Promotion of Micro, Small and Medium Enterprises through Financial Institutions

PROMOTION OF MICRO, SMALL AND MEDIUM ENTERPRISES THROUGH FINANCIAL INSTITUTIONS

Introduction

This paper will focus on developments in the finance sector in Uganda, that have contributed or will enhance the development of a Micro, Small and Medium Enterprises policy framework from a finance perspective.

Micro Enterprises, small and medium enterprises are defined by basing on three main characteristics; these include number of employees, capital invested and annual turnover. Micro Enterprises are defined as enterprises that employ at least 4 people, with assets worth and annual turnover of 12 million Uganda shillings. Small Enterprises are defined as those enterprises that employ at least 50 people, with annual turnover of 360 million ($34,000) and Medium enterprise is defined as an enterprise that employs over and above 50 people with capital investment of over 360 million and turnover of 360 million.

Uganda’s economic development programs have been guided and built on the Poverty Eradication Action Plan (PEAP) that was initiated by the government in 2005 as a cornerstone for guiding economic development in Uganda. “Economic Development” will be used in this paper to refer to increased production of goods and services that encompasses improved quality of life for all Ugandans. As such the following pillars were identified as a basis for implementing and evaluation of Uganda’s strategic development goals.

 Pillar 1: Economic Management
 Pillar 2: Enhancing Production, competitiveness and Incomes
 Pillar 3: Security, Conflict resolution and Disaster Management
 Pillar4: Good Governance
 Pillar 5:Human Development

These are the basic fundamentals pillars on which the MSMEs has found its basis to be established in the country as shall be discussed in details ahead. The government of Uganda has further developed a monetary policy that is used to guide the banking and micro finance sector. This policy has further been support by the Uganda Investment Authority (UIA) SMES policy
Upon this pillar the government of Uganda set up the Uganda Investment Authority to coordinate all investment in the country for MSMEs and also large scale investments. The government has further setup a Ministry of Micro finance to coordinate and setup policies governing micro finance in the country. The government has further setup the association of Micro finance institutions in Uganda to implement and coordinate the activities of Micro finance providers in the country.

On 19th April 2010 the government of Uganda replaced the PEAP with a new 54 trillion shillings National Development Plan. Development Initiatives Africa has therefore not based this paper on its key foundations; however in the future we might consider aligning our propositions after a careful study of the document.

2. Profile of the Republic of Uganda

Geography

Uganda covers an area: 241,040 sq. km. (93,070 sq. Kampala being centrally located in town with a total population of about 31 million people. The largest parts of the country are covered by forest of about 70%, terrain covering 18%, national parks and game reserves covering 12%.
Uganda’s climate is suitable for agriculture production through at least 8 months of the year with some patches of Semi arid vegetation in North Eastern Uganda, rainfall in these parts is less than 50 cm (20in), In Southwestern Uganda, rainfall of 130 cm in south western Uganda. The country mainly experience two dry seasons between December to February and June – July however due to global climatic changes these patterns have changed.

The largest Ethnic groups are the Baganda , that mainly occupy central parts of Uganda and settled around lake Victoria, Banyankole, Bahima, Bakiga, Banyarwanda that mainly occupy South Western Uganda also settle around hilly and fertile regions, Banyoro, Batoro the western parts around mountain Rwenzori, Langi, Acholi, Lugbara Northern Uganda with semi arid vegetation and fertile soils, Karamojong, Basoga, Bagisu settled in Eastern Uganda. Karamoja and some parts of Teso being arid and semi arid.
Uganda as of 2007 was composed of 12% Muslims, 85% Christians and other groups such as atheist and believers in traditional Gods making 2%.

The official language is English, having got our independence from the British in 1962; historically English was adopted as the national language for administration of Uganda. Among the most spoken languages Luganda is the most popular for two main reasons. The Baganda ethnic group is the largest in the country and secondly the national administration structures and capital city are located in Buganda as such making it the most spoken local languages in the country.
The Gross Domestic Product as of last year was about $13 Billion and an annual growth rate of 8.7% , and inflation rate of about 7% and those below the poverty line or leave on less than two dollars a day are about 31% this has tremendously gone down , compared to the previous years that were 60% and above. Uganda’s has a wealth of natural resources with Agricultural cash crops leading export earners. Among the Agricultural exports are coffee, tea, cotton, tobacco, sugar cane, cut flowers, vanilla. Food crops--bananas, corn, cassava, potatoes, millet, pulses. Livestock and fisheries--beef, goat meat. Natural resources: Copper, cobalt, limestone, phosphate, oil. In the last five years, Uganda has heavily invested in Oil and discoveries of more oil rich areas are going on.

