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How financing can save SMEs

More than 85 per cent of the new start-up small and medium-sized enterprises (SMEs) never live to see their fifth birthday due to several reasons, among which is lack of access to financing.

In Uganda, SMEs are recognized as big drivers of output, economic growth, innovation and job creation, not forgetting over 80 per cent of employment availed by SMEs. It should be our dream to attain a vibrant SME sector to enhance the standards of living and to reduce poverty.

Indeed, SMEs continue to yearn for funds, capacity building, and other resources to grow beyond the initial capital, yet they offer the best opportunities for growth.

Uganda Investment Authority defines SMEs as entities that employ between five and 100 people, have assets not exceeding Shs 100 million and register revenue not exceeding Shs 360 million per annum.

We can never wane the influence of the SMEs and the informal sector, but many times they wiggle in the noose of demise for lack of collateral to access financing to leap them forward.  This challenge, at times, subjects them to resort to funds availed by moneylenders and shylocks at exorbitant rates, where they have a definite visa to collapse.


Several studies conducted by the World Bank and other organisations have indicated very low levels of bank financing to SMEs in Uganda. 

These are dominated by informal, very small (micro) enterprises, and by semi-large companies on the other. These studies have attributed low levels of bank financing to SMEs in Africa to both supply and demand.

While the lack of effective business plans and adequate skills within SMEs are a problem on the demand side, the supply is constrained by lack of capacity in the financial sector to do business with smaller companies; inadequate information resulting in high-risk assessments; and lack of availability of longer-term funds.

For the SMEs, the cost of finance, including investment finance, is higher compared to the corporates. That is because it is considered riskier by many financial sector players due to the manner in which they conduct their business affairs.


According to a recent UNCTAD report, the “default rate for Ugandan SMEs was 78 per cent. The SMEs have little collateral to ensure against these risks. They also suffer from: low capitalization, vulnerability to market fluctuations, and high mortality rates.”

Certainly, the lack of collateral and reliable collateral registries gravitates into poor protection of creditors. Sufficing to note that any forward-looking financial institution should work towards fixing the salient challenges for the SMEs, who are the backbone of the Ugandan economy.

It is in response to these challenges that the African Guarantee Fund for Small and Medium-sized Enterprises (AGF) was created by the African Development Bank (AfDB), the Government of Denmark through the Danish International Development Agency (DANIDA), and the Government of Spain through the Spanish Agency for International Development Cooperation (AECID). Certainly, AGF was imagined and designed particularly as a response to the SME challenges as the need to foster innovation, business growth and provide employment opportunities that are essential to long-term and sustained growth.


Through the AGF’s credit guarantees, Centenary bank is to partially be covered in regard to the risks associated with SME financing and thus enabling the support to the vibrant SME sector and, most importantly, meriting SME business proposals that only lack financing to flight, without which they may never see the light of the day.

Additionally, this guarantee will also enable the banks to raise long-term resources for SMEs’ needs. In addition, AGF also offers the capacity development facility to enable partner financial institutions enhance their SME financing capabilities and thus to execute their growth strategies in the sector with ease.

A combination of AGF’s guarantee and capacity development facilities, allows the partners to bring their SME financing business to the required scale.

Centenary bank, with her mission of focusing on the growth of the local SMEs, and with over Shs 160bn in loans taken out by SMEs alone, will be re-energized as it services this critical sector, which will go a long way in boosting business success, output, employment and economic growth.

The writer is a fellow of Uganda Institute of Bankers and a general manager, Commercial Banking at Centenary bank.

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