International Journal of Trend in Scientific Research and Development (IJTSRD)

Volume 7 Issue 2, March-April 2023 Available Online: www.ijtsrd.com e-ISSN: 2456 – 6470

Financial Literacy and Financial Performance of Small and

Medium Enterprises (SMES) among Selected Firms in Lagos State
Oguh Festus. A., Ph.D1; Adjene Veronica E.2; Onaghise Osagie C.3
1,3
Department of Business Administration, Wellspring University, Benin City, Edo State, Nigeria
2
Department of Accounting, Wellspring University, Benin City, Edo State, Nigeria

ABSTRACT How to cite this paper: Oguh Festus. A.

There is a perception that SMEs in Nigeria tends to lack skills and | Adjene Veronica E. | Onaghise Osagie
knowledge needed to run their businesses profitably. This also tend to C. "Financial Literacy and Financial
have direct impact on the financial performance of SMEs as the small Performance of Small and Medium
business owners may not be proficient in financial education. This Enterprises (SMES) among Selected
Firms in Lagos
paper examined the role of financial literacy in enhancing the
State" Published in
financial performance of SMEs among selected firms in Lagos State. International Journal
In order to achieve the objective of this paper, some research of Trend in
questions were raised and hypotheses formulated. Various literatures Scientific Research
relating to financial literacy and financial performance were reviewed and Development
in ordered to establish a relationship between the two constructs (ijtsrd), ISSN: 2456- IJTSRD55089
under investigations. The study made used of primary data sourced 6470, Volume-7 |
from questionnaires administered to respondents. The research design Issue-2, April 2023, pp.515-527, URL:
adopted was survey research design and correlational research www.ijtsrd.com/papers/ijtsrd55089.pdf
design. Three hundred and eighty four SMEs firms were selected
from the twenty local government councils in Lagos State. The Copyright © 2023 by author (s) and
International Journal of Trend in
ordinary least square regression technique was used to analyze the
Scientific Research and Development
role of financial literacy in enhancing the financial performance of Journal. This is an
SMEs. The result of the analysis revealed that a relationship exist Open Access article
between financial literacy and financial performance. The study distributed under the
further revealed that SMEs in Lagos State are lacking in financial terms of the Creative Commons
education; poor in financial knowledge; weak in cash flow Attribution License (CC BY 4.0)
management; lack financial discipline; amongst others. It is therefore (http://creativecommons.org/licenses/by/4.0)
concluded that lack of financial literacy have undermined the
financial performance of SMEs in Lagos State in particular and KEYWORDS: Financial literacy,
Nigeria in general. The study recommends that SMEs should engage financial performance, SMEs,
the services of accountants and also send their owners and managers financial education, financial
to attend accounting courses, trainings and seminars to provide the planning
necessary basic knowledge of financial education to enable SMEs
grow financially.

INTRODUCTION:
Financial literacy is becoming increasingly poor financial education as well as other structural
recognized in SMEs literatures as an important issue problems that plague the SME sector.
that may affect the financial performance of small and
SMEDAN (2013) defined SMEs in terms of Micro,
medium scale businesses. There are increasing need Small and Medium Enterprises (MSMEs) as follows-
for individuals who operate small businesses to
Micro Enterprises are classified as assets not greater
manage their businesses to achieve financial gains.
than N5mn (excluding land and buildings) with a
Greater financial education for SMEs remains a
workforce not exceeding ten employees, Small
challenge as SMEs face a chicken and egg problem,
Enterprises are classified as assets greater than N5Mn
where they find it hard to grow without greater
not exceeding N50Mn (excluding land and building)
financial knowledge and good financial planning. The
with a workforce more than 10 persons, but not
solution to this problem is perceived to be financial
exceeding 49 employees while Medium Enterprises
literacy. Education programs and training for SME
are classified as assets greater than N50Mn not
entrepreneurs may be a way to solve the problems of
exceeding N500mn (excluding land and building)

