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Lending terms, financial literacy and formal credit accessibility

Author

Listed:
  • Stephen Korutaro Nkundabanyanga
  • Denis Kasozi
  • Irene Nalukenge
  • Venancio Tauringana

Abstract

Purpose - – The purpose of this paper is to investigate the relationship between commercial bank lending terms, financial literacy and access to formal credit by small and medium enterprises (SMEs). Design/methodology/approach - – In this cross-sectional study, the authors surveyed 384 business owners or managers of SMEs in Uganda. The authors applied confirmatory factor analysis to reduce the number of factors and identify the important elements that capture commercial lending terms, financial literacy and access to formal credit. The authors put forward and tested two hypotheses relating to the significance of the relationship between perceived commercial bank lending terms, financial literacy and access to formal credit using structural equation modelling with analysis of moment structures 18. Findings - – The results suggest a positive and significant relationship between perceived commercial bank lending terms, financial literacy and access to formal credit. Moreover, the ANOVA results serendipitously show that access to formal credit varies with type of business and turnover. However, collateral and loan repayment periods are not observed variables for commercial bank lending terms. The most significant observed variable for commercial bank lending terms is interest rates. This, together with financial literacy, explains 31 per cent of the variances in access to formal credit by SMEs in Uganda. Research limitations/implications - – The study is limited to the SME firms registered and operating in Kampala, Uganda and it is possible that the results are only applicable to these firms in Uganda. Nevertheless, the findings have implications to commercial banks wishing to improve the turnover of their micro-lending schemes. Practical implications - – Efforts by the stakeholders to improve financial literacy of SMEs owners and managers must be matched with favourable interest rates if access to formal credit is to be enhanced. Social implications - – The findings also have implications for governments aiming at improving access to finance to overcome income inequality problems, and also improve their growth. Originality/value - – The results provide initial evidence of the aggregate explanatory power of interest rates and financial literacy for the criterion variable, access to formal credit by SMEs.

Suggested Citation

  • Stephen Korutaro Nkundabanyanga & Denis Kasozi & Irene Nalukenge & Venancio Tauringana, 2014. "Lending terms, financial literacy and formal credit accessibility," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 41(5), pages 342-361, May.
    • Handle: RePEc:eme:ijsepp:v:41:y:2014:i:5:p:342-361
    DOI: 10.1108/IJSE-03-2013-0075
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    Citations

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    Cited by:

    1. Antonio Duréndez & Julio Dieguez-Soto & Antonia Madrid-Guijarro, 2023. "The influence of CEO’s financial literacy on SMEs technological innovation: the mediating effects of MCS and risk-taking," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-26, December.
    2. Nur Hafidzah Idris* & Melissa Faisal Wee & Shafinar Ismail & Khairunnisa Abd Samad, 2018. "Financial Knowledge, Debt Literacy and Over-Indebtedness," The Journal of Social Sciences Research, Academic Research Publishing Group, pages 22-29:3.
    3. Zhao, Bingyu & Yang, Wanping, 2020. "Does financial development influence CO2 emissions? A Chinese province-level study," Energy, Elsevier, vol. 200(C).
    4. John Kuada, 2021. "Financial Inclusion and Small Enterprise Growth in Africa: Emerging Perspectives and Research Agenda," Working Papers of the African Governance and Development Institute. 21/084, African Governance and Development Institute..
    5. Antonio Molina-García & Julio Diéguez-Soto & M. Teresa Galache-Laza & Marta Campos-Valenzuela, 2023. "Financial literacy in SMEs: a bibliometric analysis and a systematic literature review of an emerging research field," Review of Managerial Science, Springer, vol. 17(3), pages 787-826, April.
    6. Jianmu Ye & KMMCB Kulathunga, 2019. "How Does Financial Literacy Promote Sustainability in SMEs? A Developing Country Perspective," Sustainability, MDPI, vol. 11(10), pages 1-21, May.
    7. Basha, Shabeen Afsar & Bennasr, Hamdi & Goaied, Mohamed, 2023. "Financial literacy, financial development, and leverage of small firms," International Review of Financial Analysis, Elsevier, vol. 86(C).
    8. ISMANTO, Hadi & MUHARAM, Harjum & PANGESTUTI, Irene Rini Demi & WIDIASTUTI, Anna & ROFIQ, Fathur, 2019. "The Nexus Between Financial Literacy And The Credit Status In Indonesia," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 23(3), pages 49-65, September.
    9. Tian, Guangning & Zhou, Shuyuan & Hsu, Sara, 2020. "Executive financial literacy and firm innovation in China," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    10. Gerda Žigienė & Egidijus Rybakovas & Robertas Alzbutas, 2019. "Artificial Intelligence Based Commercial Risk Management Framework for SMEs," Sustainability, MDPI, vol. 11(16), pages 1-23, August.
    11. Teti Chandrayanti & Teti Chandrayanti & Sulaeman Rahman Nidar & Asep Mulyana & Mokhamad Anwar, 2020. "Impact of entrepreneurial characteristics on credit accessibility: case study of small businesses in West Sumatera – Indonesia," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 7(3), pages 1760-1777, March.
    12. John Kuada, 2021. "Financial Inclusion and Small Enterprise Growth in Africa: Emerging Perspectives and Research Agenda," Working Papers 21/084, European Xtramile Centre of African Studies (EXCAS).
    13. John Kuada, 2021. "Financial Inclusion and Small Enterprise Growth in Africa: Emerging Perspectives and Research Agenda," Research Africa Network Working Papers 21/084, Research Africa Network (RAN).
    14. Kara, Alper & Zhou, Haoyong & Zhou, Yifan, 2021. "Achieving the United Nations' sustainable development goals through financial inclusion: A systematic literature review of access to finance across the globe," International Review of Financial Analysis, Elsevier, vol. 77(C).
    15. Oludamola Durodola & Patricia Fusch & Steven Tippins, 2017. "A Case-Study of Financial Literacy and Wellbeing of Immigrants in Lloydminster, Canada," International Journal of Business and Management, Canadian Center of Science and Education, vol. 12(8), pages 1-37, July.
    16. Aleksandr Kljucnikov & Jaroslav Belas, 2016. "Approaches Of Czech Entrepreneurs To Debt Financing And Management Of Credit Risk," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 11(2), pages 343-365, June.

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