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Lending terms, financial literacy and formal credit accessibility

Stephen Korutaro Nkundabanyanga (Department of Accounting, Makerere University Business School, Kampala, Uganda)
Denis Kasozi (Department of Accounting, Makerere University Business School, Kampala, Uganda)
Irene Nalukenge (Department of Accounting, Makerere University Business School, Kampala, Uganda)
Venancio Tauringana (Business School, Bournemouth University, London, UK)

International Journal of Social Economics

ISSN: 0306-8293

Article publication date: 6 May 2014

3837

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.

Keywords

Citation

Korutaro Nkundabanyanga, S., Kasozi, D., Nalukenge, I. and Tauringana, V. (2014), "Lending terms, financial literacy and formal credit accessibility", International Journal of Social Economics, Vol. 41 No. 5, pp. 342-361. https://doi.org/10.1108/IJSE-03-2013-0075

Publisher

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Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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