Jurnal Pengurusan 59(2020) 89 – 102

https://doi.org/10.17576/pengurusan-2020-59-09

The Relationship between Financial Literacy, Rational Financing Decision, and

Financial Performance: An Empirical Study of Small and Medium Enterprises in
Makassar
(Hubungan antara Literasi Kewangan, Keputusan Pembiayaan Rasional dan Prestasi Kewangan: Kajian
Empirikal Perusahaan Kecil dan Sederhana di Makassar)

Muhammad Irfai Sohilauw

(Department of Management, Makassar College of Economics Bongaya)
Mursalim Nohong
(Faculty of Economics and Business, Hasanuddin University)
Andi Sylvana
(Faculty of Economics, Open University of Indonesia)

ABSTRACT

This research analyzes the effect of Financial Literacy, Rational Financing Decision, Financial Capital, and SME
Financial Performance. A survey approach is used for data collection from a sample of financed SMEs in Makassar
City. Using the cluster method technique and stratified random sampling, 279 samples are obtained and analyzed
with Structural Equation Modeling with the AMOS Software. The results show that Financial Literacy significantly
affects Rational Financing Decision and Financial Capital. Rational Financing Decision significantly affects Financial
Capital. Furthermore, Financial Literacy and Capital significantly affects performance. Moreover, Rational Financing
Decision does not significantly affect Financial Performance. The study shows that Financial Capital is not a Moderator
variable in explaining the relationship between Financial Literacy and Rational Financing Decision with Financial
Performance. This research implies that financial institutions should be careful in providing loans to SMEs.
Keywords: Financial literacy; rational financing decision; financial capital; financial performance.

ABSTRAK

Kajian ini bertujuan untuk menganalisis kesan Literasi Kewangan, Keputusan Pembiayaan Rasional, Modal Kewangan
dan Prestasi Kewangan Perusahaan Kecil dan Sederhana. Pengumpulan data dilakukan dengan menggunakan pendekatan
tinjauan. Sampel penyelidikan ini adalah Perusahaan Kecil dan Sederhana yang telah mendapat pembiayaan dari
Institusi Kewangan di Kota Makassar. Dengan menggunakan teknik kaedah kluster dan pensampelan rawak berstrata,
279 sampel diperoleh untuk dianalisis menggunakan Pemodelan Persamaan Struktural dengan Perisian AMOS 23. Hasil
kajian membuktikan bahawa Literasi Kewangan mempengaruhi Keputusan Pembiayaan Rasional, Literasi Kewangan
secara signifikan mempengaruhi Modal Kewangan, Keputusan Pembiayaan Rasional mempengaruhi Modal Kewangan
secara signifikan. Literasi Kewangan secara signifikan mempengaruhi Prestasi Kewangan PKS, dan Modal Kewangan
mempunyai pengaruh yang signifikan terhadap Prestasi Kewangan Perusahaan Kecil dan Sederhana. Penemuan lain
adalah bahawa Keputusan Pembiayaan Rasional tidak banyak mempengaruhi Prestasi Kewangan Perusahaan Kecil
dan Sederhana, dan Modal Kewangan bukanlah pemboleh ubah Moderator dalam menjelaskan hubungan Literasi
Kewangan dengan Prestasi Kewangan Perusahaan Kecil dan Sederhana dan Keputusan Pembiayaan Rasional
terhadap Prestasi Kewangan Perusahaan Kecil dan Sederhana. Implikasi dari penyelidikan ini adalah bahawa institusi
kewangan harus berhati-hati dalam memberikan pinjaman kepada Perusahaan Kecil dan Sederhana.
Kata kunci: Literasi Kewangan; Keputusan Pembiayaan Rasional; Modal Kewangan; Prestasi Kewangan

INTRODUCTION
2016). However, financial issues such as initial capital,
SMEs play an essential role in job creation, poverty access to working capital, and investment pose the main
alleviation, and economic growth, though they face challenges (Indonesian Banking Development Institute
challenges in funding (Gherghina et al. 2020). The main 2015). Many SMEs in Indonesia are not bankable
problems experienced include lack of financial resources, (International Labour Office 2019). Therefore, their
econology, skilled labor, market access and information business mindset needs to be changed by implementing
markets, high transaction costs, and lack of established detailed planning, product diversification, quality
business networks, entrepreneurial enthusiasm, business employees, good marketing, and sound processes
capacity, and knowledge (Yoshino & Taghizadeh-Hesary (International Labour Office 2019).

