Abstract:
Sri Lanka is currently experiencing an economic crisis resulting from divergent
currency rates, adverse economic policies, and economic mismanagement. The
current economic crisis in Sri Lanka makes the MSME sector even more
vulnerable. This study intends to identify the level of financial literacy among
MSME entrepreneurs and understand its impact on the financial decision making
of entrepreneurs of the MSME sector in the Northern Province during the current
economic crisis. The study is a cross-sectional descriptive survey with a sample
of 150 MSME businesses operating in manufacturing and industry, trading, and
service sectors. This study contributes to the existing literature on behavioural
finance, which incorporates the level of financial literacy to the Prospect Theory
(PT), relating the two different stages of decision specifically to the MSME sector.
The study it reveals that the financial literacy rate of these MSME entrepreneurs
is below 35% in the Northern province which has an adverse impact on the
financial decision making and financial performance during a crisis. It was
identified that financial literacy is a better predictor of the financial behaviour of
MSMEs. Factors such as liquidity of the business, debt level, turnover and profit
have been negatively affected during the crisis resulting from lack of financial
knowledge, poor financial attitude and financial behaviour of the MSMEs. The
findings of the study will support the Central Bank of Sri Lanka to draft a national
level policy for MSMEs to improve their financing decision by developing their
level of financial literacy.
