THE 10th ISLAMIC BANKING, ACCOUNTING AND FINANCE INTERNATIONAL CONFERENCE
(iBAF 2022)
Increasing SMEs Performance through Financial Literacy, Financial Inclusion and Access to Finance
Lian Eric Junico
Student of Bachelor, Faculty of Economics, Universitas Muhammadiyah Semarang (UNIMUS), Jalan Kedungmundu No.18, Semarang, Indonesia
Telp: +628 2223 393208 E-mail: [email protected]
Kartiko Wibowo
Faculty of Economics, Universitas Muhammadiyah Semarang (UNIMUS), Jalan Kedungmundu No.18, Semarang, Indonesia
Telp: +6282243352149 E-mail: [email protected]
Abstract
SMEs sustainability can be achieved if it has good performance. The performance is influenced by several factors. The purpose of this literature is to describe and analyze financial literacy, financial inclusion, and access to finance in encouraging SMEs performance. SMEs that apply financial literacy to their entrepreneurial activities at a higher level have the opportunity to be more successful in running their business because they can make the right financial decisions. Furthermore, the ease of services related to finance also needs to be a concern for business actors. The ease of financial services will be good if SMEs implement financial inclusion properly as well. Financial inclusion refers to access to various financial services, at a reasonable cost, for people who are considered unbanked as well as those who run businesses in rural areas. Financial inclusion services include savings, credit (short term & long term), leasing, insurance, and pension funds. Another important thing related to the performance of SMEs is access to finance. Access to finance is one of the obstacles to the growth and development of SMEs.
Access to finance can be analyzed from various aspects, namely the availability of financial services for companies and individuals such as financing which includes increasing the number of ATMs and adding access points through digital payment services.
Keywords: SMEs Performance; Financial Literacy; Financial Inclusion; Access to Finanace
1. Introduction
The COVID-19 pandemic has made many changes in various fields of life, including the economy. The impact of the spread of this virus has weakened the Indonesian economy, which is marked by a high percentage of poverty and unemployment. Badan Pusat Statistik (BPS) released the second data as can be seen in table 1.1. The high percentage of unemployment rate is caused by companies that reduce Human Resources (HR). As a result of these actions, there was an increase in the percentage of poverty and the unemployment rate.
Table 1. Poverty and Unemployment Rate Data
Year Poverty Unemployment Rate
Month Percentage Month Percentage
2021 September
March
9,71%
10,14%
August February
6,26%
6,49%
2020 September
March 10,19%
9,78% August
February 7,07%
4,99%
2019 September
March
9,22%
9,41%
August February
5,28%
5,01%
2018 September
March
9,66%
9,82%
August February
5,34%
5,18%
2017 September
March 10,12%
10,64% August
February 5,50%
5,33%
The weakening of the Indonesian economy due to COVID-19 requires recovery efforts. The economic growth of a country is supported by Micro, Small, and Medium Enterprises (SMEs), especially in developing countries.
In Indonesia there are 19 million SMEs. SMEs have a more important role in encouraging economic development.
According to the SME Law No. 20 of 2008, SMEs aim to grow and develop businesses in order to build a national economy based on people's economic justice. SMEs in Indonesia have an important contribution or role in the expansion and absorption of new workers, the formation of Gross Domestic Product (GDP), and a business safety net for low-income people in achieving efficient economic activities.
The importance of the role of SMEs is expected to be able to provide positive changes for Indonesia because of the large number of them. However, this is a concern because not a few SMEs are still experiencing instability and are difficult to develop due to experiencing several problems, one of which is financial. Lack of understanding of financial service concepts and products makes most SMEs unable to run their business properly. Therefore, it is not uncommon for SMEs to experience failure in their business. One of the factors that cause SMEs to experience delays in their development is related to financial problems. Therefore, strategic efforts are needed to improve SME performance (Suryandani & Muniroh, 2019) related to finance through access to finance, financial inclusion, and financial literacy.
Access to finance is an important determinant of the performance of small businesses because it provides them with working capital, encourages stronger innovation and corporate dynamism, enhances entrepreneurship, encourages more efficient asset allocation, and increases the company's ability to take advantage of growth opportunities (Beck & Demirguc-kunt, 2006).
The results of the study (Lakuma et al., 2019) show evidence that financial inclusion is very important for company growth. In addition, financial inclusion is a component that supports financial system stability and economic growth. The more people access financial services easily, the faster economic growth is expected, so it is expected to be able to increase economic capacity and reduce poverty and economic inequality (Raza et al., 2019).
Furthermore, financial literacy is needed by SMEs actors in running their businesses. SMEs with good financial literacy will be able to implement strategic plans to identify opportunities and threats, have adequate access to finance, and respond to changes in the fluctuating business environment so that the decisions taken will provide innovative and targeted solutions to improve SME performance. Business actors must have the ability to prepare financial reports and financing activities that require financial knowledge (Dahmen & Rodríguez, 2014).
