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THE IMPACT OF FINANCIAL LITERACY ON THE PERFORMANCE OF SMALL SCALE ENTERPRISES IN CAMEROON
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The contribution of small-scale enterprises (SSEs) to the national economy should not be underestimated. In recent years, however, policymakers have begun to focus more on these types of businesses, particularly in developing nations, due to growing dissatisfaction with the outcomes of their traditional development strategies. Research indicates that small and medium-sized enterprises (SMEs) play a crucial role in job creation, rural development, entrepreneurial growth, mobilizing local resources, linking with larger industries, and maintaining regional balance through more equitable investment distribution. Over the centuries, SMEs have acted as catalysts for development, especially in countries like Malaysia, Thailand, China, and India. SSEs have accounted for over 70 percent of exports, contributing to the rapid growth these countries have experienced in recent years (Delavande, 2018). However, sector-specific enterprises (SSEs) in Nigeria face a wide array of challenges that significantly hinder their progress and development.
Numerous researchers have demonstrated that SSEs form the foundation for industrialization in most developing nations. Small-scale enterprises (SMEs) have made significant contributions to improving the global standard of living by alleviating social challenges, fostering domestic entrepreneurship, and generating employment opportunities, all while maximizing the use of limited resources. As the name suggests, financial literacy is a critical factor in achieving overall organizational success (Bernheim, 2018). It also promotes a reasonable degree of financial gain, which is a business objective. Financial literacy has been a determining factor in the success or failure of businesses in our country for centuries. Therefore, organizations and companies must maintain accurate and sufficient financial records to ensure the reliability of their financial statements. Over time, this will contribute to increased profitability.
Furthermore, profit can be likened to the lifeblood of an organization; thus, the accounting foundations, principles, and concepts implemented should include and disclose all pertinent data to ensure the accuracy of assessments (Nelson & Onias, 2021). Additionally, Enikanselu and Oyende (2019) emphasized that the operation of a business relies on both financial literacy and maintaining some form of accounting records. Consequently, it can be concluded that adequate financial literacy is essential for the effective management of any enterprise, regardless of its scale. Efforts are being made to promote financial literacy among small and medium-sized businesses so they can provide comprehensive and relevant financial data essential for informing their decision-making processes and ultimately increasing their profitability.
Despite these efforts, most small-scale enterprises in Nigeria have underperformed and failed to fulfill their expected role, even though they are considered the backbone of job creation and technological advancement. A lack of financial literacy is the primary issue confronting small and medium-sized enterprises (SMEs) in Nigeria, as evidenced by their failure to maintain comprehensive accounting records. As a result, SSEs operating within the state have consistently struggled to secure a sufficient share of business profits. Additionally, the lack of financial literacy complicates the computation of financial data, leading to a decline in the profitability of small-scale enterprises. Other issues include inadequate knowledge of financial opportunities and risks, imprudent spending, using company funds for personal transactions, limited access to bank credit facilities, and lack of insurance policies (2019, Houston, Texas). Therefore, it is crucial for these studies to investigate the impact of financial literacy on the performance of small and medium-sized businesses in Cameroon.
1.2 Statement of the Problem
The increasing acknowledgement of the significance of micro and small enterprises (MSEs) in developing nations is not an accident, but rather a necessity, so as to contribute to the economies through, among other things, job creation, income growth, and purchasing power enhancement. The Kenyan government has acknowledged the significance of MSEs in generating employment and eradicating destitution. This resulted in the formulation and advocacy of policies designed to foster the expansion of the sector, such as the Kenya Vision 2030, which reinvigorated policy endeavours aimed at advancing the growth of micro, small, and medium enterprises (MSMEs) by means of abilities enhancement and availability of financial services. A legislative measure known as the MSE Act, which was implemented by the government, seeks to foster the expansion of MSEs by providing, among other things, access to business development services, an enabling business environment, and the establishment of an authority tasked with formulating, reviewing, and monitoring pertinent policies (David 2020). Consequently, it serves as a pathway for fostering business development, stimulating innovation, advancing industry, generating employment, and expanding the economy. Despite consecutive policy interventions and financial education programmes, the micro, small, and medium enterprises (MSMEs) sector in Kenya exhibits restricted growth and competitiveness, despite enhanced access to finance (Densil 2018). Research has been undertaken to examine the significance of financial literacy in relation to the growth and profitability of micro, small, and medium enterprises (MSEs). These studies have demonstrated that a global deficiency in financial literacy has resulted in business failures and was even identified as a contributing factor to the global economic crisis of 2008-2009 (Niwaha, Schmidt, & Tumuramye, 2016). Budgeting, cash management, deposits, and record keeping are crucial to the profitability of women-owned businesses in Kenya, according to a study on the impact of financial literacy on such enterprises (Kalekye & Memba, 2017). It underscored the significance of financial education in augmenting operational capacities and day-to-day business operations. Another study that examined the impact of financial literacy on the growth of small and medium-sized enterprises (Lusimbo & Muturi, 2016) discovered that while the majority of MSE managers had a reasonable understanding of debt management literacy, they were unable to comprehend the effect of inflation and interest rates on the loans they obtained in terms of matching assets and liabilities. Furthermore, they noted that the managers’ inadequate knowledge of bookkeeping resulted in negligible or nonexistent growth.
