1.1 BACKGROUND OF THE STUDY
Small and medium enterprises (SMEs) are the primary drivers of economic growth and job creation, and they play a critical role not only in established but also in developing and emerging economies (Lockea,2012). In most nations, SMEs face challenges in obtaining financing, utilizing technology, having limited management competencies, low productivity, and dealing with regulatory constraints.
According to the Capital Market Authority (2010), SME’s account for more than 99 percent of all businesses worldwide. Small and medium-sized enterprises (SMEs) play an important role in the Kenyan economy, such as job creation, but they face several challenges, including financial setbacks, discrimination, issues with government regulation, tax and government levies, poor access to justice, and a lack of education, to name a few. The economic pillar of the Vision 2030 project intends to promote the well-being of all Kenyans through an economic development program that spans all of the country’s regions and aspires to attain an annual GDP growth rate of 10% starting in 2010. It targets tourism, agriculture, wholesale and retail trade, manufacturing, business process outsourcing (BPO), and financial services, with an emphasis on pushing the economy up the value chain. In Kenya, SMEs confront obstacles that prevent them from achieving economies of scale. They lack the necessary training and management skills to properly manage the company’s resources. As a result, financial literacy is seen as one of the tactics utilized by bankers to give the information and skills needed to shift attitudes and attract more prospective agents.
Despite these obstacles, SMEs have the potential to generate economic growth by creating new employment, expanding the tax base, and driving innovation. According to Wanjohi (2011), SMEs boost competitiveness and entrepreneurship, which has a positive impact on overall economic efficiency, innovation, and productivity. They are the principal means through which new entrepreneurs provide the economy with ideas, skills, and innovations constantly. According to Normah (2007), a tight link exists between the concentration of SMEs and the dominating economic activity. Small and medium-sized businesses (SMEs) dominate global economies in terms of employment and number of businesses, yet their full potential remains largely untapped (Atsede et al., 2008).
1.2 STATEMENT OF THE PROBLEM
Remote areas and villages have started their own companies. Animal husbandry, greenhouse farming, dairy farming, fishing, and other local farming operations are examples of family enterprises. These firms are run in a very domestic and local way, with the owners not considering how to increase their investment. These businesses are not long-term and are subject to changes in the environment and politics. Despite the efforts of national and international organizations and government agencies to assist small businesses, small and medium-sized companies (SMEs) can not exist without their own efficient and effective business and financial management. Most businesses fail early on or never expand because maintaining a firm necessitates financial management expertise.
Despite their importance, SMEs have a variety of problems, one of which is a lack of financial information and company records. Lack of sufficient business skills, according to Wanjohi (2011), is a key problem in the creation and expansion of SMEs. This is mostly due to a lack of appropriate information and company records, as well as low levels of knowledge. The CMA (2010) also found that SMEs have restrictions that reduce their risk resilience and prohibit them from expanding and achieving economies of scale. Internal and external factors both limit access to financial data. As a result, they struggle to meet their goals in terms of liquidity, long-term solvency, and profitability, resulting in missed business opportunities and a failure to expand in terms of size and financial resources (Badagawa, 2008). A study of the financial literacy of SMEs in emerging and wealthy nations reveals a mixed picture. In a study of national surveys performed in numerous African nations, Liedholm and Mead (2005) estimate that between 17 and 27 percent of the working population engaged in SMEs is financially literate, which is roughly double the employment of large businesses and the public sector. According to a review of the literature in this field, there is a considerable gap in understanding the implications of financial literacy on SME performance. As a result, this research was conducted.
1.3 OBJECTIVE OF THE STUDY OBJECTIVE
The overall goal of the research is to critically investigate financial literacy and its impact on small-scale businesses performance. Specifically, the study is set to;
1. Investigate the role of financial literacy on the development of SMEs.
2. Investigate if financial literacy positively contribute to the performance of SMEs
3. To investigate factors influencing the use of financial literacy by SMEs.
1.4 RESEARCH QUESTIONS
The following research questions guide the objective of the study.
1. What is the role of financial literacy on the development of SMEs?
2. Does financial literacy positively contribute to the performance of SMEs?
3. What are the factors influencing the use of financial literacy by SMEs owners?
1.5 SIGNIFICANCE OF THE STUDY
The study’s goal is to discover and investigate the link between financial literacy and company performance and profitability in small and medium businesses (SMEs). This research will aid the government and the international community in better understanding the variables that influence the development and viability of the private sector in Nigeria. The findings of the study will also assist the private sector in determining which elements are crucial to their company’s profitability. This study will contribute to the existing body of knowledge on the issue and will serve as a resource for academics, researchers, and students interested in undertaking future research on this or a related topic.
1.6 SCOPE OF THE STUDY
The study covers the impact of financial literacy on small and medium-sized businesses in Rivers state. Hence, enrolled participants for this study will be obtained from selected SMEs in Mile2, Port-Harcourt Rivers State.
1.7 LIMITATION OF STUDY
The lack of willingness of small business owners to complete the questionnaire is a key drawback of this study.
1.8 DEFINITION OF TERMS
Financial literacy: Financial literacy is the possession of a set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.
Small scale businesses: a small-scale business is a privately owned and operated business, characterized by a small number of employees and low turnover.
Performance: The extent to which an investment is profitable, especially other investments.
Our focus in this chapter is to critically examine relevant literature that would assist in explaining the research problem and recognize the efforts of scholars who have previously contributed immensely to similar research. The chapter intends to deepen the understanding of the study and close the perceived gaps.
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