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Universidade Autónoma de Lisboa
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ENTREPRENEURSHIP DEVELOPMENT- IS FINANCIAL LITERACY MATTER?
A LITERATURE REVIEW
MOHSEN MOHAMMADI KHYAREH
m.mohamadi@gonbad.ac.ir
Assistant professor, University of Gonbad Kavous, Gonbad Kavous (Iran)
ORCID ID: 0000-0003-3977-0929
AMINEH ZIVARI
aminehzivari@gmail.com
MA, University of Gonbad Kavous, Gonbad Kavous (Iran)
ORCID ID: 0009-0009-5469-3504
Abstract
This paper investigates the role of financial literacy in entrepreneurship development. A
comprehensive review of 79 articles reveals that financial literacy positively influences
entrepreneurs' financial behavior. Proficiency in financial concepts enables better decision-
making, essential for activities like cost tracking, revenue management, and investment
assessment. The paper also offers recommendations for future research and suggests
enhancing entrepreneurs' knowledge and financial literacy through school education as a
means to foster entrepreneurship.
Keywords
Entrepreneurship, financial literacy, small and medium enterprises, financial behavior
Resumo
Este artigo analisa o papel da literacia financeira no desenvolvimento do espírito empresarial.
Uma análise exaustiva de 79 artigos revela que a literacia financeira influencia positivamente
o comportamento financeiro dos empresários. A proficiência em conceitos financeiros permite
uma melhor tomada de decisões, essencial para actividades como o controlo de custos, a
gestão de receitas e a avaliação de investimentos. O documento apresenta ainda
recomendações para investigação futura e sugere o reforço dos conhecimentos e da literacia
financeira dos empresários através do ensino escolar como forma de promover o
empreendedorismo.
Palavras chave
Empreendedorismo, literacia financeira, pequenas e médias empresas, comportamento
financeiro.
How to cite this article
Khyareh, Mohsen Mohammadi; Zivari, Amineh (2023). Entrepreneurship Development. Is Financial
Literacy Matter? A Literature Review. Janus.net, e-journal of international relations, Vol14 N2,
November 2023-April 2024. Consulted [online] in date of last view,
https://doi.org/10.26619/1647-7251.14.2.11
Article received on May 3, 2023 and accepted on August 30, 2023
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Entrepreneurship development – is financial literacy matter? A literature review
Mohsen Mohammadi Khyareh; Amineh Zivari
246
ENTREPRENEURSHIP DEVELOPMENT- IS FINANCIAL LITERACY
MATTER? A LITERATURE REVIEW
MOHSEN MOHAMMADI KHYAREH
AMINEH ZIVARI
1. Introduction
The significance of entrepreneurship has seen rapid growth in recent years, garnering
attention from both scholars and society at large. Entrepreneurship and small to medium-
sized enterprises play pivotal roles in economic development, particularly in developing
countries (Okello et al., 2017). Some researchers argue that limited access to financial
services, particularly from financial institutions, hinders the potential of small businesses
and entrepreneurship (Schiffer et al., 2001; Beck and Demirguc-Kunt, 2006; Balarezo
and Nielsen, 2017). A key contributing factor to this limitation is the low level of financial
literacy among entrepreneurial stakeholders. Several studies emphasize the importance
of enhancing financial literacy through business education as a means for SMEs in
developing countries to acquire the necessary financial and business skills for growth
(Bruhn et al., 2010; Balarezo et al., 2017; Ye et al., 2019).
Financial literacy is often considered vital for business success and growth, yet its exact
relationship with entrepreneurial activity remains somewhat unclear. This article
addresses the question of whether financial literacy the reason why business ventures
grow?
To tackle this question, we conducted an extensive literature review. We searched more
than 24,000 journals for articles related to entrepreneurship and financial literacy using
the Web of Science database. We systematically analyzed each article, employing a
framework based on financial development theory. This review encompasses 79 articles
that delve into the relationship between entrepreneurship and financial literacy,
examining how financial theory informs this connection. While these 79 articles offer
valuable insights, they leave certain aspects of the relationship between
entrepreneurship and financial literacy underexplored, necessitating a more
comprehensive understanding of the topic. To address this gap, we augment the insights
from our initial review by examining top journals in various key disciplines, such as
finance, management, sociology, and economics. This multidisciplinary approach enables
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Entrepreneurship development – is financial literacy matter? A literature review
Mohsen Mohammadi Khyareh; Amineh Zivari
247
us to develop a research agenda that draws on both the finance scholars' perspective
and the literature on entrepreneurial development from related fields.
