THE IMPACT OF FINANCIAL LITERACY ON THE PERFORMANCE OF SMALL SCALE ENTERPRISES IN CAMEROON

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Small-scale enterprises' (SSEs) contribution to the national economy should not be undervalued. In recent years, however, policymakers have paid more attention to these types of businesses, especially in third-world nations, due to the growing disillusionment with the outcomes of their development strategies. Research indicates that small and medium-sized enterprises (SME) contribute to employment creation, rural development promotion, entrepreneurial growth, the mobilisation of local reserves, connections with larger industries, and regional equilibrium through the more equitable distribution of investments. Throughout numerous centuries, small and medium-sized enterprises (SME) have served as catalysts for development, particularly in nations like Malaysia, Thailand, China, and India. SSEs have contributed to over 70 percent of exports, which explains the exponential growth experienced by these countries in recent years (Delavande, 2018). Sector-specific enterprises (SSEs) in Nigeria are confronted with an extensive array of obstacles that significantly impede their progress and advancement. 

Multiple researchers have demonstrated that SSEs serve as the foundation for industrialization in the majority of developing nations. Small-scale enterprises (SMEs) have made significant contributions to the global standard of living by alleviating social embarrassment, stimulating domestic entrepreneurship, and generating employment opportunities, all while maximising the use of constrained resources. As its nomenclature suggests, financial literacy is a critical factor in the pursuit of organisational success as a whole (Bernheim, 2018). Additionally, it promotes a reasonable degree of financial gain, which is a business objective. Therefore, throughout the centuries, financial literacy has been a determining factor in the success or failure of businesses in our country. As a consequence, it is the responsibility of organisations and companies to maintain accurate and sufficient financial records in order to guarantee the dependability of their financial statements. Over time, this will contribute to an enhancement in their profitability. 

Moreover, profit can be likened to the vitality of an organisation; therefore, the accounting foundations, principles, and concepts implemented should encompass and disclose all pertinent data to guarantee the accuracy of its assessment (Nelson & Onias, 2021). Additionally, it was emphasised by Enikanselu and Oyende (2019) that the operation of a business is contingent upon both financial literacy and the possession of accounting records in some capacity. Hence, it can be concluded that adequate financial literacy is critical for the effective administration of any enterprise, irrespective of its scale. In addition, efforts are being made to promote financial literacy among small and medium-sized businesses so that they are capable of providing comprehensive and pertinent financial data that is essential for informing their decision-making processes and ultimately increasing their profitability. Notwithstanding the aforementioned, the majority of small-scale enterprises in Nigeria have exhibited unsatisfactory performance and have failed to fulfil their anticipated substantial role, despite being considered the backbone of employment creation and technological advancement. Inadequate 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. Consequently, SSEs operating within the state have consistently been unable to secure a sufficient portion of the business profit. Once again, the absence of sufficient financial literacy complicates the computation of financial data. The end result of this issue has been a decline in the profitability of small-scale enterprises. Additionally, inadequate knowledge regarding financial opportunities and risks, imprudent spending, the utilisation of company funds for personal transactions, restricted availability of bank credit facilities, and insurance policies. (2019, Houston, Texas) Therefore, it is imperative that these studies investigate the influence 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.