Demystifying the role of risk tolerance, economic hardship and financial literacy on microentrepreneurs’ financial capability

Purpose The aim of the study is twofold. Firstly, the study aims to examine the impact of economic hardship and risk tolerance on entrepreneurs’ financial capability, an area of the entrepreneurial ecosystem that has received limited research attention. Second, to validate whether the elements of financial literacy – such as financial behaviour, financial knowledge and financial attitude – moderate these relationships. Design/methodology/approach A quantitative research design using structural equation modelling was employed to analyse the data collected from 311 microentrepreneurs through a structured questionnaire. Additionally, the study complements the findings by performing necessary condition analysis (NCA) to examine economic hardship and risk tolerance as predictors of financial capability. Findings The findings revealed that economic hardship has a significant influence on financial capability, whereas risk tolerance does not. Individuals facing economic hardship often develop coping mechanisms that may force people to become more financially capable in terms of money management. Furthermore, the study found no moderating effect of financial literacy constructs on the relationship between the independent variables and financial capability. NCA results confirm that economic hardship and risk tolerance are moderately necessary for developing financial capability among microentrepreneurs. Practical implications The results highlight the importance of addressing microentrepreneurs’ economic hardships. Enhancing financial literacy through interventions may not necessarily improve financial capability. The study intends to give policymakers and practitioners insights into establishing effective financial planning education and training programmes, specifically on coping with and preparing for economic hardships to sustain during economic hardship. Originality/value This study highlights the relevance of economic hardship as a key component of financial capability. To tackle economic hardship, skills and support are more relevant than merely stressing the importance of improving financial literacy. It establishes economic hardship as a major external driver of financial capability. It challenges the dominant narrative by showing that financial literacy alone is insufficient to enhance capability. It brings much-needed focus to micro-entrepreneurs, an understudied group. Ultimately, it broadens a direction to reframe policy priorities, shifting attention from financial literacy to economic resilience and support for survival.