The impact of financial literacy on risk propensity mediated by access to finance

Abstract

Purpose – Financial literacy has become an important area of research in recent years. Its significance in making wise financial choices has also been documented in recent studies. In developing economies, business sustainability is a major issue as has been identified in many prior studies. Most SMEs are unable to survive 3 years after establishment. Prior researchers have mostly attributed this to a lack of access to finance. Recently, it has been discovered that financial literacy tends to assist SMEs with the needed skills and knowledge such as understanding the various sources of finance and analyzing different financial choices accurately, in order to be able to make the right financial choices. This study hence examines the impact of financial literacy on risk propensity mediated by access to finance. Methodology – Data for the study was collected from SME owners/managers through structured questionnaires. The questionnaires were administered to 432 SME owners/managers. Descriptive statistics was used in describing the demographic statistics of the respondents. PLS Structural Equation Modeling (SEM) was used for the data analysis. Findings – The study’s hypotheses were confirmed. The findings showed that access to finance partially mediates the association between financial literacy and risk propensity. The relationship between financial literacy and risk propensity was likewise strongly favorable, and it was further established that access to finance significantly impacts on risk propensity. Conclusion ¬– Financial literacy and access to finance both remain a significant aspect of SME sustainability, both have a positive and significant implication for risk propensity. SMEs should hence include financial literacy programs such as workshops and seminars in their annual programs to help improve their financial knowledge since financial literacy impacts both access to finance and risk propensity. Policymakers should also put in more effort in making policies such as financial literacy training compulsory to help improve the financial knowledge of SMEs.