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Access to credit is crucial for the SMEs’ growth, real value, diversification of risks, and the time value of
though it is rarely achieved (Domeher, Musah & Hasan money. Educated people often make rational decisions,
2017). In most cases, owners seek additional working act logically and rationally, and manage savings properly.
capital from family and friends or use their savings In making financial decisions, knowledge insights are
(Oladele, Oloowokere & Akinruwa 2014; Rossi 2014). needed (Dickerson 2016). This involves considering the
This research discusses a performance improvement psychological and rational risks expected (Tavor & Garyn-
model, focusing on financial literacy for SMEs in Tal 2016). According to Katarachia and Konstantinidis
Makassar City. (2014), emotional factors dominate decision making. This
Economic growth in Makassar city tends to leads to a systematic error and bias in making decisions
increase every year, even at a higher rate compared (Blanco 2017). However, Ambuehl, Bernheim and Lusardi
to the provincial and national levels. Specifically, the (2015); Lusardi (2015) stated that financial education does
growth level was 7.39(2014), 7.55(2015), 8.03(2016), not influence decisions.
8.23(2017), 8.4(2018), and 8.4(2019) (Bank Indonesia
2019). The SME sector significantly contributes to H1 Financial Literacy has a positive effect on Rational
this growth, although it is not directly related to other Financing Decision
economic variables. The superiority of SMEs in
developing their businesses in Makassar city relies According to Kaiser and Menkhoff (2017), there is
on the ability of internal resources, such as financial a positive relationship between Financial Literacy and
management (Nohong et al. 2018). However, it is access to capital. Good Financial Literacy affects how
essential to understand financial concepts and have self- financial institutions relate to potential debtors (Lusardi
confidence, a condition called Financial Literacy (Saeedi 2019). Cámara and David (2015) stated that insufficient
& Hamedi 2018). Essentially, a sound financial literacy financial knowledge leads to a lack of access to financial
improves the manager’s ability to manage financial products and their frequent utilization failures. Therefore,
strategy, including determining capital structure. For this good financial literacy is advantageous in interacting
reason, it affects the company’s performance (Fujianti with financiers (Sherraden & Ansong 2016).
2018). Although many studies have been conducted on
financial literacy, SMEs’ financial performance has not H2 Financial Literacy has a positive effect on Financial
been explained in detail, especially their capital structure. Capital
For instance, Adomako and Danso (2014) and Delić et
al. (2016) only provided recommendations for further Agyapong and Attram (2019) stated that there is
research on financial literacy. They focused on learning a significant positive relationship between Financial
and making decisions on the company’s capital structure Literacy and SME Financial Performance. Similarly,
(Adomako & Danso 2014) and financial literacy. This is Menike (2018) stated that financial knowledge and
because financial literacy is perceived to be critical in behavior positively impact company performance.
determining the capital structure decisions (Delić et al.
2016). H3 Financial Literacy has a positive effect on SME
This research builds conceptual and empirical Financial Performance.
models to overcome the gap between Financial Literacy
and Capital to improve SME financial performance at RATIONAL FINANCING DECISION
Makassar city. As a proxy for Resourced base view theory
(Barney 1991), capital structure theory (Modigliani & Decision Making Decisions are deliberately
Miller 1958; 1963) and Pecking Order Theory (Myers selected actions from various alternatives to achieve
& Majluf 1984), the research model is expected to solve organizational goals (Abubakar et al. 2019). Decision
SME capital problems in Makassar City. The results are making is a management function process (Puseljic,
expected to contribute to the body of knowledge on the Skledar & Pokupec 2015). Basically, quality and
RBV and capital structure theory. timeliness in decision making are essential to the
success of any company. According to Simon (1947)
and Mintzberg, Raisinghani and Theoret (1976), the
LITERATURE REVIEW & HYPOTHESIS DEVELOPMENT decision-making process require three distinct aspects,
including intelligence (tracing environmental conditions
FINANCIAL LITERACY that need decision making), design (find, develop and
analyze problems) and choice (actual choice of available
Financial Literacy (Remund 2010) is a measure of financial alternatives).
concepts understanding the ability and confidence to
manage personal finances for proper decision making. Rational Decision Making Stoner (2006)
Lusardi, Mitchell and Curto (2010) defined Financial established that a rational model in making decisions
Literacy as knowledge of basic financial concepts, consists of four aspects. This include observing the
including compound interest, differences in nominal and situation, developing alternatives, assessing and choosing

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 The Relationship between Financial Literacy, Rational Financing Decision, and Financial Performance 91