In summary, our literature review indicates that financial literacy can indeed foster
entrepreneurship. Entrepreneurial activities and SMEs generate substantial
competitiveness not only locally but also on international and global scales
(Rachapaettayakom et al., 2020). Consequently, entrepreneurs must cultivate financial
literacy to comprehend and execute effective financing strategies. Financially literate
entrepreneurs tend to make more informed financial decisions and commit fewer
management errors compared to their less financially literate counterparts. Moreover,
financial literacy can enhance individuals' ability to make informed financial choices,
ultimately improving small businesses' access to and utilization of financial services
(Okello et al., 2016).
This paper contributes significantly to the literature by providing deeper insights into the
intersection of financial literacy and entrepreneurship and highlighting how financial
theory influences the relationship between entrepreneurship and economic inequality.
We encourage finance scholars to incorporate these insights into future research to
enhance their understanding of this relationship and its associated boundary conditions.
Additionally, the practical implications of our findings suggest that improving individuals'
financial literacy is likely to enhance the success of entrepreneurial activities.
2. Definition of the Domain
2.1 Entrepreneurship
The concept of entrepreneurship has evolved over time, with various definitions and
perspectives from scholars. Richard Cantillon initially defined an entrepreneur as
someone who purchases a product at a fixed price and sells it at an unspecified price,
emphasizing risk-taking and decision-making in resource allocation (Casson, 1993). In
the 19th century, economists like Jean-Baptiste Say, John Stuart Mill, and Alfred Marshall
further developed the notion of entrepreneurship. Jean-Baptiste Say considered
entrepreneurs as creators of economic value by transferring resources from low-
productivity areas to high-productivity ones, emphasizing their expertise in cost and price
analysis (Say, 1803).
Subsequently, the concept of entrepreneurship evolved to combine Jean-Baptiste Say's
"resource" component with John Stuart Mill's "management" component, highlighting
management as the primary coordinator of the production factors—land, labor, and
capital (Marshall, 1890). In the 20th century, Schumpeter introduced the idea of
entrepreneurs as innovators, defining them as individuals who develop untested
technologies. This definition underscores innovation in terms of introducing new
products, innovative production processes, opening new markets, discovering new
resources, and establishing new industry organizations. It posits that wealth is created
when such innovations lead to new needs (Schumpeter, 1934).
Over time, entrepreneurship has attracted the attention of researchers from diverse
fields, resulting in various definitions. While these definitions may differ slightly, they
share common concepts such as "demand and supply," "value and wealth creation,"
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Entrepreneurship development – is financial literacy matter? A literature review
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"innovation," "resource management," "organizational capability," "risk tolerance," and
"funds." Recognizing this interdisciplinary nature, comprehensive definitions of
entrepreneurship include all types, such as economic, social, public, organizational, and
collaborative entrepreneurship, spanning micro, small, medium, start-up, and new
ventures (Oseifuah, 2010; Otieno et al., 2011).
2.2 Financial Literacy
Financial literacy, a term first championed by the Jump$tart Coalition for Personal
Financial Literacy in 1997 in the United States, pertains to an individual's ability to employ
knowledge and skills to effectively manage their financial resources, ensuring lifelong
financial security (Lusardi & Mitchell, 2011). Various definitions of financial literacy
abound:
− Financial literacy encompasses knowledge and understanding of financial concepts,
the confidence to use this knowledge, and responsible behavior in making informed
financial decisions (OECD, 2005).
− It represents a combination of awareness, knowledge, skills, attitudes, and behaviors
necessary for sound financial decision-making and achieving financial well-being
(Abubakar, 2015).
− Financial literacy includes skills such as budgeting, bill payment, shopping, debt
management, consumer issue handling, and comparison shopping, emphasizing
practical application (Reich & Berman, 2015).
− It denotes the application of knowledge and skills to effectively manage one's financial
resources, leading to economic well-being. This encompasses understanding one's
financial situation, engaging in financial behaviors like saving, budgeting, planning,
and making informed financial decisions (Kapoor, 2014; Singla & Mallik, 2021).
