Has UDB got the muscle to solve SMEs financing challenges?

Vendors sell products during an expo in Kampala. Development banks can be key players for development by providing long-term financing.PHOTO/file

What you need to know:

Checklist. Most SMEs struggle to meet Uganda Development Bank’s criteria of Shs1000m.

Ms Dorothy Kimuli, a businesswoman, doesn’t think the country’s development bank is meant for people like her. 

She believes that Uganda Development Bank (UDB), the country’s national development finance institution, is a preserve of the “big boys and a few big girls” seeking relief in form of temporary operating capital.

This is because development banks in Africa, seem to be out of reach for most small and medium businesses where Ms Kimuli Is a player.

As a result, the processor of chili sauce and tomato ketchup, draws a conclusion that development banks in a shape of UDB are for her but for selected big industry players and not start-ups or Small and Medium Enterprises looking recapitalise or expand its operations. 

The proprietor of D&M International also doubts that the country’s development finance institution would ever serve the financing needs of the majority SMEs, considering that few of them can generate the kind of turnover UDB requires as a condition to prequalify an SME for a loan.

She asks: “How many SMEs have Shs100 million in their accounts or even generate a turnover to that tune which is a requirement for financing?”

Ms Kimuli is just one of the many domestic investors who believe the development bank despite its mandate to accelerate the country’s socio-economic development by way of offering reasonable financial interventions, is seemingly out of touch with the reality.

In another study by SEATINI Uganda, the process of accessing financing was  bureaucratic. It also became clear that the loan requirements by UDB alienated Micro, Small and Medium Enterprises (MSMEs) from accessing the financing. Not just MSMEs… Perhaps, even some “big boys” in the industry cry foul, saying UDB is not paying them any attention despite repeated attempts to engage the development bank.

The problem, however, according to researcher Paul Corti Lakuma, is not really UDB as an institution or even the SMEs who are in need of the financing. He argues that UDB has a credit worthiness checklist which it must stick to.

 A significant number of SMEs struggle to meet the criteria set in the checklist yet UDB has a limit on the extent it can stretch its non-performing loans portfolio. Not only are the big industry players complaining but also small and medium sized business.

 “This is not just an issue of small and medium businesses, even the big companies complain about access to UDB financing. I believe this is an institutional challenge,” Dr Fred Muhumuza, lecturer at the Makerere School of Economics, said when contacted last week.

Going forward, Dr Muhumuza who is also a former advisor at the Ministry of Finance, believes that UDB needs to get back to the original policy of categorisation basing on the tiers, something the development bank last week embarked on.

With this arrangement, all category under Micro, Small and Medium Enterprises (MSMES) will be catered for basing on their needs. But because of the make-up and integration of the economy, Dr Muhumuza says UDB finds itself working more with the “big boys” at the expense of MSMEs.  

The executive director, Centre for Budget and Tax Policy (CBTP), Mr Patrick Kiconco Katabaazi says UDB needs clarity in its operations because it appears as a development bank but conducts business as a commercial bank. This therefore alienates a huge section of other economic sectors that could have benefited from its services.

He is of the view that clarity is made on which category of people and businesses should partake the Emyooga funds or get help from the Microfinance Support Centre. Once this “confusion” is sorted, it will help UDB focus its attention where it is supposed to be. 

Evolving

Recently, the country’s development finance bank has been charting a new path that the Finance Minister Matia Kasaija describes as “long overdue.” 

This is because development banks can be key players for development by providing long-term financing directly from their own funding sources as UDB has demonstrated last week by putting aside 20 per cent of its capital towards causing economic transformation among SMEs, women and youth, a category most excluded from financing because they are considered risky. 

Under this special programme, SMEs, women and youth have been identified in the development bank’s strategy. The beneficiaries are in the sectors supported by UDB including Hospitality, tourism, human capital development, agriculture and manufacturing.

According to Mr Kasaija, government believes that their support to the isolated segment of the economy, will result into good quality jobs and sustainable income. 

