Strategies for improving access to debt finance in SMEs in Uganda: a case of construction SMEs in greater Kampala Metropolitan Area (GKMA)

Abstract

This study explores the challenges and opportunities faced by construction small and medium-sized enterprises (SMEs) in the Greater Kampala Metropolitan Area regarding access to debt financing. The research aims to elucidate the levels of awareness regarding various debt financing options, assess the accessibility of these financial resources, identify constraints impeding access, and propose strategies to enhance financing opportunities for construction SMEs. The findings reveal a significant disparity in awareness among SMEs regarding different financing sources. While there is a robust recognition of commercial banks as a primary source of financing (mean score of 4.52), awareness of alternative options such as microfinance institutions, Savings and Credit Cooperative Organizations (SACCOs), government loan programs, and international development funds is notably low, with mean scores of 2.39, 2.52, 2.09, and 1.67, respectively. This limited awareness presents a critical gap, suggesting that SMEs may overlook viable financial avenues that could support their growth. In terms of access to debt financing, bank loans emerge as the most utilized option, with a mean score of 3.34 reflecting varied experiences among respondents in terms of application and approval processes. However, the study indicates low engagement with microfinance loans (mean score of 1.45) and government loans (1.06), highlighting a cautious approach to debt among SMEs. Notably, 57.58% of respondents reported that less than 10% of their total capital is sourced from debt, indicating a risk-averse financial strategy. The analysis identifies several constraints hindering access to debt finance, with high-interest rates (mean score of 4.48) and stringent collateral requirements (4.33) as the most significant barriers. Lengthy approval processes (3.70) and inconsistent cash flow (4.27) further complicate financing efforts. Conversely, factors such as poor credit history and insufficient financial records are perceived as less critical, suggesting that addressing high-interest rates and collateral demands should be prioritized to improve financing accessibility. Respondents propose various strategies to enhance access to debt financing, emphasizing the need for the reduction of interest rates (mean score of 4.45) and the easing of collateral requirements (4.12). Other strategies include streamlining loan approval processes (3.85) and increasing awareness of financing options (3.21), along with offering financial literacy and management training (3.42). Encouraging banks to develop tailored financing solutions for the construction sector is particularly highlighted, with a mean score of 4.33. In conclusion, this study underscores the critical need for targeted initiatives aimed at improving awareness and accessibility of debt financing for construction SMEs in Greater Kampala. Addressing identified constraints and implementing the recommended strategies could significantly enhance the financial landscape for these enterprises, thereby fostering their growth and contribution to the regional economy. Future research should focus on evaluating the effectiveness of awareness campaigns and the impact of tailored financial products on SME development.