The analysis of effectiveness of bank credit as a funding alternative for SMEs in Kampala

Abstract

This research project was carried out to analyze the effectiveness of bank credit as a funding alternative for SMEs in Kampala district. The study set out to establish the current status of access to bank credit by SMEs in Kampala district, evaluate the factors affecting access to bank credit among SMEs in Kampala district and to design strategic frameworks that can ease bank credit access by SMEs. The study applied both qualitative and quantitative techniques to obtain and analyze the data that was collected for the study. A total of 384 unique SMEs were selected using a combination of quota sampling and random route based sampling. The findings of the study have been summarized and presented as percentages, descriptive statistics and absolute figures in a bid to explain the findings and answer the research questions that had been put forward during the study. The main findings of the study were that less than half of the businesses needed credit and of those that sought bank credit, less than half were able to obtain it citing access and eligibility issues. The study also found out that 64% of the SMEs that obtained bank credit experienced growth in turnover showing that bank credit was important for SMEs growth. The study further established that the entrepreneurs did not see collateral as a major hindrance to accessing credit and neither did they consider their businesses unfit to access credit by virtue of business volatility nor formal status. However, the main hindrances to accessing credit resulted from a general perception by entrepreneurs that using their own savings was always better than accessing credit hence the observed moderate levels of aspiration to borrow. The study concludes that bank credit is needed for the growth of the SMEs and further recommends that for the credit to be effective, there’s need for financial literacy regarding financial discipline when it comes to maintaining pre-determined purpose of borrowed funds and the opportunity cost of investment as SMEs wait to accumulate own funds as opposed to obtaining bank credit.