Assessing Financial Risk Management Strategies among Small and Medium Enterprises (SMES) in Lusaka’s Industrial Sector

Abstract

This study examines financial risk management (FRM) strategies among small and medium enterprises (SMEs) in Lusaka’s industrial sector within a context of persistent macroeconomic volatility. SMEs are central to Zambia’s economic structure, contributing approximately 97% of businesses, 70% of Gross Domestic Product (GDP), and 88% of employment. Despite this contribution, SMEs remain highly vulnerable to financial risks arising from inflation, exchange rate instability, high interest rates, and limited access to finance. These risks manifest in quantifiable outcomes, including cash flow instability, declining profitability, and increased probability of business failure. Guided by a pragmatic research philosophy, the study adopts a cross-sectional mixed-methods design. Quantitative data were collected using structured questionnaires from industrial SMEs, while qualitative insights were obtained from key informant interviews. The study is anchored on Enterprise Risk Management (ERM) theory, contingency theory, and the resource-based view (RBV), which collectively explain how SMEs identify, assess, and mitigate financial risks under dynamic conditions. Descriptive results indicate that SMEs face high exposure to market risks (interest rate, exchange rate, and inflation risks), alongside moderate-to-high exposure to liquidity and credit risks. Correlation and regression analyses reveal statistically significant positive relationships between financial risk management practices and financial outcomes (R² = 0.49), indicating that structured FRM improves financial resilience. However, qualitative findings reveal that most SMEs rely on informal and reactive strategies due to low financial literacy, high collateral requirements, and weak institutional support. The study concludes that inadequate and informal FRM practices significantly undermine SME sustainability. It recommends strengthening financial literacy, improving access to finance, and promoting structured risk management frameworks tailored to SMEs. The study contributes to the limited empirical literature on FRM in developing economies and provides practical insights for policymakers, financial institutions, and SME managers.