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Lending terms, financial literacy and formal credit accessibility

Lending terms, financial literacy and formal credit accessibility
Lending terms, financial literacy and formal credit accessibility
Purpose - The purpose of this paper is to investigate the relationship between commercial bank lending terms, financial literacy and access to formal credit by small and medium enterprises (SMEs).
Design/methodology/approach - In this cross-sectional study, the authors surveyed 384 business owners or managers of SMEs in Uganda. The authors applied confirmatory factor analysis to reduce the number of factors and identify the important elements that capture commercial lending terms, financial literacy and access to formal credit. The authors put forward and tested two hypotheses relating to the significance of the relationship between perceived commercial bank lending terms, financial literacy and access to formal credit using structural equation modelling with analysis of moment structures 18.
Findings - The results suggest a positive and significant relationship between perceived commercial bank lending terms, financial literacy and access to formal credit. Moreover, the ANOVA results serendipitously show that access to formal credit varies with type of business and turnover. However, collateral and loan repayment periods are not observed variables for commercial bank lending terms. The most significant observed variable for commercial bank lending terms is interest rates. This, together with financial literacy, explains 31 per cent of the variances in access to formal credit by SMEs in Uganda.
Research limitations/implications - The study is limited to the SME firms registered and operating in Kampala, Uganda and it is possible that the results are only applicable to these firms in Uganda. Nevertheless, the findings have implications to commercial banks wishing to improve the turnover of their micro-lending schemes.
Practical implications - Efforts by the stakeholders to improve financial literacy of SMEs owners and managers must be matched with favourable interest rates if access to formal credit is to be enhanced.
Social implications - The findings also have implications for governments aiming at improving access to finance to overcome income inequality problems, and also improve their growth.
Originality/value - The results provide initial evidence of the aggregate explanatory power of interest rates and financial literacy for the criterion variable, access to formal credit by SMEs.
Keyword(s):Development; SMEs; Uganda; Literacy; Access to formal credit; Lending terms.
Development, SMEs, Uganda, Literacy, Access to formal credit, Lending terms
0306-8293
342 - 361
Nkundabanyanga, S.K.
0d896afa-91f4-4616-92a0-c0550c026503
Kasozi, D.
fe3c3a1a-e774-4978-89bf-5062ab7c595e
Nalukenge, I.
3650df9f-7acf-4834-9550-50cdfc9d84a9
Tauringana, Venancio
27634458-b041-4bc1-94da-3e031d777e4f
Nkundabanyanga, S.K.
0d896afa-91f4-4616-92a0-c0550c026503
Kasozi, D.
fe3c3a1a-e774-4978-89bf-5062ab7c595e
Nalukenge, I.
3650df9f-7acf-4834-9550-50cdfc9d84a9
Tauringana, Venancio
27634458-b041-4bc1-94da-3e031d777e4f

Nkundabanyanga, S.K., Kasozi, D., Nalukenge, I. and Tauringana, Venancio (2014) Lending terms, financial literacy and formal credit accessibility. International Journal of Social Economics, 41 (5), 342 - 361.

Record type: Article

Abstract

Purpose - The purpose of this paper is to investigate the relationship between commercial bank lending terms, financial literacy and access to formal credit by small and medium enterprises (SMEs).
Design/methodology/approach - In this cross-sectional study, the authors surveyed 384 business owners or managers of SMEs in Uganda. The authors applied confirmatory factor analysis to reduce the number of factors and identify the important elements that capture commercial lending terms, financial literacy and access to formal credit. The authors put forward and tested two hypotheses relating to the significance of the relationship between perceived commercial bank lending terms, financial literacy and access to formal credit using structural equation modelling with analysis of moment structures 18.
Findings - The results suggest a positive and significant relationship between perceived commercial bank lending terms, financial literacy and access to formal credit. Moreover, the ANOVA results serendipitously show that access to formal credit varies with type of business and turnover. However, collateral and loan repayment periods are not observed variables for commercial bank lending terms. The most significant observed variable for commercial bank lending terms is interest rates. This, together with financial literacy, explains 31 per cent of the variances in access to formal credit by SMEs in Uganda.
Research limitations/implications - The study is limited to the SME firms registered and operating in Kampala, Uganda and it is possible that the results are only applicable to these firms in Uganda. Nevertheless, the findings have implications to commercial banks wishing to improve the turnover of their micro-lending schemes.
Practical implications - Efforts by the stakeholders to improve financial literacy of SMEs owners and managers must be matched with favourable interest rates if access to formal credit is to be enhanced.
Social implications - The findings also have implications for governments aiming at improving access to finance to overcome income inequality problems, and also improve their growth.
Originality/value - The results provide initial evidence of the aggregate explanatory power of interest rates and financial literacy for the criterion variable, access to formal credit by SMEs.
Keyword(s):Development; SMEs; Uganda; Literacy; Access to formal credit; Lending terms.

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More information

Published date: May 2014
Keywords: Development, SMEs, Uganda, Literacy, Access to formal credit, Lending terms
Organisations: Southampton Business School

Identifiers

Local EPrints ID: 398222
URI: http://eprints.soton.ac.uk/id/eprint/398222
ISSN: 0306-8293
PURE UUID: 649c0d68-8b46-4160-ba8d-65b58f49dae7
ORCID for Venancio Tauringana: ORCID iD orcid.org/0000-0002-1433-324X

Catalogue record

Date deposited: 20 Jul 2016 15:45
Last modified: 23 Jul 2022 01:58

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Contributors

Author: S.K. Nkundabanyanga
Author: D. Kasozi
Author: I. Nalukenge

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