Meeting the Long-term Financing Needs of SMEs in Uganda
In Uganda, small and medium-sized businesses (SMEs) contribute around 70% to GDP. But while most of the finance offered by banks is short-term, it is long-term finance which is necessary for the growth of most SMEs. Frequently, this results in SMEs in Uganda using the wrong kind of funding for expansion – for example using a two-year loan to invest in a new facility– which creates a mismatch in a company’s cash flow and can sadly cause it to fail.
For the last 50 years DFCU has tried to address this shortage of finance in Uganda. DFCU has a particular focus on providing SMEs with the long-term funding they need, given the large finance gap in this area. We concentrate on providing finance for businesses in certain sectors where it can have a real impact, including education, agribusiness, construction and manufacturing.
However, long-term funding for SMEs is not something we can currently provide alone. The lack of long-term funding available in Uganda is partly a result of the low levels of savings, with the current saving rate as a percentage of GDP standing at only 14%, compared to the world average of 25%. This means a shortage of local resources, which in turn means banks like DFCU need to harness long-term funding from external sources.
In our case, DFCU was set up in 1964 by the Government of Uganda and CDC, the UK’s development finance institution. And we’re fortunate that over the last 50 years, CDC has continued to provide capital and advice to help the bank develop and grow. But banks across Africa need external investors to help bridge the funding gap that SMEs currently face. This is both a development and a business opportunity – all our investors and lenders expect, and receive, returns on their capital.
Eventually, we believe that with financial deepening, as more Ugandans open bank accounts and increase their savings, it will be possible to free up domestic resources which can provide this kind of funding to SMEs. However, this is likely to take at least a decade, and in the meantime, accessing capital from international investors continues to be vital.
Partnerships with institutions like CDC are not just about finance. For example, CDC’s financial support has been coupled with support through corporate governance and technical assistance. The other critical role CDC has played is as a long-term shareholder over the last 50 years, remaining with us even through the difficult times. To have this kind of shareholder, who is committed and dedicated to the growth of DFCU, has been very important to our work.
With CDC’s support, we have been able to provide long-term funding to the SMEs which are vital to Uganda’s economic development. This has enabled businesses across a number of sectors to expand, providing sustainable jobs to hundreds of thousands of people throughout Uganda.