Financial literacy is instrumental in numerous aspects of personal finance, including
understanding financial market products, returns, risks, personal financial planning,
investment in capital markets, banking services, insurance, savings, deposits, pension
fund benefits, and financial institutions (Cressy, 2002; Riwayati, 2017; Okello et al.,
2017; Goodell, 2020).
In summary, financial literacy comprises the knowledge, skills, attitudes, and behaviors
that empower individuals to make informed financial decisions, with far-reaching positive
consequences for individuals, families, and society as a whole. Various studies have
developed knowledge scales to measure financial literacy, encompassing skills related to
savings, debt, insurance, investments, and financial self-assessment (Mien & Thao,
2015; Perry & Morris, 2005).
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249
3. Methodology
This paper's objective is to explore the nexus between financial literacy and
entrepreneurship through the lens of financial theory and lay the groundwork for future
research. Our approach involves a comprehensive literature review on entrepreneurship
and financial literacy.
3.1. Identification of Articles
We conducted a search across the extensive collection of over 24,000 journals available
on the Web of Science. We examined titles, keywords, and abstracts for terms such as
"financial literacy" and related terms including "opportunistic entrepreneurship,"
"essential entrepreneurship," "formal entrepreneurship," "informal entrepreneurship,"
"entrepreneurship development," and more. Our search initially yielded 446 articles.
These articles were then carefully scrutinized for inclusion, with a focus on those that
provided substantial analysis of entrepreneurship and financial literacy. This meticulous
review led to the inclusion of 79 articles in our analysis. Articles that only briefly
mentioned entrepreneurship or financial literacy without substantial exploration of these
topics were excluded.
Subsequently, we conducted an in-depth analysis of these 79 articles, coding various
characteristics of each article, including the applied theories, research methodologies,
research questions, dependent and independent variables, and contributions. To facilitate
a deeper understanding of the central themes in the literature, we organized the articles
in multiple ways, such as by level of analysis or by the specific topics investigated.
4. Research Findings: Distribution of 79 Research Articles by Publication
Year
Table 1 presents an insightful analysis of the distribution of 79 research articles,
comprising scholarly papers, reports, and various studies, without imposing any temporal
constraints on the investigation. Notably, the distribution of these articles across different
publication years reveals intriguing trends and patterns.
In 2020, there was a notable surge in research activity, with 8 articles published,
indicating a considerable emphasis on the subject matter during that specific year.
Following closely behind, in 2017, there were 7 articles, reflecting a sustained interest in
the subject. The years 2011, 2014, and 2015 all contributed 6 articles each, suggesting
a consistent scholarly focus over this period.
Furthermore, 2016 and 2013 both saw the publication of 5 articles, reinforcing the
enduring significance of the topic. In 2019 and 2021, 4 articles were published in each
of these years, indicating ongoing research engagement. The years 2009 and 2010
contributed 3 articles each, signifying a continued interest in the subject during those
periods.
Additionally, there were 2 articles published in the years 1996, 2003, 2009, and 2010,
suggesting a sustained and enduring academic inquiry into the subject matter.
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In summation, the notable prominence of articles published in 2020 underscores the
heightened relevance and significance of the subject within the academic discourse
during that particular year.
Table 1: Distribution of Research Articles by Publication Year
Number
Of papers
year of
publication
Number
Of papers
year of
publication
Number
Of papers
year of
publication
6
2014
1
2004
1
1890
6
2015
1
2005
1
1934
5
2016
1
2006
1
1993
7
2017
1
2008
1
1995
2
2018
3
2009
2
1996
4
2019
3
2010
1
1998
8
2020
6
2011
1
2001
4
2021
2
2012
1
2002
2
2022
5
2013
2
2003
Source: Authors
We systematically analyzed a corpus of 79 articles collected with the influence of financial
literacy on the progression of entrepreneurship. Our approach involved categorizing
these articles based on the journals in which they were published to gauge the extent to
which they addressed this critical subject matter.
To facilitate our analysis, we categorized these articles based on the journals in which
they found their academic home. This categorization allowed us to discern which journals
demonstrated a more pronounced dedication to addressing this pivotal subject. Our
findings unveiled intriguing trends: a substantial portion of the articles, precisely 47,
were single representatives from various journals, while 3 journals exhibited a
heightened commitment by featuring two articles each. Notably, the Journal of Pension
Economics & Finance emerged as a standout, contributing a noteworthy total of 3 articles
to the discourse.
