Spaza shops represent a significant segment of South Africa’s informal economy, serving as vital retail outlets within township communities by supplying everyday essentials. Originating during the apartheid era as a response to the socio-economic restrictions imposed on black South Africans, these often-home-based micro-enterprises have evolved to become entrenched in predominantly black urban and peri-urban areas (Yesufu 2021). Their presence plays a crucial role in alleviating poverty and unemployment by fostering grassroots economic participation and offering employment opportunities (Hare & Walwyn 2019). They help reduce some aspects of unemployment in these areas by facilitating access to basic requirements and providing jobs and local economic activity (Perks 2010). Despite their socio-economic contributions, many spaza shops are run by individuals with limited financial acumen. The level of financial literacy (FL) of these small business owners influences their ability to grow and have successful businesses (Musie 2015). The financial management of small businesses largely depends on the skills and FL of the owners. Owners who possess strong financial knowledge are better equipped to handle budgeting, financial planning, risk management and investment decisions capabilities that are essential for effective financial control (FC) and long-term viability (Chiloane-Tsoka & Rankhumise 2019; Fatoki 2021). In a simple sense, FL empowers spaza shop owners by helping them understand how money works in a business and make informed decisions that support the operational and strategic health of their businesses.

Financial literacy is a crucial entrepreneurial skill that helps businesses navigate and survive in volatile environments. Eniola and Entebang (2016) state that FL leads to several positive impacts on businesses, such as equipping individuals with the financial knowledge necessary to create household budgets, initiating saving plans, making strategic investment decisions and paying bills on time and proper debt management, all of which can have positive results and improve the creditworthiness of potential debtors to support business performance. According to Lusardi and Mitchell (2014), FL enables investors to assess and compare different financial products, such as bank accounts, savings options, credit and loans, payment methods, investments and insurance, to make informed decisions. Furthermore, FL education equips individuals with essential knowledge, skills and confidence to make informed financial decisions and identify viable business opportunities, which can significantly enhance business performance. Recent studies emphasise that FL is a key driver of sustainable business development, as it supports effective resource allocation, strategic financial planning and risk mitigation (Lusardi & Mitchell 2020; OECD 2023). This competency is particularly important for SMEs facing volatile economic environments (Miller et al. 2009, as cited in Aziz & Cassim 2020).

Therefore, it can be argued that small businesses such as spaza shops led by financially literate entrepreneurs are more likely to achieve business success than those run by less knowledgeable people. Research indicates that entrepreneurs with higher levels of FL are better equipped to manage cash flow, access financing and make strategic decisions, all of which contribute to improved business performance and sustainability (Amponsah & Osei-Assibey 2023; Lusardi 2022; OECD 2023). Studies suggest a strong association between FL and improved financial behaviour, though the direction of causality remains a subject of ongoing research. While individuals with higher FL tend to exhibit better budgeting, saving and borrowing practices, some scholars argue that positive financial behaviour may also lead to greater financial knowledge over time (Kaiser & Menkhoff 2021; Lusardi 2022; OECD 2023). Individuals with FL are less likely to be overwhelmed by the complexities of the financial system. Numerous studies have shown that FL positively influences entrepreneurial success (Atkinson & Messy 2012; Lusardi & Mitchell 2014). Nonetheless, there are instances where financially illiterate individuals successfully manage businesses. For example, in Kenya, many informal sector SMEs, such as those in the Jua Kali and farming sectors, are run by financially illiterate entrepreneurs who still achieve significant success (Kinyanjui 2014; Moyi 2013).

Financial literacy has garnered growing interest globally because of its impact on financial decision-making. We investigate whether education level predicts FL skills and how these skills influence financial management decisions, such as budgeting, financing and investing. This study explores the FL and financial management practices of township spaza shops located in the KwaZulu-Natal lower South Coast area of KwaGamalakhe Township. The aim of this article is to investigate how FL affects business success using educational attainment as a key determinant of literacy. We analysed FL and financial management concepts such as financial planning, budgeting, financing, managing financial risks, FC and investing decisions, which helped establish the role and use of financial concepts in township spaza shop businesses. The application of financial management has led to the survival and success of township spaza shops, and the identification of FL challenges and management skills inadequacies is necessary to ascertain the support required for the growth of these small informal businesses in South Africa. The hypothesis behind the study is that FL influences the success rate of small informal businesses in townships.

