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1.1  Background of the Problem

Micro and small enterprises (MSE’s) are facilitators for broad-based growth in competition, entrepreneurship and offer economy-wide benefits such as innovation and aggregate productivity growth (Tarfasa, Ferede, Kebede, & Behailu, 2016). A micro enterprise as defined by (Government of Nigeria , 2012) is a firm, industry or business activity that has an annual turnover not more than five hundred thousand shillings, and employs less than ten people. The law of Nigeria  also defined small enterprise as a firm, industry or business activity whose annual turnover is between five hundred to five million shillings and employs ten to fifty people. Therefore, we can define Micro and small enterprises as firms, industry or businesses that has an annual turnover of less than five million shillings and employs less than fifty employees.

Micro, small and medium enterprises (MSMEs) contribute largely to output, employment in both developed and developing countries and contribute greatly to the revitalization of the global economy and of individual national economies (Paul, 2009). In the global economy today, the multinational firms are increasingly directing their efforts towards branding and marketing rather than production which results in extended supply chain reaching far into developing countries and providing new opportunities for small firms (Simeon & Lara, 2005). There are 420 to 510 million MSMEs worldwide as estimated by the International Finance corporation (IFC) and the McKinsey Global Institute (MGI) based on a 2010 study of 132 countries. They also found that only 9% are formal SMEs and 80 to 95% are emerging markets (Kushnir, Mirmulstein, & Ramalho, 2010).

Micro small and medium enterprises represent 90% of all businesses in the European union and are often referred to as the backbone of the European economy providing a potential source for jobs and economic growth. MSMEs generate two out of every three jobs and in 2013, over 21 million MSMEs provided almost 90 million jobs throughout EU (EUR_Lex, 2016). In the Caribbean, the Micro, Small and Medium Enterprises (MSME) sector is also a substantial contributor to economic and social development (Caribbean development bank, 2016).

The MSMEs account for more than 50% of regional enterprises, and over 50% of Gross Domestic Product. According to a study by the Caribbean development bank, despite the contributions of MSMEs in the Caribbean, there are a number of major constraints faced which includes inadequate access to financial resources for investment and working capital; gaps in training in business skills; high cost of infrastructure services; inadequate physical infrastructure support; low levels of technology usage to improve productivity and; and lack of competitiveness.

In many African countries, Micro and Small enterprises MSE’s employment are almost twice the level of total employment in registered large-scale enterprises confirming that micro and small enterprises are a major source of livelihood for a large proportion of the population (Tarfasa et al., 2016). MSE’s therefore are critical in kick starting broad-based growth, private sector led growth and employment creation especially for developing countries that aspire to have sustainable growth. In south Africa, the government introduced a new ministry of Small Business Development in 2014 so as to recognize the importance of MSE’s in the economy (Bureau for economic research, 2016). The ministry was introduced with the aim of facilitating the promotion and development of small businesses and in turn significantly contribute to national GDP and job creation.

As reported by (Adan and Dulacha , 2017), in 1999, a national baseline survey of MSE’s carried out by central bureau of statistics in Nigeria  showed there were 1.3 million MSE’s employing

2.4 million people and accounting for 18.4% of the national gross domestic product. They further noted that recent statistics by the Nigeria n national bureau of statistics show that MSE’s within formal sector account for 75% and 42% of establishments and employment, respectively. However, it is worth noting that the formal sector only reflects a partial portion of the MSE’s as a large number of them operate informally. The Nigeria  Vision 2020 further stresses the efforts targeted at growth of MSE’s through skills development, access to financial services and development of MSE parks among others (“Nigeria  Vision 2020,” 2007). The government of Nigeria  has also enacted an MSE legislation aimed to encourage the growth of the industry through providing an enabling business environment; facilitating access to business development services by micro and small enterprises; facilitating formalization and upgrading of informal micro and small enterprises; promoting an entrepreneurial culture; and promote

representative associations (National council for law, 2012). Participants in the MSE industry may require a little bit of financial skills and knowledge to prevent making wrong decisions that harm both individuals and societies. These skills are often referred to as financial literacy.

Financial literacy is the mastery of a set of knowledge, attitudes and behaviors. It was defined by (Nkundabanyanga & Kasozi, 2014), as the ability of an individual to make informed judgement and take effective decisions regarding the use and management of money. They added that such person also possesses a facilitating attitude to the effective and responsible management of financial affairs. That is the ability to read, analyses, manage and communicate personal financial conditions that affect well-being and the ability to distinguish financial choices, discuss money and financial issues without discomfort. It has assumed the role in allowing people to make responsible decisions as they strive to attain financial wellbeing (Ani, Kelmara, & Wesley, 2016).