From this comprehensive review, it becomes evident that the Journal of Pension
Economics & Finance has played a pivotal role in emphasizing the significance of the
financial literacy-entrepreneurship nexus within the scholarly arena.
In addition to these research articles, our investigation also unearthed 23 additional
references, offered in the form of books and reports, further enriching the available
resources and insights on this pertinent subject.
Moving forward, we extended our analysis to evaluate the indexing status of these
journals in prominent databases, including Scopus and JCR (Journal Citation Reports).
Impressively, 17 of the reviewed journals boasted indexing in both Scopus and JCR
databases, a testament to their academic impact. Furthermore, 15 journals enjoyed
exclusive indexing in Scopus, while 2 journals secured their place in the JCR database.
For a more comprehensive breakdown of our findings in Table 2, which provides an in-
depth summary of the distribution of research articles across these journals.
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Entrepreneurship development – is financial literacy matter? A literature review
Mohsen Mohammadi Khyareh; Amineh Zivari
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Table 2: Distribution of Research Articles by Journal and Indexing Status
NO.of
papers
Index
NO. of
papers
Index
Journals
1
Scopus-
JCR
1
Scopus
American Economic Review
1
Scopus
1
Scopus
American Based Research Journal
1
Scopus
1
JCR
Amazonia Investiga
1
Scopus
1
-
African Journal of Business Maneagemnt
1
Scopus-
JCR
1
Scopus
African Journal of Economic and
Management Studies
1
Scopus-
JCR
1
Scopus-
JCR
Asia Pacific Management Review
1
Scopus-
JCR
1
-
Business & Applied Sciences
1
-
1
-
Conference on Measurement, Promotion,
and Impact of Access to Financial Services
1
Scopus-
JCR
1
Scopus
Finance research letters
1
Scopus
1
Scopus-
JCR
Economic Literature
1
Scopus
1
Scopus-
JCR
Frontiers in Psychology
1
Scopus-
JCR
1
Scopus-
JCR
Financial counseling and planning
3
Scopus-
JCR
1
-
Finansal Araştırmalar ve Çalışmalar
Dergisi
1
-
1
Scopus-
JCR
Global Business Review
1
JCR
1
-
International Journal of Research Studies
in Management
2
2
-
International Journal of Academic
Research in Business and Social Sciences
1
-
1
-
In 2nd International Conference on
Economics & Banking
1
Scopus
1
-
In Proceedings of the 2nd advances in
business research international conference
2
Scopus-
JCR
1
Scopus-
JCR
International Journal of Libraries and
Information Studies
1
Scopus-
JCR
1
Scopus-
JCR
. International Small Business Journal
1
Scopus-
JCR
1
-
International journal of economics,
commerce and management,
1
Scopus
1
-
International Journal of Economics and
Financial Issues
1
Scopus
1
-
International
Journal of Business and Management
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1
Scopus-
JCR
1
-
International Journal of Education and
Research
1
Scopus
1
Scopus
Iranian Journal of Management Studies
-
-
1
Scopus
Journal of clinical and experimental
dentistry
Source: Authors
4.1. Global Insights on Financial Literacy
Financial literacy is tightly interwoven with household wealth and financial stability (Cole,
2009). A substantial body of evidence underscores that individuals with strong financial
knowledge tend to make more astute financial decisions, leading to increased savings
and investments while reducing reliance on borrowing. This, in turn, bolsters the overall
financial health of households. People who comprehend financial concepts such as basic
accounting, inflation, and risk diversification are more inclined to plan for their retirement
(Lusardi & Mitchell, 2017; Klapper, & Panos, 2011). Importantly, these rational financial
decisions hold significant implications for a country's economic growth and long-term
stability (Bongomin et al., 2017; Gusti et al., 2021). Greater long-term savings and
investment contribute substantial capital to the economy, reducing reliance on external
debt.