Financial literacy has proven to be very important in increasing transparency, efficiency, accuracy, and accountability in business. The success or failure of SMEs depends on their financial capabilities. Financial literacy is a key resource for organizations to improve the performance of SMEs, giving them a sustainable competitive advantage (Chepngetich, 2016).
This research was planned because of the finding of gaps in the research variables. The firstis the relationship between financial literacy and SMEs performance. The results of the study (Adomako & Danso, 2014) found a significant influence on financial literacy on SMEs performance. Meanwhile, different things were found in research (Eniola & Entebang, 2015) which said that financial literacy had no significant effect on SMEs performance. Second, is the relationship between financial inclusion and SMEs performance. The results of the study(Dewi, 2018)found that financial inclusion had a significant effect on SMEs performance. Not all research results are the same. The results of the study (Lakuma et al., 2019)found that financial inclusion had no significant effect on SMEs performance. Third, is the relationship between access to finance and SMEs performance. The results of the study (Mabula, 2018)found a negative influence between access to finance and SMEs performance.
In contrast to the results of previous studies, (Bongomin, G., Ntayi, J., & Munene, 2016) found a positive relationship between access to finance and SMEs performance.
Based on the description above, the purpose of this research plan is to describe and analyze financial literacy, financial inclusion, and access to finance on SMEs performance.
2. Literature Review
Figure. 1. Conceptual Model
2.1 SMEs Performance
Organizational performance is something that describes the extent to which a group has carried out all its main activities to achieve the vision and mission of the institution (Subagja et al., 2017). The performance of a company or SMEs is a result made by management or a company continuously and is the result of the decisions of many individuals to achieve company goals for both small and medium enterprises (Fitriati et al., 2020). From some of the opinions above, it can be concluded that the performance of SMEs is the result of evaluating the company's work achieved by a person or group with the division of activities in the form of tasks and roles within a certain period of time with company standards (Mutegi et al., 2015).
Business performance indicators according to (Aragón-sánchez & Sánchez-marín, 2005)include profitability, productivity, and market. According to (Yanti, 2019), the SME Growth Indicator includes three indicators, namely the absorption of labor, capital, and the profits or profits obtained by SMEs. (Ningsih & Tasman, 2020) combines the two previous studies by writing down indicators used to measure performance including adding sales growth, capital growth, adding labor every year, market and marketing growth, and company profit/profit growth.
2.2 Financial Literacy
Financial literacy can be defined as knowledge of basic economic and financial concepts and the ability to apply that knowledge and other financial skills to manage financial resources (Hung et al., 2009; Huston, 2010).
(Lusardi, 2008b, 2008a) and (Lusardi et al., 2011)conceptualize financial literacy as knowledge of basic financial concepts and the ability to perform simple calculations. Financial literacy can be defined as individual awareness, insight, and understanding of financial concepts (Shih & Ke, 2014).Financial literacy is the ability of a person to read, analyze, manage and communicate financial conditions that affect their welfare (Lusardi, 2008b). The definition of financial literacy according to (Xu & Zia, 2012)includes financial products, concepts derived from the perception and understanding of financial institutions, and the concept of financial literacy. Meanwhile, based on the Regulation of Otoritas Jasa Keuangan Number 76/POJK.07/2016 concerning Improvement of Financial Literacy and Inclusion in the Financial Services Sector for Consumers and the Community, financial literacy is defined as knowledge, skills, and beliefs that are influenced by attitudes and behavior to improve the quality of decision-making and management. finance in well-being.
Financial literacy indicators in research (Bongomin, et al., 2016) include behavior, skills knowledge, and attitude. Meanwhile(Yushita, 2017) uses the financial literacy dimension including general knowledge of finance, savings and loans, insurance, and investment.
Several studies have shown that SMEs that apply financial knowledge to higher levels of entrepreneurial activity have the opportunity to be more successful in running their businesses. Previous research has shown that financial literacy has a high influence on access to finance in the context of SMEs in developing countries, and there is a significant impact of financial literacy on SME growth (Bongomin et al., 2017).
Financial Literacy
Financial Inclusion
Access to Finance
SMEs Performance
H1
H2
H3
The relationship between financial literacy and SME performance is based on the Theory of Planned Behavior (TPB)(Ajzen, 1991) which states that there are goals and intentions before human behavior. In this case, behavioral factors in the theory of planned behavior are motivated by information in the form of financial knowledge. .. If a person has a lot of knowledge about financial matters, that knowledge can be used as a decision- making factor to maximize business performance.
