FINANCIAL CAPABILITY AND SME PERFORMANCE: THE MEDIATING ROLE OF FINANCIAL SELF-EFFICACY AND THE MODERATING ROLE OF INTERNAL LOCUS OF CONTROL

Abstract

This study empirically investigates the impact of owners' financial capabilities on SME performance in Pakistan. The study further investigates the mediating role of financial self-efficacy and the moderating effect of internal locus of control. Grounded in theory of planned behavior and resource-based view, the study explores how individual-level financial capabilities translate into improved firm outcomes such as financial performance. Data were collected from SME owners across various sectors in Pakistan using a purposive sampling technique to ensure representative coverage. After removing incomplete responses, final dataset consisted of 363 responses. PLS-SEM was employed by using SMART PLS-04 and analysis confirms a significant direct relationship between owners' financial capabilities and SME performance, suggesting that financially capable owners are more likely to drive business success. Furthermore, financial self-efficacy significantly mediates this relationship, indicating that confidence in financial decision-making enhances the positive impact of financial capabilities on performance. However, the moderating role of internal locus of control was found to be insignificant, implying that the personal belief in controlling outcomes does not significantly influence the strength or direction of the financial capabilities–performance relationship. The study contributes to the literature by empirically validating the mediating role of financial self-efficacy in the SME sector of a developing country. Policy implications include the need for targeted financial training programs to build financial confidence among SME owners.