@ IJTSRD | Unique Paper ID – IJTSRD55089 | Volume – 7 | Issue – 2 | March-April 2023 Page 515
 International Journal of Trend in Scientific Research and Development @ www.ijtsrd.com eISSN: 2456-6470
with a workforce between 50 and 199 employees. The literacy as “... [a] combination of awareness,
2013 Small and Medium Enterprises Development knowledge, skill, attitude, and behavior necessary to
Agency of Nigeria (SMEDAN) and National Bureau make sound financial decisions and ultimately
of Statistics Collaborative Survey stated that the total achieve individual financial well-being.” In other
number of (MSMEs) as at the time of the report stood words, the OECD/INFE concept of financial literacy
at 37,067,416 (Micro- 36,994,578, Small- 68,168, and is multidimensional, reflecting not only knowledge,
Medium-4,670). Lagos state has the highest number but also skills, attitudes, and actual behavior.
of small and medium enterprises (11,663), Small Financial knowledge is information and concepts
(11,044), Medium (619) while Kwara state has the which help individuals to compare financial products
least (226). Lagos state also has the highest number of and services and make appropriate, well-informed
micro enterprises (3,224,324), followed by Oyo state financial decisions. A basic knowledge of financial
(1,864,954), then Kano state (1,794,358) while the concepts, and the ability to apply numerical skills to
FCT (482,365) and Nasarawa state (382,086) financial issues enable consumers to manage their
recorded the least. The total number of persons financial affairs and respond appropriately to news
employed by the MSMEs stood at 59,741,211, and events that may have implications for their
representing 84.02% of the total labour force of financial situation. Financial knowledge can be
71,103,560 in Nigeria. SMEs in Lagos State generates measured either objectively (through survey
17.72% of the employment. The SMEs also questions) or subjectively; i.e., by asking respondents
contribute 48.47% to the nation’s Gross Domestic to rate their own knowledge compared with that of
Product (GDP) in nominal terms. their peers. Financial behavior (or financial “savvy”)
Most SMEs owners use their retirement savings and refers to financial decisions and actions. Some types
pensions to commence the business, resulting mainly of behavior, such as delaying bill payments, not
from the trend of switching to defined-contribution planning for future expenditures, or choosing
from defined-benefit pension plans, as well as financial products without researching the market,
developments in financial technology (fintech) which may adversely effect on an individual’s financial
require greater sophistication on the part of users situation and well-being. Financial behavior may thus
(OECD/INFE 2016). In the global context, surveys differ from financial knowledge, and it is important to
consistently show that the level of financial literacy is how financial knowledge can affect financial
relatively low even in advanced economies behavior. Financial attitudes regarding longer-term
(OECD/INFE 2016). This has resulted to the calls at financial planning include aspects such as individuals’
international summits to develop strategies for time preference and willingness to make planned
financial education to improve financial literacy. At savings.
their summit in Los Cabos in 2012, G20 leaders Financial performance is a phenomenal associated
endorsed the High-Level Principles on National with increase in turnover and income generated by the
Strategies for Financial Education developed by the business. Through a well- managed financial
Organization for Economic Cooperation and performance system, the SMEs could operate more
Development International Network on Financial efficiently for stability. The functional areas of the
Education (OECD/INFE) as cited by (Morgan and business can be mobilized and allocated for
Trinh 2019). The group of twenty acknowledged the productive use, provide structures for financial
importance of coordinated policy approaches to management the basis for managing liquidity in the
financial education and suggested that survey data on firm.
financial literacy can provide information on the The fundamental objectives of this paper is to
levels of financial literacy of various groups within a establish a relationship between financial literacy and
country, and thereby indicate which groups have the financial performance of SMEs in Lagos State. The
greatest needs for financial education. Economic specific objectives are to-
Policy Research Centre (EPRC) in Uganda and Femi
Egbesola, national president, Association of Small 1. Analyse the relationship between financial
Business Owners of Nigeria (ASBON), reveals that education and the financial performance of SMEs
over 80% of SMEs in Africa nations have trapped due in Lagos State.
to financial crunch (Anudu & Okojie, 2020). 2. Analyse the relationship between financial
knowledge and the financial performance of
Morgan and Trinh (2019) states that financial literacy SMEs in Lagos State.
is divided into three related aspects: financial
knowledge, financial behavior, and attitudes toward 3. Examine whether Financial behavior have
longer-term financial planning. This is consistent with significant impact on SMEs financial
OECD/INFE (2016, p. 47), which defines financial performance in Lagos State.

@ IJTSRD | Unique Paper ID – IJTSRD55089 | Volume – 7 | Issue – 2 | March-April 2023 Page 516
 International Journal of Trend in Scientific Research and Development @ www.ijtsrd.com eISSN: 2456-6470
4. Investigate the impact of financial planning on especially rewards and risks in order to make
SMEs ability to generate income in Lagos State. informed choices. It refers to the ability to make
informed judgments and to take effective decisions
Research Questions
regarding the use and management of money (Levine
Based on the specific objectives of this paper, the
Research questions would be- 2000). Attamah (2019) stated that financial literacy is
ability of a person to effectively and responsibly
1. Is there any significant relationship between
financial education and the financial performance manage financial affairs.
of SMEs in Lagos State. The Organization for Economic Co-operation and
Development (OECD) started an inter-governmental
2. Is there any significant the relationship between
financial knowledge and the financial project in 2003 with the objective of providing ways
performance of SMEs in Lagos State. to improve financial education and literacy standards
through the development of common financial
3. Can financial behavior have significant impact literacy principles. In March 2008, the OECD
on SMEs financial performance in Lagos State. launched the International Gateway for Financial
4. Can financial planning impact on SMEs ability to Education, which aims to serve as a clearinghouse for
generate income in Lagos State. financial education programs, information and
research worldwide Financial literacy involve
Research Hypotheses financial education. Financial education primarily
Therefore, the underlying Hypotheses for the study relates to personal finance, which enables individuals
will be stated in null forms as outline below: to take effective action to improve overall well-being
H01: There is no significant relationship between and avoid distress in financial matters (Hastings,
financial education and the financial performance of Justine, Madrian, William and Skimmyhorn 2013).
SMEs in Lagos State. Hence improvement of financial knowledge of
H02: There is no significant relationship between households is necessary for them to participate
financial knowledge and the financial performance of continuously in financial markets. Financial literacy
SMEs in Lagos State plays a vital role in the efficient allocation of
household savings and the ability of individuals to
H03: Financial behavior have significant impact on meet their financial goals.
SMEs financial performance in Lagos State.
Financial literacy thus goes beyond the provision of
H04: Financial planning can impact significantly on financial information and advice. It is again a major
SMEs ability to generate income by Lagos State. issue for finance markets as it both drives and distorts
LITERATURE REVIEW investment behavior. It empowers the common
Conceptual Framework person and thus reduces the burden of protecting the
Concept of financial literacy common person from the elements of market failure
According to Wikipedia financial literacy is the from a regulatory perspective. It is regarded as an
possession of the set of skills and knowledge that important requirement for functioning effectively in
allows an individual to make informed and effective modern society. Trends in retirement income policies,
decisions with all of their financial resources. work patterns and demography suggest its importance
Financial Literacy can broadly be defined as the can only increase in the years ahead. Raising financial
capacity to have familiarity with and understanding of literacy supports social inclusion and enhances the
financial matters, financial market products, wellbeing of the community (Hasting etal 2013).
Factors that contributes aggrandizing the meaning of financial literacy.
Complexity of the needs of individuals Complexity of financial products
more and more instability in the working life of deregulation of financial markets,
individuals, a wider range of financial services and
lowering the social protection, a stronger dynamic of development for
increasing personal responsibility, new services,
increasing the living standard, new distributional channels,
increasing debts, a growing number of information
longer life expectancy, more self-employments. available.
Dimensions of financial literacy
Financial Knowledge
Financial knowledge is defined as the understanding of key financial terms and concepts needed to function daily
(Huston, 2017) as cited by (Umogbaimonica, Agwa & Asenge 2018). It is defined by (Potrich, Kelmara and