Spaza shops within the Ray Nkonyeni Municipality in the Ugu district are spread across several areas, including Hibberdene, Port Shepstone, Shelly Beach, Margate, Ramsgate, Gamalakhe, Murchison and Izingolweni, collectively serving an estimated population of 362 134 people (Municipalities of South Africa: Ray Nkonyeni Municipality 2022). This study specifically focuses on spaza shops operating within Gamalakhe Township, which has a population of approximately 15 000 residents and is supported by more than 200 informal retail outlets (Impande’s History 2019). As of December 2024, over 500 spaza shops were accounted for in the Ray Nkonyeni Municipality, contributing to Ugu District’s significant share of KwaZulu-Natal’s total 51 000 registered spaza shops (EWN 2024). This highlights the municipality’s strong informal trade presence. The government-led registration drive, launched in November 2024 and extended to February 2025, aims to enhance food safety and business compliance (Daily Investor 2024). However, many shops remain unregistered because of non-compliance or lack of awareness, necessitating further research on its economic impact (AllAfrica 2024).

To account for the sample size of the targeted population, the researcher used

Slovin’s formula to compute the sample size in a study given the total population and margin of error (Tejada 2012). Slovin’s formula (Equation 1) is defined as follows:

where:

n = Sample size

N = Total population (500 spaza shops within Ugu district)

E = Margin of error (0.09, which is calculated at the 90% confidence level)

For this study, the total population is disclosed to be 500 potential participants, and the margin of error to be used is 9%. These figures applied to the formula are as follows (Equation 2):

To enhance data reliability and address potential challenges such as non-response, incomplete questionnaires and participant attrition, the researcher recruited approximately 140 individuals through purposive sampling and the analysis was conducted on 100 spaza shops as per the Slovin’s formula calculation. This strategy aligns with the recommendations of Fowler (2014) and Creswell (2014), who advocate for oversampling to secure a final sample size that is adequate for rigorous analysis. Oversampling is particularly effective in addressing common limitations in survey-based research, including missing data and dropout, which may threaten the validity and reliability of the findings. Using the inclusion and exclusion criteria, data were collected from spaza shops in KwaGamalakhe Township, including both current and former owners from the past decade, while excluding shisanyama, vendor stalls, non-food outlets and informal fast-food businesses. Participation required formal consent, and efforts were made to ensure a balanced representation across different racial groups within the area (Creswell & Plano Clark 2011; Etikan, Musa & Alkassim 2016). To choose spaza shop owners in South African townships who could offer valuable insights into the connection between education, FL and company sustainability, a purposive sample technique was used. Township location, ownership and financial management responsibilities, minimal operating experience of at least 1 year and use of basic financial services were the main inclusion criteria.

Reliability of questionnaire was tested through a pilot study and computation of Cronbach alpha. The level of education referred to general education such as completing matric and participants’ identities were kept anonymous to protect their privacy. The quantitative data were analysed via the Statistical Package for the Social Sciences (SPSS).

However, the goodness-of-fit statistics presented in Table 4 revealed mixed results. The Pearson Chi-square test yielded a value of 62.778 (degree of freedom [df] = 36, p = 0.004), and the deviance Chi-square test returned a value of 70.877 (df = 36, p < 0.001). These significant p values suggest a potential lack of perfect fit. However, given the sensitivity of these tests to sample size, these results do not necessarily invalidate the model but suggest that it may not capture all the complexities of the data.

The model’s explanatory power was assessed via pseudo-R-square measures presented in Table 5. The Cox and Snell R-square was 0.183, the Nagelkerke R-square was 0.185 and the McFadden R-square was 0.041 (see Table 5). These values indicate that the level of education explains approximately 18.5% of the variance in FL according to the Nagelkerke R-square, with the McFadden R-square suggesting that approximately 4.1% of the variance is explained by the model. While these values demonstrate that education level has a notable effect, they also imply that other factors are likely influencing FL.

This study examines the relationship between educational attainment and FL among spaza shop owners and analyses how FL influences business management. Our research question is whether the level of education is a significant factor in determining the FL skills needed to run the spaza shop business. The results revealed that education level is a significant predictor of FL, with higher education levels generally associated with higher FL scores. Moreover, while educational level influences FL scores, other factors must also be considered. This finding aligns with that of Lusardi and Mitchell (2011), who reported a strong positive correlation between education and FL, where individuals with higher educational attainment demonstrated better financial decision-making skills. Their study emphasised that formal education equips individuals with basic numeracy and problem-solving skills essential for understanding financial concepts, which are crucial for running small businesses such as spaza shops. In the context of small businesses, Drexler et al. (2014) highlighted the fact that education improves not only FL but also the ability to manage business finances effectively. Their research, which focused on micro-enterprises, revealed that business owners with higher educational levels were more adept at tracking cash flows, budgeting and accessing external financing, all of which are critical for business success.