Speaking at the launch of the Special Programme last week, Mr Kasaija noted that economic transformation requires long-term investment to support the expansion of productive capacities, as well as infrastructure development that underpins industrial activities and reduces bottlenecks, a trend he said UDB has embraced, although that should have been its responsibility right from the beginning.

This perhaps explains the Uganda Development Bank Ltd (UDBL), the country’s national Development Finance Institution, announcement meant at addressing the growth of three unique segments which include the youth, women and SMEs.

“Our aim is to offer a definitive end-to-end solution for the growth and sustainability of business in the Youth, SME and Women-led business segments, which are the new engines of development in Uganda especially during this time when the country is looking towards the much-needed economic recovery,” the managing director of UDB, Ms Patricia Ojangole said.

To address some of the critical constraints to access to credit, the Bank has resolved to implement a more accommodative arrangements on cost of credit, collateral requirements, equity contributions, simplified loan processing and requirements among others.

 To ensure scaling up of entrepreneurship and sustainability of the businesses, all qualifying businesses will benefit from UDB’s tailored offer that provides advisory services, now referred to as “BASE.”

On flexible collateral arrangements for example, land agreements can be used. The use of land agreements, the Bank explained, is to make the offer accessible to majority of Ugandans for whom land is the most available security. In practice for example UDB will rely on a simple agreement such as a sales agreement or even advance loans on customary title while helping an applicant process the land by surveying and titling the land.

Further, UDB seems to be looking to positioning itself as the development financing institution that in many ways not only shapes the country’s financial industry agenda but also establish its architecture, something that a development bank should ideally be doing. 

With the ongoing Covid-19, there is no ec0nomic sector that has been spared, with education, tourism, accommodation and catering, mining and quarrying, all bearing the brunt of the pandemic.

The country went into two separate total lockdowns to contain the spread of the pandemic which threatened to get out of hand. As a result, livelihoodS and businesses took a beating, with many currently struggling to remain afloat.

Majority borrowed at the exorbitant commercial rate, normally ranging between 20-30 per cent, which even according to the financial sector players, let alone the industry regulator, Is simply a death trap that most SMEs cannot just afford to walk past.        

At 12 per cent, although still a very high lending rate, UDB is still lower than commercial banks. 

About a fortnight ago, the Ministry of Finance, Planning and Economic Development and UDB hosted alongside their international partners a global gathering of financial sector players drawn from policy owners, regulators, and leaders from the financial sector, to examine what the development bank described as “cutting-edge solutions for mobilising and financing the post-pandemic economy.”

The two-day meeting organised under the World Development Finance Forum (WDFF) explored new approaches, pragmatic solutions, and collective actions to mobilise capital and finance the transition to a zero-carbon, green, inclusive and sustainable economy, something the minister of Finance, Mr Matia Kasaija says the government will support as part of the Covid-19 recovery programme.

The meeting “Unveiled Financing 4.0” which is an effort to revolutionise the mobilisation and deployment of capital at a mass scale. The forum will end with recognition of various sustainability leaders for their contribution towards a better world for all.

For struggling SMEs, financing 4.0 seem to be the answer for many of their financing challenges, including those looking to transition to businesses with little or no negative impact on the environment.

“This is about linking people with capital to those who need it most and align it to our goal and vision,” UDB, Director Credit, Mr Samuel Edem – Maitum said in an interview.

He continued: “We would love to offer lower lending rates than the 12 per cent we currently charge. In the medium to long term we would love to charge in the ranges of 10 0r8 per cent or even lower, and solution like this – 4.0 financing, will help accelerate that.”

Mr Matia Kasaija said: “We know that business as usual will not work. Therefore the initiative 4.0 financing which delivers new solutions to raise funds at scale and use them effectively to achieve sustainable development goal, environment and climate protection is critically important.”

Easing pressure

In addition of the two mentioned initiatives, including the Special Program, launched last week, the government through the ministry Finance has made available Shs100billion which Commercial Banks tops with another Shs100billion to lend at an affordable and less requirement to MSMEs, a development Mr John Walugembe, the executive director of Federation of Small and Medium-Sized Enterprises-Uganda (FSME), totally applauds.

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