Lending terms, financial literacy and formal credit accessibility
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Date
2014
Journal Title
Journal ISSN
Volume Title
Publisher
International Journal of Social Economics
Abstract
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.
Description
Keywords
Development, SMEs, Uganda, Literacy, Access to formal credit, Lending terms
Citation
Nkundabanyanga, S. K., Kasozi, D., Nalukenge, I., & Tauringana, V. (2014). Lending terms, financial literacy and formal credit accessibility. International Journal of Social Economics. DOI 10.1108/IJSE-03-2013-0075