SMEs fearful of borrowing from government recovery fund

by Business Times
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Since its launch at the tail end of the Covid-19 pandemic, there has been a slow uptake of the UGX 200 billion, Small Business Recovery Fund (SBRF) overseen by the Bank of Uganda (BoU).

Latest reports indicate less than five percent has been borrowed. Lack of awareness has been cited as major reason, which raises the question whether there is need for setting up a small business administration in Uganda.

It would be an autonomous government entity that will coordinate and filter information, resources and perhaps better focus on serving the interests of small and medium enterprises (SMEs) across the country.  

It’s not that small business owners don’t want the SBRF money—it’s just that they are intimidated by the whole process of getting it.

At the moment, owners of SMEs are bombarded by all sorts of goodwill gestures, but few places to seek practical advice or guidance. In other words, there is plenty of sympathy, but not enough empathy.

During the second half of 2021 there was a loud clamour for help from Kampala’s small business owners picking up the pieces after two punishing lockdowns in the wake of the pandemic. The government duly obliged.

In November, BoU launched the SBRF. This is a partnership between the government and commercial banks to avail a total of UGX200 billion to the struggling SME sector by way of soft loans, but terms and conditions apply.

In the original proposition, SME owners had access to as much as UGX 100 million in financing and a discounted interest rate of 10% per annum on a reducing balance.

When the applicant asks for say, UGX20 million—the government contributes UGX10 million and the relevant commercial bank comes up with an equal amount.

Eligibility requirements state that the small business, whether operated by an individual, group, partnership or is a company, employs between five and 49 people; have an annual turnover of between UGX 10 million and UGX 100 million and also be in a position to demonstrate a capacity for recovery.

In addition, the qualifying borrower can only access this financing once and there are no top-ups. This is to allow an opportunity for other eligible borrowers. Another provision is that agri-businesses or agricultural activities that are eligible under the Agricultural Credit Facility (ACF) and those that have already been financed under ACF are not eligible.

According to BoU, Uganda’s micro, small, and medium enterprises (MSMEs) employ over three million people, account for more than 90% of the private sector, and contribute more than 70% to our national GDP.

These enterprises play a significant role in creating low-cost jobs, reducing poverty, promoting industrialisation and fostering economic growth. However, a key constraint even before the pandemic has been the lack of access to affordable financing to expand and grow their businesses.

Considering the obvious need and relatively low interest rate, officials were expecting a rush for the cash. Instead, even in the early days of SBRF, the slow uptake emerged as a distinct trend. By the end of March 2022, figures showed that from applications totaling UGX1.2 billion, a mere UGX60 million were approved and disbursed.

Representatives of some banks also expressed their reservations. First, that the cost of serving customers in this bracket (SMEs) was high, and yet the interest rate, which is capped at 10% per annum, is too low to cover these costs.

Secondly, although the fund offers benefits of relatively low-interest rate and tenor for the beneficiaries, there is a risk of default, thereby necessitating collateral. However, most small businesses lacked collateral to access financing.

A decision was then made to review the terms and conditions. The September 2022 changes included revising employment levels from the minimum of five persons to two; increasing the maximum annual turnover from UGX 100 million to UGX 300 million; increasing the maximum loan amount from UGX 100 million to UGX 200 million and allowing the borrowers to use the fund to service their existing loans. Despite these revisions there has been no marked change.

Speaking earlier this month, during a workshop to review the operations of the ACF and SBRF, Michael Atingo-Eto, the BoU Deputy Governor said, “The Covid-19 pandemic disproportionately affected MSMEs, as they are labour-intensive, have limited liquidity reserves, and lack assets to use as collateral to access quick credit. In addition, the quarantine and lockdown measures imposed by the government led to demand/supply chain disruptions, raw material shortages, transportation challenges, and cash flow disruptions.”

recovery fund
Deputy Governor of Bank of Uganda

He said, “The Fund has still registered a very low uptake, with only UGX 6.58 billion disbursed as of 31 December 2022.”

Although lack of awareness is a major factor, let us also consider the nature of Uganda’s average small business owner. Formalizing is a doorway through which small business owners can get more opportunities, but the owners are hesitant and fearful of the process and the implications.

They do not like excessive paperwork. Tell them, you have money to help their businesses grow and they will smile. Add that there are some forms to fill out and other procedures to follow and they will frown.

Maintenance of financial records remains a sensitive issue. They are not very welcoming to inquiries about their books of accounts (if any), for fear of attracting future scrutiny from the Uganda Revenue Authority.  They will present a couple of receipts, invoices and other scraps of paper, but everything else that is important to their business is inside their heads.

How can you demonstrate a capacity for recovery without financial records?

Many reason that they have survived thus far without a business plan, cash flow statements or financial planning and find it hard to change their ways. Others will resort to hiring a ‘financial adviser’ to cook up the figures that suit the purposes of accessing a loan and invariably be denied because the same figures don’t add up.

ALSO READ: How SMEs will benefit from Emyooga funds

Obviously this picture varies. Some SMEs are much more organised than others.  Small business is a huge catchment area. It can range from the man who hawks his fresh produce on a wheel barrow and wants to graduate to a three-wheel motorcycle to the salon owner who urgently needs to buy new hair dryers. Or the proprietor of an electronics repair shop requiring modern equipment and the casements workshop owner applying for a loan to buy a better forge.

A large percentage of them however, operate on a semi-formal basis, appearing to be governed by formal rules and procedures, but in fact largely unregulated and un-recorded by the relevant government agencies.

As of the end of 2021, the Uganda Registration Service Bureau reported 800,000 businesses on their data base. However there are an estimated similar number of SMEs which are not registered, whose owners have no TINs and are mostly found in the informal sector.

The World Bank says although seen as a government priority, programs aiming at formalizing micro and small enterprises have not proven effective. According to John Walugembe of the Federation of Small and Medium-sized Enterprises (FSME), “There has to be a link between requests to formalise and the benefits that come through like financing or business offers. Currently, there is nothing substantive about formalization.”

A new small business agency can change this mindset to provide the missing link. It would be staffed by personnel who thoroughly understand SME problems and have the patience to explain matters and the capacity to provide workable solutions. For instance, if there is any direct government funding for SMEs then it should channeled through this entity, because the staff would know what is on the ground.

Part of the problem the government faces with its financing initiatives like Emyooga and specifically limiting the rate of defaulters, is to assume people know what they are doing. More often than not, they don’t. This is a factor that may also hinder the ambitious aims of the Parish Development Model.  But having a place where they can get practical assistance would matter greatly to increasing the chances of seeing more successful outcomes.

Two years ago, Charles Ocici, the Executive Director of Enterprise Uganda, told a gathering In Kamuli district, “You cannot just give people money and tell them to start a business without educating them on what it takes to keep a business in the market. That is deceiving the population.”

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