Conversely, multiple studies have illuminated the severe economic repercussions of
financial illiteracy. A lack of financial awareness and the consequent financial behaviors
can lead to unfavorable financial outcomes. Inadequate comprehension of key economic
concepts and skills prompts individuals to make suboptimal financial decisions (Hastings
& Mitchell, 2020). A notable subset of individuals with low financial literacy avoids the
stock market (Van Rooij et al., 2011), exhibits poor borrowing habits, saves less, and
accumulates reduced wealth due to inadequate retirement planning. Lusardi et al. (2009)
delved into the connection between financial literacy and excessive indebtedness,
concluding that those with lower financial literacy are more inclined to accumulate debt
and engage in costly financial transactions. The suboptimal financial behavior of
employees can lead to heightened psychological stress, ultimately impacting employee
productivity, with employers bearing the associated costs (Garman et al., 1996). This
highlights that the consequences of financial illiteracy extend beyond individuals to
encompass society and the nation as a whole.
An international project assessing financial literacy in eight countries found that,
regardless of a country's level of financial development, financial literacy remained low
worldwide (Lusardi & Mitchell, 2011). The survey instrument comprised three questions
covering topics such as counting, inflation, and risk diversification. Moreover, the study
revealed variations in financial literacy among different population subgroups. Financial
literacy exhibited a U-shaped pattern across age groups, with younger and older cohorts
displaying lower levels of financial literacy. Women with lower education levels
demonstrated diminished financial literacy. Geographical, racial, regional, and religious
factors also significantly influenced financial literacy. Furthermore, individuals with a
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strong grasp of fundamental financial concepts were more likely to engage in
comprehensive retirement planning (Lusardi & Mitchell, 2011).
The OECD International Network conducted a study on financial education in 14 countries
across four continents, measuring financial literacy across three dimensions: financial
knowledge, financial behavior, and financial attitude. Results indicated a widespread lack
of financial literacy among large segments of the population in all countries studied.
Women generally displayed lower economic literacy compared to men. A positive
correlation existed between income levels and financial literacy. Highly educated
individuals exhibited high levels of financial literacy, sound financial behavior, and
positive attitudes. The study also highlighted that individuals with greater financial
knowledge were more likely to exhibit prudent financial behaviors, emphasizing the
strong link between financial attitudes and actions (Atkinson & Messy, 2012; Sebstad &
Cohen, 2003; Sherraden, 2010).
The MasterCard Financial Literacy Assessment, conducted between July and August 2014
across 16 countries in the Asia Pacific region among 8,087 respondents aged 18 to 64,
assessed knowledge in three main sections: basic money management, financial
planning, and investing. The results revealed a slight decline in financial planning
knowledge across the region compared to the previous survey. In the realm of
investment, the Asia-Pacific region fared poorly across all components of the Financial
Literacy Index. Developed markets, led by Taiwan, New Zealand, and Hong Kong, and
exhibited superior financial literacy, with consumers in higher income brackets or those
employed in certain professions displaying higher levels of financial literacy (Ahmad et
al., 2016).
Another study, conducted on behalf of the Asian Development Bank Institute, highlighted
lower financial literacy scores in Asian countries. Given the profound impact of financial
literacy on a nation's economic development, researchers stressed the need for
heightened policy efforts at the national level to channel savings into various financial
instruments that promote economic growth (Yoshino et al., 2015). Interestingly, financial
illiteracy is not limited to less developed countries; it is also prevalent in developed
nations. An analysis of a national sample of Americans based on debt knowledge, financial
experience, and debt level judgments revealed significant gaps in debt literacy, with
higher rates among women, the elderly, certain ethnic groups, and individuals with lower
incomes and wealth. The study unveiled a direct relationship between debt literacy and
excessive debt, with financially literate individuals bearing a lower debt burden.
Additionally, those with limited financial knowledge entered into expensive transactions,
incurring higher costs and interest rates. The study estimated that lack of debt knowledge
accounted for a substantial portion of the costs and expenses incurred by the less
financially educated (Lusardi et al., 2017).
Another study focusing on the financial capabilities of working women in the United States
drew data from the National Financial Ability Study, assessing the financial behaviors of
working women across various career stages and family situations. The findings indicated
that women generally possessed lower financial literacy compared to men. The study
unveiled trends of substantial long-term debts, reliance on high-cost credit card loans,
and insufficient financial planning among working women. Furthermore, higher
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education, greater income, and marriage exhibited positive effects on the financial
behaviors of respondents (Grifoni and Messy, 2012). To address these unique financial
challenges faced by women, researchers advocated for tailored financial education
programs, personalized services, and debt counseling (Scheresberg et al., 2014).
