Impact of Financial Literacy on Financial Decision Making of Micro, Small, and Medium-sized Enterprises (MSME) during Crisis

Abstract

The current economic crisis in Sri Lanka makes the MSME sector even more vulnerable. This study intends to identify the level of financial literacy among MSME entrepreneurs and understand the impact of the current economic crisis on the financial decision-making of entrepreneurs of the MSME sector in the Northern Province. Based on a questionnaire-based survey of 150 MSMEs, the study reveals that the financial literacy rate of these MSME entrepreneurs is below 35% in the Northern province, which hurts financial decision-making and financial performance during a crisis. It was also identified that financial literacy is a better predictor of the financial behavior of MSMEs. Factors such as liquidity of the business, debt level, turnover, and profit have been negatively affected during the crisis, resulting from lack of financial knowledge, poor financial attitude, and financial behavior of the MSMEs. This study contributes to the existing literature on behavioral finance, which incorporates the level of financial literacy to the Prospect Theory, relating the two different stages of decision specifically to the MSME sector.