Financial literacy has become essential in the running of businesses and operations of organizations in the complex and dynamic environment today. Atkinson and Messy (2012), added that governments around the world are interested in finding effective approaches of improving financial literacy of their populations through developing strategies for financial education with the main aim of providing various learning opportunities. Financial education as defined by (Ani et al., 2016), is a process of developing abilities of people to facilitate making decisions that are correct and to manage finances successfully. Therefore, it is right to conclude that financial education is knowledge which is among other factors involved in financial literacy.

Many countries have developed strategies for the implementation of financial education to improve financial literacy of their population as it is perceived as a life skill necessary for intelligent financial conduct in modern life and an important basis for the economic and financial stability of society and the state (Tali, 2016). The Standard & Poor’s Ratings Services Global Financial Literacy Survey (S&P Global Fin Lit Survey) conducted a survey across a wide array of countries. They found that around 3.5 billion adults globally, most of them in developing economies, lack an understanding of basic financial concepts. They added that the countries with the highest financial literacy rates are Australia, Canada, Denmark, Finland, Germany, Israel, the Netherlands, Norway, Sweden, and the United Kingdom, where about 65 percent or

more of adults are financially literate (Leora, Lusardi, & Peter, 2015). It builds on the earlier initiatives by the International Network on Financial Education (INFE) of the Organization for Economic Co-operation and Development (OECD), the World Bank’s Financial Capability and Household Surveys, the Financial Literacy around the World (FLAT World) project, and other national survey initiatives that collect information on financial literacy.

Financial literacy has got an increasing interest in developed countries because of the increasing complexity of financial markets, increasing cost of life, the shift of retirement responsibility from government to individuals, which all demand personal financial management capability in individual and households (Refera, Dhaliwal, & Kaur, 2016). They added that studies revealed recent modest recognition of financial literacy in developing countries, which showed promising outcomes of financial education and other interventions that are being implemented. However, there is no much information about financial literacy level and financial education programs in least developing countries in Africa. According to (Xu & Zia, 2012) on their paper, review of financial literacy across the globe, the survey results in sub-Saharan Africa indicated that, a large proportion of population in some countries like Mozambique, Malawi, and Nigeria lack awareness of basic financial products and concepts such as saving accounts, interest on savings, insurance, and loans. These shows that the low level of financial literacy is correlated with low level of financial inclusion in Africa.

In Nigeria there is a correlation between use of financial services and exposure to financial information (Xu & Zia, 2012). The most common source of financial information is through radio, word of mouth from friends and family members, and the urban youth have greater access to television and other media. Despite successive policy interventions, micro and small enterprises in Nigeria  face challenges that limit their growth and diminish their contribution to sustainable development. According to Lusimbo and Muturi, (2016) the small enterprise sector in Nigeria  shows a distinct dual structure, at one extreme there exist a few large modern capital intensive enterprises, while at the other extreme there are small micro enterprises that are informal, use very simple and traditional technologies and serve a limited local market.

The profitability of a company shows the ability of the company to generate earnings for a certain period at a rate of sales, assets and certain of capital stock (Margaretha & Supartika, 2016). Knowing that factors that determine the profitability is key to helping managers in developing effective strategies that will lead to the profitability of their firm. Profitability is attained through various practices such as effective corporate governance; marketing strategies that create quality products, position products at the top -of- mind of consumers, and build customer loyalty; research and development; and financial management and accounting practices that build advantage. Financial management being a major area and opportunity is an art and science of managing money through planning, organizing, lending and controlling financial activities to achieve organization goals.

1.2  Problem Statement

The growing recognition of the importance of Micro and small enterprises (MSE’s) in developing countries is not by choice but out of necessity in order to add value to the economies by creating jobs, enhancing income, strengthening purchasing power among others. The government of Nigeria has recognized the importance of MSE’s in employment generation and poverty eradication in the country. This led to the development and promotion of policies that are there to support the growth of the sector like the Nigeria Vision 2020 that further rejuvenated policy efforts targeted at growth of MSE’s through skills development and access to financial services.

The government has enacted an MSE legislation that among other interventions aims to promote growth of MSE’s through enabling business environment, access to business development services, and establishment of an authority to formulate, review and monitor relevant policies (Government of Nigeria, 2012). It is therefore, an avenue for incubating enterprises, catalyzing innovation, and promoting industry, creating employment, and growing the economy. Despite successive policy interventions and financial education programs, MSE’s sector in Nigeria in addition to improved access to finance demonstrate limited growth and competitiveness (Micro and Small Enterprises Authority, 2013).

