Poorly governed SMEs cannot attract genuine financiers, says World Bank 

Many small businesses fail to put in place governance structures, thus creating loopholes in the management of operations and financing. Photo / File 

What you need to know:

  • The World Bank contends that a substantial amount of research demonstrates that companies with sound governance practices have noticeably superior long-term financial outcomes

Small and medium-sized businesses in Uganda have long complained about inadequate funding, but new research indicates that they require strong corporate governance to increase their operational effectiveness, increase their access to capital, and reduce risks. 

The World Bank contends that a substantial amount of research demonstrates that companies with sound governance practices have noticeably superior long-term financial outcomes, and grow faster and more sustainably.

“Conversely, results consistently show poor governance practices to be directly linked to poor business performance, fraud, and catastrophic failures,” the World Bank said in a new report about corporate governance in small and medium-term enterprises (SMEs).

The oil and gas industry in Uganda is one example, which has opened up many opportunities for Ugandan businesses. 

But many Ugandan business people who have had the chance to have these contracts have abused them, according to Mr Humphrey Asiimwe, chief executive officer of the Uganda Chamber of Mines and  Petroleum, ultimately ruining their tenders, which he attributed to poor cooperate governance.

While conducting financial intelligence training for small businesses at the Uganda Registration Services Bureau (URSB) in Kampala recently, Mr Asiimwe revealed that some companies mishandle the initial funds they get after winning contracts. 

These funds are usually utilised to cover costs of the products or services that a specific company is supposed to deliver as specified in the contract.

According to the most recent data from the Ugandan Petroleum Authority, 460 out of 624 companies that supply Kingfisher and Tilenga projects are owned and operated by Ugandans, accounting for 73 percent of the total.

Estimates show that just Shs7b of the more than Shs30b in opportunities in oil projects have been taken.   

Despite this, the World Bank’s private sector funding arm, the International Finance Cooperation, says SMEs can benefit more from early adoption of good practices to support their growth and competitive survival. 

“Entrepreneurs need to start governing their companies based on a certain set of principles, trusting that specific solutions and tools will evolve with the business as it grows. For example, even simple internal controls, when properly designed, help prevent fraud and allow for more accurate financial reporting and planning,” the World Bank says, noting that SMEs interested in attracting investors should improve their governance, given that SME funders such as private equity and venture funds rely on good governance to guarantee a good return on investment. 

Mr Tony Okoa Otoa, the Stanbic Bank Incubator chief executive officer, said a business needs systems, the right personnel with the right skills, the right amount of capital, right mindset to grow and, survive, noting that one of the main issues in the oil and gas sector is that many domestic companies frequently struggle to manage their operations due to a lack of manpower and poor preparation. 

Additionally, he says, operating capital is a major obstacle that makes managing operations difficult. 

“But also, oil and gas is a new thing [in Uganda] and capital intensive. Many people are enthusiastic at first, but as they get deeper into it, they begin to see a larger issue than they had initially imagined,” he explains.