IMPACT OF FINANCIAL LITERACY ON FINANCIAL DECISION MAKING OF MICRO SMALL AND MEDIUM ENTERPRISES (MSME) DURING THE CRISIS

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.