Fixing salient challenges for small sized enterprises

More than 85 per cent of the new start up Small and Medium sized Enterprises (SMEs) never live to see their fifth birthday due to several reasons among which include lack of access to financing.
In Uganda, SMEs are recognised as big drivers of output, economic growth, innovation and job creation.
It should be our goal to attain a vibrant SME sector to enhance the standards of living and reduce poverty.
Many SMEs continue to yearn for funds, capacity building, and other resources to grow beyond the initial capital, yet they offer the best opportunities for growth.
Uganda Investments Authority (UIA) defines SMEs as entities that employ between five to 100 people, have assets not exceeding Shs100m and register revenue of not more than Shs360m per annum.
We can never wane the influence of the SMEs and the informal sector, but many times they wiggle in the noose of demise for lack of collateral to access financing to leap them forward.
This challenge, at times, subjects them to resort to funds availed by money lenders and shylocks at exorbitant rates, where they have a definite visa to collapse.
Several studies conducted by the World Bank and other organisations have indicated very low levels of bank financing to SMEs in Uganda.
These are dominated by informal, micro enterprises and semi large companies on the other hand. The studies attribute the low levels of bank financing to SMEs in Africa to supply and demand.
While the lack of effective business plans and adequate skills within SMEs are a problem on the demand side, the supply is constrained by lack of capacity in the financial sector to do business with smaller companies, inadequate information resulting in high-risk assessments and lack of availability of longer term funds.
For the SMEs, the cost of finance is higher compared to the corporates, for it is considered more risky by many financial sector players, due to the manner in which they conduct their business affairs.
A recent United Nations Conference on Trade and Development report indicates that the default rate for Ugandan SMEs was 78 per cent.
The report also states that SMEs have little collateral to ensure against these risks as they also suffer from low capitalisation, vulnerability to market fluctuations and high mortality rates.
Certainly, the lack of collateral and reliable collateral registries gravitates into poor protection of creditors.
Suffice to note that any forward-looking financial institution should work towards fixing the salient challenges for the SMEs.
It is in response to these challenges that the African Guarantee Fund (AGF) for Small and Medium-sized Enterprises was created by the African Development Bank (AfDB), the Danish International Development Agency and the Spanish Agency for International Development Cooperation.
AGF was designed particularly to foster innovation, business growth and provide employment opportunities that are essential to long-term and sustained growth.
Through the AGF’s credit guarantees, Centenary Bank is to partially be covered in regard to the risks associated with SME financing and thus enabling the support to the vibrant SME sector, and most importantly the meriting SME business proposals that only lack financing to flight, without which they may never see the light of the day.
Additionally, this guarantee will also enable the banks to raise long-term resources for SMEs long-term needs.
AGF also offers the capacity development facility to enable partner financial institutions enhance their SME financing capabilities and thus to execute their growth strategies in the sector with ease.

Ms Jjingo is a fellow of Uganda Institute of Bankers and a general manager Commercial Banking at Centenary Bank.