Small and Medium Enterprises (SMEs) continue to dominate Uganda’s economy.
However most of these enterprises do not survive for more than a year or if they survive, they never transition into medium scale and mostly remain on a small scale.
According to the deputy Governor Bank of Uganda Dr. Louis Kasekende, there are many reasons and challenges, both external and internal that have bayed SMEs from growing.
In most cases, these SMEs fail or close up due to lack of profitability. This is mainly due to external factors like the difficulty business environment facing SMEs like competition, high cost of doing businesses due to high cost of power and transport plus unreliable labor and unfavorable legal system that is slow in solving disputes like land and property disputes.
However the other big challenge facing SMEs is lack of substantial capital to sustain their businesses and higher dependency on loans which are very unfavorable to SMEs.
According to Kasekende, due to the substantial risks involved in startup businesses, the most appropriate form of capital for start-ups should be equity capital rather than loan capital mainly because loans have to be serviced irrespective of whether or not the businesses makes profits.
“To fund a start-up business mainly with loans is a recipe for trouble as the business is likely to struggle to generate sufficient revenue in the early years of its operations to survive its loans,” Kasekende said.
He added, “Consequently, the bulk of equity finance needed by startups must be mobilized by the owners themselves from their savings or those of their families.”
Kasekende delivered a major address on ‘how Uganda can improve the performance of SMEs, so that more of them can survive and expend the scale of operations’ during the Stanbic Bank Enterprise Conference on Friday April 5 at Hotel Africana in Kampala.
Kasekende who represented the Governor Bank of Uganda as the guest of honor said that the key contribution banks can make to SMEs is to provide working capital after the SMEs are established.
He appealed to banks to help SMEs by undertaking financial literacy programs and giving SMEs impartial advice on the adequacy and realism of their business plans.
“Banks should also look for innovative ways to reduce transactions costs of lending to SMEs, for example by utilizing digital technology,” he said.
The deputy Governor further called on government and other responsible parties to invest more in financial training for these SMEs on proper management and running of third businesses.
Kasekende noted that most SMEs are poorly managed by their owners who leave them under the management of third parties because they have other fulltime jobs, take out capital from the business to finance their daily needs or start up other small enterprises but also do not keep proper financial books to determine whether they are making profits or not.
“The owners and managers of SMEs can benefit from practical help and training to strengthen their businesses and management skills. A number of organisations are currently providing technical assistance to SMEs in Uganda. Training programs need to be scaled up if they are to make a significant contribution to the economy, given the huge number of SMEs in the country,” Kasekende noted.
He further points out the need for government to created good environment for SMEs to operate by reducing the cost of doing businesses but also putting in place a strong legal system that can solve business disputes fast but also create trust among the community members.