The supply-demand factors interface and credit flow to small and micro enterprises (SMEs) in Uganda

Abstract

The potential of small and micro-enterprises (SMEs) in promoting economic growth in both developed and developing countries is widely accepted and documented by both scholars and policy makers. Lack of access to sufficient financing for these SMEs, especially in developing countries, has been identified as a major bottleneck in realising this potential. Bank credit is one of the major ways of addressing the challenge of inadequate funding that exists in the SME sector. This study was undertaken in order to explore the experiences of bank loan officers and SME borrowers in credit extension to the SME sector in Uganda. The research methodology used multiple methods of data collection which enabled an element of triangulation to be built into the study design. Data was collected both from the supply-side (bank loan officers) and the demand-side (SME borrowers), and entailed unstructured and semi-structured interviews and a questionnaire survey of loan officer and SME borrower experience. Further data was collected through direct observation of the interactive interviews between loan officers and borrowers, which enabled a unique opportunity to enhance the understanding of experiences of loan officers and borrowers. This method offers a development of extant methodologies that have been used to assess bank lending to SMEs, typically indirect methods such as verbal protocols and hypothetical business plans. The supply-side findings suggest that, in addition to the bank lending guidelines and procedures, the organisational context in terms of institutional structure, borrower attributes (especially their knowledge of bank lending guidelines and procedures) and level of congruence between loan officers and organisational goals are important determining factors of credit flow to SMEs. This implies that the context in which lending guidelines are implemented is as vital as the application of these guidelines. Banks are, therefore, challenged to ensure a favourable organisational context in order to facilitate loan officer decisions. On the credit demand side, it was found that borrowers seek to play an active role in the lender-borrower relationship which, in turn, influences decisions made by loan officers. It was established that, in pursuit of this role, borrowers deliberately pre-plan loan requests in an effort to influence the results of the evaluation of their loan applications by loan officers. At times, borrowers intentionally manipulate the information they disclose to loan officers in order to enhance their chances of obtaining credit from banks. The findings also suggest that, in most cases, the borrowers with some knowledge of bank lending guidelines and procedures find it easier to access credit than their counterparts who lack this knowledge. With regard to women-owned SMEs, while there little evidence of ‘official’ discrimination against women-owned SMEs by bank lending policies, there are systematic, cultural, social and legal impediments that lead most women-owned SMEs to access lower levels of credit than their male counterparts. The study recommends that banks should design lending guidelines that integrate both supply and demand factors, instead of focusing only on supply factors like project viability and collateral availability. It is also recommended that banks should develop comprehensive training programmes for borrowers about all aspects of the lending transaction in order to positively influence them. It is further recommended that there should be more consultations with loan officers and borrowers in order to develop a mutually acceptable set of lending policies. This approach, which integrates bank management, loan officers and borrowers in drawing up lending guidelines and procedures, is likely to minimise information asymmetry in SME lending decisions and create a more conducive environment for promoting credit availability to the Ugandan SME sector.