@ IJTSRD | Unique Paper ID – IJTSRD55089 | Volume – 7 | Issue – 2 | March-April 2023 Page 517
 International Journal of Trend in Scientific Research and Development @ www.ijtsrd.com eISSN: 2456-6470
Wesley, 2016) as a particular kind of capital acquired in life through the ability to manage income, expenditure
and savings in a safe way. Financial knowledge is wisdom acquired through learning the ability to manage
income, expenditure and savings in a safe way (Lusardi and Mitchell, 2008). Financial knowledge is associated
with a number of “best practice” financial behaviors, including possessing an adequate emergency fund,
monitoring credit reports, avoiding checking account overdrafts, avoiding revolving debt, owning a dedicated
retirement account, and having insurance protection (Robb, 2014). The Organization of Economic Co-operation
and Development (OECD), added that financial knowledge is an important determinant of whether the individual
is financially literate, involving questions related to concepts such as simple and compound interest, risk and
return and inflation (OECD INFE, 2011).
Financial Behaviour
Financial behavior as defined by Zeynep (2015)is the capability to capture of understanding overall impacts of
financial decisions on one’s circumstances and to make the right decisions related to the cash management,
precautions and opportunities for budget planning. Research has shown that financial literacy consistently predicts
measures of financial behavior of individual (Huston 2017).. Sucuahi (2013) highlighted that a good financial
behavior involves the ability to make financial decisions that increase wealth and prevent uncertainties of
businesses and individuals. These activities generate more financial assets, prevent over- indebtedness, finance
retirement, and insure against major life contingencies (Umogbaimonica et al 2018)..
Financial Attitude
Financial attitude can be defined as the application of financial principles to create and maintain value through
decision making and proper resource management (Latif, Razak, and Lumpur, 2011). Financial attitude is one of
the factors that have significant impact on financial management practice (Umogbaimonica et al 2018).. It is
defined by Eagly and Chaiken(1993) as psychological tendency that is expressed by valuating a particular entity
with some degree of favor or disfavor”. That is, it a psychological predisposition when it comes to agreeing or
disagreeing with certain financial management practices. Latif et al.(2011) defined financial attitude as the
creation of value in decision making and resource management through application of financial principles.
Financial attitude is improved through procurement of adequate information (Abiodun, 2016).
Financial education
For keeping and increasing the wealth of each individual it is important that he has the skills to manage with his
financial means. To consider himself for financially capable he has to know how to manage personal or so to say
family finances, he has to have the ability to plan in advance, to receive informational decisions linked to
financial products/service. He has to monitor within the scope of his needs all news on the financial market. There
he meets the problems of deciding like self-control, delaying, temporal discordance of wishes, aims, intensions
and real needs, problems with creating its own financial strategy and the problem of choosing the suitable
financial product/service.
Financial education is by the definition of the OECD (2005) a process where the user of financial
services/investors improve their understanding for financial products, notions and risks and on the bases of
information, instructions and objective advice develop the skills and confidence in strengthening information
about financial risks and occasions, make decisions on the bases of good information, are acquainted with the fact
where to find help and take other effective measures for improving their wealth.
Delimitation of financial education
financial education

understanding information instructions adviee

Source: OECD, 2005.

The information cover facts, data and specific knowledge by means of them individuals acquaint with financial
opportunities, alternatives and consequences of the choice. The instructions guarantee training and leading where
individuals gain skills and abilities of understanding financial conditions and concepts. Some advices help
individuals at understanding general financial matters and products and enable the best exploitation of the
acquired information and instructions.

@ IJTSRD | Unique Paper ID – IJTSRD55089 | Volume – 7 | Issue – 2 | March-April 2023 Page 518
 International Journal of Trend in Scientific Research and Development @ www.ijtsrd.com eISSN: 2456-6470
Financial Planning
Financial planning is a continuous process of directing and allocating financial resources to meet strategic goals
and objectives. It is largely concerned with anticipating significant new developments and changes that will have
a major impact on the performance of the business. Financial planning begins with forecast of fnancial statement
to determine the future's financing and investment needs.
Financial Performance
Performance refers to the ability to attain set objectives (Attamah 2019). Financial performance is
therefore defined as an ability to achieve financial planned goals as measured against its intended
outputs. Performance comprises outcomes related to financial performance, market performance and
shareholder return (Nkundabanyanga & Kasozi (2014). Business performance is also the ability of a
business enterprise to come across or surpass its pre-set objectives or goals as agreed upon by its
investors over a definite period which enables the business enterprise to realise unique or superfluous
set goals relevant to a business progress in the market (Allgood & Walstad 2016). Das & Teng (2000)
stated that business performance is a consistent dimension of consequences and results, which
produces reliable data on the success and effectiveness of a planned effort. Performance in the context
of SMEs businesses is the ability to achieve results based on plans and set objectives.

Source: Adapted from Odebiyi, Fasesin,& Ayo-Oyebiyi 2020

Odebiyi, Fasesin & Ayo-Oyebiyi (2020) stated that there is connection between financial literacy, measured by
knowledge, behavior, and attitude as independent variables while SMEs performance as a dependent variable,
which could be measured by profit level, sales growth, market share, and customer satisfaction.
Theoretical Framework
SMEs- The engine of growth theory
Many studies have investigated the impact of SMEs on the growth of an economy including Lazányi (2014);
Afolabi (2013 ); (Robu, 2013);(Martins, 2012); (Kadiri 2012); Murta1a, Awo1aja, Bako and Yusuf (2012);
Aremu and Adeyemi (2011); Akingunola (2011); Meghana (2011); Oluba (2009) and others. These studies are
some of the proponents of SMEs growth theory. The theory argued that SMEs are the engine of growth in an
economy. They are the dominant form of business organization, representing roughly 95 – 99% of all
companies. SMEs are considered to be the backbone of many economies and contribute greatly to a country‘s
wealth. These enterprises represent an essential source of economic growth and development in advanced
countries, just as they do in emergent economies. From an empirical and quantitative perspective, the
Organization for Economic Cooperation and Development (OECD) claims that SMEs account for over 99% of
all enterprises in the European Union and, globally, this sector represents between 60 and 70% of employment
(OECD, 2009). Using this parameter, SMEs worldwide are considered as the engine of growth as they help meet