In a similar vein, a survey assessing the financial literacy of individual investors in the
United Arab Emirates analyzed the impact of age, gender, employment status, work
activity, income, and education level on financial literacy levels and investment decision
factors. The study revealed low levels of financial literacy among UAE investors, with
significant disparities based on income, education, gender, and workplace activity.
Women displayed lower financial literacy levels than men. Surprisingly, age did not
appear to influence financial literacy levels among respondents. The study identified
religion as the most influential factor affecting investment decisions (Al-Tamimi & Anood
Bin Kalli, 2009).
Financial literacy, undeniably, exerts a positive influence on financial behavior. It
empowers individuals to make informed decisions regarding their financial well-being,
ultimately driving savings, asset accumulation, and debt reduction. Findings from the
National Financial Skills Study on Investor Education affirm the strong link between
financial literacy and household financial behavior. Moreover, financial literacy tends to
enhance responsible credit card usage. Women with lower financial literacy exhibit
greater involvement in costly credit card transactions than their less-educated male
counterparts. However, no gender disparities were observed in the credit card behavior
of financially literate individuals (Mottola, 2013). This research underscores the critical
importance of financial literacy in facilitating sound decision-making and averting
financial pitfalls. Families lacking financial skills and knowledge are more susceptible to
making irresponsible financial choices.
4.2. Financial Literacy and Its Significance in Entrepreneurship
As outlined in the previous sections, the possession of financial literacy emerges as a
paramount factor, significantly impacting financial decision-making, particularly for
entrepreneurs and business owners. Within this context, this section delves into the
extensive body of literature and research dedicated to elucidating the pivotal relationship
between financial literacy and entrepreneurship.
Numerous business surveys have consistently pinpointed access to finance and adept
financial management as the foremost determinants of survival and growth for Small and
Medium-sized Enterprises (SMEs). Insights gleaned from these studies underscore that,
particularly in developing economies, access to financial resources empowers SMEs to
make strategic investments, expand their operations, and embrace cutting-edge
technologies. Consequently, access to financial resources not only secures their
competitiveness but also fosters innovation, macroeconomic flexibility, and GDP growth
(Beck and Demirguc-Kunt, 2006; Calcagno et al., 2020; Saptono, 2018; Purnomo, 2019).
Financial literacy emerges as a critical factor facilitating engagement with financial affairs
effectively. Reduced levels of financial literacy can inhibit individuals from navigating
intricate financial products, such as insurance, as they may be apprehensive about
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investing in instruments they do not fully comprehend (Cole & Fernando, 2008). In this
regard, research indicates that bolstering financial literacy through the acquisition of
business skills plays a pivotal role in fueling SME growth and represents a key
determinant of productivity. Financial literacy is defined as "the ability to obtain,
understand, and assess tax-related information and make decisions and choices with an
understanding of the potential financial consequences," making it indispensable for SME
growth (Njoroge, 2013; Nielsen, 2017; Ahmad et al., 2019).
Furthermore, findings from analogous studies consistently demonstrate that individuals
equipped with financial literacy skills tend to make fewer management errors in financial
decision-making compared to their less financially literate counterparts. This underscores
that adept financial management is fundamental to the survival and effective functioning
of SMEs. Financial literacy empowers SME owners by enabling them to evaluate financial
products judiciously and make informed decisions. Moreover, it enhances the risk
management capabilities of SME owners (Njoroge and Gathungu, 2013; Alshebami et al.,
2020). Financial literacy equips SME proprietors with the skills necessary to navigate
challenging financial periods by employing risk mitigation strategies, such as building
savings, diversifying assets, and avoiding excessive debt.
A United Nations report emphasizes that financial literacy, defined as the ability to apply
knowledge and skills to manage financial resources, plays a pivotal role in the financial
success of SMEs in developing economies. This acumen is particularly crucial as a tool in
the fight against poverty. Empirical evidence underscores that SMEs led by financially
literate entrepreneur’s exhibit a significantly higher likelihood of success than their
uneducated counterparts. Financial literacy empowers managers and owners of SMEs in
developing economies to make informed financial decisions and select suitable financial
products from the financial system with confidence (Siekei, 2012; Riepe et al., 2020;
Munyuki & Jonah, 2021).
