The effect of access to finance on performance of Small and Medium Enterprises in Uganda

Abstract

The study investigated how financial services affect the performance of small and medium enterprises in Uganda. It specifically analysed the effect of independent variables which included loan value, outstanding loan value, proportion of sales sold for export, value of collateral required, years of experience by top managers, firm applied for a loan in last period, seasonal workers, full time employees and total annual cost of electricity in last fiscal year on a firm’s total sales. It also studied the effect of the same independent variables on a firm’s full-time workers. Secondary data was extracted from the World Bank’s Enterprise Surveys for the year 2019. The study used the pecking order theory to explain the choice of financial services. Natural logarithms were used in the transformation of the data and the regression method was used for analysis.

The study found that on average a 10 percent change in value of the loan, holding other factors constant affects positively a company’s total sales by 9.5 percent. Loans if invested well result in increased output of a company’s goods and services, which are then sold. The study found that a 10.0 percent change in the value of outstanding loans, holding other factors constant negatively affects a company’s total sales by 36.3 percent. Results again indicate that on average a 10 percent change in loan application in the previous year, holding other factors constant positively affects total firm sales by 11.5 percent. This study also found that on average a 10 percent change in years of experience by top managers holding other factors constant significantly increases total sales by 0.7 percent. Measuring a firm’s performance by looking at full time workers, holding other factors constant, annual cost of electricity in the previous fiscal year and value of collateral required had a significant effect.

The study recommends that the government should ensure that a policy enabling firms to easily access finance is put and enforced. Financial institutions should avoid over charging firms for loans through lowering interest rates. In order to stimulate better performance at the firm level, a special fund should be set up that charges firms lower than market rates. This will in effect reduce on the burden that many firms face.