The main trade exports are agricultural products and coffee fetching 70% of the total agricultural exports. Trade Exports total to (2008 est.)--$1.72 billion: coffee, fish and fish products, tea, electricity, horticultural products, vanilla, cut flowers, and remittances from abroad. The Major markets for Uganda are the European Union (EU), Kenya, Democratic Republic of the Congo, Sudan, Rwanda and U.K . Other big contributors to were earnings from nationals outside of Uganda uganda
The countries total Imports were (2008 est.) $4.5 billion: capital equipment, vehicles, petroleum, medical supplies, metals, cereals and these were mainly supplied by--U.A.E., Kenya, EU, India, South Africa, China, U.S.
In this financial year Uganda Investment Authority reported Investments worth $1.34 billion. A total of 62 companies licensed with planned jobs at about 23,848.

3. Objectives

The Objective of this paper will focus on the promotion of Micro, Small and Medium Enterprises through financial institutions. However to have a logical framework through which we can develop the same sector, the following key objectives will be focused on:
• Development and writing of a MSME national guiding policy framework
• Provision for a board of directorate or National MSME governing authority
• Provision for an MSME Banking institution
• Provision for a government subsidies/concessions/grant to MSMEs mechanism
• Provision for structured grants service to facilitate MSMEs
• Increase finance access through telecommunication services.

4. Lessons Learnt from programs in India

Based on India’s experience and presentation from members from over 16 countries, the lessons learned shall be structured according to the objectives. India has had a developed MSME structures that has evolved over the years from 1948/60 to 2010. On 6th April 1948, all industries in handlooms, handicrafts, coir, silk and Khadi village industries were grouped into small scale sector. 6th January 1955, A unit employing less than 50 persons and capital assets not exceeding Rs 5 Laks were also grouped under the small scales sector. 1962 on wards Rs 5 lakhs(Five hundred thousand shillings) for (Small Scale Industries) SSI and Rs 10 Lakhs (One million Uganda Shillings) for ancillary units. In 1977- 1988 the concept of “Tiny” was introduced as a definition for MSMEs in towns and villages with a population of less than 50,000 and investment of one hundred thousand. Small Scale Industries (SSI) by definition was raised from 10 lakhs (I million UG shillings) to 20 lakhs (2 million UG shillings) and ancillary manufacturers increased from 15 lakhs ( 1.5 UG shillings) to 25 lakhs (2.5 UG shillings). The investment ceiling was increased from Rs 60 lakhs ( six Million Shillings) to Rs 75 lakhs ( Seven million five hundred thousand shillings), If the Unit exports 100% of its’ production, special incentives were Given and the investment ceiling was considered up to Rs 100 lakhs ( 10 million Uganda Shillings). In 2000 – 2004 an industrial undertaking in which the investment plant and machinery held ownership on hire purchase or lease does not exceed Rs 100 lakhs ( 10 million Uganda shillings) was the new definition for Small Scale Industries. Tiny Enterprises was redefined to any undertaking of more than 25 lakhs ( 2.5 Ug Shillings) irrespective of the location. A Small Scale Industrial Unit/ industry related service or business enterprise managed by one or more women entrepreneurs in proprietary concerns, or in which she/they individually or jointly have a share capital of not less than 51% as partners /share holders / Directors of private limited companies /members of co-operative societies. This initiative was added to promote Women entrepreneurs in the MSME sector. The above trends provide a basis for the evolving definition and parameter of defining small scale industries, Tiny Enterprises and to date definition of Micro, Small and Medium enterprises.
The government of India recognized the contribution of the Micro, Small and Medium enterprises thus from 1948- 1991 invested in policy reforms that would benefit those engaged in Micro, Small and Medium Enterprises access Bank Credit, reserve products lines for only MSMEs, reserved products for exclusive purchase by government, a state financial cooperation was setup, district industrial centers were setup for single window assistance, established training institute for entrepreneurship development and relief on excise for small scale units, testing centers were setup for quality certification. A Small Industries Bank was created to accelerate finance, Technology development fund was created to provide services to SME entrepreneurs and a scheme was launched to set mini industrial estates for SMEs. After further review and realization for the economic benefits of the MSME sector in 1999 – 2000 new policies were announced to address the persisting problems relating to credit, infrastructure, technology and Marketing. Among the most notable ones were the promotions of export oriented production, where subsidies are provided to entrepreneurs to participate in International trade fairs, credit linked subsidy schemes and to modernize traditional technology. The government support initiatives in IT based developments and provided for 15% subsidy for technological up gradation. Introduction of testing centers to encourage innovation and standards in the SME sector, establishment of Industrial parks and incubation centers, establishment of credit guarantee schemes for loans up to 50 lakhas (five Million Shillings) for especially first generation entrepreneurs, Development of agro processing in rural and Peri urban areas. In order to institutionalize all these factors, an act was enacted on 23rd June 2006 and its implementation started in October of the same year with an aim of promoting the development and enhancing competitiveness the MSME sector. The policy is implemented, monitored and guided by the national board for Micro, small and medium enterprises.

