The Influence of Financial Literacy on the performance of SMEs in Lagos, Nigeria

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Price: 2000 Naira (BSC, MSC)

ABSTRACT

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Since 1970s, both the federal and state governments have shifted attention to small and medium scale enterprises in Nigeria. This is due to the realization of the potentials of this sector in terms of rural development, poverty reduction, and generation of employment and mobilization of domestic savings among many others. In prior to this, government and institutions have directed their support to this sector through credit facility and entrepreneurship development to ensure that those who wish to run business have the right skills, education, attitudes and values to do so  (Aladekomo, 2004).

According to a survey by PWC (2017), the SME sector is seen as the backbone of major developed economies, as well as important contributors to employment, economic and export growth. According to the Nigerian Bureau of Statistics (2017), small and medium scale enterprises (SMEs) in Nigeria have contributed about 48% of the national GDP in the last five years, account for 96% of businesses and 84% of employment. With a total number of about 17.4 million, they account for about 50% of industrial jobs and nearly 90% of the manufacturing sector, in terms of number of enterprises.

Despite the significant contributions of SMEs to the Nigerian economy, it still faces challenges that hinder the growth and development of the sector, such challenges include: low innovation of the sector, poor educational background of SME owners, no adoption of technology, inadequate external financing or internal capital, poor environment, government instability and poor management of profit due to lack of financial literacy among many others  (Sevdie, 2014).

Financial literacy as one of the key drivers to the success of businesses has been of great concern recently due to the inarguable eminence the phenomenon offers to the economy (Mabula, 2016). This importance of financial literacy has captured the attention of many groups such as: banking corporations, government agencies, educational institutions, consumer and community interest groups, and other businesses (Eresia-Eke, 2013). This concern of financial literacy by people and businesses is as a result of the Asian financial crisis in 1998, the global financial crisis of 2008 and the European Sovereign debt crisis of 2012 (Al-shami, 2018).

Decisions made by economic agents are highly shaped by their financial literacy regarding understanding of basic financial principles (Aren & Aydemir, 2014).

Entrepreneurs operate in environments that are dynamic, and as financial markets get more competitive and financial portfolios more complex, entrepreneurs become exposed to information asymmetries when the complexity in financial markets is not matched by equal growth in entrepreneurial financial literacy (Usama & Yusoff, 2019). Hence the need for entrepreneurs to be equipped with adequate financial literacy skills in order to operate successfully in their businesses as well as coping with the changes in the financial markets (Usama & Yusoff, 2019).

The study therefore aims to prove a relationship between financial literacy and business performance.

1.2 Statement of the problem

Every year, the Nigerian tertiary institutions produce about millions of graduates into a stagnant economy that is already overpopulated which raises the rate of unemployment in the country. It is in respect to this that government along other agencies have shifted their attention to small and medium sized enterprise (SME) sector with the hope that more employment opportunities will be created (USMAN, 2014). Despite the focus, SMEs in Nigeria are still falling beyond expectations in performance due to factors such as: poor accounting standards within the SMEs, simple records of financial transactions are not kept which leads to loopholes for fraud, improper records of business transactions which all limit accessibility of these SMEs to institutional credit (Ikem, Chidi, & Titus, 2009).The factors hindering the success of SMEs can be summarized into: poor or careless financial management, poor record keeping, inefficient use of accounting information to support their financial decision making and the low quality and reliability of financial data (Ikem, Chidi, & Titus, 2009). These factors might be the cause of SME failure in Nigeria. Therefore, the researcher aims to evaluate how financial literacy can influence the performance of these SMEs. The results will be carefully analyzed so as to draw conclusion and make necessary recommendations.

1.3 Research objectives

The objective of the study is to ascertain the influence of financial literacy on the performance of SMEs in Nigeria. But the specific objectives are as follows:

  • To assess the influence of financial knowledge on the performance of SMEs
  • To evaluate the influence of financial behavior on the performance of SMEs
  • To measure the influence of financial attitude on the performance of SMEs

1.4 Research questions

The following are some of the questions this study intends to answer:

  • To what extent does financial knowledge affect the performance of SMEs?
  • To what extent does financial behavior affect the performance of SMEs?
  • Can financial attitude affect the performance of SMEs?

1.5 Significance of the study

This study will serve as a guide to businesses and companies by creating awareness on the important roles financial literacy plays in checkmating business performance. Government can also make use of the recommendations of the study to set the necessary structures in place to equip people with the right financial literacy skills needed to run businesses.  The study will also contribute to the existing literature as students who wish to carry out a research in this field can also see this work as a useful material.

1.6 Scope of the study

This study will be limited to some selected and available SMEs on the Lagos Island, Nigeria; with our target being Enterprise Development Center where suitable SMEs will be found. Details gotten from respondents will be subjected to analysis and the results will be deemed final. There are no restrictions made on the desired respondents as to age, net worth, size of business or number of workers, so long as the business is located on the Lagos Island and has the characteristics of a small and medium sized enterprise.

1.7 Limitation of the study

The study is likely to be faced with some challenges and one which is time. The researcher is struggling with balancing the project with other academic demands like assignments, group and individual presentations and the need to study for other assessments. The study is also limited in the sense that, it is looking at only SMEs located on the Lagos Island, this excludes other areas in Lagos as well as other states in Nigeria. Hence the recommendations suggested based on the results gotten may not be applicable to all states in the country.

1.8 Operational definition of Terms

The following terms were used in the course of this study:

According to Cambridge Assessment (2013), literacy is the ability to read, write, speak and listen. Being competent and effective in an area of study. Literacy from the business perspective means the ability to read and write about business, knowledge, and education for employees about the company’s business to operate its financial goals (Taskiran, 2019).

Financial literacy: Financial literacy simply refers to the ability of entrepreneurs to understand and analyze financial information and act (Usama & Yusoff, 2018).

Education: Education and literacy are often used interchangeably by people to mean same thing, but these two terms are different and independent of each other, although literacy helps one get educated (Chakrabarty, 2016). While literacy can be identified in areas of reading and writing, education is a broader concept which encompasses the ability to acquire knowledge, open our minds to new things and perceive things in new ways as rational beings (Chakrabarty, 2016).

SMEs: Small and medium sized enterprises (SMEs) are businesses defined by certain criteria such as: turnover, profit, number of employees, capital employed, available finance, market share and relative size within the industry, which varies from country to country (Ufot, Reuben, & Michael, 2014).

Performance: Performance in business refers to the ability of a business enterprise to achieve or surpass its pre-set objectives or goals as agreed upon by its investors over a definite period (Usama & Yusoff, 2018).

Entrepreneurship: Entrepreneurship is the ability to create a new thing that is perceived valuable which involves a great deal of innovation and risk taking (Ufot, Reuben, & Michael, 2014).

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