Financial literacy and SME financial distress studies: A systematic literature review

Abstract

Small and medium-sized enterprises (SMEs) played a pivotal role in global economic development by contributing to job creation, innovation, and income generation. However, they remained highly vulnerable to financial distress due to limited access to finance, poor internal financial management, and exposure to external shocks. This study conducted a systematic literature review (SLR) to examine the relationship between financial literacy and financial distress among SMEs. A total of 44 empirical studies published between 2007 and 2025 were selected from the Scopus database, based on their methodological rigor, thematic relevance, and empirical focus. The findings showed that financial literacy improved SMEs’ internal financial capabilities, enabled better budgeting and debt management, increased risk awareness, and facilitated access to formal financing. These capabilities collectively reduced the likelihood of financial distress. However, the impact of financial literacy varied across contexts and was moderated by factors such as firm size, ownership structure, regulatory environment, and digital financial inclusion. These contextual variables shaped how financial knowledge was applied and influenced the effectiveness of financial literacy programs. The review also identified several research gaps, including the dominance of cross-sectional study designs, a geographical concentration in emerging economies, and a limited investigation of causal relationships and mediating variables. To address these gaps, future studies needed to adopt longitudinal and experimental designs, expand research coverage to underrepresented regions, and explore how financial literacy interacted with institutional and technological enablers. This study provided valuable insights for policymakers, financial institutions, and development agencies aiming to improve SME resilience. By designing targeted and context-specific financial literacy interventions, stakeholders could enhance the financial sustainability of SMEs and reduce their vulnerability to financial shocks.

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