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Access to Finance and Performance of Small Firms In South
Africa: The Moderating Effect Of Financial Literacy
OLAWALE FATOKI
Department of Business Management, University of Limpopo, Private Bag X1314,
Sovenga, 0727, SOUTH AFRICA
Abstract: The failure rate of small medium and micro enterprises (SMMEs) is very high in South
Africa. One of the challenges faced by SMMEs is inaccessibility to external finance. There is a
general low level of financial literacy amongst small business owners in South Africa leading to ill-
informed financial decisions. Financial literacy is an important knowledge resource for financial
decision-making but little research has focused on how financial literacy affects the performance of
SMMEs. The aim of the study was to examine if financial literacy moderates the relationship between
access to finance and performance of SMMEs in South Africa. The cross-sectional survey method
was used for data collection in a quantitative study. Descriptive statistics, Pearson correlation and
hierarchical regression were used for data analysis. The Cronbach’s alpha was used as a measure of
reliability. The findings indicated that the relationship between access to finance and financial literacy
is significant. The findings also showed that financial literacy moderates the relationship between
access to finance and performance of SMMEs. Empirically, the study added to the body of literature
on financial literacy, access to finance and performance of SMMEs. Practically, recommendations to
improve the financial literacy of SMMEs are suggested.
Keywords: financial literacy, access to finance, performance, SMMEs, moderating, South Africa
1. Introduction
Small and medium and micro enterprises
(SMMEs) play an important role in the
economies of countries around the world.
SMMEs generate employment and value
added and contribute to the gross domestic
product (GDP). SMMEs are crucial to the
efforts of governments to achieve a more
inclusive growth. In the Organisation for
Economic Co-operation and Development
(OECD) countries, SMMEs are the main form
of enterprise, accounting for approximately
99% of all firms. SMMEs contribute about
70% of jobs and generate between 50% and
60% of value added [1]. In developing
countries, SMMEs are a major contributor to
employment generation, economic
empowerment and social wellbeing of the
majority of the citizens. SMMEs contribute
about 40% of the GDP and 60% of total
employment in developing economies. It is
estimated that 600 million jobs will be needed
by 2030 to absorb the increasing global
workforce and this makes SMME
development a major priority for many
governments around the world [2, 3]. In South
Africa, the SMME sector accounts for 98.5%
of all firms but only firms contribute 28% of
all jobs [4]. One of the reasons for the low
contributions of SMMEs to job creation in
South Africa is their high failure rate. This is
because when SMMEs fail, jobs are lost. The
high failure rate of SMMEs paints a bleak
picture of the sector's ability to contribute
significantly to job creation, the reduction of
poverty and income inequality and economic
growth in many developing countries. SMMEs
continue to be as economically fragile and
about 70% of emerging small businesses fail
within the first two years of operation. The
number of SMMEs and their contribution to
employment continue to decline yearly. Thus,
South Africa’s SMME sector is an outlier
internationally in respect of its contribution to
employment and the GDP [4, 5]. The growth
of SMMEs is hindered by many factors
including lack of managerial skills, regulations
and inaccessibility to external finance [6].
SMMEs suffer change from a financing gap
which means that that there are significant
numbers of SMMEs that cannot obtain finance
from the formal financial system. Access to
finance is the second most reported obstacle to
the growth of SMMEs in developing countries
[2, 7]. Most SMMEs are managed by the
owners and their success or failure is
dependent on the resources available to the
owners. These resources include financial
literacy [3, 8,]. According to [9], financial
literacy measures how well an individual can
understand and use personal finance-related
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information. Financial literacy includes the
ability and confidence of an individual to use
his/her financial knowledge to make financial
decisions. There is a general low level of
financial literacy amongst individuals and
small business owners in South Africa leading
to ill-informed financial decisions. The role of
SMMEs in creating employment and
stimulating economic growth has been
hampered by lack of access to finance from
formal financial institutions and this can be
attributed to the level of financial literacy
amongst SMME owners and managers [10,
11]. However, research on the role of
financial literacy in transforming access to
finance to improved performance is limited
[12]. According to [13], extant research
generally agrees that SMMEs have constrained
access to external finance. However, most
studies have focused on supply side
institutions, information asymmetry and the
use of collateral to reduce default risk. This
approach fails to take into consideration the
effect of financial literacy in improving access
to finance and performance of SMMEs. [14]
point out that the role of knowledge-based
resources in improving the sustainability of
small businesses is a current topic of debate.
Financial literacy is an important knowledge
resource for financial decision-making but
little research has focused on how financial
literacy affects the performance of SMMEs.
