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.