Experts warn SMEs over foreign currency loans
Joadah Consults Ltd chief executive officer Joel Aita lifts the Top 100 mid-sized award after his firm emerged last year’s overall winner. PHOTO BY STEPHEN OTAGE
What you need to know:
Risk. The loans are faced by volatility in the exchange rate which costs the borrower foreign exchange losses or is forced to increase prices on consumer goods.
Kampala. Financial experts have warned Small and Mid-Sized Enterprises under the Top 100 Mid-Sized Companies Club 2015 against taking foreign currency loans due to the lower interest rates than the Shilling.
By mid this year, interest on foreign currency loans averaged 8.11 per cent, much lower than the 23 per cent charged on Uganda Shilling loans.
According to Bank of Uganda (BoU), between February and April, there was growth in foreign currency denominated loans rebounded by 1.2 per cent from minus 2.3 per cent.
“As medium-sized firms, you need to match the financing options for your companies according to your receivables. You can only go for foreign exchange denominated loans if you have an assured contract with a buyer that you will receive payment in foreign currency,” Mr Ivan Musaja, head of commercial banking at Stanbic Bank Uganda, said yesterday.
This was during a training session at KPMG Uganda offices in Kampala for previous participants of the Top 100 mid-sized companies.
Mr Musaja said because interest rates on foreign currency loans were lower than the Shilling loans, there was a risk brought about by volatility in the exchange rate. The borrower would suffer foreign exchange losses or be forced to increase prices on consumer goods if they derive income in the Shillings but must pay back their loan in dollars.
“Last year, entrepreneurs and several tenants downtown [Kampala] went on strike because landlords were charging them in dollars. The problem is that landlords had liabilities in dollars that if they change their charges to Uganda Shillings, then they will incur foreign exchange losses,” Mr Musaja said.
The training included giving midsized company executives skills on effective financing options and effective risk management by taking on insurance policies.
Top SMEs survey on
The KPMG and Daily Monitor Top 100 Mid-Sized Companies 2016 survey is currently ongoing until September 30 on the theme “staying ahead of the competition in the evolving economic environment”. The criterion for companies to take part in the survey is for those that have an annual turnover of between Shs360 million and Shs25 billion with three-year audited books of accounts. Top 100 is sponsored by Stanbic Bank and the ICEA Group.
