Is Knowledge that powerful? Financial literacy and Access to Finance: An analysis of Enterprises in the UK

Hussain, Javed G. and Salia, Samuel and Karim, Amin (2018) Is Knowledge that powerful? Financial literacy and Access to Finance: An analysis of Enterprises in the UK. Journal of Small Business and Enterprise Development, 25 (6). pp. 985-1003. ISSN 1462-6004

Is Knowledge that powerful - 01-8-2018 Final submission.pdf - Accepted Version

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Purpose – The purpose of this paper is to examine the relationship between financial literacy, access to finance and growth among small- and medium-sized enterprises (SMEs) within the Midlands region of the UK. It assesses whether financial literacy assists SMEs to overcome information asymmetry, mitigate the need for collateral, optimises capital structure and improves access to finance.
Design/methodology/approach - To gain a deeper insight into the complex relationship between financial literacy, access to finance and growth, qualitative research is carried out among SMEs that have operated for over five years or longer. Using the purposive sampling technique, 37 firms were selected based on size, location and characteristics, mainly from the City of Birmingham and the joining conurbations. Open-ended and a combination of dichotomous questions were used for the survey. Interviews were recorded, transcribed and thematically analyzed.
Findings - Financial literacy is an interconnecting resource that mitigates information asymmetry and collateral deficit when evaluating loan applications, therefore financial literacy should be part of school curriculum. The analysis suggests enhanced financial literacy, reduces monitoring cost and serves to optimize firms’ capital structure that positively impacts on SMEs growth. Financial management knowledge is recognized as the core resource that aids an effective decision making by owners of SMEs.
Research limitations/implications - The limitation of this research is the small sample that limits its generalization. Its findings could be enhanced by a larger sample and by conducting comparative studies in other regions or economies. SMEs growth is seen as a strategic policy to stimulate enterprise but the finance gap tends to constrain that objective. The UK government’s effort to improve access to finance and to mitigate excessive collateral demands by lenders has proved elusive. This empirical research provides evidence that financial literacy enhances access to finance and, in turn, promotes growth potentials.
Practical implications – The results of this study advocate the provision of financial literacy at schools and target support for SMEs to acquire financial management skills in order to mitigate information asymmetry between lenders and borrowers.
Social implications- Findings suggest that financial literacy mediates access to finance, enables enterprises to use optimal financial structure to mitigate business failure, creates employment and reduces public sector support for social benefits.
Originality/value - This study is novel in that it examines financial literacy and its implications for access to finance and firm growth in the UK. The study is an effort to highlight the role of financial information in mitigating barriers to finance for SMEs.

Item Type: Article
Identification Number:
8 August 2018Accepted
19 November 2018Published Online
Uncontrolled Keywords: SMEs, Growth, Financial literacy, access to finance
Subjects: CAH17 - business and management > CAH17-01 - business and management > CAH17-01-07 - finance
Divisions: Faculty of Business, Law and Social Sciences > Birmingham City Business School
Depositing User: Javed Hussain
Date Deposited: 02 Aug 2018 10:27
Last Modified: 22 Mar 2023 11:49

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