Relationship between financial literacy and the growth of micro and small enterprises in Kenya: A case of Kakamega Central sub- county.

Abstract

Small Enterprises in Kenya face unique challenges that inhibit their growth and profitability hence diminishing their contribution to sustainable development. Consequently, very few enterprises have made the transition from micro to medium scale. The transition is important because it is when they become medium-sized that growth-oriented MSEs make their most tangible contribution to economic growth and job creation. Although numerous financial education programmes are in place for MSEs limited growth persists, It remains unclear whether MSEs in Kenya have been reached by financial literacy programmes and which factors play a key role in bringing about growth. This study sought to determine the relationship between financial literacy and the growth of MSEs in Kenya. Specific objectives were; to determine the effect of debt management literacy on the growth of MSEs, to establish the effect of budgeting skills on the growth of MSEs, to find out how banking services literacy affects the growth of MSEs and to examine the effect of Book keeping literacy on the growth of MSEs in Kakamega Central Sub County. The study targeted 1300 MSEs registered under the single business permit in Kakamega Central Sub County as of 2015 and adopted descriptive cross sectional survey design. Stratified proportionate sampling technique was used to select respondents where 306 MSEs were selected using Yamane‘s formula. A structured questionnaire was used to collect primary data while document analysis was used to collect secondary data. Data was analyzed using percentages, frequencies and means using SPSS. The data was presented in form of tables, graphs and pie charts from which statistical inference was made. Chi square test of independence and descriptive statistics were used to determine the relationship between financial literacy and the growth of MSEs. Findings reveal that although MSE managers had a fair knowledge of debt management majority do not understand the effect of inflation and interest rates on loans they borrow and were not comparing terms and conditions before purchasing financial products which could affect their financial decisions of when to borrow, how much and from whom, leading to sub- optimal business performance. Results also indicate that most MSE owners have low level of budgeting and Book keeping literacy since they do not engage in formal financial planning, budgeting and control and do not keep proper books of account as well as preparation of financial statements which increases their information opacity and may constraint their access to finance. Although most of the respondents appreciate the need to operate bank accounts for their businesses, majority do not effectively utilize existing banking services. Results further indicate that those businesses whose managers have low financial literacy have recorded minimal or no growth over the years. Recommendations made include; organizing financial literacy training programs for MSEs across the county, Incorporating financial education in the school curriculum from Primary level so that individuals are financially informed early in life, Government agencies such as MSEA, WEF, YEF and Uwezo to develop downloadable easy to learn modules that can be downloaded by interested MSEs to reduce information search costs and take advantage of existing technology platforms.