Sustaining Small and Medium Enterprises through Financial Service Utilization: Does Financial Literacy Matter?

TLDR: In this paper, the authors used a direct measure of financial knowledge to empirically investigate the linkage between financial literacy and utilization of financial services by SMEs and established a bi-causality problem.

Abstract: In the past, Small and Medium scale enterprises (SMEs), particularly in developing countries, lacked access to financial products and services The SME market was perceived by banks as risky, costly, and difficult to serve However, there exists an array of financial products -microcredit, savings, and loans, insurance, mutual funds - in both the formal and informal sectors in Ghana today for SMEs Opportunities to utilize these financial services are more plentiful than about a decade ago This paper uses a direct measure of financial knowledge to empirically investigate the linkage between financial literacy and utilization of financial services by SMEs However, since people‟s level of knowledge can improve through utilization of financial service, we establish a bi-causality problem In the analysis, two equations were estimated for financial literacy level, and utilization of financial service which includes financial literacy as an endogenous variable The equation determining the level of financial literacy was estimated using the OLS while the equation for the utilization of financial service was estimated using logistic regression The IV method was used to correct for the problem of endogeneity Overall, the results show that there was modest level of financial literacy among small and medium entrepreneurs in Ghana Moreover, it was discovered that the more financially literate entrepreneurs were more likely to utilize financial service than the less literate ones The most commonly utilized financial service was operating a bank account Finally, the instrument for financial literacy, recipient of financial education, also had positive relationship with utilization of financial service