@ IJTSRD | Unique Paper ID – IJTSRD55089 | Volume – 7 | Issue – 2 | March-April 2023 Page 519
 International Journal of Trend in Scientific Research and Development @ www.ijtsrd.com eISSN: 2456-6470
economic, social and environmental challenges through the creation of wealth. SMEs are a very important part
of the economy as it contributes significantly to GDP, employment generation and capacity building.
Dual –Process Theory
The dual-process theory was propounded by Lusardi and Mitchell (2011). This theory posits that financial
decisions can be driven by both intuitive and cognitive processes which mean that financial literacy may not
always yield optimal financial decisions. The Dual Process Financial literacy theory argues that the behavior of
people with a high level of financial literacy might depend on the prevalence of the two thinking styles: intuition
(system 1) and cognition (system 2) (Lusardi and Mitchell, 2011; Glaser and Walther, 2013). Intuition is the
ability to acquire knowledge without inference or the use of reason. Intuition provides views, understandings,
judgments, or beliefs that cannot be empirically verified or rationally justified. Taylor (1981) as cited by Chan and
Park (2013) asserts that individuals who rely on intuition prefer to use mental short cuts as they make decisions
which tend to be largely influenced by their emotions. Glaser and Walther (2013) point out that the positive effect
of financial literacy on reasonable investment decisions is diminished by a high prevalence of intuition. Therefore,
increased use of intuition results to sub optimal investment decisions.
Cognition on the other hand is the process by which the sensory input is transformed, reduced, elaborated, stored,
recovered and used. Cognition is the mental processing that includes the comprehending, calculating, reasoning,
problem solving and decision making (Chan and Park 2013). High cognition individuals enjoy thinking, are
analytical and are better at retaining information and more likely to search out new information.
Relevance of the two theories to the work
SMEs- The engine of growth theory is considered relevant to this study because it shows that SMEs who
constitute the larger percentage of employment are high on cognition. They are more likely to be influenced by a
relevant financial knowledge and information. This means that their decision making on skills acquisition can be
boosted by knowledge of financial literacy training using simple easy to understand methodologies.
Also, financial literacy can reduce the use of intuition by provision of relevant information to support decision-
making through financial education since individuals tend to rely on intuition where relevant information is
lacking. The overall results may boast the performance of the individual SMEs operator in financial decision
making.
Empirical review
One of the earliest empirical work on financial literacy was that of the Jump Start Coalition for Personal
Financial Literacy program for high school and college students in the US in 1997 described in Mandell (2009)
as cited by Morgan and Trinh (2019). Lusardi and Mitchell (2006) study on Health and Retirement Study (HRS)
provided questions on financial literacy. The study served as a model for subsequent studies. The three core
questions in the original survey were aimed at identifying respondents’ understanding of some key financial
concepts: compound interest, real rates of return, and risk diversification. Later surveys, including the
OECD/INFE survey, extended the financial knowledge questions but also added questions about financial
attitudes, financial behavior, and financial experience.
Odebiyi, Fasesin, Oladipo & Ayo-Oyebiyi 2020 study examines the influence of financial literacy on the
performance of SMEs with particular reference to SMEs registered with Lagos Business directory. The total
population of the study comprises all 376 SMEs that registered and listed in Lagos Business Directory. Closed-
ended questionnaires were employed to collect data from 190 SME entrepreneurs. The result reveals that the
majority of the SME operators had a numeracy level of financial literacy of using a calculator for addition and
subtraction only. This implies that most of the small business entrepreneurs did not have a spectrum of financial
skills. It was also discovered that financial literacy dimensions independently and jointly influence SMEs’
performance. Therefore, the study recommends that SME entrepreneurs should leverage on the spectrum of
financial skills, and also there should be a collaboration between SME entrepreneurs and accounting professional
bodies in Nigeria, to organize seminars and workshops on financial literacy. Thus, this will go a long way to
equip SME entrepreneurs with an array of financial skills such as book-keeping, cash management, inventory
management, daily cash reconciliation and budgeting.
Attamah etal contributes to the literature on financial literacy and the performance of SMEs in three ways; first it
draws on dual theory to explain the importance of financial literacy; it also expands the knowledge of financial
literacy because it reviewed the relationship between financial literacy and SMEs performance. In overall, the
study was able to provide a guide to policy makers to design programmes that will enhance financial literacy,

