Written by Administrator Friday, 30 July 2010 08:09
On August 16, 2010, Uganda will host a specialised forum on micro finance growth being funded by the IMF and Bergamo - Italy Forum on Developmental Finance (FDC).Richard Crenshaw, an IMF specialist in micro business, attacks financial institutions in Uganda for derailing the growth of small-scale firms.
"Over the years, Uganda has had a surge in the number of commercial banks. This has more than doubled as it stands at 22, with over 213 branches. Despite this increment, access to financial services, especially for the small and medium enterprises (SMEs), is hard," says Crenshaw.
The East African region in particular rates behind other parts of the continent when it comes to financial accessibility. This has been made worse with the onslaught of foreign companies and financial institutions.
"This impacts heavily on the business operations of local companies because these foreign companies have their own policies which are in truth, Cosmo - capitalist," adds Crenshaw.
Margaret Kaweesa of Uganda stock Exchange re-echoes Crenshaw's assertion that the growth of banks has had little effect on the growth of SMEs.
"In the early 1990s, Uganda had only 9 commercial banks. At the time, the financial services market was mainly characterised by strong regulatory controls over institutional structures and instruments," she comments.
"As a result, access to financial services was only a privilege of the few. Owing to this challenge, the government instituted a liberalisation policy aimed at deregulation of interest rates, elimination of credit controls and liberalisation of entry restrictions in the banking and non banking sectors," she says.
She adds: "This move was undertaken to create competition and improve access to financial services by the non- banking sector."
Recent studies on financial access indicate that commercial banks only serve slightly above two million people, representing 18% of the total bankable population.
Bernard Sekatawa, an SME businessman engaged in the production of energy saving stoves in Nakawa, recounts of how he approached one of the banks with an order of a Shs 20 million loan.
"The bank requested for collateral security, which I provided. My land is valued at Shs 90 million as open market value; three times the value of the loan. With these conditions, I was forced to give up on the loan," he says.
As it stands today, there are many SMEs that have been frustrated by commercial banks under similar circumstances, while a study reveals that SMEs are the biggest contributors of employment and revenue to the government.
Crenshaw adds that despite their enormous contribution, financial services' needs are fragile.
"They require asset financing, trade finance, working capital and bridge financing to enable them settle their short-term emergent financial needs," says Crenshaw.
Relevant loan amounts that could stimulate SME growth also require long-term repayment patterns and a quick turn-around. Most commercial banks lend short-term loans that take long to be processed.
"Consequently, Micro-Finance Institutions (MFIs) have brought competition on commercial banks, forcing most of them to down- scale, although access is still limited. With poor turn-around time and stringent conditions set by commercial banks for SME customers to access finances, MFIs have tried to bridge the gap,' argues Kaweesa.
This action, contends Kaweesa, has equally not been effective as the micro deposit taking institutions (MDI) Act provides for a maximum of 24 months-loan-term for MFIs and only 1% of their core capital as the maximum loan size.
Regionally, the SME sector has enormous business potential for financial institutions if right models are built to tap into their business.
Micro finance has been able to succeed in some areas of the private sector with time. This has been effected by application of right financial models for clients at the bottom of the pyramid. The approaches used by micro finance institutions would provide good lessons for commercial banks interested in serving the SME segment.
Hillary Mugenyi, an official in the trade ministry, says that banks ought to recognise that SME sector is unstructured in the way it operates.
"Many times they don't keep records, lack past credit and savings history, but their enterprises are very profitable," he says.
By Timothy Kihumuro blog comments powered by Disqus
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