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Is financing the main hinderance of growth of small businesses in Uganda? According to the National Small Business Survey of Uganda Report, MSMEs play a vital role in the Ugandan economy and society at large as they constitute about 90% of private sector production and employ more than 2.5 million people. They also contribute to the generation of domestic income. Financial Sector Deepening Uganda (FSDU) contracted Nathan Associates and TNS to carry out a small business survey in a bid to identify the constraints that inhibit development and growth of MSMEs with respect to access to finance, infrastructure, business development services, markets and technology. The highest proportion of MSMEs work in the agricultural sector, followed by the education & health sector, and recreation & personal sector.
According to the Ministry of Finance, Planning and Economic Development (MFPED), most MSMEs have fewer than 20 employees. MFPED defines a Micro Enterprise as an enterprise employing up to 4 people with an annual revenue turnover of 12 million Uganda shillings (USH.), a ‘Small Enterprise’ as an enterprise employing between 5 and 50 people with an annual sales or revenue turnover of up to 360 million USH., and a ‘Medium Enterprise’ as an enterprise that employs more than 50 people with an annual sales turnover or assets of between 360 million USH. and 30 billion USH.
The MSMEs in Uganda are relatively newly established enterprises. Majority of them have been set up in the last 10 years. Nearly three quarters of the MSMEs operate as sole proprietorships and are typically run and managed by owners. The owners are relatively well educated with more than half having achieved a secondary education or higher. Most of the business revenue comes from individuals within their locality and not from company or organization purchases or sales.
According to the survey, when financing the start-up of a small business, 86% of the businesses use their own funds for this purpose. Less than 7% of the businesses are financed through friends and family funds while banks provide start-up funding for less than 4% of the enterprises.
MSMEs have a high loan appetite, especially micro and small enterprises, to cater for their working capital needs. Banks are the most common sources of loans among businesses that are able to secure loans. However, most businesses fail to access these loans due to the collateral requirement of banks. Often times, the collateral required by banks in order to issue out loans to businesses is land. Majority of the MSMEs are unable to provide this type of collateral. Unsecured loans are rarely issued to businesses despite the fact that they rarely fail to repay on time.
The second most common source of loans is microfinance institutions. Microfinance is defined as small-scale business or credit services made available to individuals running small enterprises in which goods are manufactured, reprocessed, repaired, or exchanged in rural as well as urban areas (Stanley G, 2008). Be that as it may, the proportion of businesses borrowing from microfinance institutions is negligible. Similar to banks, businesses are unable to obtain loans from microfinance institutions due to lack of collateral.
Moreover, most businesses are not part of any association. With the presence of well-established associations, businesses can create saving and lending groups with the guidance of microfinance institutions. The businesses are then able to access funding through the associations saving and lending scheme.
When choosing a financial provider, the businesses firstly considers the length of relationship with the institution. Secondly, they consider the interest rates. High cost of finance deters the businesses from seeking out loans from organizations such as banks as the interest rate charged on the loans is relatively high.
Legal requirements also affect financing of MSMEs in Uganda. A fifth of the MSMEs in Uganda are not legally registered while three quarters do not have a tax identification number. This is attributed to the fact that the owners do not know how to go about the procedure, or they find it too complicated. Hence, they do not have access to services that require legal documents such as obtaining finance from banks or microfinance institutions.
Starting up a small business is a courageous step that comes
with a myriad of challenges. From
the survey conducted by FSDU, Nathan Associates and TNS, the greatest
challenge facing MSMEs in
Uganda is financing. Sourcing for finance for small business owners is
challenging due to the high cost of interest, the collateral requirements and
legal requirements of loans upheld by banks and microfinancing institutions. MSME
owners in Uganda expressed that the government’s priority should be improving
access to finance. The government and relevant stakeholders in collaboration
with the Ugandan Revenue Authority can carry out sensitization on the
importance of registering a business, obtaining a tax identification number and
all the legal documents required of a business. In addition to this, the public
sector can implement programs that aim to create awareness on the importance of
collective action and the benefits of being a member of a professional