Financial Barriers and the Role of Financial Literacy in Microfinance for SMEs Growth: Evidence from Peshawar, Pakistan

Abstract

Purpose: This study focuses on the complex barriers faced by small and medium enterprises (SMEs) in Peshawar, Pakistan with a special focus on the moderating role of financial literacy in accessing, and make effective use of, microfinance services for business growth.Methodology: Employing quantitative (cross-sectional survey) design, primary sources of data were collected from 60 SME owners in retail and wholesale sectors from three major business zones (University Road, Kohat road and Saddar) in Peshawar. A structured questionnaire based on validated scales was used to measure the financial literacy level of respondents, their utilization pattern of microfinance, perceived growth barriers and business performance parameters. Descriptive and inferential statistical techniques, namely, correlation analysis and comparative assessments were used to investigate the relationship between financial literacy, access to microfinance and the growth outcomes of SMEs.Findings: Results show that SMEs in Peshawar are faced with systemic barriers such as poor financial access (according to 83% of respondents), political instability (according to 75%), corruption (according to 72%) and poor infrastructure (according to 68%). The State of Financial Literacy is also split with about 53% of SME owners showing good knowledge in financial concepts and 47% showing huge knowledge deficit. Financially literate owners attribute better business outcomes and more effective financial decision-making to financial literacy. Microfinance utilization is as high as 47% with users mentioning benefits of working capital but procedural complexity and lack of post-loan support as a limitation. The findings of this study show that financial literacy and access to microfinance, although necessary, is not enough for the growth of SMEs without concomitant institutional and macroeconomic reforms. Practical implications: Findings highlight the need for integrated policy approaches that use multiple interventions (financial education, microfinance institutional reform, improvement of governance) to foster enabling environments for SME development in conflict-affected, emerging market contexts.Originality and value: This research adds to scarce empirical literature on SME finance in the Khyber Pakhtunkhwa province of Pakistan in terms of extending the theories of human capital and financial intermediation to investigate the nexus between literacy, finance and growth in a challenging institutional environment.

Keywords: Financial inclusion, financial literacy, microfinance, Pakistan, Peshawar, SM enterprises, SME growth