The Relationship between Access to Finance and Growth of SMEs in the Northern Province of Sri Lanka: Financial Literacy as a Moderator

Abstract

The direct effect of access to finance on the growth of Small and Medium Enterprises (SMEs) run by entrepreneurs is well studied. However, there is limited understanding on the difference in the rate of entrepreneurship growth across a nation. Further, the empirical findings relating to the financial literacy of entrepreneurs significantly differ across different geographic communities. Thus, the purpose of this study is to examine the impact of financial literacy on the access to finance and the business growth of the SME Sector in the Northern Province of Sri Lanka in the postcivil war context, as SMEs promote resilience of communities to recover from adversities such as civil war. The Indebtedness of Northern Province has suddenly increased, as there is a sharp growth is evident in the average debt per family in the post-civil war context. Thus, demonstrating the lack of proper financial literacy and the discipline required to be financially stable, which is a crucial benchmark for a successful business. According to the model of ambidextrous management in entrepreneurial growth companies, entrepreneurship is process where the entrepreneurial orientation turns into implementation and thereby leads to the business growth. However, the effect of access to finance to the entrepreneurs and the impact of financial literacy of the entrepreneur on this relationship is not examined. Thus, this study incorporates the effect of access to finance and the moderating effect of financial literacy to the existing model. It was evident from this study that, access to finance has a direct impact on the growth of the SMEs in the Northern Province of Sri Lanka. The results also reflect that the financial literacy and ability to make the financial decisions influence access to finance, resulting in business growth.