5. Assessment of Uganda SME Sector per objective

Based on the lessons learned as clearly stipulated above, I will make the attempt to assess Uganda MSME sector also relying on secondary information provide through documentation by Ministry of Economic planning and Development and other relevant economic policy authorities in Uganda in line with international trade instruments and protocols. This will guide the recommendation herein.
OBJECTIVE 1
Development and writing of a MSME national guiding policy framework.
While efforts have been made to develop and account for Micro, Small and Medium enterprises in Uganda, there is need for a comprehensive National SME policy frame work. Currently the government is depending on the Uganda investment authority framework which in my opinion does clearly set the right parameter or mechanisms for a fully functional SME sector. The relevance of this policy in reference to finance and credit institutions would be a confidence in providing financing to MSMEs as stipulated in the policy and clear mechanisms through which recovery and provision of support to appropriately well defined MSME institutions in accordance with the law.

Objective 2

National SME Board

As we have learned from the case of India the policy would require a national board that is composed of an assortment of stakeholders to ensure guarantee in all sectors for the success of the MSMEs, this will in the long run make it easy for MSME to access finance from banks and also in turn lower the rate of defaults. The assumption of course is on ground that this board will be structured from the central, district, Sub County, parish and village level. The national SME board will be mandated in accordance with the law to ensure a systematic approach to selection of beneficiaries for grants, loans and access to any other financial services available based on standard criteria. This will increase confidence in banking institutions to provide finance to MSMEs but and also reduce the financial sectors costs of follow up on defaulter largely because the committees will be in operation. This proposal is contrary to the current situation because banks are still dealing directly with MSMEs on individual basis and many of the commercial banks that are mostly centrally located may not have the appropriate instruments in serving the MSME sector in rural areas.

Objective 3

Establishment for MSME Development Bank.

In order to maintain and coordinate appropriate finance instruments to the MSME sector it is paramount that the government of Uganda sets up a National MSME Bank that is solely responsible for providing services to this sector. Currently this sector is coordinate through the Bank of Uganda, Uganda development bank and association of micro finance however it is a matter of policy and development to separate the sector to grow. The current government efforts that have been put in place to support MSME sector such as National agricultural advisory authority,North Uganda Social action Funds (NUSAF) Bonabagawale, Business Development Services ( a private sector foundation initiative), UNIDO Master crafts man program, Jua Kali initiatives, Entandikwa and cluster financing to SACCOs.
All these well thought out efforts are appropriate and rightly fitting for Uganda’s economy however coordination of their finances and financing mechanisms used to select beneficiaries, to monitor and provide for access to finances are not uniform and in some cases against all ethics of financial management. This has therefore led to loss of finances to this sector but also made it difficult to monitor and evaluate the financial progress of MSEMEs and mechanisms of disbarment of funds some of which are purely grunts. It is also clear that because of having no national SME Bank some parts of the country where commercial banks are nonexistent are missing out accessing financial services. Many of the same programs have also been marred with political interference.

