The Relationship Between Financial Literacy and Liquidity Among Small and Medium Sized Enterprises in Mogadishu, Somalia

Abstract

Despite the critical role played by SMEs in growth of developing countries like Somalia, these firms have been characterized by interplay of many challenges. These include liquidity constraints attributed to limited financial literacy among managers and owners. Misuse of funds, lack of financial planning and risk management skills among managers have been established as other challenges curtailed liquidity levels of SMEs in Somalia. It is therefore important to enhance liquidity levels of these firms so that they can have a meaningful contribution towards recovery and growth of Somalia’s economy. This study sought to determine the effect of financial literacy on liquidity. Descriptive survey design was adopted targeting 110 SMEs in Mogadishu and census was adopted. Both primary and secondary data was gathered and the analysis was supported by descriptive statistics like means and standard and regression analysis and presented through tables. The study noted that financial planning (β=0.911) had the greatest effect on liquidity of SMEs in Somalia followed by risk management (β=0.384) and lastly debt management (β=0.247). The study concludes that financial literacy has significant effect on liquidity. It was recommended that management team working with SMEs in Somalia should maximize their liquidity position by balancing between their current assets and liabilities in their balance sheets. The policy makers working with SMEs in Somalia should create relevant policies on financial literacy that will see its increased uptake for better liquidity ion the said enterprises.