Indeed, various studies present compelling evidence regarding the robust association
between financial literacy and entrepreneurial success. Researchers posit that financial
literacy empowers SME managers in developing economies with strategic financial
knowledge, skills, and the ability to make prudent financial decisions (Lusardi et al.,
2009; Moore, 2003; Ali et al., 2018). These studies reveal that financial literacy exerts a
positive impact on the performance of SMEs, fostering savings and effective risk
management through insurance contracts. Similarly, investigations into Kenyan
microenterprises highlight the substantial positive influence of financial literacy training
on their performance. Consequently, financial literacy fosters SME expansion, amplifying
their profitability, productivity, and competitive edge (Nunoo et al., 2015; Simeyo, 2011;
Eniola & Entebang, 2016).
A prevalent cause of failure for numerous small and medium-sized enterprises in
developing countries can be traced to insufficient financial literacy and financial acumen,
which undermine entrepreneurial activities. Financial literacy is, in fact, regarded as one
of the pivotal managerial competencies for the establishment and growth of SMEs
(Timmons et al., 2004; Aren & Aydemir, 2014). Furthermore, some experts assert that
alongside the provision of small loans, imparting basic business skills through training
assumes great importance in enhancing the ability of SME managers to utilize these loans
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optimally. It also imparts knowledge on the effective use of financial products and
services, reducing vulnerability to exploitative financial institutions and fraudulent
practices (Webster & Fidler, 1996; Atandi et al., 2017). This contention is substantiated
by the findings of Mutegi and Phelister (2015) and Bruhn and Zia (2011), which highlight
that financial literacy contributes to crucial decision-making processes such as timely bill
payments and prudent debt management, ultimately enhancing the creditworthiness of
SMEs. This, in turn, supports livelihoods, fosters economic growth, strengthens financial
systems, and mitigates risk. Financial literacy aids SME proprietors in developing
economies in acquiring the financial knowledge and skills essential for business planning,
initiating savings plans, and making strategic investment choices (Mutegi and Phelister,
2015; Chepngetich, 2016). Therefore, the judicious application of financial literacy and
skills empowers SME owners in developing economies to fulfill their financial obligations
through comprehensive planning, resource allocation, and value extraction.
USAID defines an economically literate SME owner/manager as someone who possesses
knowledge of the most suitable financing and financial management options for their
business at different stages of development. Such individuals are well-informed about
where to procure the most appropriate products, people, and services and confidently
engage with the suppliers of these offerings. Consumer financial literacy predominantly
revolves around individuals and their capability to manage their personal financial
decisions. In contrast, financial literacy for SMEs centers on individuals' ability to
translate financial literacy concepts into pragmatic business needs (Lusardi & Mitchell,
2009; Jiyane & Zawada; 2013; Liu et al., 2021). Therefore, the intersection of
consumption behavior and financial literacy can be observed through studies by Lusardi
& Wallace (2013) and Dahmen & Rodríguez (2014), which assert that regardless of
permanent income, individuals typically allocate the same amount for expenditures. The
number of divisions depends on variables such as interest rates, job-related uncertainty,
wealth-to-income ratio, and family size. This underscores that financial literacy plays a
pivotal role in summarily guiding business conduct (Lusardi & Wallace, 2013; Egbo et al.,
2020; Eniola & Entebang, 2017).
Riwayati (2017) investigates the mediating role of financial literacy in the relationship
between financing channels and SME growth in developing economies. The study posits
that financial literacy plays a positive and significant mediating role in the association
between access to finance and SME growth in developing economies. Furthermore, both
financial literacy and access to finance independently exert a substantial and positive
influence on firm growth in developing economies. In a similar vein, a study titled
"Managing innovation in financial education in selected OECD countries" assesses the
financial literacy levels of 15-year-old students across some OECD countries, utilizing
data from PISA 2015 measurements. This study underscores the criticism directed at
education quality and job skills for inadequately addressing the demands of the labor
market. Financial literacy and skills, the study contends, bolster individuals' performance
in financial markets and personal finance (Mihalcova et al., 2020). Moreover, research
endeavors seeking to discern the impact of socioeconomic and demographic variables on
financial literacy and its consequences for the utilization of financial services have yielded
valuable insights (Jana et al., 2019). The study identifies occupation, income, and
education as the primary explanatory variables for financial literacy, while income and
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257
place of residence emerge as the most prominent positive determinants. These findings
hold profound implications for policymakers, guiding their efforts to enhance financial
literacy and foster financial inclusion (Jana et al., 2019).