the best among several options, and implementing According to Rao, Kumar and Madhavan (2019),
decisions and monitoring results. Jones (2012) financing decisions affect the company’s capital
reported that a decision-making model include problem structure composition. A business owner is obligated to
identification, alternative solutions, understanding the make decisions by paying attention to the company’s
consequences of the actions taken, and implementation. financial structure and information asymmetry
(Alqatamin & Mohammad 2018; Egaña, Bravo &
Financial Decision Pruitt and Gitman (1991) Cabanes 2016; Buvanendra, Sridharan & Thiyagarajan
established that financial sector requires investment, 2017).
financing, and dividend decisions. Investment decision
refers to the implementation in the allocation of working H4 Rational Financing Decision has a positive effect on
capital funds and budgeting. The financing decisions Financial Capital
determine the source of capital in developing a business,
while rational considerations are needed in choosing Doan (2020) stated that there is a significant positive
alternative funding. In companies, capital source is an relationship between financing decisions and SMEs’
obligation to be returned to investors, hence called a performance. According to Zada, Yukun and Zada
dividend decision. (2019), investment and financing decisions are positively
Investment, funding, and working capital decisions related to company performance and growth. The CEO of
are interrelated financial strategies (Ross, Westerfield a company delegate decisions regarding capital structure
& Jordan 2008). Investment decisions are related to in case of insufficient knowledge (Graham, Campbell
investment capital allocation in companies whose & Puri 2014). Rashid (2015) stated that managers need
funding decision combines long-term debt and capital to carefully consider the overall economic situation and
used. Working capital decisions include the management business activities’ solvency when making financing
of short-term assets and liabilities. It is essential to find decisions.
the optimal combination of these financial decisions.
H5 Rational Financing Decision has a positive effect on
Concept Synthesis of Rational Financing Decision The SME Financial Performance
rationality of decision making in business is absolutely
necessary. Managers and individuals need adequate Financial knowledge influences decision making
financial knowledge in making decisions (Menike (Usama & Yusoff 2019). It has a significant effect on
2018). Research on non-performing credit has been business continuity, including negotiation, monitoring,
conducted for long. However, the results have not been insurance, loans, and savings (Kamyabi & Devi 2011).
very encouraging. The ratio of non-performing loans Entrepreneurs need to improve their financial capacity
has even increased, not only for SME loans. There are because it affects business profitability (Hosseini et
still fundamental mistakes during financing, specifically al. 2012). Furthermore, managers need to understand
on disbursement, use, and credit refund. Debtors and SMEs’ credit risk, which helps them maximize
prospective borrowers often lack knowledge on the company performance (Li, Niskanen & Niskanen
risks of misusing loan funds, including poor decisions 2019). According to Basah et al. (2016), credit risk
(Majamaa, Lehtinen & Rantala 2019). Figure 1 shows management knowledge is essential for sound and
the broad concept of Rational Financing Decision. sustainable performance.

Rational Financing Decision

(Muhammad Irfai
Sohilauw 2008)

FIGURE 1. Concept of rational financing decision

Source: Concept Development (2018)

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H6 Rational Financing Decision mediates between Sales of existing assets, reducing inventory levels) and
Financial Literacy and Financial Capital. external sources (Leasing, credit from suppliers), as well
as long-term finances (Bank loans, Trading, Factoring).
FINANCIAL CAPITAL This research positions Financial Capital as a
moderating variable. It is based on Adomako and Danso
Most SMEs rely on internal financing, short-term (2014) and Delić et al. (2016) development. According to
credit from suppliers, and special financial products Sekaran and Bougie (2016), a moderating variable may
(World Bank 2014). This is because their fund is more change the initial relationship between the dependent
controlled with no obligation to pay the installments and independent variables. Baron and Kenny (1986)
(Myers 1984; Myers & Majluf 1984). When internal stated that the moderator might change the strength and
capital is depleted, the company uses external financing. direction in the relationship between the dependent and
Pecking order theory is more relevant in the SME sector independent variables.
because of the relatively larger Asymmetric Information According to Zada et al. (2019) and Ndiaye et al.
and high cost of external equity (Brescia & Turin 2017). (2018), there is a positive relationship between working
It uses working capital from (1) Own money (personal capital and SME performance. Management of accounts
savings and retained earnings); (2) Short-term loan; (3) payable and receivable is vital in increasing SMEs’
Long-term debt (Myers & Majluf 1984). Miller et al. profitability (Tauringana & Adjapong 2013). Palacios,
(2016) and Eniola and Entebang (2015) are the empirical Carrillo and Guzmán (2016) established that internal
evidence supporting the use of the pecking order theory financing sources have a significant positive effect on
to SMEs. They emphasized that small businesses rely performance. Contrastingly, external sources have an
heavily on loans to finance their operations. Generally, insignificant positive effect on performance. Phuong
companies that use internal funds tend to be limited and et al. (2017) stated that all debt ratios have significant
do not consider using external capital (Silver, Berggren negative relationships with company performance.
& Fili 2016).
Oladele et al. (2014) stated that SME capital comes H7 Financial Capital has a positive effect on the financial
from personal finances (daily business contributions, performance of SMEs
bank saving), informal sources (family, friends,
money borrowers), and formal sources (banking and An average of 95.4% of SME owners and managers
microfinance institutions). According to Rossi (2014), consider financial literacy as an essential factor in
the SME’s capital come from internal (Retained Profits, determining the composition of the company’s capital

Hypothesis 3

Financial Literacy
(X1) Hypothesis
8

Hypothesis
2
Hypothesis
Hypothesis Financial Capital 7 SME Financial
1 (Z) Performance
(Y2)

Hypothesis 6 Hypothesis
4
Rational Financing Hypothesis
Decision 9
(Y1)

Hypothesis
5

FIGURE 2. Conceptual framework

Source: Concept Development (2018)

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 The Relationship between Financial Literacy, Rational Financing Decision, and Financial Performance 93

structure (Delić et al. 2016). This is because it reduces wrong analysis leads to a decrease in performance. A
the impact of asymmetric information and helps owners little debt improves company performance.
(managers) make the best decisions regarding financing
sources. It ultimately contributes to better business results H9 Financial Capital is a moderating variable between
and competitiveness. Ngek (2016) stated that financial Rational Financing Decision on SME Financial
literacy affects financial performance, a relationship Performance
strengthened by financial capital availability. According
to Adomako and Danso (2014), financial literacy affects CONCEPTUAL FRAMEWORKS
a company’s performance in case finance (capital) is
easily accessed. Conceptual frameworks as shown in Figure 2.

