Financial Literacy and SME Performance in Pakistan: The Mediating Role of FinTech Adoption

Abstract

Small and medium-sized enterprises (SMEs) play a key role in employment and economic development in developing economies, but are often characterized by poor financial management and insufficient capacity to utilize modern financial tools. This study aimed to explore the impact of financial literacy on SME performance and to explore the mediating effect of FinTech. A quantitative cross-sectional design was used and data was gathered by using a structured questionnaire from 250 SME owners/managers in Peshawar District, KPK, Pakistan. Mediation analysis in a structural equation modeling framework was performed and bootstrapping was used to test the indirect effect. The findings indicated that financial literacy significantly improved the performance of SMEs and the adoption of FinTech, while the adoption of FinTech significantly improved the performance of the SMEs. The relationship between financial literacy and SME performance was partially mediated by the adoption of FinTech, meaning that the financially literate SME owners had a better performance, partly due to their higher probability to adopt FinTech. The study connects various literatures on financial literacy and digital finance and proposes that the financial education and digital financial inclusion should be pursued jointly to improve the performance of SMEs.