The aim of this study is to investigate the
effect of financial literacy on access to finance
and performance relationship of SMMEs.
Thus, this study will examine if financial
literacy moderates the relationship between
access to finance and performance of SMMEs
in South Africa. To achieve the main
objective, the study will also investigate the
impact of access to external finance on
performance, the effect of financial literacy on
access to finance and the influence of financial
literacy on the performance of SMMEs. This
research will contribute to the literature on
financial literacy, access to finance and
performance of SMMEs in the following
ways. First, limited studies [11, 12] have
examined the moderating effect of financial
literacy on access to finance and performance
and to the best of the author’s knowledge none
from the South Africa. The findings of this
study will extend research on how financial
literacy affects access to finance and
performance of SMMEs from a developing
country perspective where extant research has
been very limited. Second the research
findings will provide SMME owner-managers
and policymakers with information on how
financial education and skills can improve the
performance of SMMEs. The study is
organised as follows: Section two will provide
the review of the literature and the
development of the conceptual framework and
hypotheses. Section three will focus on the
research methodology and measures. The
presentation of results and discussion will be
done in sections four and five. The conclusion,
implications, limitations and areas for further
study will be presented in section six.
2. Problem formulation
2.1 Definition of small, medium and
micro enterprises in South Africa
The National Small Business Act of 1996, as
revised in 2003, defines a small business as “a
separate distinct entity including cooperative
enterprises and non-governmental
organisations managed by one owner or more,
including branches or subsidiaries if any is
predominately carried out in any sector or
subsector of the economy mentioned in the
schedule of size standards”. There are three
enterprise classes for SMEs in South Africa.
These are micro, small and medium. The
quantitative definition focuses on the number
of employees and total annual turnover [15]
(Government Gazette, 2019). The number of
employees is one of the indicators that is used
to classify SMMEs in South Africa.
Quantitatively, a micro enterprise will have
between 0 and 10 employees, small enterprises
between 11 and 50 employees, and medium
enterprises between 51 and 250 employees
[15].
2.2 Access to debt finance and
performance of SMMEs
[16] remark that access to debt finance is
linked with the ability of an enterprise to
obtain financial services. Access to external
finance is an important factor in ensuring
business growth through the financing of
existing and new investment projects. An
efficient investment can only be achieved
when a firm does not face credit obstacles.
[17] points out that the majority of small
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businesses in countries in the South African
Development Corporation (SADC) depend on
owners’ capital especially at the start-up stage.
However, owners’ capital is often inadequate
and limits the operation of SMMEs. This
underfunding can lead to stagnation or failure.
The major sources of external finance are
equity and debt. However, access to equity is
limited for many SMMEs in South Africa
[18]. [19] agree that the lack of external
equity makes many SMEs dependent on debt
financing. Paradoxically, access to debt
finance is also limited for SMMEs [20].
Therefore, lack of access to finance is a
serious impediment to start-up and growth of
SMMEs. [21] find that access to debt finance
positively impacts on the performance of
Zimbabwean SMMEs. According to [16], one
of the ways that access to finance can impact
on firm performance is through improvement
in productivity. The results of the study show
that improving financial accessibility has a
significant positive impact on the total factor
productivity of SMMEs. [22] also find a
positive relationship between access to
finance, firm productivity and export intensity
of small firms. SMMEs need external finance
for daily operations and to invest in profitable
projects and technologies that can improve
their competitiveness. Therefore, financing
constraints can hamper the performance of
SMMEs. It is hypothesised (H1) that there is a
significant positive relationship between
access to finance and the performance of
SMMEs.
2.3 Financial literacy and access to debt
finance by SMMEs
Huston [9] describes financial literacy as
measuring how well an individual can
understand and use personal finance-related
information. [32] defines a financially-literate
SMME owner as one that has an adequate
level of personal finance skills and an
appropriate level of understanding of
functional financial management systems. [8]
find that the financial literacy of is one of the
important factors in the understanding and use
of financial services by SMMEs. A low level
of financial literacy can prevent SMME owner
from understanding and assessing financial
products from financial institutions. Financial
literacy positively affects the production of
financial statements. A small business that
produces financial statements has a higher
probability of loan approval and repayment
and a lower probability of failure [13, 23, 24].
Financial literacy can help the owners of
SMMEs to understand both traditional and
alternative financing sources like
crowdfunding and to diversify financial
instruments [25]. Consequently, it is
hypothesised (H2) that there is a significant
positive relationship between financial literacy
and access to finance by SMMEs.