@ IJTSRD | Unique Paper ID – IJTSRD55089 | Volume – 7 | Issue – 2 | March-April 2023 Page 520
 International Journal of Trend in Scientific Research and Development @ www.ijtsrd.com eISSN: 2456-6470
particularly the ones that are directly tailored to the needs of SMEs. The paper was qualitative in nature and used
analytical approach of secondary sources to draw insights from scholarly articles
Lusardi and Mitchell (2014) as cited by Risk (2019) provide an extensive review of the literature on factors
related to financial literacy. Financial literacy scores tend to follow a hump-shaped pattern with respect to age,
first rising and then declining in old age. However, elderly persons’ confidence in their financial literacy shows
no similar decline, suggesting a perceptual gap. Women generally score lower than men in financial literacy,
although this seems to vary a lot by country and culture. On the other hand, women tend to be more willing to
admit not knowing an answer than men are. Higher levels of education and parents’ education are positively
correlated with financial literacy. These findings were generally confirmed in the analysis of the results of the
OECD/INFE survey in the above-mentioned sample of 30 countries in OECD/INFE (2016).There is need for
financial literacy in both the developed and the developing countries alike. The increasing number and
complexity of financial products, the continuing shift in responsibility for providing social security from
governments and financial institutions to individuals, and the growing importance of individual retirement
planning make it imperative that financial literacy be provided to all in the developed countries. In the
developing countries financial literacy can be seen as the first step toward alleviation of poverty and
development.
Financial literacy can make a difference not only in the quality of life that individuals can afford, but also the
integrity and quality of markets. It can provide individuals with basic tools for budgeting, help them to acquire
the discipline to save and thus, ensure that they can enjoy a dignified life after retirement. Financially educated
consumers, in turn, can benefit the economy by encouraging genuine competition, forcing the service providers
to innovate and improve their levels of efficiency.
A key question for policy is whether financial education programs can improve financial literacy. A large
number of studies have been conducted, but the results are inconclusive. The results depend on many specific
aspects of the programs, including course content, knowledge of the teachers, etc. Fernandes(2014) perform a
meta-analysis of 188 studies and find that financial education has a significant but very small effect of only 0.1%
on related economic behaviors. Lusardi and Mitchell (2014) cite Walstad(2010) as an example of a careful study
that found significant impacts from a financial literacy study program. In their survey, Hastings (2013) argue that
the evidence on the effectiveness of financial education programs on financial literacy is “ at best contradictory.”
Many papers attempt to link measures of financial literacy with other economic and financial behaviors, going
back to Bernheim (1995, 1998) in the US.
Hilgert(2003) found a strong correlation between financial literacy and daily financial management skills, while
other studies found that the more numerate and financially literate are more likely to participate in financial
markets, invest in stocks, and make precautionary savings (Christelis 2010; van Rooij et al. 2011; de
BassaScheresberg 2013). The more financially savvy are also more likely to undertake retirement planning, and
those who make financial plans also tend to accumulate more wealth (Lusardi and Mitchell 2011). Mahdzan and
Tabiani (2013) find similar evidence in Malaysia. In terms of household borrowing, Moore (2003) found that
those with lower financial literacy are more likely to have more expensive mortgages. Campbell (2006) showed
that those with lower income and less education were less likely to refinance their mortgages during periods of
falling interest rates. Stango and Zinman (2009) found that those who could not correctly calculate interest rates
generally borrowed more and accumulated less wealth.
Theoretical framework
Instrumental variables growth theory
The proponent of this theory include amongst others Levine (1998, 1999, 2000) that financial development
predicts economic growth, these results do not settle the issue of causality. It may simply be the case that
financial markets develop in anticipation of future economic activity. Thus, finance may be a leading indicator
rather than a fundamental cause. To assess whether the finance-growth relationship is driven by simultaneity
bias, one needs instrumental variables that explain cross-country differences in financial development but are
uncorrelated with economic growth beyond their link with financial development and other growth determinants.
Levine (1998, 1999) and Levine and Beck (2000) use the La Porta (1998, henceforth LLSV) measures of legal
origin as instrumental variables. In particular, LLSV (1998) show that legal origin – whether a country’s
Commercial/Company law derives from British, French, German, or Scandinavian law – importantly shapes
national approaches to laws concerning creditors and the efficiency with which those laws are enforced. Since
finance is based on contracts, legal origins that produce laws that protect the rights of external investors and

@ IJTSRD | Unique Paper ID – IJTSRD55089 | Volume – 7 | Issue – 2 | March-April 2023 Page 521
 International Journal of Trend in Scientific Research and Development @ www.ijtsrd.com eISSN: 2456-6470
enforce those rights effectively will do a correspondingly better job at promoting financial development.16
Indeed, LLSV (1998), Levine (1998, 1999, 2003). In terms of identifying why legal tradition influences the
operation of the financial system, see Beck, Demirgüç-Kunt and Levine (2003b, 2005a).
Levine and Beck (2000) as cited by Morgan and Trinh (2019) trace the effect of legal origin to laws and
enforcement and then to financial development. Since most countries obtained their legal systems through
occupation and colonization, the legal origin variables may be plausibly treated as exogenous. Following Levine,
Loayza and Beck (2000, henceforth LLB) analysis of 71 countries, consider the generalized method of moments
(GMM) regression: G(j) = α+βF(i)+γX+ε. G(j) is real per capita GDP growth over the 1960–95 period. The legal
origin indicators, Z, are used as instrumental variables for the measures of financial development, F(i). X is
treated as an included exogenous variable. LLB use linear moment conditions, which amounts to the requirement
that the instrumental variables (Z) be uncorrelated with the error term (ε). They find that the exogenous
component of financial development is closely tied to long-run rates of per capita GDP growth. Furthermore, the
data do not reject the test of the over-identifying restrictions. The inability to reject the orthogonality conditions
plus the finding that the legal origin instruments (Z) are highly correlated with financial intermediary
development indicators (i.e., the null hypothesis that the legal origin variables does not explain the financial
intermediary indicators.
Research Methods
The study covered SMEs in Lagos State with number of employees ranging between 11- 300. The population of
the study comprises of SMEs firms in Lagos State numbering (11,663), Small (11,044), and Medium (619). The
research design adopted was a combination of survey research design and correlational research design. The
study used a sample of three hundred and eighty four respondents which consist of the ownersand managers of
the SMEs firms. The sampling was done using simple random sampling techniques, the sample sizes were
determined using Cochran (1977). The data was generated using well-structured likert scale questionnaires of
strongly agree, agree, strongly disagree, disagree and undecided. The study employed ordinary least re
regression method. The model of study is operationalized thus-
SMEfg=f(fl.) or …(1)
…(2)
Where
SMEfg= SMEs financial performance
==financial education
= financial attitude and behaviour
= financial knowledge
= financial planning
error term
Analysis, Results and Interpretation
Hypothesis testing
Table 1 Correlation analysis table on the relationship between financial education and the financial
performance of SMEs in Lagos State
FINANCIAL EDUCATION SA A UN D SD
You acquire financial education to enable you understand Frequency 148 98 15 55 70
financial concepts. Percentage 38% 26% 4% 14% 18%
You acquire financial education to enable you the ability to Frequency 183 109 21 30 43
apply numerical skills to financial issues and enable
consumers to manage their financial affairs and respond
appropriately to news and events that may have Percentage 47% 29% 5% 8% 11%
implications for their financial situation.
You acquire financial training to enable you understand Frequency 200 108 15 24 39
consumers and to manage your financial affairs. Percentage 52% 28% 4% 6% 10%
Source: Field Survey, 2023

