• Authored By: Justine Luwedde
19 Oct 2020

Micro, Small and Medium Enterprises (MSMEs) play an important role in the economy such as providing numerous employment opportunities and generating innovations in all sectors thereby promoting competition and efficient resource allocation. There are a myriad of ways to define MSMEs: size of capital investment, the number of employees, turnover, management style, location and market share. In Uganda, MSMEs usually employ less than 5 and a maximum of 50 employees, with working capital of less than Ug.Shs 50 million and annual income turnover of between Ug.Shs 10 to 50 million.[i]

Among the many constraints that MSMEs in Uganda are facing, access to finance stands out as a challenge for it limits their growth and performance.[ii] Therefore, the capacity for MSMEs to realise their potential in a given economy may largely depend on the availability of finance to enable them increase their income and resolve their liquidity constraints. Yet, literature shows that many MSMEs do not have access to credit and very few are incorporated in the formal financial markets. And those that access credit often borrow from informal market lenders who charge high interest rates.[iii]

Consequently, close to 90 percent of MSMEs in Uganda often collapse within the first year of start-up, owing to the lack of access to credit.[iv] In response, several financial institutions have taken initiatives to extend financial services to MSMEs especially during this period of the Covid-19 pandemic to enable them create employment, build their assets base and improve their capabilities.

A rapid survey by the Economic Policy Research Centre (EPRC), the risks associated with COVID-19 have aggravated the credit and liquidity limitations among MSMEs in Uganda with 69 percent of the businesses recording a drop in access to credit, while 34 percent reported over 50 percent reduction in credit.

This is largely due measures implemented to control COVID19, which drove many MSMEs to temporarily suspend operations due to failure to implement preventative health measures such as provision of accommodation on work premises for employees, sanitizers and handwashing tools for clients/customers. Arguably, preventive measures put in place to control COVID-19 have increased the cost of doing business.

In addition, financial institutions ration credit to SMEs, charge relatively higher interest rates and offer short-term maturities for the loans, which often excludes many credit-worthy small-scale borrowers.[v] In this case, banks prefer to lend to larger firms, which are more credible, provide better business plans, and project a higher chance of success and profitability.

It follows that as much as finance is crucial for enterprise growth; it ought to be fairly priced for MSMEs to access it. This is due to the fact that MSMEs do not only find challenges in accessing credit from financial institutions to finance working capital and investment; but also face high interest rates in cases where MSMEs succeed in accessing financial resources. This most repeatedly leads to non-performing loans. Therefore, while credit plays a crucial role in enhancing enterprise development and economic development of the country, MSMEs face constraints that impede their access to financial resources.

In addition, businesses with networks are in a better position to access bank credit compared to those without such networks. MSMEs therefore require up to date and inexpensive sources of information and media, which takes into, account their limited mobility and time constraints.

Networking among firms, industry and trade associations enhance learning by enabling knowledge sharing, acquiring key information on the sources of finance and learning opportunities, processing and using the information availed to them. Hence, amidst the Covid-19 crisis, MSMEs need networks to make themselves attractive to finance and opportunities for business sustainability and resilience.

Equally, inadequate human capital impedes MSMEs’ ability to build their capacity to obtain financing. Thus good quality human capital is a necessity for MSMEs to enhance their marketing and financial planning, business records and corporate governance[vi], management skills, entrepreneurial skills and knowledge of business opportunities.[vii]

To complement financial services, MSMEs require financial literacy, training and mentoring in governance and compliance to develop the credibility of their businesses. Relatedly, MSMEs also need capacity building to improve their financial records and accounting systems. Proper record keeping and maintenance is important and the books of accounts have to be clear, realistic and replicating their operations and financial standing.

In turn, good books of accounts give credibility to the businesses and com in a handy in accessing credit from banks, business management and monitoring and guiding tax authorities. Fortunately, Some institutions in Uganda such as Stanbic Business Incubator have made an effort to train and mentor MSME’s in these area to harness their business and growth opportunities.


[i] See Kasekende and Opondo (2003)

[ii] See Kasekende and Opondo (2003) and Kibuuka et al. (2013)

[iii] See Adams (1984)

[iv] See Baguma (2010)

[v] See Kulabako (2011)

[vi] See UNEP (2007)

[vii] See Tusubira & Nabeta  (2013); UIA (2008)