2.4 Financial literacy and performance
of SMMEs
[26] claim that a good financial foundation of
the owners of SMMEs is a significant
barometer of success. Financial literacy
improves access to finance and success of
SMMEs. The theoretical link between
financial literacy and performance can be
linked to the Resource Based View (RBV)
theory [27]. According to the RBV, managers
should focus on a firm's internal resources in
order to identify those capabilities,
competencies and assets that can bring
superior competitive advantages. Tangible
resources include financial capital and
physical capital whilst intangible resources
consist of knowledge, skills and experiences
[28]. Financial literacy is a resource that a firm
can utilise to generate competitive advantage
[29]. Financial literacy influences a firm’s
selection, use and management of financial
assets and the effectiveness of financing
decisions and strategy [12, 26]. Good
financing and investment decisions by
financially literate owners can impact on the
liquidity, solvency and profitability SMMEs. It
is hypothesised (H3) that there is a significant
positive relationship between financial literacy
and the performance of SMMEs.
2.5 Financial literacy moderates the
relationship between access to debt
finance and performance of SMMEs
[12] assert that the financial capability of firm
owners is a resource that can be regarded as
valuable, rare and inimitable and influences
both access to debt finance and performance of
SMMEs. Access to finance can be linked to
dynamic capabilities that can affect firm
performance. A high degree of financial
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literacy can give small business owners access
to knowledge and information about how to
obtain finance which in turn can lead to
competitive advantage and superior
performance. Lack of financial literacy can
lead to bad financial decisions with negative
consequences on a firm’s operation, financial
structure and mission [13]. According to [12],
financial literacy positively enhances access to
finance and performance relationship of small
businesses in Ghana. Financial literacy can
enable the effective conversion of access to
finance into improved firm performance. [11]
find a significant positive moderating effect of
financial literacy in the relationship between
access to finance and growth of SMMEs in
Uganda. The application of financial
knowledge and skills can help SMMEs to
obtain financial resources, generate
competitive advantage and improve
performance. It is hypothesised (H4) that
financial literacy moderates the relationship
between access to finance and performance of
SMMEs.
2.6 Research methodology
The study used a positivistic research
paradigm and a quantitative research
approach. Data was collected through the
cross-sectional survey approach. The
population comprised of the owners of all
SMMEs in the Gauteng and Limpopo
Provinces of South Africa. The survey was
conducted in the Central Business Districts of
Johannesburg (Gauteng Province) and
Polokwane (Limpopo Province) of South
Africa. The areas were used for the survey
because they contain a large number of
SMMEs. Currently, there is no national
database or list of small businesses in South
Africa or in the Gauteng or Limpopo
Provinces, therefore the purposive sampling
technique was used to identify survey
participants. The use of non-probability
sampling method is consistent with previous
empirical studies on SMMEs in South Africa
[18, 34]. The phone numbers and Email
addresses of the participants were obtained
during the distribution of questionnaires.
Three field agents assisted in the data
collection process and data collection took
place between May and September, 2019.
Repeated phone calls, emails and visits were
made to the participants to complete the
questionnaire. If the questionnaire is not
completed after two months, it is treated as
non-response. A pilot study was conducted on
the survey instrument used in this research
with 30 SMME owners in order to ensure face
and content validity. The pilot study was done
before the actual data collection and the
respondents of the pilot study did not
participate in the actual survey. The
questionnaire was divided into four parts: (1)
biographical information; (2) access to finance
(3) financial literacy and (4) firm financial
performance. Descriptive statistics, Pearson
correlation and hierarchical regression were
used for data analysis. The Cronbach’s alpha
was used as a measure of reliability. For
ethical, consideration, the purpose of the study
was clearly specified in the questionnaire,
participation was voluntary, and
confidentiality and anonymity were ensured.
The variables in the study were measured as
follows: Subjective questions were used to
measure the performance of SMMEs. Three
questions (growth in profitability, turnover
(sales) market share) and anchored on the five
point Likert scale (1 significant decline” to “5
significant increase” in the prior year) were
used to measure financial performance. The
responses to the three questions are summed to
obtain the average financial performance. This
is consistent with similar studies [12, 26], The
Cronbach’s alpha of the scale was .76,
indicating high reliability of scale [30]. Four
questions were used to measure the financial
literacy of SMME owners. (1) we prepare
monthly company financial statement (income
statement and balance sheet); (2) we review
monthly financial statements; (3) we perform
financial analysis on monthly financial
statements; and (4) we have an understanding
of the company’s gross profit ratio and its
contribution to the overall profit. A five-point
Likert scale with anchored on “1 ‘strongly
disagree’ and ‘5 strongly agree’ was used to
measure financial literacy. The responses to
the four questions are summed to obtain the
average financial literacy. This is consistent
with studies [12, 13]. The Cronbach’s alpha of
the scale was .80, indicating high reliability of
scale. Two questions were used to measure
access to debt finance (1) access to bank credit
and (2) access to trade credit. A five-point
Likert scale with anchored on “1 ‘totally
dissatisfied and 5 totally satisfied was used to
measure access to debt finance [33]. The
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responses to the two questions are summed to
obtain access to debt finance. The Cronbach’s
alpha of the scale was 0.77, indicating high
reliability of scale.