A case of Micro finance institutions and Commercial Banks

It would be unfair to conclude on the establishment of a SME bank without evaluating the role of micro finance institutions, money lenders and Commercials Banks that are currently the main financial backers of the MSME in the private sector. Micro Finance institutions have played a leading role in supporting MSMEs among which to mention but a few are FINCA, PRIDE Micro finance Limited (MDI), Faulu, Brac Uganda, Centenary Rural development Bank and Equity bank and other Micro finance Deposit taking institutions and Savings and Credit cooperatives. However these institutions are limited in capacity and many of them operate in towns and very few reach out to rural areas through village banking. A technical assessment of their growth annually or over a period of five years would reveal that they don’t expand as much to rural areas, but maintain circulation in nearby areas to the capital. Further to this the Micro finance institutions are guided by various mandates and operate as independent entities as such are not legally bound to implement or take on government strategic key areas to provide finance or limit finance as may be deemed appropriate by the government. The MFIs have so far been able to provide and absorb less than 2 million people, however compared to over 80% of Uganda’s entire population in nonfarm activities of the private sector that are employed by SMEs, this is a drop in the ocean therefore a structured well distributed Bank would serve more people in the country.
Commercial banks both national and international are mostly centrally located and also operate in accordance to their international policies, only a few commercial banks eg. CERUDEB are offering financial or have wide reach to the rural communities. Currently the government has licensed 23 Banking institutions with about 400 branches in the country. In total commercial banks are providing financial services to about 5 million people with bank accounts in a population of 31 million, leaving a huge part of the population without savings accounts. Further to this commercial banks are mainly profit making financial institutions therefore will only provide financial services to stable and profitable sectors, it should be noted that 80% of Ugandans are employed in the agricultural sector, and about 70% in the informal sector. It is upon these views that I see the need for a national bank solely dedicated to MSME spread throughout the country. Banks in countries such as Bolivia and Bangladesh have products such as Village bank providers (retailers). These are individual that are given minimal training in banking, equipped with simple and effective equipment and work as bank retailer representatives in various communities through a well coordinated telecommunication system.

Objective 5

Setting up Credit reference bureau and Credit Audit bureau

Credit Reference Bureau

The current interest rates on loans according to Ministry of finance report 2008/2009 is averaging 20% for accessing loans from commercial banks, though some rates have gone as far as 30% ( some of the highest interest rates in the World) while interest rates on savings accounts in Uganda shilling and dollars is about 2.0% to 2.1% respectively. These high interest rates have been attributed to high levels of defaults on loan across the board in many of the commercial banks, therefore causing banks to raise the interest rates to cover for their loses. This phenomenon has thus made it difficult for MSMEs to access loans to finance their business due to the high interest rates. The Bank of Uganda realized this effect and has established a credit reference bureau through which all individuals trying to access fund will be scrutinized for their debt burden hence reducing defaults in the future, which will in turn bring down interest rates other factors constant.

Credit Schemes

While the credit reference bureau is in the offing in Uganda, there is need for a bureau that will check the credit worthy of businesses as well, this will help in providing a clear picture to commercial banks and other lending institutions of the actual debt burden or credit worthy of an organization. This scheme has been effective in India as such made the work of Small industries development bank (SIDBI) easy. The organization should be an independent firm that plays the role of checking and providing certification of the credit worthiness of an organization to the banks before they access any finance services.

1. Objective 6

Increased access to Financial Services through Telecommunication services
While the number of savings accounts in Uganda is still low, and the spread of commercial banks to the rural areas still leaves a lot to be desired. New innovations in the Market such as Mobile money transfer systems have seen an increased usage of banking services. Pioneered by MTN, several communication services such as ZAIN, UTL and Standard Chattered bank and Crane Bank have all joined to this concept of extending financial services through mobile phones. According to the current statics (Uganda Communication Commission, 2009) there are over 9,801,173 Mobile subscribers and the tele density by March 2009 had grown from 29. 4% in 2008 to 32.6% in 2009, the population coverage for mobile usage is 100% while the geographical coverage is 65% of the country while internet connection through brand retailers have increase to about 22,600 unit connections. Innovations of such nature can further be improved to reach the rural MSME producers in places. It is clear from these figures that the rate of growth is higher in the telecommunication sector as such this opportunity should be strategically harnessed by the state and private sector.

Objective

Provision for a government subsidy

Based on the case of India and Bangladesh it has shown that once the right infrastructure is in place, financial services provided for and Markets opened up for MSMEs they raise to the challenge and access finance and equally pay back. The success story of a developed financial culture from the initial stages that includes, community leaders, NGOs and banking institutions has enable a financially discipline MSME sector in India, as a result the government set up a credit scheme guarantee for would be investors and this has successfully worked through providing guarantee schemes to youths and those that have a business plan that requires funding.

Provision of credit guarantee scheme in Uganda may be a costly venture and unattainable as the financial management culture is just growing, however it can be adopted in a systematic manner by providing guarantee schemes to nationals engaged in a given sector. This program can be monitored over the years and improved accordingly, a selected group cluster that is evenly distributed across the country could be considered for a study case.

