Relationship between Financial Literacy and Borrowing Behavior of Small-Scale Business Owners in Homa Bay Town, Kenya

Abstract

Small-scale businesses play an important role in the global economy with over 60% of the population depending on them for employment. In Kenya, statistics indicate that about 30% of the population depends on the Small-scale businesses for their livelihoods. However, research indicates that up to 70% of the businesses are collapsing under the burden of unserviced loans. In Homa Bay town, 60% of the non-performing loans portfolio among commercial banks is from small-scale businesses indicating poor borrowing behaviour. While prior studies indicate that financial literacy influences borrowing behaviour, the effects of this on borrowing behavior of small-scale business owners in Horna-bay town are unknown. The main objective of the study was to establish the relationship between financial literacy and borrowing behavior among small business owners in Homa Bay town. The specific objectives were to; establish the relationship between knowledge of key money concepts and borrowing behaviour; determine the relationship between knowledge of financial institutions and borrowing behaviour; and to establish the relationship between knowledge of cash budgeting and borrowing behaviour of small-scale business owners in Homa Bay town. The study was anchored on the theory of Reasoned Action and guided by correlational research design. Population of the study was the 1220 business owners who were classified into three categories; retail, manufacturing and service from which a sample of 301 small scale business owners were selected through stratified random sampling technique. Interviews and structured questionnaires were used to collect primary data while secondary data were collected from records available in the businesses. A test-retest of the questionnaires was conducted and reliability coefficient of 0.815 obtained. Content validity index of 0.723 was also computed. The results were greater than the threshold of 0.7, suggesting that the questionnaire was reliable and valid. Correlation analysis indicated that 65%, 49.8% and 30.2% changes in the borrowing behaviour are associated with knowledge of key money concepts, financial institutions and cash budgeting respectively. Multiple regression analysis was used to analyze the data. The study revealed that an increase in knowledge of key money concepts would lead to 0.581 significant improvement in borrowing behavior W=0.581, p =0.00), while an increase in knowledge of financial institutions would lead to 0.338 significant increase in borrowing behavior (f3=0.338, p = 0.03), and an increase in knowledge of cash budgeting would lead to 0.299 insignificant increase in the borrowing behavior (~=0.299, p = 0.052). The explanatory power of the estimated model was R2= 0.596, meaning that 59.6% changes in the borrowing behaviour was explained by the three independent variables. It was concluded that knowledge of key money concepts and financial institutions were significant determinants of borrowing behavior. It is recommended that commercial lenders educate small-scale business owners on key money concepts and awareness on financial institutions. Findings from the study may benefit borrowers in understanding the need to be more financially literate. Researchers may also use the findings in this study as a basis of more research in the area of borrowing behaviour.