Credit accessibility and performance of micro, small and medium enterprises in Uganda: A case of Kampala district

Abstract

This study aimed at providing an understanding of the factors that determine access to credit and the performance of SMEs in Uganda. It specifically intended to: (i) determine the main sources of credit for SMEs in Uganda (ii) examine the key determinants of access to credit among SMEs (iii) establish the relationship between access to credit and growth of SMEs (iv) analyze how access to credit influence the growth of SMEs. Stratified sampling was used to select the sample size and descriptive statistics, tabulations and simple logit model were used to conduct the analysis. Study results show that most businesses have been in operation between 2 and 5 years, most them being in service industry. The most common source of credit is personal savings (69.6%), majorly due to unfavorable credit terms (interest rates, collateral requirement and loan repayment). Age of business owner, business’ total annual turnover and age of business are key determinants of access to credit. Businesses with high turnover are twice more likely to access credit than those with low turnover. The study revealed a positive relationship between access to credit and performance of business. Consequently, 57% of entrepreneurs who accessed credit achieved high annual turnover compared to those who did not access credit. Regression analysis further shows that firms which accessed credit were 2.1 times more likely to achieve higher turnover or their turnover rate is more than two times higher than those which did not access credit. In addition, education (diploma & degree level) has positive contribution to business performance. Also older business owners and businesses five years and above have a higher rate of business turnover compared to those less than two years. The study recommends that Government and the private sector need to ensure that terms of credit (interest rates charged by commercial banks and microfinance institutions, collateral requirements and loan repayment periods) are softened to enable easy credit access. Easy of credit access implies more businesses started or existing ones expanded and more employment opportunities created. This way, businesses will make a meaningful contribution to economic growth and national aspiration. Young SMEs with higher rates of annual turnover need to be supported to grow. Additionally, entrepreneurs should be encouraged to attain some education level before they can venture into a business enterprise. This is important because it is believed that the collection of knowledge and prior-qualification can increase psychological confidence of owner or managers of the business. A particularly important skill for entrepreneurs is the capacity to predict and make decisions under conditions of uncertainty which can be enhanced through education.