@ IJTSRD | Unique Paper ID – IJTSRD55089 | Volume – 7 | Issue – 2 | March-April 2023 Page 522
 International Journal of Trend in Scientific Research and Development @ www.ijtsrd.com eISSN: 2456-6470
Financial Education Financial performance
Pearson Correlation 1 .701
Financial Education Sig. (2-Tailed) .000
N 384 384
Pearson Correlation .701 1
Financial performance Sig. (2-Tailed) .000
N 384 384
The table above shows that there is a high positive relationship between financial education and the financial
performance of SMEs in Lagos State (r = 0.701). This result is statistically significant because the p-value of the
result (0.000) is less than the 0.05 level of significance used for the study. This implies that as entrepreneurs
acquire more knowledge, the finance of their enterprises also increases.
Decision
Null hypothesis is not accepted; thus it is concluded that there is a significant high positive relationship between
financial education and the financial performance of SMEs in Lagos State.
Hypothesis two
Table 2 There is no significant relationship between financial knowledge and the financial
performance of SMEs in Lagos State
FINANCIAL KNOWLEDGE SA A UN D SD
You acquire university education to enable you understand Frequency 142 92 19 57 76
financial concepts. Percentage 36% 24% 5% 15% 20%
You acquire university education to enable you the ability Frequency 173 99 23 38 53
to apply numerical skills to financial issues and enable
consumers to manage their financial affairs and respond
Percentage 45% 26% 6% 10% 14%
appropriately to news and events that may have
implications for their financial situation.
You acquire university education to enable you understand Frequency 192 99 19 19 38
consumers and to manage your financial affairs. Percentage 50% 26% 10% 5% 10%
Source: Field Survey, 2023
With regards to financial knowledge, 61% of the respondents agreed that they acquired university education to
enable them understand financial concepts; 71% agreed that they acquired university education to enable them
the ability to apply numerical skills to financial issues and also enable consumers to manage their financial
affairs and respond appropriately to news and events that may have implications for their financial situation; and
76% agreed that they acquired university education to enable them understand consumers and to manage their
financial affairs.
Hypothesis testing
Correlation analysis table on the relationship between financial knowledge and the financial performance of
SMEs in Lagos State
Financial Knowledge Financial performance
Pearson Correlation 1 .881
Financial Knowledge Sig. (2-Tailed) .000
N 384 384
Pearson Correlation .881 1
Financial performance Sig. (2-Tailed) .000
N 384 384
The table above shows that there is a high positive relationship between financial knowledge and the financial
performance of SMEs in Lagos State (r = 0.881). This result is statistically significant because the p-value of the
result (0.000) is less than the 0.05 level of significance used for the study. This implies that as entrepreneurs
acquire more knowledge, the finance of their enterprises also increases.
Decision
Null hypothesis is not accepted; thus it is concluded that there is a significant high positive relationship between
financial knowledge and the financial performance of SMEs in Lagos State.

@ IJTSRD | Unique Paper ID – IJTSRD55089 | Volume – 7 | Issue – 2 | March-April 2023 Page 523
 International Journal of Trend in Scientific Research and Development @ www.ijtsrd.com eISSN: 2456-6470
Hypothesis three
Table 3 Financial behavior and attitude have significant impact on SMEs financial performance in
Lagos State
FINANCIAL ATTITUDE AND BEHAVIOUR SA A UN D SD
Frequency 157 134 7 49 38
Your firm financial behavior have affected its income.
Percentage 41% 35% 2% 13% 10%
Frequency 142 115 11 88 30
Your firm actions have affected its income.
Percentage 37% 30% 3% 23% 8%
Your firm financial attitude have affected your sales and Frequency 173 119 19 19 57
production capacity in the past. Percentage 45% 31% 5% 5% 15%
Source: Field Survey, 2023
With regards to financial behavior and attitude,76% of the respondents agreed that their financial behavior have
affected its income; 67% agreed that their firms’ actions have affected its income; and 76% agreed that their
firms’ financial attitude have affected their sales and production capacity in the past.
Hypothesis testing
Table 5 Regression Analysis table on financial behavior impact on SMEs financial performance in
Lagos State
r² 0.793 n 199
r 0.891 k 1
Std. Error 0.151 Dep. Var. Financial performance
ANOVA table
Source SS df MS F p-value
Regression 316.8905 1 316.8905 2468.17 .000
Residual 25.293 197 0.128391
Total 342.1835 198 -
Regression output
variables coefficients std. error t (df=197) p-value
Intercept 1.9449 0.0083 122.987 0.000
Financial behavior 0.3299 0.0105 51.487 0.000
There is a positive relationship between financial behavior and SMEs financial performance in Lagos State. The
value of the coefficient of determination shows that 79.3% of the variance recorded in
SMEs financial performance in Lagos State is accounted for by the financial behavior of SMEs operators in
Lagos State (R2 = 0.793, p<0.05). This value is statistically significant because the p-value of the result (0.000)
is less than the 0.05 level of significance used for the study.
The ANOVA table shows that with 1 and 197 degree of freedom, the critical value of F (3.88) is less than the
calculated F value of 2468.17. This signifies that the regression model provides a good fit to the data in the
sample.
The simple regression model for this hypothesis is
Financial performance = α1 + β1 Financial behavior
SMEs financial performance = 194 + 0.329 Financial behavior
An evaluation of the unstandardized coefficient of Financial behavior and its associated p-value (βFB= 0.329, P <
0.05) shows that a unit increase in the financial behavior of SMEs operators in Lagos state will result in a 32.9%
increase in financial performance.
Decision
Null hypothesis is not accepted; thus it is concluded that financial behavior has significant impact on SMEs
financial performance in Lagos State