H8 Financial Capital is a moderating variable between

Financial Literacy and SME Financial Performance METHODOLOGY

The company’s working capital is determined by its RESEARCH DESIGN AND SAMPLING
cash flow conditions, growth, age, and size. Finance is
often sought to improve company performance (Mazlan This research took place in Makassar from January to
& Leng 2018). For this reason, an entrepreneur needs to September 2018. This is an explanatory research that
calculate the benefits likely to be enjoyed by the increase uses the Non-Probability Sampling method. It focuses
in venture capital before making decisions. This involves on the large trade, retail, and repair sectors as the number
determining whether it is the right time to increase capital two contributor to GRDP in Makassar (BPS Makassar
and its usefulness. Qamar et al. (2016) stated that large City 2017). Cluster and Stratified Random Sampling
companies lower the debt ratio, while small ones increase techniques are based on the type and number of SMEs
it. Managers need to revise their financing policies. that are financed by other institutions. In sampling, the
Generally, financing can be successful in case it is based Slovin formulation is used by considering the proportion
on the manager’s accuracy in calculating real needs. A of uncertain SMEs sampled, hence the technique adopted

TABLE 1. Operational definition

Construct Meaning Indicator Source Scale

Financial understands financial aspects, 1. Knowledge of interest Lusardi and Scheresberg Interval
Literacy including risks that may occur 2. Knowledge of risk (2013)
in the business’s management. 3. How to count interest Remund (2010)
4. How to manage risk Sabri and MacDonald (2010)
5. Budgeting Rahmandoust et al. (2011)
6. Saving
7. Investment
8. Debt
9. Financial Performance
10. Company protection
11. Financial products
12. Teaching
13. Learning
Rational rationality in making financing 1. Credit amount Muhammad Irfai Sohilauw Interval
Financing decisions 2. Benefit and risk (2018)
Decision 3. Update financial information
Financial capital condition of SMEs in 1. Daily contribution of the Oladele et al. (2014) Interval
Capital conducting their business business Rossi (2014)
2. Savings in the bank
3. Retained earnings
4. Family
5. Friend
6. Money borrowers
7. Credit from suppliers
8. Commercial banks
9. Microfinance institutions
SME Financial debtor’s business performance 1. Sales growth Lee and Tsang (2001) Interval
Performance 2. Asset growth
3. Profitability growth
Source: Concept Development (2018)

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is random (Susanti, Suprayitno & Ratnasari 2019). The RESULTS

samples chosen were traditional markets (the majority
of SMEs were in these locations) (BPS Makassar RESPONDENT PROFILE
City 2017), and existing debtors, including those with
problems (business is still running). The questionnaire Respondents were divided into traditional markets (149
and interviews were conducted successively on these people), Small Business debtors (75 people), Medium
groups of individuals. Business debtors (41 people), and Troubled Debtors (14
Based on the Slovin formulation, a total sample people). Total Non-Market Respondents are 130 people.
of 400 respondents was obtained. A total of 310 The total number of respondents was 279. The trading
questionnaires were successfully collected, though 31 business respondents were 84.2% (235 people), while
were invalid. Therefore, the total sample size is 279, 15.8% were service businesses (44 people). Based on
where 149 respondents were in traditional markets, gender, 67.7% (189) were male, while 32.3% (90) were
while 130 respondents were debtors of existing financial female. Based on age, respondents aged > 51 years were
institutions. Descriptive and inferential statistical 77.1% (215), 41-50 were 21.9% (61), 3 aged 31-40 are 3
analysis (data measurement, validity and reliability tests, respondents (0.9%). In terms of education level, 10.8%
structural equation modeling test, and determination (30) graduated from Junior High School education,
coefficient analysis) was used for data analysis (Lodico, 69.2% (193) had a Senior High School education, and
Spaulding & Voegtle 2006). Measurement of variables 20.1% (56) had a Bachelor degree. Based on the length
was carried out using a Likert scale with Strongly Agree, of business, respondents with business, especially of >
Agree, Less Agree, Disagree, and Strongly Disagree 21 years old, were 80.6% (225 respondents), 17.6% (49)
(Joshi et al. 2015). 16-20 years, and 1.8% (5) with 11-15 years.

