MODERATING EFFECT OF FINANCIAL LITERACY ON THE RELATIONSHIP BETWEEN LOAN CHARACTERISTICS AND FINANCIAL PERFORMANCE OF SMES IN BUNGOMA COUNTY KENYA
Mathew Maruti Wakhungu - Master of Business Administration (Finance Option), Kenyatta University, Kenya
Dr. Geoffrey Mbuva - Kenyatta University, Kenya
ABSTRACT
The so called small and medium sized firms has proven to positively contribute to social-economic threats arising from poverty, increased job opportunities and economic upscaling. Even with such a remarkable support, these small firms still have challenges on their future survival due to financial accessibility levels and financial performance deterioration. The main goal of the current study was to assess the extent to which financial literacy moderated the association between loan characteristics (composite) and financial performance of SMEs in Bungoma County Kenya. More specifically, the study aim was; to assess the moderating effect of financial literacy on the relationship between loan characteristics and financial performance of SMEs in Bungoma County Kenya. The study was underpinned by the following four theories, namely; credit rationing theory, information asymmetry theory and financial literacy theory. The study used explanatory research design. The 4,264 SMEs operating in Bungoma County represent the study population out of which a sample size of 366 SMEs firms were determined using Yamane formula of 1967. The sample elements were selected through stratified random and convenience sampling technique. To collect data, a drop and pick approach was utilized whereby all the structured questionnaires were distributed to research participants. Where this approach was not suitable, the researcher considered use of Covid-19 Pandemic protocols. Research findings portrayed that financial literacy had statistically significant moderating effect on the relationship between loan characteristics and financial performance of financial performance of SMEs in Bungoma County, Kenya for there was both moderator and interaction term significant influence. Policymakers need to establish lending-borrowing policies which are friendly to the SMEs so as to accommodate the smaller firms such as micro-small. Investment in capacity building by financial institutions need to be given pre-eminence for the acquired skills by the loan borrowers aid in financial sustainability of the businesses they run due to improved financial performance.