Challenge of educating small business borrowers on financial literacy: Whose responsibility?

By Wickrama Narayana  

Small business borrowers

During a program conducted to educate the entrepreneurs who belong to the Small & Medium scale Enterprises (SME) category, the audience was asked to describe the items in a simple balance sheet. Most of them were silent and a few of them came up with a few answers while some of them were entirely clueless. The entrepreneurs who participated with enthusiasm were not interested with the numbers but very attentive with the business strategies and future prospects of the business. 

Many people are not comfortable when someone discusses about numbers in a business. So called the arithmetic itself is confusing if someone is not passionate about it. This phenomenon is very common for small business borrowers whose education is predominantly limited to secondary education and very few have surpassed higher education or professional education. Thus, no other secret could have triggered them to take risks in doing a business in a field preferred by them.

A recent survey conducted by the Census and Statistics Department (2013/14) revealed that over 90% of the economic activities in the country are of the category sole ownership. There is no statutory requirement for them to keep books and accounts unless sources of income are explained to the Inland Revenue Department. Therefore, they usually resort to an accountant to get documents prepared to produce to the Inland Revenue Department for tax purposes. 

What is financial literacy?

Financial literacy is the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources. In this endeavour, basic knowledge in financial accounting, financial management, investment and tax law would help someone to understand how money works for someone, rather than one work for money.

Who should educate small business borrowers?

Small business borrowers have their own ways of managing finance somewhat different from standards. How could we make them persuaded about basics of finance management? The sole issue is the reaching of small business borrowers for discourse about the importance of proper financial education. Natural tendency is that they are reluctant to listen to anyone due to various reasons including their own egos. This has caused many issues in running their businesses mostly in working capital management. All issues start with not having proper financial information about their business activities or mixed up business transactions with personal transactions.

Financial institutions, especially banks can easily access small business borrowers as they are compelled to discuss their business transactions when they seek financial support. This would be the perfect time to intervene, convince and influence them to inculcate good practices of financial accounting and financial management. Bank officers are enterprising enough to win the confidence of small business borrowers to engage in such an exercise. Understanding the languages, perceptions and level of education of small business borrower are key imperatives in this task, which not only strengthens the relationship with the banks but also ensures a sustainable business development for both. 

(The writer is Assistant General Manager – SME of People’s Bank.)