TABLE 2. Construct validity test results

Loading Factor Construct Variance

Variable Item Indicator
(>0.5) Reliability (>0.7) Extracted (>0.5)
X1.1 Knowledge of interest 0.803
X1.2 Knowledge of risk 0.783
X1.3 How to count interest 0.699
X1.4 How to manage risk 0.805
X1.5 Budgeting 0.798
X1.6 Saving 0.804
Financial Literacy X1.7 Investment 0.677 0.9 0.5
X1.8 Debt 0.757
X1.9 Financial performance 0.700
X1.10 Protection of companies 0.609
X1.11 Financial product 0.722
X1.12 Teaching 0.680
X1.13 Learning 0.675
Y1.1 Loan amount 0.779
Rational Financing
Y1.2 Benefit and risk 0.629 0.8 0.5
Decision
Y1.3 Financial information update 0.725
Y2.1 Sales growth 0.671
SME Financial
Y2.2 Asset growth 0.917 0.9 0.7
Performance
Y2.3 Profitability growth 0.849
Z.1 Daily business contribution 0.659
Z.2 Saving in bank 0.713
Z.3 Retained earnings 0.559
Financial Capital 0.8 0.4
Z.7 Credit from suppliers 0.505
Z.8 Commercial bank 0.586
Z.9 Microfinance institution 0.668
Source: primary data processed (2019)

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 The Relationship between Financial Literacy, Rational Financing Decision, and Financial Performance 95

VALIDITY TEST causality of the Rational Financing Decision on SME

Financial Performance is not confirmed.
The factor loading of all question items for the variable
has fulfilled the requirements, specifically > 0.5. The INDIRECT HYPOTHESIS
reliability test results in Table 2 show that the instrument
is reliable because one of the construct reliability value Mediation Testing
or variances extracted is within the acceptable limits.
Based on Figure 3, the Rational financing decision’s
SEM ANALYSIS coefficient value in explaining the effect of Financial
Literacy on Financial Capital is 3,406 (> 1.98) and
Structural Model Feasibility Testing significant.
Table 5 shows that Financial Literacy affects
Financial Capital by mediating the Rational Financing
TABLE 3. Comparison of model fit index with cut-off value Decision. Rational Financing Decision acts as a partial
mediator (Namazi & Namazi 2016).
Model
Criteria Results Cut-off Value
Evaluation
MODERATION TESTING
Expected to
Χ2 - Chi-Square 431.197 Not Fit
be small
According to Table 6, Financial Literacy not affect SME
Probability 0.000 ≥ 0.05 Not Fit
Financial Performance by moderating Financial Capital.
CMIN/DF 1.883 ≤ 2.00 Good Fit Furthermore, Rational Financing Decision not affect
RMSEA 0.056 ≤ 0.08 Good Fit SME Financial Performance by moderating Financial
GFI 0.894 ≥ 0.90 Marginal Fit Capital moderation. From Table 6, Financial Capital is
AGFI 0.850 ≥ 0.90 Marginal Fit not a mediator variable because it is negative (Namazi
& Namazi 2016). For coefficient of determination, the
TLI 0.937 ≥ 0.90 Good Fit
overall model contribution is 0.695, meaning that the
CFI 0.952 ≥ 0.90 Good Fit SME financial performance is explained by the Financial
Source: primary data processed (2019) Literacy, Rational Financing Decision, and Financial
Capital by 69.5%.

Table 3 shows the four criteria for the goodness of

fit that have fulfilled the cut off value. According to the DISCUSSION
evaluation results, the final model is good.
FINANCIAL LITERACY AND RATIONAL FINANCING
DIRECT HYPOTHESIS DECISION

The significance level of parameter estimation in Financial Literacy has a direct and significant effect on
hypothesis testing is set at 95% or α = 0.05 as in Table 4: Rational Financing Decision. The better the Financial
Based on table 4, the results of direct hypothesis Literacy of SME entrepreneurs, the better their Rational
testing for five causalities are confirmed. However, the Financing Decision. Since SME entrepreneurs need good

Rational Financing Decision

(Y1)

B=
A= 0.356
0.694
SE A = SE B =
0.089 0.094

Financial Literacy Financial Capital

(X1) (Z)
C = 0.195

FIGURE 3. Sobel test

Source: Primary data processed (2019)

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TABLE 4. Direct effect hypothesis testing

Independent Variable Dependent Variable Estimate C.R. P Results

Financial Literacy Rational Financing Decision 0.694*** 7.807 0.000 Supported
Financial Literacy Financial Capital 0.195** 2.236 0.025 Supported
Rational Financing Decision Financial Capital 0.356*** 3.774 0.000 Supported
Financial Literacy SME Financial Performance 0.268*** 2.920 0.004 Supported
Rational Financing Decision SME Financial Performance 0.184* 1.867 0.062 Not Supported
Financial Capital SME Financial Performance 0.183** 2.373 0.018 Supported
Note: *10% level significant, **5% level significant, ***1% level significant
Source: primary data processed (2019)