@ IJTSRD | Unique Paper ID – IJTSRD55089 | Volume – 7 | Issue – 2 | March-April 2023 Page 524
 International Journal of Trend in Scientific Research and Development @ www.ijtsrd.com eISSN: 2456-6470
Hypothesis four
Table 6 Financial planning cannot impact significantly on SMEs ability to generate income in Lagos
State.
FINANCIAL PLANNING SA A UN D SD
Your educational qualification has helped your firm in Frequency 142 92 19 57 76
financial planning. Percentage 37% 24% 5% 15% 20%
Your educational qualification has helped your firm to Frequency 134 99 19 38 92
achieve planned savings. Percentage 35% 26% 5% 10% 24%
Your educational qualification has helped your firm Frequency 192 99 38 76 34
achieve longer-term financial goals. Percentage 50% 26% 10% 20% 9%
Source: Field Survey, 2023
61% of the respondents agreed that their educational qualifications have helped their firms in financial planning;
61% of the respondents agreed that their educational qualifications have helped their firms to achieve planned
savings; and 56% of the respondents agreed that their educational qualifications have helped their firms achieve
longer-term financial goals.
Hypothesis Testing
Table 7 Regression Analysis of Financial planning and SMEs ability to generate income in Lagos State
r² 0.811 n 199
r 0.901 k 1
Std. Error 0.190 Dep. Var. SMEs ability to generate income
ANOVA table
Source SS df MS F p-value
Regression 411.2530 1 411.2530 11380.53 .000
Residual 7.1189 197 0.0361
Total 418.3719 198
Regression output
variables coefficients std. error t (df=197) p-value
Intercept 5.9833 0.0262 228.659 0.000
Financial planning 1.0093 0.0095 -106.680 0.000
There is a positive relationship between financial planning and SMEs’ ability to generate income in Lagos State.
The value of the coefficient of determination shows that 81.1% of the variance recorded in SMEs ability to
generate income in Lagos State is accounted for by financial planning (R2 = 0.811, p<0.05). This value is
statistically significant because the p-value of the result (0.000) is less than the 0.05 level of significance used
for the study.
The ANOVA table shows that with 1 and 197 degree of freedom, the critical value of F (3.88) is less than the
calculated F value of 11380.53. This signifies that the regression model provides a good fit to the data in the
sample.
The simple regression model for this hypothesis is
Y = α4 + β4 Financial planning
SMEs ability to generate income = 5.98 + 1.0093 Financial planning
An evaluation of the unstandardized coefficient of financial planning its associated p-value (βFP= 1.0093, P <
0.05) shows that a unit increase in Financial planning will result in a 100% increase in SMEs ability to generate
income.
Decision performance of SMEs in Lagos State. The result of all
Null hypothesis is not accepted; thus it is concluded the analyses above reveals as follows: the cross
that financial planning can impact significantly on sectional data that were sourced through
SMEs ability to generate income in Lagos State. questionnaire shows that there is a high positive
relationship between financial education and the
Discussion of findings
financial performance of SMEs in Lagos State (r =
Based on the specific objectives of this study, four
0.701). Meaning that there is a significant relationship
hypotheses were tested with a view to establishing a
between the variables under investigation. This also
relationship between financial literacy and financial

@ IJTSRD | Unique Paper ID – IJTSRD55089 | Volume – 7 | Issue – 2 | March-April 2023 Page 525
 International Journal of Trend in Scientific Research and Development @ www.ijtsrd.com eISSN: 2456-6470
implies that the variables displayed high tendency [4] Anudu, O & Okojie, J. (2020). SMEs closures
during the period of conducting the research. seen after Covid-19 pandemic. Available at
Furthermore, there is a positive relationship between https://businessday.ng/enterpreneur/article/smes
financial behavior and attitude as well as SMEs -closures-seen-after-covid-19-pandemic/
financial performance in Lagos State. The value of [5] Attamah, N. (2019) Financial Literacy and
the coefficient of determination shows that 79.3% of SMEs Performance in Nigeria International
the variance recorded in SMEs financial performance Network Organization for Scientific Research
in Lagos State is accounted for by the financial INOSR APPLIED SCIENCES 5(1): 48-55,
behavior of SMEs operators in Lagos State (R2 = 2019.
0.793, p<0.05). This value is statistically significant [6] Afolabi, M. O (2013). Growth effect of Small
because the p-value of the result (0.000) is less than and medium enterprises (SMEs) financing in
the 0.05 level of significance used for the study. Nigeria. Journal of African Macroeconomic
The ANOVA table shows that the critical value of F Review.
(3.88) is less than the calculated F value of 2468.17. [7] Bernheim, Douglas. 1995. Do Households
This signifies that the regression model provides a Appreciate Their Financial Vulnerabilities? An
good fit to the data in the sample.. The implication of Analysis of Actions, Perceptions, and Public
this is that the more there is financial education, Policy. In Tax Policy and Economic Growth.
financial attitude, financial behavior the higher the Washington: American Council for Capital
level of financial performance in SMEs firms. Formation, pp. 1–30.
Conclusion/Recommendations [8] Christelis, Dimitris, Tullio Jappelli, and Mario
The fundamental objective of this paper is to establish Padula. 2010. Cognitive Abilities and Portfolio
a relationship between financial literacy and financial Choice. European Economic Review 54: 18–38.
performance of SMEs in Lagos State. The increasing [CrossRef]
number and complexity of SMEs products have make [9] Eagly, A., andChaiken, S. (1993). The
it imperative that financial literacy be addressed by Psychology of Attitudes. Toronto: Harcourt
SMEs. Based on empirical literature review and the Brace Jovanovich College
result of the analyses. It is therefore concluded that [10] Fernandes, D., John G. Lynch Jr., and Richard
lack of financial literacy have undermined the G. N. (2014). The Effect of financial literacy
financial performance of SMEs in Lagos State in and financial education on downstream
particular and Nigeria in general. This findings is in financial behaviors. Management Science 60:
line with the works of Hilgert(2003) and Stango and 1861–83. ([CrossRef) Group of Twenty (G20).
Zinman (2009). The study recommends that SMEs 2012. G20 Leaders Declaration. Los Cabos,
owners should acquire relevant financial education Mexico. June 19. Available online:
that can influence their financial attitude and http://www.g20.utoronto.ca/2012/2012-0619-
behavior, and also engage the services of accountants loscabos.html (accessed on 4 October 2017).
as well as management consultants continually send [11] Hastings, J. S., Brigitte C. M., and William L.
their owners and managers to attend financial courses, S. (2013) Financial literacy, financial
trainings and seminars to provide the necessary basic education, and economic outcomes. Annual
knowledge of financial education to enable SMEs Review of Economics 2013: 347–73.
grow financially. [12] Hilgert, Marianne A., Jeanne M. Hogarth, and
REFERENCES Sondra G. Beverly. 2003. Household financial
[1] Abiodun, A. (2016). Financial literacy and management: The connection between
SME firm performance. International Journal knowledge and behavior. Federal Research
of Research Studies in Management, 5(1), 31- Bulletin 89: 309.
43. [13] Huston, S. J. (2017). Measuring Financial
[2] Aifuwa, H.O., Musa, S.M., & Aifuwa, S.A Literacy. The Journal of Consumer Affairs,
(2020). Coronavirus Pandemic Outbreak and 44(2), 296–316.
Firms Performance in Nigeria. Management [14] Kadiri I.B (2012). Small and Medium Scale
and Human Resource Research Journal 9(4). Enterprises employment generation in Nigeria:
[3] Allgood, S. & Walstad, W.B. (2016). The The role of finance. Kuwait Chapter of Arabian
effects of perceived and actual financial Journal of Business and Finance and
literacy on financial behaviors. Econ. Inq., Management review Vol.1 No 9.
54, 675–697. [15] Latif, J. Y., Razak, B. T. and Lumpur, K.
(2011). Financial Management Attitude and

