Uganda Development Bank supports small businesses in Covid-19 recovery

March 21, 2022 in Financial Services, Opinion by Editor

Twinomugisha says UDB is scaling up lending operations by offering cheaper credit (10-12percent) and long- term project financing, one to15 years (tenors).

Over the last two years, the Covid-19 pandemic impacted businesses on national and global scale writes Bob Twinomugisha.

Governments in many developing countries introduced severe containment measures, involving restrictions on economic activity and mobility, to curb the spread of the pandemic. In Uganda, public transport and non-essential businesses were closed during the two lockdowns (March-June 2020, and June-August 2021).

Other sectors such as education, and tourism were closed for two years. The night quarantines and hence the closure of the night economy took a toll on businesses in Uganda.

The Covid-19 lockdown greatly impacted micro, small and medium enterprises (MSMEs). Indeed, World Bank (2021) indicated that over 89 pc of MSMEs reported a decrease in turn over by about 49 pc resulting from low demand for their products and services because of the pandemic. Notably, Uganda has an extensive MSME sector that accounts for approximately 90 per cent of the private sector, over 80 per cent of manufactured output and contributes about 75 pc to the GDP.

The sector employs over three million people, which makes 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. Now, the perceptions about doing business are optimistic as reflected by the Business confidence index at over 50.

According to Bank of Uganda latest statistics, the Business Tendency Index increased 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 the improvement in global economic performance as Covid-19 vaccination picks up.

However, Ugandan MSMEs continue to face operational challenges because of limited capital. Many businesses lost operating capital because of the increase in operational costs, and the significant losses incurred during the lockdown. This challenge is exacerbated by the limited access to affordable and patient finance. Finance is needed to give birth to MSMEs through facilitation of access to other factors of production such as land and labour. In Uganda, about 70 pc of MSMEs close shop before celebrating their second birthday. This is mainly attributed to their lack of ability to raise finance due to inadequate collateral to secure loans, information opaqueness, low technical and management skills, competition, and inability to afford long term financing among others.

Development financial institutions worldwide play a key role in closing the funding gap faced by MSMEs. Uganda Development Bank (UDB) as an example has set out to enhance MSMEs access to affordable and patient credit through several initiatives.

For instance, on 14th December 2021, 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 effect, the Bank established SME kazi loans, women prosper loans and youth step-up loans. Specifically, SMEs Kazi loans intervention enables access to affordable financing and Business support with the aim of promoting sustainable growth of SMEs and build their resilience against business shocks.

UDB’s SMEs Kazi loans initiative is key in accelerating Post Lockdown recovery of MSMEs in Uganda. The bank offers SMEs business acceleration facility that covers Short-term working capital, trade facilities, invoice discounting, contract financing with a minimum of UGX50 million and a maximum of UGX720 million.

Relatedly, UDB offers SMEs business expansion facility products, purposely to facilitate SME businesses with demonstrated potential for expansion (both start-ups and existing) with capital investment. The bank also provides SMEs asset financing facility. The product enables SMEs acquire assets necessary for production, collateral pegged to the acquired asset.

As UDB strives to support resilience and growth of MSMEs, its products come with many advantages in form of low interest rates, adequate grace period and patient capital among others. Uganda Development Bank scales up lending operations by offering cheaper credit (10-12 percent) and long- term project financing, 1-15 years (tenors). In the recent past, the Bank positioned itself to play the risk absorption role during economic downturns by revamping collapsing SMEs and large scale enterprises and supporting the sectors in dire need for credit during a crisis (Crisis resolution vehicle).

In addition to these SMEs Kazi loan products, UDB offers Business Accelerator Program for Successful Entrepreneurship (BASE).The bank provides advisory to clients pertaining to management best practices, good governance, record keeping, financial management etc., based on the Bank’s wider knowledge of the business, operating environment, and experience gained from funding, implementing, and monitoring such projects. This is done by way of training and technical support to develop and implement the required processes in the businesses. The objective is to have professionally run businesses and enterprises which result in reduced risk of default of financed projects.

Bob Twinomugisha is an economist at the Uganda Development Bank Limited