TABLE 5. Mediation effect testing results

Exogenous Endogenous Intervening Estimate (Indirect) S.E. (Indirect) C.R. (Indirect) Prob. Results
Financial Financial Rational Financing Supported
0.247 0.125 1.982 0.048
Literacy Capital Decision
Source: primary data processed (2019)

TABLE 6. Moderation effect testing results

Exogenous Endogenous Moderator Estimate C.R. (Indirect) Prob. Results

Financial Literacy SME Financial Performance Financial Capital -0.657 -2.403 0.016 Not Supported
Rational Financing
SME Financial Performance Financial Capital -1.835 -2.410 0.016 Not Supported
Decision
Source: Primary data processed (2019)

and rational financial knowledge when making decisions, Konstantinidis 2014) because emotional factors dominate
there is a positive change in the estimate. According to financial decisions, resulting in systematic errors and
the respondents, the interest rate needs to be considered bias in decision making (Blanco 2017). Furthermore,
when taking a loan (X1.1). The concept of interest rates Ambuehl et al. (2015) stated that financial education
is very simple, including the debt principal’s results, does not affect financial decisions.
the interest rate per period, and the loan term. In case
the interest rate is too high, the installments may not be FINANCIAL LITERACY AND FINANCIAL CAPITAL
paid, affecting the business cash flow. On this basis, the
respondent estimates the total liabilities to be paid during Financial literacy has a direct and significant effect on
the loan term, including the term, fees, installment Financial Capital. The better the Financial Literacy of
patterns, and others. Otherwise, the loan nominal might SME entrepreneurs, the higher the chance of securing
be larger for respondents to repay. Financial Capital. The estimated value is in a positive
Respondents actively use banking financial facilities direction because SME entrepreneurs need sufficient
to save business profits (savings, current accounts, or financial knowledge to access financial products
deposits) in different portions (Indicator X1.6). Based (Financial Capital).
on the interviews, savings are usually for incidental The majority of respondents use their savings in a
needs and additional business capital. Current accounts bank as additional business capital (indicator Z.2), rather
and deposits are used for transactions and investments, than deposits and current accounts (indicator X1.6). In
respectively. For this reason, respondents expect the case they do not save, the business results cannot be visible
business and personal wealth to be separated. Current or enjoyed. High-interest rates and reduced purchasing
accounts are preferred for transactions because they are power are the causes of respondents’ unwillingness to
more practical and do not need to hold cash. use bank loans. For this reason, the business cash flow
These findings are in line with Dickerson (2016), can be disrupted. In case the interest rate offered is high
which stated that financial insight is needed in (indicator X1.1), it cannot be accepted.
decision making. The decisions are based on rational Respondents need financial knowledge in choosing
considerations of the risks faced (Tavor & Garyn-Tal sources of financing, analyzing carefully before deciding
2016). However, this research contradicts (Katarachia & what suits the business needs. The decision to choose

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 The Relationship between Financial Literacy, Rational Financing Decision, and Financial Performance 97

logical and rational financing sources, inside or outside They do not want to be “redundant” to avoid affecting
the company, makes the public more careful. In case the payment of interest costs. Furthermore, respondents
it is wrong, it may have fatal consequences and affect analyze benefits and risks before deciding to take a loan
business operations. (with financial knowledge possessed), and actively seek
These results are in line with several studies. For the latest financial information via TV and newspapers.
instance, Kaiser and Menkhoff (2017) stated that low Understanding the current conditions also affects
financial understanding makes it difficult for people to behavior and the business cycle.
access financial products. According to Lusardi (2019) These findings are in line with Rao et al. (2019),
there is a positive relationship between Financial which stated that financing decisions affect the
Literacy and access to capital. Cámara and David (2015) composition of a company’s capital structure; Alqatamin
stated that Lack of Financial Literacy affects access to and Mohammad (2018), which stated that the CEO
credit. Sherraden and Ansong (2016) established that in is responsible for determining the company’s capital
case financial literacy is managed properly, it is easy to structure decisions; paying attention to it, as well as the
access sources of capital. prevailing asymmetric information (Egaña et al. 2016;
Buvanendra et al. 2017).
FINANCIAL LITERACY AND FINANCIAL PERFORMANCE OF
SMES RATIONAL FINANCING DECISION AND SME FINANCIAL
PERFORMANCE
Financial Literacy has a direct and significant effect
on the financial performance of SMEs. The better the Rational Financing Decision has a direct but insignificant
Financial Literacy, the higher the opportunity to improve effect on SMEs’ financial performance in a negative
performance. The estimated value with a positive direction. The better the Rational Financing Decision
direction is attributed to the SME entrepreneurs using level, the lower the SME Financial Performance. The
their knowledge (finance) to run the business. Working financial development update (0.454) is the lowest
capital is managed from loans and their property. The loading factor of the Rational Financing Decision
allocation is in line with the business development plan. variable. Respondents know that independent learning or
With the knowledge of calculating loan interest help from other parties (financial institutions) improve
rates, respondents can be selective in business capital skills and knowledge to manage funds (de Grip & Pleijers
sources. They save returns in the form of savings 2019). Attention from creditors encourages respondents
(tactical fund requirements), and current accounts and to manage their loans (Sohilauw et al. 2019).
deposits as a medium for storing wealth (indicator X1.6). The low sales level (indicator Y2.1/loading factor
This is proven by the Y2.2 indicators (wealth growth), the 0.400) of SMEs also makes this hypothesis insignificant.
highest loading factor for the SME financial performance Although there are still buyers, the numbers are not as
variable (Y2). Since sales tend to decline, respondents many as usual. The shift from conventional to online
prefer saving their business results instead of turning transactions indirectly reduces the sales level of SMEs
them into capital. This leads to an increase in their (Barhatov, Campa & Pletnev 2018).
business wealth increases (indicator Y2.2). Financial These results contradict several studies. For
performance increases when the company’s Financial instance, Doan (2020) stated that financing decisions
Capital is selected and processed correctly. In case it is have a significant effect on SME performance. According
wrong or wrongly executed, capital affects the business to Zada et al. (2019), financing decisions affect the
as a whole. It reduces sales, wealth, and business profits. company’s growth rate. Graham et al. (2014) stated that
These results are in line with Agyapong and Attram company CEOs delegate decisions (capital structure)
(2019) and Menike (2018), which stated that good in case they lack adequate knowledge. Rashid (2015)
financial literacy improves the performance of SMEs. established that managers should carefully consider the
overall state of the economy and the solvency of their
RATIONAL FINANCING DECISION AND FINANCIAL CAPITAL business activities when making financing decisions.