@ IJTSRD | Unique Paper ID – IJTSRD55089 | Volume – 7 | Issue – 2 | March-April 2023 Page 526
 International Journal of Trend in Scientific Research and Development @ www.ijtsrd.com eISSN: 2456-6470
Practice among the Medical Practitioners in Development. American Journal of Business
Public and Private Medical Service in Malaysia, and Management, 1(1), 18–22.
6(8), 105–113. [25] Nkundabanyanga, S. K., & Kasozi, D.
[16] Levine, R., Loayza, N., Beck, T. (2000). (2014). Lending terms, financial literacy and
“Financial intermediation and growth: formal credit accessibility. International
Causality and causes”. Journal of Monetary Journal of Social Economics, 41(5), 342–
Economics 46, 31–77. 361.
[17] Lusardi A., and Olivia S. M. (2014). The [26] Odebiyi I., Fasesin O. & Ayo-Oyebiyi G.T.
economic importance of financial literacy: (2020) Financial Literacy and Small and
theory and evidence. Journal of Economic Medium Enterprises’ Performance in Lagos
Literature 52: 5–44. State, Nigeria: An Empirical Approach
[18] Lusardi, A., and Olivia S. M. (2011). financial [27] OECD. (2005). Improving Financial Literacy:
literacy and planning: implications for Analysis of Issues and Policies. Retrieved from
retirement well-being. in financial literacy: http://www.oecd.org/document/28/0,3343,en_2
implications for retirement security and the 649_15251491_35802524_1_1_1_1,00.html
financial marketplace. Edited by Olivia S. [28] OECD/INFE(2016). OECD/INFE International
Mitchell and AnnamariaLusardi. Oxford and survey of adult financial literacy competencies.
New York: Oxford University Press, pp. 17–39. Paris: OECD.
[19] Lusardi, A., and Olivia S. M.(2006). Financial [29] OECD/INFE.(2017). G20/OECD INFE Report
literacy and planning: implications for on Adult Financial Literacy in G20 Countries.
retirement wellbeing. Working Paper. Paris: OECD, Available
Philadelphia, PA, USA: Pension Research online:http://www.oecd.org/daf/fin/financial-
Council, University of Pennsylvania. education/G20-OECD-INFE-report-adult-
[20] Lusardi, Annamaria, and Olivia S. Mitchell. financial-literacy-in-G20-countries.pdf
2014. The Economic Importance of Financial (accessed on 13 February 2018).
Literacy: Theory and Evidence. Journal of [30] Potrich, A. C. G., Kelmara, M. V. and Wesley,
Economic Literature 52: 5–44. [CrossRef] M. D. S. (2016). Development of a financial
[PubMed] literacy model for university students.
[21] Mahdzan, N.S., and Saleh T. (2013). The Management Research Review, 39(3), 356–376.
impact of financial literacy on individual [31] Robb, C. A. and Woodyard, A. S. (2011).
saving: an exploratory study in the malaysian Financial Knowledge and Best Practice
context. Transformations in Business and Behavior. Journal of Financial Counseling and
Economics 12: 41–55. Planning, 22(1), 60-70.
[22] Moore, D.(2003). Survey of financial literacy in [32] Robu, M. (2013). The dynamic and importance
Washington state: knowledge, behavior, of SMEs in economy. The USV annals of
attitudes, and experiences. Washington State economics and public administration. Vol.13.
University Social and Economic Sciences 1(17)
Research Center Technical Report 03-39.
[33] Sucuahi, W. T. (2013). Determinants of
Pullman: Washington State University Social
financial literacy of micro entrepreneurs in
and Economic Sciences Research Center.
Davao city. International Journal of Accounting
[23] Moore, Danna. 2003. Survey of Financial Research, 1(1), 44–51.
Literacy in Washington State: Knowledge,
[34] Umogbaimonica E.., Agwa T.R & Asenge L.E.
Behavior, Attitudes, and Experiences.
(2018). Financial Literacy And Performance Of
Washington State University Social and
Small And Medium Scale Enterprises In Benue
Economic Sciences Research Center Technical
State, Nigeria International Journal of
Report 03-39. Pullman: Washington State
Economics, Business and Management
University Social and Economic Sciences
Research Vol. 2, No. 04; 2018.
Research Center.
[35] Zeynep, T. (2015). Financial Education for
[24] Muritala, T. A. Awolaja, A. M. & Bako, Yusuf.
Children and youth. Handbook of Research on
A. (2012). Impact of Small and Medium
Behavioral Finance and Investment Strategies,
Enterprises on Economic Growth and
24

@ IJTSRD | Unique Paper ID – IJTSRD55089 | Volume – 7 | Issue – 2 | March-April 2023 Page 527