Financial Literacy and SME Performance: The Role of Financial Access in Colombo, Sri Lanka

Purpose: Small and Medium Enterprises (SMEs) are pivotal to Sri Lanka’s economic growth, yet their performance is often hindered by limited financial literacy and restricted access 1o finance. Despite the recognized importance of these factors, limited empirical evidence exists on how financial literacy influences SME performance through the mediating role of financial access. This study aims to fill this gap by examining the impact of financial literacy on SME performance in the Colombo Division, with financial access as a mediating factor.
Design/Methodology/Approach: A descriptive, quantitative research design was adopted. Data were collected through structured questionnaires from 276 SME owners and managers in the Colombo Division. Statistical analyses, including correlation and mediation testing, were conducted to assess relationships among financial literacy, financial access, and SME performance.
Findings: The results reveal that financial literacy significantly enhances both financial access and SME performance. Furthermore, financial access partially mediates the relationship between financial literacy and performance, implying that financially literate SMESs are more likely to secure finance and achieve improved business outcomes.
Originality: This study contributes to the literature by empirically demonstrating the mediating role of financial access in the financial literacy—performance nexus, a relationship under explored in the Sri Lankan context. It provides evidence-based insights for policymakers and development agencies to design financial literacy initiatives and improve SME financing mechanisms.
Research Limitations/Future Research Directions: The study is limited to SMEs in Colombo Division and relics on self-reported data. Future research could include longitudinal designs, other regions, or additional mediators such as innovation capability.