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DISERTATION-Loans and Finance

DISERTATION-Loans and Finance

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Published by Tusiime Samson
Research on loans and finance in Uganda. An under graduate dissertation from Makerere
Research on loans and finance in Uganda. An under graduate dissertation from Makerere

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Published by: Tusiime Samson on Jul 12, 2010
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Small scale businesses are those that include all businesses formal or informal, urban or rural that do not have tangible collateral that qualify them to borrow from the formalestablished banking/financial institutions, they can not easily mobilize and their investment capital and the number of people employed qualifies them to be categorizedas small businesses (Uganda Women Trust Network, 2002). These small scale businesses are categorized as stationary shops, restaurants, smallagricultural farms, saloons, guest houses and retail shops.Commercial Banks are businesses, highly regulated money shops, which store and storeand hire out money for an agreed period. Hire charges are their income and money their  product (Michael Murphy).To a small scale business owner, acommercial bank should be regarded as merely asupplier of money small (Michael Murphy). At sometime a business will need to set up asupplier relationship with a money lender (bank).The demand-led economy has small scale business because they help to diversify anation, economic base and provide it with the opportunity of responding to a variety of market conditions, help to create jobs and “mop up” unemployment, provide an elementof local control and can respond to local needs.As a result of good quality dialogue between the government of Uganda, and the privatesector, the business environment in Uganda has improved over the past decade. Nevertheless, the Ugandan private sector still remains among the least profitable in sub-Saharan Africa. In financial terms this lack of profitability is translated into lack of 1
collateral for raising external funds and low economic return on investment.Where as it is evident that the private sector has continued to experience a wide range of constraints that have contributed to its performance, the effect of these constraints haveweighed more heavily on the SSB sub-sector than on the larger scale enterprises. Theseconstraints are access to markets on account of superior competition from local firms andimported products, high cost of raw material inputs as opposed to low product prices.Lack of access to appropriate technology, poor infrastructure, limited access to financeand good business premises at affordable rentals compounds, amounts to small scale businesses inability to produce and supply high quality goods, and insufficient quantities.Government has invested heavily in the improvement of roads, infrastructure, prohibitivetransport costs and heavy tax burden and yet another constraint. The above constraints have confined SSBs to lower production levels, a very narrowmarket segment within their localities and dampened incentives to grow. These bottlenecks have denied the SSBs an opportunity to exploit and benefit from variouseconomies of scale. From the above constraints, however, credit is often listed as a keyconstraint by the SSBs.Limited access to term finance the working capital for purchase of better machinery,employment of skilled personnel, acquisition of managerial expertise considerablyundermines SSBs productivity. They cannot compete effectively in the input and productmarkets besides, ultimately, accumulating sufficient reserves for further development.Given that they have a weak net worth, the resultant scenario has rendered these firms unattractive to banks and, unfortunately, limit access to commercial bank credits.These small scale businesses use several sources available for start up capital whichinclude self financing by the owner through cash, equity, loan on his or her home andeven selling their personal assets like land and other holdings in a home, loans from2
friends and relatives , private stock issue , borrowings from partnerships. The abovesources of funding to small scale businesses still prove not to be sufficient to facilitatetheir undertakings. And this calls for more sources like availing credits to these smallscale businesses and most especially through commercial banks.Of all commercial banks established in Uganda Kisoro district has a small number ocommercial banks and microfinance institutions, and the district has a number of businessundertakings which may require financial services from a wide range of commercial banks. This shows that indeed there is great deficiency so far as the availability andaccessibility of credit to small scale businesses is concerned. The small scale businesseshave small means of getting start up capital and so require special attention of the bankersif they are to up lift their status, develop and progress.This study is therefore prompted by an urgent recognition that small scale businesseshave for long continued to have limited access to commercial bank credit resources. Itwill therefore set out those factors responsible for this limitation and also to gauge theextent to which commercial banks are extending credit to this sub sector..
1.2Statement of the Research problem
In a bid to support the growth of small scale businesses, financial institutions wereestablished to provide focused quality services to small scale businesses in the urban, pPeri-urban and rural areas of Uganda. However in Kisoro district small scale businessescomplain that they don’t access commercial bank credit and those that access it say it isnot enough to make them take off. If this situation continues the small scale businesseswill not grow and will consequently collapse. This will in turn have an effect on theeconomy since small scale businesses are the major players of the private sector which issupposed to lead in economic growth. There is thus a need to carry out a research that istailored towards establishing the factors that hinder the access to commercial bank credit by small scale businesses.3

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