Financial Literacy and Financial Performance of Micro Enterprises in Developing Economies: The Mediating Role of Credit Access

Abstract

The purpose of this paper is twofold: to establish the influence of financial literacy on the financial performance of micro-enterprises (MEs) in developing countries and establish the mediation role of credit access in the relationship between financial literacy and financial performance of micro-enterprises. The authors employed a cross-sectional and quantitative methods research design. Close-ended questionnaires were administered to the owner and or at least one focal staff member of the micro-enterprises which were selected from Nebbi district in Northwestern Uganda. Most studies on financial literacy, credit access and financial performance in Uganda have focussed on small and medium enterprises (SMEs) given their pivotal position in the economy of Uganda, leaving out the micro-enterprises (MEs), and yet MEs supplement SMEs with business linkages, partnerships and subcontracting, but also MEs have unique challenges. The study found that financial literacy in micro-enterprises in developing economies positively affects their financial performance. Further still, it has been established that credit access by micro-enterprises mediates the relationship between their financial literacy and financial performance. In this regard, owners of the micro-enterprises should endeavour to understand the procedures for obtaining credit from micro-finance institutions. They should also learn the terms associated with the acquisition of credit, such as; loan size, interest rate, repayment period, the amounts of the microloan they can apply, the interest rates as well as the repayment periods, this knowledge will enable them to access loans that meet their business needs much quicker for business growth.

Keywords: Financial Literacy, Credit Access, Financial Performance, Micro Enterprises, Developing Economies.