Financial Behavior, Financial Literacy and Investment Decisions: A study of Small And Medium Enterprises In Nairobi Central Business District, Kenya

Abstract

Investment decisions play a significant role on the economic development of SMEs. This is because profitable investment projects result to financial prosperity of an enterprise. Despite adequate support by the Kenyan government through introduction of single business permits as a solution to business licensing problems, provision of grant funding and offering business training, SMEs continue to face serious challenges in making rational investment decisions which result to great financial losses. The study therefore sought to examine the moderating effect of financial literacy on the relationship between financial behavior and investment decisions among small and medium enterprises in Nairobi CBD, Kenya. The specific objectives were to determine the effect of savings behavior, borrowing behavior, spending behavior and investment behavior on investment decisions and to investigate whether financial literacy moderates this relationship . The study was anchored on the prospect theory, theory of planned behavior and the human capital theory. Explanatory research design was adopted. The study targeted 1,842 registered SMEs operating within Nairobi CBD. A sample size of 329 respondents was selected using the simple random sampling technique. Questionnaires were used to collect data. The data collected was analyzed using both descriptive statistics such as means and standard deviations as well as inferential statistics including regression and Pearson correlation. Hierarchical regression model was used to test the hypotheses. The findings indicated that savings behavior (β = 0.23, p < 0.05), borrowing behavior (β = 0.18, p < 0.05), spending behavior (β = 0.22, p < 0.05) and investment behavior (β = 0.15, p < 0.05) positively and significantly influence investment decisions. In addition, the hierarchical regression results showed that financial literacy moderates the relationship between savings behavior and investment decisions (β = 0.01, p < 0.05, ΔR 2 = 2.01%), borrowing behavior and investment decisions (β = 0.60, p < 0.05, ΔR 2 = 0.2%), spending behavior and investment decisions (β = 0.66, p < 0.05, ΔR 2 = 0.2%), investment behavior and investment decisions (β = 0.02, p < 0.05, ΔR 2 = 0.1%) among SMEs in Nairobi CBD. Thus, the study concluded that financial behavior plays a significant role in investment decisions made by SMEs. Moreover, financial literacy strengthens and moderates the relationship between financial behavior and investment decisions. The study recommends that the Kenyan government collaborates with well-established financial bodies such as World Bank in a bid to offer business training to SMEs. Furthermore, Kenyan commercial banks should come up with efficient user-friendly tools that encourage wise financial behavior and financial literacy among business owners. SMEs owners are consequently encouraged to continue taking up financial education courses and to always seek for financial expertise even before making investment decisions. The study also recommends that the Kenya Education curriculum incorporates financial literacy courses so that students gain financial skills and knowledge at an early age.