Micro, Small and Medium Enterprises (MSMEs) are the back bone of Uganda’s economy as they represent 90 percent of the entire private sector and contribute about 18 percent to the country’s GDP. MSMEs also account for the bulk of employment in Uganda. According to the 2015 MSME policy, 2.5 million people are employed by these enterprises, and the policy is cognizant of the substantial contribution that MSMEs make to technological innovation and new products. Thus, MSMEs are regarded as highly significant, with great potential to change Uganda’s economy for better.
Despite their contribution to the economy, MSMEs still face legal, institutional and attitudinal challenges which impede their growth and survival. Recent evidence indicates that the most significant binding constraint to MSME growth is limited access to affordable short-term and long-term financing. For instance, Lakuma et al., (2019) show that Uganda’s MSMEs are more credit constrained than large enterprises, with only 10 percent of them accessing a bank loan or a line of credit.
Most importantly, this particular challenge has been exacerbated by the economic crisis triggered by the outbreak of the COVID-19 pandemic. Due to the COVID-19 induced uncertainty and its associated containment measures, most borrowers are afraid to borrow. In addition, the lenders are hesitant to lend to MSMEs because their riskiness has increased. A recent study by the Economic Policy Research Centre confirms that COVID-19 has aggravated the credit and liquidity constraints among MSMEs relative to large businesses – with 69 percent of businesses reporting a decline in access to credit. Worse still, 65 percent of the MSMEs having outstanding debts indicated that their ability to service debts declined because of the risk associated with COVID-19.
To ensure MSMEs recovery from the effects of the pandemic, the government came up with stimulus packages such as the credit facility advanced to the Uganda Development Bank (UDB) to enhance MSMEs investments in import replacement and export promotion and also stimulate businesses operating in the tourism sector. Other interventions include funds advanced to Savings and Credit Cooperatives (SACCOs) through the microfinance support centre, cheap capital for special groups such as youth and women through the “Emyooga” program, among others.
Nonetheless, COVID-19 being an existential crisis poses challenging questions in this regard: whether these packages can adequately meet the financing needs given that the exact financing gap is not known; whether the target beneficiaries are aware of these packages and if they meet the eligibility criteria and the required documentation to apply for them (accessibility); and whether the few enterprises that have accessed these packages will not backslide after servicing them or even whether they will be able to service the loans in the first place (sustainability). Additionally, most of the beneficiary enterprises do not have the requisite financial skills and knowledge to gainfully utilize these packages to enable them to pay back within the credit period and meet other terms of the credit.
For instance, as already indicated, the biggest percentage of the private sector is made up of MSMEs, however, details about these enterprises, including who they are, how many they are, their location, ownership, nature of operation and the actual financing gap are not well understood. More so, how much of the MSME financing gap has been created by the pandemic has not been established. This therefore justifies the queries on the adequacy of these packages.
Additionally, according to UDB’s requirements (call for application) for loans directed at businesses engaged in the production of essential goods and services for import replacement and export promotion, applicants are required to be registered and must possess collateral security depending on project specifics and risk, with current valuation of the assets. Also, among the documents required for loan application are business plans, credit reference bureau and audit reports and proof of compliance with National Social Security Fund (NSSF) which most MSMEs in Uganda do not possess.
The application procedure further requires the loan applicants to present a bank statement for the past one year, yet most of these enterprises hardly have transact with formal financial institutions. The World Bank Enterprise Survey (WBES) indicates that only 9 percent of SMEs in Uganda had a line of credit with formal financial institutions by 2013. Moreover, majority of the MSMEs are unaware of some of these packages, let alone the inability of MSME owners to understand the requirements and application procedures since they are expressed only in English. This automatically pushes majority of them out of the bracket of eligible beneficiaries for these packages which are specifically meant for them.
Furthermore, the sustainability component of these packages is not very clear. Apart from the collateral security (which most MSME owners do not even have) that is listed as part of the requirements for accessing the loans, sustainability plans in the event that the borrower fails to service the loan due to some unforeseen factors is not addressed. Just like in other similar government programs, the issue of sustainability has not been given a lot of attention, which partly explains failure of such initiatives to achieve the intended objectives.
In conclusion, most of these stimulus packages may not adequately address the financing needs of MSMEs which have been worsened by the pandemic. In fact, these packages may not actually reach the target beneficiaries as indicated in the calls for loan application. Instead, larger firms may benefit more from the stimulus packages since they are more likely to meet the eligibility criteria plus the required documentation.
Nevertheless, through the Census of Business Establishment (CoBE) conducted by the Uganda Bureau of Statistics (UBoS), the existing MSME financing gap and how much of this has been deepened by the pandemic should be investigated to establish the adequacy of the stimulus packages. The application procedure and requirements need to be loosened and customised to local circumstances if these packages are to benefit the actual intended beneficiaries. Furthermore, sensitisation about the available packages and the application requirements should be done in the language best understood by various MSME owners. In addition, clear sustainability arrangements need to be put in place given that most businesses in Uganda have a lifespan of less than 5 years (die before the 5th birthday.