However, as indicated in the current study, the relationship between education and FL is not entirely linear, as other factors, such as age, experience and access to financial resources, also play a role. According to a study by Van Rooij, Lusardi and Alessie (2011), individuals with more life experience and exposure to financial products tend to display higher FL levels, even when formal education is limited. This suggests that FL can be enhanced through practical experience, not just formal education. Furthermore, Cole, Sampson and Zia (2011) explored the impact of financial education programmes on entrepreneurs in developing countries and reported that while education is a significant factor, the effectiveness of FL depends on how education is delivered and applied in real-life situations. This echoes the call in the present study for further investigation into how education interacts with other variables to influence FL, especially in different social and economic contexts. The results reveal a significant link between education and FL and its influence on financing decisions and affirm that education is a key determinant of FL.

We sought to determine whether the level of education significantly influenced the application of FL skills. The results, as shown by the logistic regression model, revealed that education level does indeed have a considerable effect on how FL is applied. The model also suggested that while education is a key factor, other elements, such as experience, contribute to the effective application of FL skills. Lusardi and Mitchell (2011) reported that while formal education improves basic financial knowledge, the practical application of FL often depends on real-world experience and exposure to financial decision-making environments. Similarly, Fernandes, Lynch and Netemeyer (2014) argue that although education is crucial, experiential learning, such as managing finances over time, can significantly improve one’s ability to apply FL concepts effectively. Likewise, Huston (2010) highlights the fact that financial education programmes alone may not be sufficient to ensure skilful financial decision-making, unless paired with ongoing practical experience. This aligns with the findings of the present study, reinforcing the idea that education enhances FL but must be complemented by factors such as experience for better application.

Many Spaza store owners operate their companies to satisfy their basic requirements rather than simply to maximise profits. Because spaza owners sometimes depend on stokvels or informal lenders, which raises capital costs, traditional banks consider these tiny township firms to be high-risk. Profitability is impacted by high crime rates, which deter investment in expansion (e.g., stock theft, vandalism). Competition is heightened by the rise of foreign-owned spaza stores with stronger supply chain connections. Operations are disrupted by inadequate transportation, inadequate storage facilities and unstable electricity.

This study investigated how education may improve FL and how it affects the performance of spaza stores in Gamalakhe Township. The findings showed that formal education is essential for giving storeowners the fundamental knowledge and abilities needed for FL. Highly educated store owners showed a greater understanding of financial principles and procedures, which resulted in superior financial management choices regarding cash flow management, investing and budgeting. As a result, small businesses with financially savvy owners have a greater chance of success and operational stability. Our findings are enhance the theory of resource-based view and human capital among small business owners. The success of spaza store owners frequently depends less on outside finance and more on their financial acumen and knowledge. We also expand the theory of planned behaviour in entrepreneurship. Therefore, improving FL can change mindsets, increasing the intention and actual behaviour to grow the business sustainably.

To enhance FL and decision-making in spaza shops, training programmes focused on improving FL should be prioritised for spaza shop owners. Training programmes could provide entrepreneurs with the skills to evaluate and select better financing options and higher-level investment opportunities as financially literate individuals are more likely to make sound financial decisions. Our findings show that while education plays a critical role in enhancing FL, real-world experience is just as important in its application. Therefore, combining formal financial education with experiential learning opportunities, such as mentorship or financial management workshops, would better equip spaza shop owners to apply their FL in practice. Free or subsidised FL training programmes aimed at informal entrepreneurs should be implemented because many FL workshops and courses have fees that low-income business owners cannot afford. Participation in online financial education programmes is limited by limited access to technology, including smartphones and the internet. As they cannot afford to take time off from their firms, entrepreneurs frequently prioritise activities that generate immediate income rather than training programmes.

We recommend the implementation of community-based financial education that is taught in local languages and includes examples that are pertinent to the culture (e.g., focussing on informal lending practices and stokvel management). By creating microfinance products tailored to each township and including financial education, microfinance and credit access could be enhanced. This can also assist spaza owners with official registration, supplier savings and government incentives and also increase transaction records and savings, implement mobile money, point-of-sale (POS) systems and basic accounting applications.

However, not all FL deficits among informal business owners cannot be filled by formal schooling alone or training in FL. Many spaza shop owners rely on experience and informal education, which hinders their capacity to completely understand intricate financial ideas. The growth of FL is further hampered by issues such as a lack of mentorship opportunities, time constraints and resource limitations. A larger population and sample size in future studies could enhance generalisability. Further investigation is needed to understand the varying effects of education on FL across different groups. Future research could investigate the interplay between FL and other socio-economic factors, such as access to financial services, community support systems and local economic conditions, to gain a more comprehensive understanding of how these elements collectively influence entrepreneurial success.