Rational financing decision has a direct and significant FINANCIAL LITERACY AND FINANCIAL CAPITAL MEDIATED
effect on Financial Capital. The better the Rational BY RATIONAL FINANCING DECISION
Financing Decision of SME entrepreneurs, the higher the
chance of securing Financial Capital. Estimated value in Financial Literacy affects Financial Capital mediated by
a positive direction is attributed to SME entrepreneurs the Rational Financing Decision. The better the Rational
using common sense before deciding to take a loan Financing Decision support, the better the relationship
(appropriate and correct amount). SME entrepreneurs between Financial Literacy and Financial Capital.
also need a lot of (financial) information to run their Rational Financing Decision in indirect causality acts
business. as a partial mediation. Statistically, the position of the
Respondents calculate the real credit needs before partial mediation of the Rational Financing Decision
submitting it to the financing institution (indicator Y1.1). (Y1) variable is determined by the high Y1.1 indicator,

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 98 Jurnal Pengurusan 59

which analyzes each credit requirement. In case the Phuong et al. (2017), which stated that all loan ratios
respondent has analyzed the need for credit well, the have a significant negative relationship with company
decision to make financing can be efficient and right on performance.
target.
Analyzing and knowing the benefits and risks of FINANCIAL LITERACY ON SME FINANCIAL PERFORMANCE
taking credit helps respondents make informed decisions. MODERATED BY FINANCIAL CAPITAL
Financial Literacy increases self-confidence, promote
innovation, and an entrepreneurial spirit in business The lower the financial capital support, the weaker
investment, including determining the financing source. the relationship between Financial Literacy and SME
For this reason, it produces a high rate of return. Financial Performance. The financial capital support is
These findings are in line with several studies. not a mediating variable. Statistically, the results of the
For instance, Usama & Yusoff (2019) stated that validity test are shown in Table.3. The Table shows that
entrepreneurs understanding financial knowledge make the Financial Capital variable’s highest loading factor
(financial) decisions and other actions with financial lies in the indicator using personal savings/Z2 (0.713).
implications. According to Kamyabi and Devi (2011), The respondent chooses to use savings (the results of
financial literacy significantly affects business continuity, business profits) as an additional business capital.
including negotiations, monitoring, insurance, loans, and Additional working capital in the form of loans
savings. Hosseini et al. (2012) stated that entrepreneurs from non-bank financial institutions ranks the second-
are expected to improve their financial capacity to access highest loading factor (0.668). The respondents usually
financial services. Financial managers need to understand use this option for urgent, consumptive, and incidental
SMEs’ credit risk in maximizing company performance needs. Compared to banks, the terms of credit for non-
(Li et al. 2019). Basah et al. (2016) established that bank financial institutions were lighter, though the loan
knowledge of credit risk management is critical for a interest rates were equally higher. However, respondents
good and sustainable performance. are aware of and understand this condition.
Additional capital from daily business profits is in
FINANCIAL CAPITAL AND FINANCIAL PERFORMANCE OF third place with a loading factor of 0.659. Respondents
SME maximize existing funds and focus on completing loans.
They are careful when getting loan offers because of the
Financial Capital directly and significantly affects the unfavorable economic conditions.
financial performance of SMEs. The better the ownership This finding is in line with the Pecking Order Theory,
level, the better the performance. The estimated value in which states that entrepreneurs prioritize the company’s
this positive direction is attributed to the fact that SME internal business funding over external sources (Myers
entrepreneurs consistently use loan funds for business 1984; Myers & Majluf 1984).
operations. These findings however, are not in line with several
Based on interviews, most respondents save their studies. For instance, Delić et al. (2016) stated that
business gains in savings, current accounts, and deposits. financial literacy reduces the impact of asymmetric
Due to high-interest rates and weak public purchasing information, helps owners make decisions about sources
power, they prefer to use funds from their business savings of financing, and contributes to business returns and
because they are risk-free (Z2 indicator). Additionally, competitiveness. According to Adomako and Danso
they understand the advantages of using their capital to (2014); Ngek (2016), business experience, knowledge,
finance a business, such as no interest and administrative and company resources (human) flexible to (financial)
