By Bob Twinomugisha
Over the past two years, the pandemic has affected businesses nationally and globally. Governments in many developing countries have introduced severe containment measures, involving restrictions on economic activity and mobility, to curb the spread of COVID-19.
In Uganda, public transport and non-essential businesses were closed during both lockdowns (March-June 2020 and June-August 2021).
Other sectors such as education and tourism were closed for two years. Overnight quarantines and therefore the shutdown of the night economy have weighed on businesses in Uganda.
The Covid-19 lockdown has had a huge impact on Micro, Small and Medium Enterprises (MSMEs).
Indeed, the World Bank (2021) reported that more than 89% of MSMEs reported a decline in their turnover of around 49% resulting from weak demand for their products and services due to the pandemic.
Notably, Uganda has a large MSME sector which accounts for about 90% of the private sector, over 80% of manufacturing output and contributes about 75% to GDP.
The sector employs over 3.0 million people, making it one of the largest employers in the country, according to the Uganda Bureau of Statistics (UBOS).
In January 2022, Uganda fully opened its economy for business after nearly two years of pandemic-related lockdown. Today, perceptions on the conduct of business are optimistic, as evidenced by the business confidence index at over 50.
According to the latest statistics from the Bank of Uganda, the Business Tendency Index fell from 52.1 in December 2021 to 52.8 in January 2022, above the threshold of 50, a sign of improvement in the level of economic activity due to the release of pent-up demand and improving global economic performance as vaccination against Covid 19 resumes.
However, Ugandan MSMEs continue to face operational challenges due to limited capital. Many companies have lost operating capital due to increased operational costs and large losses incurred during the lockdown.
This challenge is exacerbated by limited access to affordable and patient funding.
Finance is needed to give rise to MSMEs by facilitating access to other factors of production such as land and labour. In Uganda, about 70% of MSMEs close before celebrating their second birthday.
This is mainly attributed to their inability to raise funds due to insufficient collateral to secure the loans, opacity of information, weak technical and managerial skills, competition and inability to afford a long-term financing, among others.
Development finance institutions around the world are playing a key role in bridging the financing gap faced by MSMEs. The Uganda Development Bank (UDB), for example, has set out to improve MSMEs’ access to affordable and patient credit through several initiatives.
For example, on December 14, 2021, the UDB launched special programs to implement and manage interventions in the categories of SMEs, women, youth and business advisory services, from start-ups to existing businesses with appropriate financial and non-financial solutions.
To this end, the Bank has introduced Kazi SME Loans, Women’s Prosperity Loans and Youth Advancement Loans.
Specifically, the Kazi Loans for SMEs intervention provides access to affordable finance and business support with the aim of promoting sustainable growth of SMEs and building their resilience to trade shocks.
The UDB’s Kazi SME Loan Initiative is key to accelerating the post-lockdown recovery of MSMEs in Uganda.
The Bank offers a Business Acceleration Facility to SMEs which covers short term working capital, trade facilities, bill discounting, contract finance with a minimum of Shs 50 million and a maximum of Shs 720 million of Shs.
Along the same lines, the UDB offers SME business expansion facility products, with the aim of facilitating SME businesses with demonstrated expansion potential (both start-up and existing) with a capital investment.
The bank also offers asset finance facilities to SMEs. The product allows SMEs to acquire the assets necessary for production, Guarantee attached to the asset acquired.
As UDB strives to support the resilience and growth of MSMEs, its products have many benefits in the form of low interest rates, adequate grace period and patient capital, among others .
The Uganda Development Bank is stepping up its lending operations by offering cheaper credit (10-12%) and long-term project financing, from 1 to 15 years (terms).
In the recent past, the Bank has positioned itself to play a risk-absorbing role during economic downturns by reorganizing bankrupt SMEs and large corporations and supporting sectors in dire need of credit during a crisis (vehicle crisis resolution).
In addition to these Kazi SME loan products, UDB offers the Business Acceleration Program for Successful Entrepreneurship (BASE).
The bank provides advice to clients regarding best management practices, good governance, record keeping, financial management, etc., based on the bank’s broader knowledge of the business, environment operational and the experience acquired in financing, implementing and monitoring such projects.
This is done through training and technical support to develop and implement the required processes in companies. The aim is to have businesses and businesses professionally managed, which reduces the risk of failure of funded projects.
The author is an Economist at Uganda Development Bank