3 Problem solution
3.1 Response rate and biographical details
Table 1. Biographical information of the respondents.
Biographical Characteristics
Frequency (N = 175)
Educational qualification of owner/manager
Frequency
Below Matric
42
Matric
91
Post–Matric qualifications
42
Gender
Female
76
Male
99
Age of the owner (years)
Less than 20
0
20–30
43
31–40
83
41–50
29
Above 50
20
Age of the firm (years)
1–5
74
6-10
67
Above 10 years
34
Number of employees
0-10
114
11-50 employees
61
Sector of the respondents
Retail 92
Service 83
Four hundred and fifty questionnaires were
distributed to small business owners and one
hundred and seventy-five questionnaires were
returned. The response rate was 39%. The
biographical details as presented in table 1
included both owner and firm characteristics.
Owner characteristics included the level of
education, gender and age of the respondents.
Firm characteristics included the age of the
firm, the number of employees and the sector.
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The results indicated that the majority of
respondents in the survey are male, with
Matric qualification and in the 31-40 age
group. In additions, most of the firms that
participated in the survey have been in
existence for between six and ten years,
employ between 0 and 10 employees and are
thus micro businesses according to the
National Small Business Act. In addition, the
majority of firms that participated in the
survey are in the retail sector.
3.2 Descriptive statistics and Pearson’s zero order correlation matrix
Table 2 Descriptive statistics and Pearson’s zero order correlation matrix
Variable
Mean
Standard
deviation
1
2
3
Access to debt
finance
3.405
1.014
1
Financial
literacy
2.810
1.113
0.599*
1
Performance
3.350
1.026
0.504*
0.755**
1
*significant at 5%; ** significant at 1%.
3.3 Hierarchical regression results
Table 3 Hierarchical regression results
Variable
Model 1
Model 2
Performance
Model 3
VIF
Tolerance
Constant
2.684
1.375
0.729
Access to
finance
(main effect)
0.199
0.206*
0.183**
1.026
0.682
Financial
literacy
(moderator)
0.708*
0.491**
1.137
0.739
Interaction term
0.162**
1.119
R2
0.052
0.178
0.253
Change in R2
0.164
0.075
Change in F
5.947*
28.715**
0.275
*significant at 5%; ** significant at 1%
Table 2 depicts the results of the descriptive
statistics and Pearson correlation. Matrix. The
results indicated that the mean of financial
literacy is 2.810 while the means of access to
debt finance (3.505) and performance (3.550).
The standard deviations of all the constructs
ranged from 1.014 to 1.13 reflecting
significant variability in the data set. The
results of Pearson correlation and hierarchical
regression. Collinerarity statistics show that
tolerance is > 0.1 and VIF < 10 for all
variables. The results of Pearson correlation
(r=0.504, p <0.05) and hierarchical regression
(β =0.183, p<0.01) indicate a significant
positive relationship between access to debt
finance and performance of SMMEs. H1 is
supported. In addition, the results (r=0.599 p
<0.05) and β =0.708, p<0.05) indicate a
significant positive relationship between
finance literacy and access to debt finance by
SMMEs. H2 is supported. The results
(r=0.755, p <0.01) and (β =0.491, p<0.01)
indicate a significant positive relationship
between financial literacy and performance of
SMMEs. H3 is supported. The hierarchical
regression (table 3) was used to show the
effects of both the independent (access to
finance and moderator (financial literacy)
variables on the dependent variable
(performance). The study followed the
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mediation steps as analysed by [35, 36, 37].
The results (β =0.162, p<0.01) show that the
interaction effect between financial literacy
and access to finance is significantly positive.
In addition, the results indicate that the
interactive term of including financial literacy
as a moderator increases the main effect
(access to finance) by 7.5% to explain
variation in performance (change in R2 =
0.075). Also the inclusion of the interactive
term between access to finance and financial
literacy boosted the predictive power of access
to finance from 0.178 to 0.253 (a change of
7.5%). Thus it can be concluded that financial
literacy significantly moderates the
relationship between access to finance and
performance of SMMEs. H4 is supported.
