and financial risk attitude on SMEs’ sustainability. The sample included 291 chief financial officers (CFOs) of SMEs in Sri Lanka. The output of structural equation modelling revealed direct positive effects of financial literacy, access to finance and financial risk attitude on sustainability. Financial literacy also emerged as a predictor of access to finance and financial risk attitude. Moreover, access to finance and financial risk attitude were found to be partial mediators of the relationship between financial literacy and SMEs’ sustainability. Theoretical implications and practical implications for policymakers, industry practitioners and academics interested in promoting sustainability amongst SMEs are discussed.

Highlights

Small and medium enterprises (SMEs) make an immense contribution to economic development through wealth distribution, creation of employment, technological advancement, reduction of poverty and innovation [1,2]
We found that access to finance and financial risk attitude partially mediated the relationship between financial literacy and small and medium enterprises (SMEs)’ sustainability, our fourth and seventh hypotheses were partially supported
This research attempted to answer the question ‘How does financial literacy influence the sustainability of SMEs?’ We used the knowledge-based view (KBV), peaking order theory and dual-process theory to develop a conceptual model that included access to finance and financial risk attitude as mediators of the relationship between financial literacy and SMEs sustainable performance

Summary

Introduction

Small and medium enterprises (SMEs) make an immense contribution to economic development through wealth distribution, creation of employment, technological advancement, reduction of poverty and innovation [1,2]. Having a strong SME sector is crucial to establishing a solid industrial sector in an economy [3] and well-functioning SMEs are essential to steady and continuous economic growth. The rapid economic development and higher profitability of emerging markets give SMEs the opportunity to become more competitive in both domestic and global markets [4,5]. The SME sectors of developing countries have stagnated rather than expanding and becoming more sophisticated. Some of the characteristics of a developing economy—economic turbulence, unstable exchange rates, immature information infrastructure, higher transaction costs, political unrest, high inequality and worsening unilateralism in trade policy—are additional threats to the sustainability of SMEs [6,7].

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