Studies have been conducted on the importance of financial literacy on performance in terms of profitability and growth of MSE’s and have shown that lack of financial literacy level among people around the world has cause business failures and even considered as one of the factors that contributed to the worldwide economic crisis of 2008/9 (Niwaha, Schmidt, & Tumuramye, 2016). A study on the role of financial literacy on the profitability of women owned enterprises in Nigeria suggested that budgeting, cash management, savings and record keeping are significant in the profitability of women owned businesses (Kalekye & Memba, 2015). It emphasized the importance of financial training in enhancing capabilities and day to day running of businesses. Another study by (Lusimbo & Muturi, 2016) that focused on the importance of financial literacy on small enterprises growth found that although MSE managers had fair knowledge of debt management literacy, majority do not understand the effect of inflation and interest rates on loans they borrow in terms of matching assets and liability. They added that the managers exhibit low book keeping literacy and in turn recorded minimal or no growth.

Other researchers argued that the success of a small enterprise does not depend on financial literacy of the managers. For example a study by (Plakalovi, 2015) focused on financial literacy among SMEs managers and found that the interviewed managers have disappointingly low level of basic financial knowledge and only a few managers use the proper ratios and ratio analysis. He added that they are not aware of the intangible values of their companies and they manage liquidity of the firms on spontaneous way.

Many researchers conducted on financial literacy focused on personal finance and fail to relate it to business management. They tend to look at factors like book keeping literacy, banking services literacy and ratio analysis on personal and household finance. Unlike that previous researches that focused on a few components of financial behavior of managers, this study focused on various components of financial knowledge, financial behavior and financial attitude and how they affect profitability of MSE’s.

1.3  General Objective

The general objective of the study was to investigate the impact of financial literacy in terms of how financial knowledge, financial behavior and financial attitude affect the profitability of students owned Micro and Small Enterprises (MSE’s) in Nigeria.

1.4  Specific Objectives

The objectives of the study were to:

1.4.1         Investigate the effect of financial knowledge on the profitability of Micro and Small enterprises owned by students in Nigeria.

1.4.2         Investigate the effect of financial behavior on the profitability of Micro and Small enterprises owned by students in Nigeria

1.4.3         Investigate the effect of financial attitude on profitability of micro and Small enterprises owned by students in Nigeria.

1.5  Significance of the study

The findings of this research study are anticipated to be of benefit to the following entities among others;

1.5.1   Researchers and Academicians

This study will be an important addition to the existing repository of knowledge and hence will be of interest of both researchers and academicians who seek to explore or investigate the importance of financial literacy among other factors on the profitability of micro and small enterprises in Nigeria or any other country.

1.5.2   The Government and Financial regulators

It is an objective of every government to promote innovations of all kinds in a country and Micro and Small enterprise being of economic benefits cannot be ignored. In addition to the perceived economic benefits, MSE development has long been viewed by policymakers to increase incomes of the poor. The results of this research will provide information on possible ways the government can tackle the issue of financial illiteracy among business owners and possible ways of promoting financial education among the entrepreneurs and small business owners which will in turn promote the profitability of the MSE’s. Also, it will help the government and financial regulators on incorporating these MSE’s in their policies on areas like having access to credits and other financial benefits which will eventually provide greater opportunities for the participants in that industry and the poor.

1.5.3   Investors and Financial Institutions

This study will be useful to investors because it will highlight the benefits that will be derived by their firms from acquisition of financial literacy. These benefits will include proper financial management skills that will lead to profitability of their firms. Also, for investors who are assisted by others, it will emphasis the importance of financial literacy so they can be able to understand financial reports of the firm, how assets are allocated, what ratio of debt to equity to be used and how to derive further profits. For financial institutions, it will help them asses the credibility of an MSE by the financial knowledge of the owners.

1.6  Scope of the Study

The study covered the Micro and Small enterprises in Lagos that are owned or controlled by students of University of Lagos (UNILAG) The sample size was drawn from estimates of MSE’s formal and informal. The research process was conducted over a period of three months from February 2017 to April 2017.

1.7  Definition of Terms

1.7.1   Financial literacy

The (OECD, 2011) defined financial literacy as a combination of awareness, knowledge, skill, attitude and behavior necessary to make sound financial decisions and ultimately achieve individual financial wellbeing. That is, it is the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.

1.7.2   Micro and Small Enterprise

A micro and small enterprise (MSE) is defined by (Government of Nigeria , 2012) as firms, industries or business activities that has an annual turnover not more than five million shillings and employs less than fifty people.

1.7.3   Profitability

The word profitability is composed of two words, namely, profit and ability (Dr. Monica Tulsian, 2014). The term profit is a measure of receipts less cost and the term ability indicates the power of a business entity to earn profits. The ability of a concern also denotes its earning power or operating performance. Therefore, profitability may be defined as the ability of a given investment to earn a return from its use.

1.7.4   Financial Knowledge

Financial knowledge is wisdom acquired through learning the ability to manage income, expenditure and savings in a safe way (Annamaria Lusardi & 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).

1.7.5   Financial Behavior

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.

1.7.6   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, & Lumpur, 2011).

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