expenses, and not dependent on others, though the information affect performance.
amount may be limited. Therefore, respondents have
to adjust the composition of their capital, when to use RATIONAL FINANCING DECISION ON SME FINANCIAL
their own funds (Myers 1984; Myers & Majluf 1984) and PERFORMANCE MODERATED BY FINANCIAL CAPITAL
external funds (Modigliani & Miller 1958). The majority
of the respondents save their business returns in bank The lower the financial capital support, the weaker the
financial products, automatically increasing their wealth relationship between Rational Financing Decision and
in the form of demand deposits, savings, and deposits SME Financial Performance, hence not a mediating
(Y2.2 indicator). variable. Respondents avoid using external funds to
These findings are in line with several studies. For increase business capital. Financial Capital’s highest
instance, Zada et al. (2019); Ndiaye et al. (2018) stated loading factor lies in the indicator of using personal
a significant positive relationship between financial savings/Z2 (0.713). An increase in interest rates is the
capital and SME performance. This increases the SMEs main reason for choosing a financing source. High loan
profitability (Tauringana & Adjapong 2013). According interest rates increase the interest expense to be paid, and
to Palacios et al. (2016), SMEs opt for financing because not in line with business income (Choi 2018). Fluctuating
due to a significant impact on improving financial loan interest rates make it difficult for respondents to
performance. However, these findings contradict regulate business cash flow. It also has the potential to

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 The Relationship between Financial Literacy, Rational Financing Decision, and Financial Performance 99

limit business growth due to slowing down economic Financial Capital is not a moderating variable in
growth (Fransson & Tysklind 2016). Slower economic the relationship between Rational Financing Decision
growth has the potential attributed to an increase in and SME Financial Performance. The better the credit
non-performing loans. This is due to an increase in loan analysis, the lower the consumption of the company’s
interest rates (Financial Services Authority 2018). external funds. Good rational financing decisions for
The decline in purchasing power is one of the reasons SME entrepreneurs make them analyze credit according
why hypothesis 9 cannot be accepted. Purchasing power is to their needs.
one of the functions of money. Essentially, money can be This study’s results are in line with (Barney 1991),
exchanged for goods and services, and its value depends which stated that VRIN (valuable, rare, immitability,
on the quantity and quality of goods and services that can not substitute) company resources create competitive
be purchased. These findings contradict other studies. For advantage. Financial Literacy is a company’s intangible
instance, Mazlan and Leng (2018) stated that based on a asset (Barney & Hesterly 2015). When appropriately
company’s working capital condition, the entrepreneurs utilized, competitive advantage can be created with a
calculate the benefits and time to use capital to improve positive impact on performance (Barney & Hesterly
the company’s performance. According to Qamar et al. 2015). Financial decision-making rationality confirms
(2016), high liquidity in large companies reduces loan the theory of financial behavior, which states that humans
ratios. However, this is not the case in companies with are affected by psychological aspects in making financial
low liquidity. Financing can be successful in case it is decisions (Ricciardi and Simon 2000). Furthermore, this
preceded by the manager’s accuracy in calculating study also confirms the preference for internal capital in
real needs. In case it is analyzed wrongly, it leads to a Pecking Order Theory (Myers 1984; Myers & Majluf
decrease in company performance. 1984).
The unconfirmed hypotheses and the determination
MANAGERIAL IMPLICATION coefficient that is only 69.5%, can be used as a reference
for further research. Monitoring and mentoring existing
The results of this study have critical implications on debtors in managing loans and businesses can be further
financial institutions because it relates to loan realization. examined. Based on the worrisome condition of SME
Financial Services Authority credit realization report NPLs, close monitoring from the financial institutions
in February 2019 shows a deceleration in SME credit is necessary. Rational Financing Decision needs to be
performance (Financial Services Authority 2019). dissected and used in other studies to test its accuracy
Financial institutions need to find ways of maintaining and maturity. It is also vital to sample theoretically more
appropriate credit performance amidst declining educated respondents, such as lecturers, teachers, and
purchasing power and high loan interest rates. employees.

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E-Mail: [email protected]

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