BizCLIR

Lending to the private sector is one of the keys to growing an economy. Companies in developing economies need capital to upgrade production equipment, to hire employees, and to access new markets. This is particularly true of micro-enterprises and SMEs, which need investment in productive assets so that they are capable of accessing value chains and public procurements.[1] In Uganda, most such enterprises lack access to productive resources and find the high cost of maintenance, spare parts, and machinery to be major obstacles to growth.[2] Only 24% of Ugandan firms report receiving loans in the last five years.[3] Not surprisingly, micro-enterprises and SMEs have made only limited upgrades to their productive assets.

 

In its most recent Doing Business report, the World Bank ranks Uganda 109 out of 181 countries for Getting Credit, seven places below its previous showing. With respect to the specific aspects of Getting Credit, Uganda scores reasonably well on the survey’s legal rights index, which measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders. This diagnostic found, however, that although the laws that govern lending and enforcement of defaulted loans are generally sufficient “on paper,” implementation of the laws is hampered by state institutions that need to modernize. Antiquated state institutions, banks’ lack of long-term capital, and other factors described in this chapter make borrowing expensive and loan products insufficient to meet the needs of borrowers. As a result, lending in the Ugandan economy is low and financial institutions are not adequately serving rural areas and certain key sectors in the economy.

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