MODERATING EFFECT OF FINANCIAL LITERACY ON THE RELATIONSHIP BETWEEN ORGANIZATIONAL CULTURE AND FINANCIAL PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN NANDI COUNTY, KENYA.

Abstract

Small and Medium Enterprises sector is a key driver of Kenyan economy as it contributes to the Gross Domestic Product and creates 80% of employment. However, most new businesses end up failing within their early years of operations because of their dismal financial performance. The main aim of the study is to examine the moderating effect of financial literacy on the relationship between organizational culture and financial performance of small and medium sized enterprises in Nandi County, Kenya. The specific objectives are to determine the effects of clan, hierarchy, adhocracy and market cultures on financial performance of small and medium sized enterprises in Nandi County, Kenya. Furthermore, the study examines the moderating effect of financial literacy on the relationship between clan, adhocracy, market, hierarchy cultures and financial performance of Small and Medium Enterprises. Resource Based View, Dual process and Agency Theories guided the study. The study utilized explanatory research design and cluster sampling technique to collect data from a sample size of 376 Small and Medium Enterprises obtained by use of Yamane formula from a target population of 6347 registered Small and Medium

Enterprises in Nandi County, Kenya. Primary data was collected using self-administered closed- ended questionnaire. Cronbach’s alpha coefficient was used to test reliability and factor analysis

to test the validity of research instruments. Data was analyzed through SPSS Version 23. Correlation and hierarchical regression analysis was used to ascertain the strength and direction of relationships between variables. The study findings indicated that Clan culture (β= 0.322, p=0.000), Adhocracy culture (β = 0.255, p=0.000), Market culture (β=0.140, p=0.012) and Hierarchy culture (β = 0.200, p = 0.000) had a positive and significant direct effect on financial performance. Results of the control variables indicate that firm age (β=.136, P = .045) significantly influences financial performance while firm size (β=.012, P=.898) does not. These control variables explain 1.2% of the variance in financial performance (R2 of .012 and ∆R 2 = 0.12). Additionally, the findings of the study revealed that financial literacy moderates the relationship between clan culture, (β = -0.157, p = 0.000, R2 = 0.618, ∆R2 = 0.032), adhocracy culture (β = 0.156, p = 0.011, R

2 = 0.625, ∆R2 = 0.007), hierarchy culture and financial performance (β = -0.186, p = 0.026, R2 = 0.631, ∆R2 = 0.006). Findings further revealed that Financial Literacy does not moderate the link between market culture and SME’s performance (β = -0.029, p = 0.688, R

2 = 0.625, ∆R2 = 0.000). ∆R2

indicates the variance in financial performance that moderation process accounts for. The study provides new knowledge to the literature that financial literacy moderates the relationship between clan culture and financial performance, adhocracy culture and financial performance, and lastly, hierarchy culture and financial performance. The findings help the owners/managers in developing strategies to cultivate financial literacy and supportive culture, policy makers to formulate policies to enhance financial literacy, manage culture to achieve sustainable improvement in financial performance of SMEs. Further study should be undertaken using longitudinal research so as to allow researchers to look at changes over time in regards to organizational culture.