Banks should be more accommodative in lending to SMEs – UDB

Tuesday July 28 2020

A security officer uses a thermometer gun to

A security officer uses a thermometer gun to check a client's body temperature. SMEs are struggling to access capital from banks. PHOTO/KELVIN ATUHAIRE 

By ISMAIL MUSA LADU

At a time like this when some borrowers are afraid to borrow and most lenders are hesitant to lend, the need for a national development financial institution, specifically designed to provide medium and long-term investment to players involved in the productive sector of the economy, couldn’t be more important.
Following the disruptions of some of the major economic value chains occasioned by the Coronavirus disease (Covid-19) and its subsequent containment measures, businesses and the economy, since the turn of the year, has not been the same.

Beyond grappling with the impact of the global supply chain disruptions on the domestic economy, enforced measures to suppress the spread of Covid-19 pandemic in the country – which include closure of all international borders to persons except cargo and the eventual shutdown of the country, simply dampen economic activities, leaving sectors such as services, informal trade, domestic transport and retail industry amongst others, gasping for oxygen to survive.

As a result, further deterioration in business conditions with production levels taking a dip and investors’ sentiments about business environment assuming a dim view, has become the order of the day.
According to the Ministry of Finance, by the time the financial year came to a close last month, economic growth slowed to about 3.9 per cent down from a pre-pandemic projection of 6 per cent.

Re-igniting business activity
To revive businesses, most of which are micro, small and medium enterprises (MSMEs) and the real backbone of the country’s economy, representing an estimated 85 per cent of private sector companies in regard to employment, government has armed Uganda Development Bank (UDB) to respond to challenges that commercial banks and other financial institutions are hesitant to deal with.

To improve the availability of investment finance and the cash flows of MSMEs and other manufacturing firms, the Finance Minister said the government has increased access to credit at UDB to offer low interest financing to manufacturing, agribusiness and other private sector firms.

About Shs1 trillion, according to Mr Kasaija has been available over the medium term for financing the aforementioned productive sectors of the economy.

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But UDB has asked financial industry players to be more accommodative and to remain relevant to the economy.

Covid-19 influence
In a statement issued by UDB last week, part of the funding will be responding to challenges emanating from Covid-19. This, the statement says will include providing liquidity to SMEs, enabling enterprises and the country to become more resilient, through promoting import replacement to cater for potential and current supply chain disruptions as well as enabling the country to become less dependent.

“UDB interventions are targeted at creating sustainable enterprises that create employment, save foreign exchange, and generate tax revenue.”

However, it emerged in the responses to the Daily Monitor that the Shs1 trillion which the government says it has made available to the development bank is capitalisation of the bank for normal operations and not an allocation for the financial year as some people think.

Despite that, the bank will continue to focus on the priority sectors, namely: Agriculture, agro-processing and industry, which are all in line with National Development Plan—the country’s development blueprint.

Other sectors such a tourism as well as cross cutting interventions in health, education (technical and vocational) which support the priority sectors will also receive financing form UDB.

Like in the classical Adventures of Tom Sawyer, by Mark Twain, where poor Tom asks for more to imbibe, the development bank requires capitalisation in the medium term to the tune of about Shs2 trillion.

According to the UDB statement, a Development Financial Institution (DFI) with the mandate of UDB should be capitalised to the tune of about 10 per cent of GDP.

If that were to be the case, UDB support to co-operatives, farmer groups and SACCOs, let alone its partnership with other partner financial institution through whom affordable funding is provided to lend to individuals and entities, whose threshold is below Shs100 million, would be much more frequent than it is perhaps the case right now.

Outlook
UDB will continue having a key role to play in driving the vulnerable economy. According to President Museveni, the real economy deals with the basic human needs. On the other hand, he describes vulnerable economy as that comprising of leisure and pleasure.

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