Lack of Financial Literacy as the bane of MSME Development

By Peter Ayim

The Art of Strategic Planning for MSMEs
Dr Peter Ayim

Micro, Small and Medium Enterprises (MSMEs) are burdened by numerous challenges which include internal weaknesses, operational deficiencies and lack of financial literacy.Of all of the diverse constraints of MSMEs, it is established that lack of financial literacy is one of the main reasons responsible for the failure of MSMEs.It is also said to be the reason  access to finance, which oils the wheels of enterprise operations and growth, remains a major and insurmountable challenge for MSMEs.

MSMEs require diverse resources to manage businesses successfully. Knowledge and Intellectual resources are considered as organizational capital and financial literacy is a critical component of intellectual capital that can positively impact on the growth and sustainability of an enterprise.

Although, the financial services sector can be volatile, dynamic and complex especially for a novice, the appropriate knowledge and capacity to appraise, use and manage money can be a veritable way of coping with the dynamics and complexities associated with financial matters.

A recent Financial Literacy survey conducted by FATE Foundation in partnership with the Association of Chartered Certified Accountants (ACCA) Nigeria, suggest that approximately 33.6 million MSMEs lack financial literacy.

The survey findings also indicate that of the 41.5 million MSMEs in Nigeria, 30 million MSMEs representing 73%do not have financial literacy skills but expressed appreciation for the imperative of financial literacy, while 8 million MSMEs representing 20%are not disposed to financial literacy due to ignorance while 33.6 million representing 82% have no awareness about financial literacy.

Financial literacy is closely linked to access to finance but with the insightful and regrettable outcome of the survey, it is apparent that access for finance for Micro, Small and Medium Enterprises (MSMEs) will continue to remain a daunting task and a critical barrier for MSMEs due to the low level of financial literacy among enterprise operators.

Given the potentials and immense contributions of MSMEs to the economic development of the nation through the fostering of innovation and technological advancement, industrial development, transformation and growth, creating wealth and generating employment, the widespread lack of financial literacy among enterprise operators is one development challenge that requires the deliberate and urgent efforts of all relevant stakeholders to urgently accelerate financial literacy advocacy and interventions to address the prevailing gap because of the immeasurable benefits of such interventions to the overall development and growth of the nation’s economy.

From simple daily financial records,book keeping and money management skills to the knowledge and capacity to facilitate effective financial decision making, the capacity to explore and analyze diverse and alternative ways of raising funding to finance or grow an enterprise can determine the growth and sustainability of an enterprise.

Oftentimes, due to lack of financial literacy, MSMEs are usually stuck with the orientation and mindset that access stops at Bank Loans as the only means of sourcing funds to finance or grow their businesses for which they usually fall short of meeting the stringent requirements of sourcing Bank Loans.

Beyond conventional and traditional Bank Loans, there are numerous other innovative financial services and options that especially exiting MSMEs can leverage to grow and expand their business. Most financial services are negotiable. MSMEs can be funded both internally and externally. Internally generated funds include investment profits, sales of assets, extended payment terms, reduction in working capital and account receivable. Externally, some sources of funds for MSMEs include Asset Based Lending, Equity and Debit Financing, Factoring and Value Chain Financing, Venture Capital, Insurance,Stock Exchange, Leasing and in contemporary times, grant and crowdfunding.

All of these financial products and funding options for MSMEs obviously requires knowledge and capacity to pull through. MSME operators may not necessarily be required to acquire the technical skills and competences to deal but they are at least expected to have a fair and reasonable knowledge and the understanding of how these things works both individual enterprise operators and firm in engaging with financial service providers.

While Access to finance refers to the availability and accessibility of financial services, in the form of demand deposits, credit, payments or insurance, Financial literacy generally refers to the knowledge and cognitive capabilities required to manage finances and make effective decisions on financial matters. A scholar,Korutaro et al. (19),succinctly refers to financial literacy as “the ability of an individual to make an informed judgement and take effective decisions regarding the use and management of money”. For MSMEs, financial literacy is a vital requirement both at the level of the individual enterprise operator and at the firm level.

Empirically, studies confirm that Financial literacy has been identified as a vital knowledge resource for financial decision making, but sufficient attention is usually notpaid to how the lack of financial literacy affects enterprise operations as prevents access to finance.Inadequate financial literacy has been identified as one of the main barriers to the sustainable development of MSMEs.

Studies also reveal that a strong financially literate MSMEs facilitates accelerated and sustainable MSME development that is best for the development of the nation’s economyin numerous ways such as fostering functional MSME growth and expansion, building strong and sustainable economy especially for developing economies.

Financially illiterate firms may lack the knowledge required to judge risks, which may, in practice limit their access to opportunities to achieve very high returns. MSMEs with high levels of financial literacy are more likely to be involved in strategic risk-taking, which may enhance their sustainability.

Running a functional enterprise is associated with uncertainties that requiresstrategicrisk management and decision making skills.Financial literacy makes it easier for MSMEs to take advantage of increased financial market competition and the capacity to minimize the impact of potential risk and degree of loses associated with poor financial decision making.

Financial literacy improves financial management practices and minimizes financial mistakes. For the MSMEs, studies have also confirmed that financial literacy enhances the performance, productivity and competitiveness of MSMEs. MSMEs are able to manage risks, identify viable business opportunities and investment in profitable businesses. It also positions MSMEs to cope with sudden economic shocks and the rapidly changing financial and credit markets

With financial literacy, MSMEs are to make effective and sound financial decisions. It helps businesses to deal with challenges and complexities of credit markets. Financial literacy enables entrepreneurs to manage risks through strategies, such as maintaining financial reserves, diversifying their investment portfolio and buying insurance etc.

Though the reality of the prevailing situation may be stark and the magnitude of the challenge enormous, the cheering news is that concerted efforts is been made at the level of the Central Bank of Nigeria (CBN) through the National Policy on Financial Inclusion and the National Financial Inclusion Committee comprising of various Working Groups to ramp up the number of financially included and scale financial literacy for MSMEs.

With the benefit of hindsight as a privileged member of the National Financial Inclusion Committee comprising of relevant stakeholders and serving on the Special Interest Interventions Working Group, I am duly informed of the various conversations and intervention strategies that are being considered and reviewed to deepen the advocacy for financial inclusion and financial literacy.

This submission is my humble contribution to the body of knowledge for the promotion of enterprise development and to the advocacy for financial inclusion and financial literacy especially as it relates to the impact of financial literacy on the promotion of functional and sustainable enterprise development.

Dr. Peter Ayim is an Enterprise Development Expert and Principal Consultant at MSME Business Development Services Limited. He can be reached via


  1. Dear Dr Ayim. Your discuss on financial literacy is apt. From my personal findings, majority of the MSME’s are ready to take steps to improve their financial literacy but, they only do so with the expectation that funding will be provided by the various financial institutions at the long run. How can financial service providers possibly ensure that the provision of such funds, equipments and other forms of assistance will get to MSME’s at the long run, if they actually meet all the requirements, in a developing country like Nigeria? Thanks.


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