Abstract
Small and Medium Enterprises (SMEs) are essential to employment generation, poverty reduction, and innovation in emerging and developing economies. But, poor credit and financial flexibility often hamper their sustainability. Traditional SME loan default explanations emphasize structural constraints — collateral shortages and poor credit infrastructure — but lack the behavioral aspects of financial decision-making. This paper uses behavioral economics to investigate the interaction between financial literacy and cognitive biases to influence credit behavior and repayment performance of SME creditor behaviors and repayment. Based on bounded rationality, prospect theory and mental accounting, the study defines financial literacy as not only a measure of knowledge and numeracy but also as an activity within the behavioral competence promoting risk perception, borrowing discipline, and repayment attitudes. Based on survey data and credit data of SMEs across sectors, the paper develops a quantitative model linking financial literacy scores and behavioral bias associated with overconfidence, loss aversion and time inconsistentness to quantitative credit outcomes. In this preliminary qualitative analysis, which is currently underway, higher financial literacy SMEs are significantly less likely to default, and more consistent repayment histories. But behavioral biases offset this relationship – overconfidence and short-termism often harmed the positive effect of literacy. This policy imperative is that behavioral insight would be integrated into the financial education and credit assessment in SME financial education and credit assessment. In concluding, the paper proposes a behavioral finance policy framework that includes literacy enhancement, cognitive bias mitigation, and “nudge-based” loan management. This approach allows SME financing to be re-formed into a purely informational challenge, into a behavioral optimization challenge, and to provide more inclusive and resilient credit environments for sustainable economic growth.
Citations
IRE Journals:
Tolulope A Shokunbi "Financial Literacy and Credit Performance among SMEs: A Behavioral Economics Perspective" Iconic Research And Engineering Journals Volume 8 Issue 8 2025 Page 999-1008 https://doi.org/10.64388/IREV8I8-1712952
IEEE:
Tolulope A Shokunbi
"Financial Literacy and Credit Performance among SMEs: A Behavioral Economics Perspective" Iconic Research And Engineering Journals, 8(8) https://doi.org/10.64388/IREV8I8-1712952
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