Good financial literacy enables entrepreneurs to use their skills in finance so that business owners or managers can make complex and strategic financial decisions related to the success of achieving business goals and growth (Drexler et al., 2014). Previous research by (Dahmen & Rodríguez, 2014)found that there was a significant relationship between financial literacy and business performance. This relationship is logically applied to companies with good financial literacy that will be able to strategically identify and respond to changes in financial conditions so that the decisions taken will create appropriate and well-directed solutions to improve company performance.
2.3 Financial Inclusion
Demirgüç-Kunt & Klappe (2013) defined financial inclusion as the use of formal financial services among various groups that benefit the welfare of many individuals. (Sahay et al., 2015)said that financial inclusion is access, use, and delivery of financial services at affordable costs for vulnerable segments of society. (Sarma, 2012) provided a comprehensive definition of financial inclusion based on several dimensions including the accessibility, availability, and use of the formal financial system for all members of the economy. (Ozili, 2018) defined financial inclusion as a process to ensure all individuals have access to basic financial services through their participation in the formal financial sector. Financial inclusion can also be interpreted as a process that ensures access, use, availability, and quality of the formal financial system to all members of an economy (Raza et al., 2019). Meanwhile, based on the Regulation of Otoritas Jasa Keuangan No. 76/POJK.07/2017 concerning Improving Financial Literacy and Inclusion in the Financial Services Industry for Consumers and the Community, Inclusive Finance is defined as the availability of access to various financial institutions, products, and services according to their needs and abilities in order to improve the welfare of the community. Financial inclusion indicators according to (Bongomin, et al., 2016) include quality, usage, and welfare.
Makina (2019) in his research said that financial inclusion provides opportunities to accelerate inclusive growth. In addition, a higher level of financial inclusion can facilitate increased participation by various economic sectors in the formal financial system because along with the increasing share of the formal financial sector, this strengthens the use of interest rates as the main policy tool for macroeconomic stability that has a positive impact on economic growth and development. company performance (Cecchetti & Kharroubi, 2012).
Based on the Theory of Planned Behavior (TPB), reduced barriers from the bank and non-bank financial institutions provide opportunities for business actors to easily access financial resources; TPB shows attitude, the influence of social environment, and strong or weak factors driving a person's behavior to access financial institutions. Financial inclusion is a process to ensure that all individuals have access to basic financial services through their participation in the formal financial sector (Ozili, 2018). By making financial access available and affordable for economic agents, a business will work well so that business performance will increase (Ibor &
Offiong, 2017). In his research, he concluded that there is a significant relationship between financial inclusion and the performance of micro, small and medium enterprises. The financial inclusion policy has a significant and positive impact on the performance of SMEs.
2.4 Access to Finance
Access to finance is defined as the ability of individuals, households, companies, and businesses to access and use various financial services if they so desire (Rojas-suarez, 2010). (Soetino & Setiawan, 2018) said that there are three syndicators used to measure financial access, namely access or availability, use, and quality. Access or availability is the ability to benefit from formal financial services in terms of physical affordability and actual cost. Usage in this case is a measure of the actual use of financial services and products. Quality is the level of fulfillment of demand and can affect people's needs. In this case, the quality can be in the form of financial literacy index, the number of financial service complaints, and the introduction of complaint service solutions.
Access to finance is an important determinant of the performance of small businesses as it provides them with working capital, encourages stronger innovation and enterprise dynamism, enhances entrepreneurship, encourages more efficient asset allocation, and enhances firms' ability to take advantage of growth opportunities (Beck & Demirguc-kunt, 2006). Access to finance is one of the main drivers of the formation, development, and growth of the SMEs sector (Mung, 2017). These factors include the structure of the financial sector, knowledge of funding opportunities, collateral requirements, and small business support services. Based on research (Osano
& Languitone, 2016), it was found that there is a relationship between financial access and the growth of SMEs, there is a relationship between funding awareness and financial access by SMEs, there is a relationship between
collateral requirements and financial access by SMEs, and there is a relationship between small business support and access to finance by SMEs. So that access to finance can affect the growth of SMEs to run well, the government needs to intervene with the right regulations, such as financing plans and the right schemes for SMEs to grow. In addition, relevant information relating to funding opportunities for SME growth is also needed (Osano
& Languitone, 2016).
3. Research Methods
The population in this research plan is all SMEs in Semarang City and Semarang Regency which are engaged in the fashion sector. Sampling using non-probability sampling with purposive sampling technique. The source of data for this research plan is primary data obtained from questionnaires given to SMEs actors. This research plan is quantitative and uses PLS (Partial Least Square) analysis tool. The data obtained in this research plan are in the form of answers to questions in the questionnaire regarding several variables in this research plan, namely financial literacy, financial inclusion, and access to finance. So, from our study we know that financial literacy, financial inclusion, and access to finance are very important in encouraging the performance of SMEs.
4. Knowledge Contribution
The contribution of this research plan is expected to be able to develop competence in the field of financial management and can be used as a reference and guide in making entrepreneurial decisions and improving business performance.
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