Linking financial literacy and business performance among SMEs in Somalia from a human capital perspective

Abstract This study examines the effect of financial literacy on the performance of small and medium-sized enterprises (SMEs) in Mogadishu, Somalia, a fragile and post-conflict economy. Grounded in Human Capital Theory, the study conceptualizes financial literacy as a multidimensional human capital investment and investigates the effects of financial education, bookkeeping practices, and cash forecasting on SME performance. Using a quantitative explanatory research design, data were collected through structured questionnaires from 397 SME owners and managers and analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM) with SmartPLS 4.0. The results reveal that financial education and bookkeeping practices have positive and statistically significant effects on SME performance, while cash forecasting does not exhibit a significant relationship. The findings suggest that Somali SMEs benefit more from practical and operational financial competencies than from forward-looking planning tools, likely due to high uncertainty and informality in the business environment. The study contributes to Human Capital Theory by demonstrating that the productivity of financial skills is context-dependent and offers policy-relevant insights for designing SME support and financial capability programs in fragile and post-conflict economies.