70% of SMEs have unmet credit needs, says report

Ms Zam Ssenoga at her tomato stall in Busega market. Most of the micro, small and medium enterprises  are household enterprises which form part of the 90 percent of Ugandan households that earn less than Shs10 million annually.  PHOTO/ Michael Kakumirizi

What you need to know:

The formal finance market considers most micro, small and medium enterprises very risky to lend to as their vision is limited to meeting their immediate subsistence needs.

In Kampala’s bustling Nakawa market, Aceng Annet, a groceries vendor, meticulously keeps a record of each item she sells. If at the end of the trading day there what she calls “savings,” she will then know she has posted a profit.

“I record everything here,” she says displaying a crumpled book, where she posts the cost of the different items in her stock, the days’ sales and surplus or loss accruing from each item.

If there is a surplus, she deposits it into her savings wallet and considers it a “goody.” Since I am not formally employed, the savings I make are my salary. So I tabulate the savings I have made at the end of the month,” she says.

On some days, the losses are obvious when part of her stock of perishables goes to waste before she could sell. 

Ms Aceng is one of 600 female micro-entrepreneurs in Uganda, whose daily activities were followed over one year, under the Small Firm Diaries, a global research initiative that sought to better understand the impact of financial records keeping and use of digital technologies on firm profit and business goals. 

Conducted by a coalition of partners including Financial Sector Deepening Uganda (FSD-Uganda) and the Bill and Melinda Gates Foundation, the global initiative which was conducted in six countries around the world, sought to find new insights into the financial lives and challenges of small businesses around the world; and how this could spark inspiration and accelerate experimentation for new financial products for small firms. 

The insights would also help to determine which private and public interventions could improve small firms’ access to financial services, particularly for women-led enterprises and enterprises in agricultural value chains.

With a clear sense of where her business is going, and a growing customer base who place their orders by phone, Aceng wants to expand her footprint by opening outlets in new locations.

“Sometimes, customers call telling me what they want. I buy the items and get a trusted Safeboda rider to deliver them. They then pay me using mobile money,” she explains, demonstrating how the adoption of digital channels is facilitating micro traders.

According to Joseph Lutwama, the director of programmes at FSD-Uganda, there are an estimated 1.1 million micro, small and medium enterprises (MSMEs) across all sectors of the Ugandan economy. 

They represent an important segment of the economy, accounting for more than 2.5 million jobs and 53 percent of Uganda’s Gross Domestic Product. A majority of them are concentrated in the services sectors, mainly in trade, accommodation and food services sectors, personal and recreational services sector.

Most of the MSMEs are household enterprises which form part of the 90 percent of Ugandan households that earn less than Shs10 million annually. But since most of them are informal, this limits their ability to access formal financing. 

According to FSD-Uganda, about 70 percent of all MSMEs in the country have unmet credit needs, with their demand for credit estimated Shs31.4 trillion ($8.8 billion). According to records, in 2019, the financial sector in Uganda supplied only Shs 6.1 trillion in financing to MSMEs.

Credit acess
Their ability to access credit from the formal financial infrastructure is impeded by size, unpredictable financial flows, high exposure to social and economic shocks and limited capacity for scaling up.

Majority of them are small with limited production capacity, little to no savings and small-ticket loan sizes. Their income is also difficult to predict because it is seasonal and very susceptible to social or economic shocks. 

Most players are heavily reliant on cash, operate in unstable markets and are digitally and financially illiterate. Worse still, their vision is limited to meeting their immediate subsistence needs. As a result, the formal finance market considers them very risky to lend to.

Researchers argue that there is no single silver approach that can unravel the financial conundrum MSMEs face and it will require an ecosystem approach, to help them transform. Such an approach would deliver economies of scale which transform the small players into viable economic units, increasing possibilities of shared services, assets and infrastructure which further enhances productivity and reduce the unit cost    of production and delivery of services. 

“That increases the possibilities of profitability and growth; economies of scope which increase the opportunities for economic multiplier effects for both the financial service providers, other economic actors and the value chain actors,”  says Lutwama.

 For instance, under the proposed ecosystem approach, financial service providers can deliver financial services to different actors across the value chain thereby increasing the possibilities of revenue and profits.
 On the flipside, value chain participants will also have increased access to various services across the value chain in addition to the primary economic activity.

Leveraging technology, previously dispersed and inaccessible value chain actors can be consolidated into viable self-reinforcing units. According to FSD Uganda, technology brings efficiency gains in the delivery of services across the value chain thereby increasing possibilities of increased productivity and affordability of financial services. 

It would also connect to viable and formal value and supply chains with sustainable financing business models and financial solutions, resulting in strong and sustainable partnerships in the ecosystem.