Yet another study, focusing on analyzing the financial literacy of business owners or
managers and its influence on access to finance and the development of Micro, Small,
and Medium-sized Enterprises (MSMEs) in West Java, Indonesia, affirms that financial
literacy wields a positive impact on access to finance and MSME growth. Concurrently,
access to finance exerts a positive influence on MSME growth (Susan, 2020). Meanwhile,
research by Oseifuah (2010) and Hossain et al. (2020) reveals that young entrepreneurs
possess above-average financial literacy, which significantly contributes to their
entrepreneurial skills. Additionally, a study leveraging survey data from 201 SMEs in
Ghana concludes that financial literacy engenders a positive correlation with enhanced
access to financial relationships and firm growth (Adomako, 2016). Lastly, Fatoki (2014)
investigates the levels of financial literacy among small business owners in South Africa,
assessing financial literacy in various domains such as financial planning, analysis and
control, bookkeeping, comprehension of financial resources, familiarity with business
terminology, financial and information skills, technology utilization, and risk
management. Data collection is facilitated through questionnaires, with subsequent
analysis employing descriptive statistics. The results underscore that small business
owners typically exhibit lower levels of financial literacy.
The amalgamation of research findings presented herein underscores the substantial
costs incurred due to the lack of financial skills and knowledge among diverse groups of
individuals, with a particular emphasis on entrepreneurs. Perhaps the most significant
ramification of inadequate financial literacy on entrepreneurs is their limited
comprehension of the myriad financial resources available for financing endeavors and,
more crucially, their inability to harness these resources optimally.
5. Conclusion
In our study, we examined the profound impact of financial literacy on entrepreneurial
activity and the broader economic landscape. Our findings illuminate several critical
aspects:
− Prevalence of Financial Illiteracy: Across the globe, financial illiteracy is alarmingly
prevalent. This deficit in financial knowledge affects people's ability to make sound
financial decisions at both personal and professional levels. Entrepreneurs, who
shoulder the responsibility of business finances, are not exempt from this challenge.
− Entrepreneurship as an Economic Catalyst: We emphasized the pivotal role of
entrepreneurs in fueling economic growth and development. Access to financial
resources is a linchpin for entrepreneurial endeavors. Given its centrality, financial
literacy assumes great importance in the entrepreneurial journey, facilitating informed
decisions and efficient resource management.
− Positive Outcomes of Financial Literacy: Our analysis underscores that financial
literacy yields positive outcomes, particularly within the entrepreneurial context.
Entrepreneurs equipped with financial literacy possess the acumen to manage their
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ventures' financial facets effectively. They can adeptly assess investment
opportunities, gauge financial risks, and optimize resource allocation—all vital for a
thriving entrepreneurial ecosystem.
Recommendations
Building on our findings, we propose the following recommendations to foster financial
literacy and its benefits:
1. Engagement in Financial Literacy Programs: We advocate for SME owners' active
participation in financial literacy programs offered by Entrepreneurship Skills
Development Organizations. These programs serve as valuable platforms for SME
proprietors to acquire the requisite financial knowledge and skills. Such education
equips them to navigate the intricacies of financial management, enabling them to
secure financing and make informed, prudent decisions.
2. Incorporate Financial Management in Business Planning: When designing business
plans, it is imperative to integrate a financial management training component. This
empowers aspiring entrepreneurs with the competencies essential for managing their
enterprises' financial aspects proficiently. Understanding budgeting, cash flow
analysis, and financial forecasting becomes pivotal for the success of their ventures.
3. Early Introduction to Financial Literacy: Recognizing that financial literacy transcends
entrepreneurship and is a universal life skill, we propose the introduction of financial
literacy education from an early age. By instilling financial literacy concepts during
childhood, individuals develop a strong foundation for making sound financial choices
throughout their lives, be it as consumers or entrepreneurs.
In essence, our study underscores that financial literacy is a linchpin for entrepreneurship
and broader economic development. By enhancing financial literacy among
entrepreneurs and instilling financial education early in life, societies can foster prudent
financial behavior, enable entrepreneurs to make informed decisions, and contribute to
sustained economic growth. This holistic approach benefits not only entrepreneurs but
also their businesses, communities, and the overall prosperity of nations.
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