3.4 Discussion
The study examined if financial literacy
moderates the relationship between access to
debt finance and performance of SMMEs in
South Africa. In addition, the study
investigated the impact of access to external
finance on performance, the effect of financial
literacy on access to finance and the influence
of financial literacy on the performance of
SMMEs in South Africa. The findings of the
study showed a significant positive
relationship between access to debt finance
and performance of SMMEs. Hypothesis one
of the study is accepted. of the study is
supported. The results support a positive
relationship between access to finance and
performance of SMEs. This is especially
important because many SMMEs are unable to
secure adequate debt finance to fund projects
with positive present values. Access to
external finance is an important factor in
ensuring business growth through the
financing of existing and new investment
projects. An efficient investment can only be
achieved only when a firm does not face credit
obstacles. In addition, access to equity capital
is also limited for SMMEs and the availability
of debt finance is important to finance growth-
enhancing projects. The findings are consistent
with the results of previous empirical studies
[16, 21, 22] that access to external finance is
an important factor in ensuring business
growth through the financing of existing and
new investment projects. Therefore,
inaccessibility to external finance is a serious
impediment to the growth of SMMEs [31].
The findings of the study showed a significant
positive relationship between financial literacy
and access to finance by SMMEs. Hypothesis
two of the study is supported. The findings are
consistent with the results of previous
empirical studies. [8] find that the financial
literacy of is one of the important factors in the
use of financial services by SMMEs.
Financial literacy positively affects the
production of financial statements and leads to
a higher probability of loan approval.
Financial literacy can help the owners of
SMMEs to understand both traditional and
alternative financing sources [25]. The
findings of the study showed a significant
positive relationship between financial literacy
and the performance of SMMEs. Hypothesis
three of the study is supported. [26] establish
that financial literacy improves access to
finance and success of SMMEs. Small
business owners can use financial literacy to
obtain financial resources which can help to
generate competitive advantage and improve
performance [29]. In addition, financial
literacy influences the selection, use and
management of financial assets and the
effectiveness of the financing decisions [26].
The findings of the study indicated that
financial literacy moderates the relationship
between access to finance and performance of
SMMEs in South Africa. Hypothesis four of
the study is supported. [12] find that financial
literacy positively enhances the access to
finance and performance relationship of small
businesses in Ghana. Financial literacy enables
the effective conversion of access to finance
into improved performance. The results of the
study by [11] also reveal a significantly
positive moderating effect of financial literacy
in the relationship between access to finance
and growth of SMMEs in Uganda. The
application of financial knowledge and skills
can help SMMEs to obtain financial resources
which leads to improved performance.
3. Conclusion
The SMME sector although accounts for
98.5% of all but only contribute 28% of all
jobs in South Africa. One of the reasons for
the low contributions of SMMEs to job
creation in South Africa is their high failure
rate. The performance of SMMEs is hindered
by many factors including lack of access to
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external finance. Therefore, it is important to
examine the factors that can improve the
performance of SMMEs.The study examined
if financial literacy moderates the relationship
between access to finance and performance of
SMMEs in South Africa. In addition, the study
investigated the impact of access to external
finance on performance, the effect of financial
literacy on access to finance and the influence
of financial literacy on the performance of
SMMEs in South Africa. The findings
indicated that the relationship between
financial literacy and access to finance by
SMMEs is significant. The findings also
showed that financial literacy moderates the
relationship between access to finance and
performance of SMMEs.
The study makes an empirical contribution to
the literature on financial literacy, access to
finance and performance of SMMEs. The
findings of the study showed that to improve
access to debt and performance of SMMEs,
the financial literacy of the business owner is
important. Empirically, the body adds to the
body of literature on the relationship between
financial literacy and access to debt and
performance of SMMEs in developing
countries. The study has some practical
implications and the findings can assist
SMME owners and government to better
comprehend how to promote financial literacy.
Owners have to be proactive and attend
courses on financial management and literacy.
Many universities in South Africa have short
courses in their curriculum that can assist
SMMEs with financial management skills.
SMME owners can also partner with banks,
accountants and bookkeepers to help them
learn how to use financial management
software. SMMEs can also partner with
governmental and non-governmental
organisations that support entrepreneurship for
training on financial literacy. The study has
some limitations. The non-probability
sampling method was used and the data
collected may be biased and represent only the
opinions of the respondents of the study.
Therefore, care should be applied in
generalising the findings of the study. The
cross-sectional survey approach used by the
study cannot be used to analyse behaviour
over a period of time and limits the ability to
determine cause and effect. Other studies can
explore the effect of demographic variables of
SMME owners on financial literacy. A
longitudinal study focusing on the same
concepts will help to improve cause and effect
relationship.
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