Alternative scholars have posited that the financial literacy of managers does not exert any influence on the success of a small business. A study (Plakalovi, 2018) that examined financial literacy among managers of small and medium-sized enterprises (SMEs) revealed that the interviewed managers possessed an unsatisfactory level of fundamental financial knowledge, with only a minority employing appropriate ratios and ratio analysis. Furthermore, he stated that they are oblivious to the intangible worth of their organisations and arbitrarily manage the liquidity of the businesses. As a result, financial expertise is not a prerequisite for the success of SMEs, according to Plakalovi. Numerous studies on financial literacy have neglected to establish a connection between personal finance and business administration. Personal and domestic finance ratio analysis, bookkeeping literacy, and banking services literacy are typically taken into consideration. In contrast to prior investigations which concentrated on specific aspects of managers’ financial behaviour, the present study examined the impact of financial knowledge, financial behaviour, and financial attitude on the profitability of micro, small, and medium enterprises (MSEs).
1.3 Objective of the Study
The central objective of the study is to examine the impact of financial literacy on the performance of small scale enterprises in Cameroon. The specific objectives are:
Ascertain whether the extent financial knowledge influences small scale enterprises performance in Buea Municipality, Cameroon.
To determine the extent to which financial behaviour enhance small scale enterprises performance in Buea Municipality, Cameroon.
To ascertain the extent financial skills promotes small scale enterprises performance in Buea Municipality, Cameroon.
To ascertain problems hindering utilization of financial literacy in management of small scale enterprises among operators in Buea Municipality, Cameroon.
1.4 Research Questions
What is the extent financial knowledge influences small scale enterprises performance in Buea Municipality, Cameroon?
What is the extent to which financial behaviour enhances small scale enterprises performance in Buea Municipality, Cameroon?
What is the extent financial skills promotes small scale enterprises performance in Buea Municipality, Cameroon?
What are the problems hindering utilization of financial literacy in management of small scale enterprises among operators in Buea Municipality, Cameroon?
1.5 Research Hypothesis
Ho: Financial literacy has no significant impact on the performance of small scale enterprises in Buea Municipality, Cameroon.
Ha: Financial literacy has a significant impact on the performance of small scale enterprises in Buea Municipality, Cameroon.
1.6 Significance of the study
The findings of this research study are anticipated to be of benefit to the following entities among others;
Researchers and Academicians This study will be an important addition to the existing repository of knowledge and hence will be of interest of both researchers and academicians who seek to explore or investigate the importance of financial literacy among other factors on the performance of micro and small enterprises in Cameroon or any other country.
The Government and Financial regulators It is an objective of every government to promote innovations of all kinds in a country and Micro and Small enterprises being of economic benefits cannot be ignored. In addition to the perceived economic benefits, MSE development has long been viewed by policymakers to increase incomes of the poor. The results of this research will provide information on possible ways the government can tackle the issue of financial illiteracy among business owners and possible ways of promoting financial education among the entrepreneurs and small business owners which will in turn promote the profitability of the MSE’s. Also, it will help the government and financial regulators on incorporating these MSE’s in their policies on areas like having access to credits and other financial benefits which will eventually provide greater opportunities for the participants in that industry and the poor.
Investors and Financial Institutions This study will be useful to investors because it will highlight the benefits that will be derived by their firms from acquisition of financial literacy. These benefits will include proper financial management skills that will lead to profitability of their firms. Also, for investors who are assisted by others, it will emphasis the importance of financial literacy so they can be able to understand financial reports of the firm, how assets are allocated, what ratio of debt to equity to be used and how to derive further profits. For financial institutions, it will help them asses the credibility of an MSE by the financial knowledge of the owners.
1.7 Scope Of The Study
The study is generally narrowed to examine the impact of financial literacy on the profitability of small scale enterprises in Cameroon. Empirically, the study will.. geographically the study will be carried out in among small scale enterprises owners in Buea Municipality, Cameroon.
1.8 Limitation of the Study
As every human endeavor is once faced with a constraint, the same was tenable during the period of this study. In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents. In addition, there was the element of researcher bias. Here, the researcher possessed some biases that may have been reflected in the way the data was collected, the type of people interviewed or sampled, and how the data gathered was interpreted thereafter. The potential for all this to influence the findings and conclusions could not be downplayed. More so, the findings of this study are limited to the sample population in the study area, hence they may not be suitable for use in comparison to small scale industries in other countries in the world.
1.9 Definitions of Terms
Small Scale Business: A small scale business is a business that have not less than ten (10) employees but not more than forty nine (49)
Financial literacy: Is a combination of awareness, knowledge, skill, attitude and behavior necessary to make sound financial decisions and ultimately achieve individual financial wellbeing. That is, it is the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.