Credit schemes through Non government Organizations and Business Enterprises.
This credit scheme can also be adopted by leading enterprise organization and Non government organizations, in a study by Ministry of Finance, planning and economic development it was clear that the leading Enterprise development organization are centered and focused in provision of workshops, capacity building, networking, trainings and very few or even non at all provide the necessary financial support that is required by its members. It is against this background that we do recommend non government organizations to take on the initiative of providing credit schemes to their members; this can be done by allowing individuals to be grunted securities guarantees that can be used by banks. An example would be Enterprise Uganda working with a cluster group by facilitating it with a credit guarantee certificate for them to access funds from financial institutions or co – invest in the project of a particular cluster and still access funding from financial institutions based on their credibility. A model that has been adopted and very successful by an association of Lady Entrepreneurs of Andra Pradesh (ALEAP) that furnishes credit guarantee certificates or co invests in the projects of its women member entrepreneurs as such making it easy for entrepreneurs to access finance from financial institutions.


2. Access of finance through a cluster approach.

Based on lessons learned from other parts of the world and especially India,Bolivia, Bangladesh and the Uganda SACCO approach, there is still great opportunity for clusters to acquire funding through clusters, while the Uganda SACCOs are unique cooperatives and able to acquire funds through micro finance institutions and the government. It’s been clear that the SACCOs are still facing challenges in their initial stages among which are access to finance after, their initial capital investment of resources, technological inadequacies , low market, proper management of resources, political interference, inadequate standard procedures across the board etc. It is upon this background that, I would suggest that we cluster producers of particular products into single units these units will be able to access finance on the basis of their strength. This would be direct support to increased productivity of each clustered sector. The government of India furthered this support to even provision of raw materials to producers of some particular MSME sector producers and also buys a certain percentage from them, as such providing market. The economic logic in this is the state, is able to indirectly create livelihoods, increase productivity, innovations but also cut its down on its costs of imports or dependence on external products. Tridad and Tobago has gone ahead to provide for cooperative unions through which the SMEs are clustered but also able to access funds and provided the necessary buffer support mechanisms.

Recommendations

Having discussed the above objectives, we shall make brief recommendations as discussed;
• Formation of a national MSME policy
• Formation of a national MSME Board that is structured according to Uganda’s administrative structure.
• Establishment of national SME Bank.
• Establishment of a credit reference bureau and agency Bureau
• Increase access to Finance through Telecommunication services
• Provide for access to finance through the cluster approach.

6. CONCLUSION

In conclusion, I do acknowledge the Uganda government effort in setting up mechanisms for improved growth of the MSME sector. However it is clear that there is need for a framework through which all MSME, activities are coordinated. However since am focusing on the financial aspect of MSME, the coordination should begin with a policy document that clearly identifies and provides for minimum financial instruments and guide lines that should be adopted by all financial institutions providing services to MSME. The government will therefore need a key financial MSME coordination mechanism such as a National SME Bank to enforce this policy. This frame work should be broken down to the last level of Uganda’s administration structures. Continuing with the current model of MSME development in Uganda will cost the country a lot of resources through corruption, and non uniform financial policies, lack of or inadequate data and information in monitoring of this sector, and a financial support system that is governed by cooperate and profit interests that may not necessarily model the appropriate key or strategic development sectors of Uganda.

Acknowledgement

I take this opportunity to extend my sincere gratitude to the government of Uganda in conjunction with Ministry of Finance Planning and Economic Development for giving me the opportunity and participate in the international program on promotion of Micro, small and medium enterprises from 20th January to 20th March 2010, at the national institute for micro, Small and Medium enterprises (ni – msme) Hyderabad, India.
I also extend my sincere gratitude to Dr. NR Prasad Reddy the program director and my fellow participants from various countries respectively for there support accorded to me up to the compilation of this report.

Not forgetting the special common wealth Africa assistance Plan (SCAAP) through the ministry of External affairs India. I also extend my sincere gratitude to Hon. Okello Oryem Minister of state Internal affairs, Ministry of Foreign affairs government of Uganda, Dr. Maggie Kigozi( Uganda Investment Authority)for accepting an improptal discussion and recognise a detailed technical discussion with my Friend, Edgar Kagumba Bakadde (FINCA). Thank you all.


8. References

1. Enhancing Competitiveness of Micro, Small and Medium Enterprises (MSME) in Uganda.
2. Uganda’s Economic and Financial Overview 2007/2008
3. Gender targeting of rural financial services, FINCA Uganda.
4. Poverty Eradication Action Plan 2005
5. Small and Medium Enterprises Business Guide, Uganda Investment Authority
6. Uganda Communication Commission Telecommunication report March 2009
7. Media stories
8.Media Center website.

8. Input and thank you note to Delegates from , Bhutane, Sudan, Zimbabwe, Iraq,Maritius, Yemen, Trinidad and Tobago, Kenya, Burundi, South Africa, Ecuador, Senegal,Mynammar, Syria and Zambia.


Written and compiled by Byaruhanga Edgar Walter (status of paper is Policy Research)