Ugandan economy is driven by SMEs and among them are manufacturers who are a priority economic sector for Uganda to promote inclusive growth. According to data available, there are more than 10,000 manufacturing units in Uganda that can be categorised as micro and small enterprises.These small businesses are an important source of employment and contribute significantly to the national output.However, small enterprises often find it difficult to access finance from banks and other formal financial institutions.Many of them are unable to provide collateral to secure loans, procedures are too complex for them, or the administrative cost of serving them is too high for banks to consider them as a profitable market.Even Uganda’s most successful companies have their share of cash flow troubles, especially during growth phases.As we all know, profits and cash flow are not the same thing. You can have a profitable business on paper and not have a dollar in the bank.In some seasonal industries it’s almost the norm. But a smooth and reliable level of working capital is essential to the success of any business.The most common cash flow problems for Ugandan businesses include cases where businesses raise most of their income in one part of the year have to carefully and diligently manage expenses, or they run out of funds to meet the sudden demand once a year.Another major challenge is lending restrictions and although this has always been an issue for small businesses, it was recently made worse thanks to economic slowdown being experienced in Sub Saharan Africa.
Banks have tightened lending criteria affecting many Ugandan SMEs and now continue to make it more difficult to obtain loans or raise credit limits. Banks often look at Ugandans personal credit score and require collateral they can easily liquidate, such as houses, cars etc.Some avoid certain industries altogether, particularly the temporary labour hire sector.Also common is the rapid expansion where companies that are growing quickly incur the cost of increased overhead like materials, equipment, staff, expanded facilities among others before they reap the rewards of their sales.They drain their cash supply to meet demand. Many Ugandan businesses experience cash flow problems because customers who goes bankrupt leave them exposed to bad debt. Setting reasonable limits for companies with poor credit history can help avoid defaults and late payments in Uganda.A recent survey of manufacturing micro and small enterprises confirmed that credit flowing to small enterprises is fairly limited. For example, an overwhelming number of small enterprises use their own capital for investing. Among those who borrow, only a third have bank loans. Overall, close to 42 percent of micro and small enterprises consider access to finance a major constraint.As the figures suggest, penetration of formal credit to small enterprises in the manufacturing sector is fairly low. While outreach of financial services appears to be low, it is important to ask whether small businesses are indeed willing to borrow? In other words, what is the real demand for credit among small enterprises in Uganda? The answer to this question is not necessarily simple.The same survey shows that around half of small manufacturers do not want take a loan from a bank. A lack of collateral, high interest rates and complex procedures were cited as key reasons for not borrowing from banks.Although close to 35 percent of small manufacturing enterprises that have a loan re-borrow under the micro credit schemes, the overall proportion of manufacturing enterprises accessing financing is less than 5 percent.A large proportion of loans are for retail. That seems to the case for bank credit in general. Retail lending for trade and consumption dominates the portfolio for all types of banks, whether they are conventional banks, rural banks like Centenary Bank or even regional development banks that have more of a development mandate like East African Development Bank.Some may argue that the preponderance of consumption loans mirrors the state of the economy, which is driven by domestic consumption.
Weak demand for loans in manufacturing would mean that financial institutions could simply wait for demand to increase. However, a counterargument to a minimalistic role of Uganda financial institutions is to see if the banking industry can play a more catalytic role in economic development.Are there ways that credit can be channeled to small businesses so that the financial institutions can tap the market of small enterprises through innovative models to deliver services? In the recent past, the policy response has focused on borrowing rates for small businesses. The cost of borrowing does matter for small businesses in Nasser Road or Kiseka and, arguably, more so for enterprises engaged in manufacturing in places like Jinja and Namamve, which, unlike trade or services, tends to have a longer turnover period. A below market rate can potentially lead to moral hazard, attracting businesses that are not necessarily interested in investing, but want to benefit from financial arbitrage.In my view, it is important to add that the presence of a large number of small enterprises does not necessarily indicate a high level of entrepreneurship. Some studies have shown that the so called necessity entrepreneurs are less inclined to invest and actively seek growth opportunities. These include people who are not able to find wage employment and are often pushed to start their own businesses. The challenge, therefore, is to find growth-oriented small businesses in and outside Kampala that can benefit from various credit schemes and deliver greater value.In light of this, public institutions and other development agencies can play an important role in addressing information asymmetries and providing technical assistance.A possible area is to help in understanding real demand for the type of financial services needed by small-scale manufacturers with high growth potential like Movit Industries and to assist financial institutions in designing appropriate loan products that match the needs of a large and heterogeneous population of small manufacturing enterprises in Uganda.