The study was carried out to determine the effect of access to finance on the performance of small and medium enterprises in Uganda. In particular, the study sought to explore the experiences of small and medium enterprises borrowers in access financial services. The main objectives of this study included; establishing the source of finance for SMEs, Establishing the factors that influence the performance of SMEs and establishing the relationship between access to finance and performance of SMEs. 

The researcher used both descriptive and analytical research designs. The research designs were appropriate because data was easily analyzed using frequency counts and percentages derived from the responses obtained in the questionnaires. 

From the study, it is clear that there is great demand for financial services by SMEs, On the other hand, it s also evident that the supply for financial services is rampant from both formal and informal financial institutions. Even with all this demand and supply, SMEs continue to face myriad of challenges in trying to access financial assistance from these financial institutions. collateral requirements has been cited as a major cause of these financing problems coupled with misuse of funds meant to assist SMEs grow into sustainable ventures. Lack of know how by small business owners about financing policies of these institutions have made SMEs incur losses in the repayment process since they end up making less than they borrowed hence some of them are forced to close down. In case they continue operating, they are incapable of acquiring a subsequent loan. 

From the study undertaken, the researcher found out there is a weak relationship between access to finance and performance of SMEs having a correlation of 0.386 Based on the results, the study recommends that there is need for commercial banks to promote transparency by regularly publishing bank charges and interest rates in the print media, as is done in Kenya. This is likely to increase competition and thus ultimate reduction in interest rates. Serious awareness programs have also been advocated to spread the know-how on the policies of fund application. Introduction of small loaning programs for SMEs has also been advocated










1.1 Background of the study 1

1.2 Problem statement 3

1.3 Purpose of the study 4

1.4 Objectives of the study 4

1.5 Research questions 4

1.6.2 Content Scope 4

1.7 Significance of the study 5


2.0 Introduction 6

2.1 Definition of SME’S 6

2.1.1 Importance of SME in Socio-Economic Development 7

2.1.2 Categories of small and medium enterprises in Uganda 8  Survivalist enterprises 8  Small enterprises 9  Medium enterprises 9

2.2 Sources of SMEs financing 9 Micro-financing 11 Venture Capital Financing 12 Leasing 13 Capital markets 14 Trade credit 14 Overdraft facility 15 Bank bills finance 16 Ordinary share capital 16 Preference shares 17 Debentures 18 Retained earning 18

2.3 Performance of SME’s 19

2.3.1 Liquidity as a measure of organizational performance 21

2.3.2 Level of sales as a measure of performance 22

2.3.3 Level of asset base as a measure of performance 22

2.4 Relationship between access to finance and performance of SMEs. 23

2.5 Conclusion 24


3.0 Introduction 25

3.1 Research design 25

3.2 Study population 25

3.3 Sample Size 26

3.4 Sampling method and design 26

3.5 Measurement of variables 26

3.5.2 Secondary Data 27

3.7 Data collection instrument 28

3.8 Data collection Procedure 29

3.9 Data processing and analysis 29

3.10 Anticipated problems of the study 30


4.0 Introduction 31

4.1.2 Sex of respondents 32

4.1.3 Marital status 32

4.1.4 Education levels of business owners 33

4.2.2 Location of enterprises 34

4.2.3 Duration of enterprise 35

4.2.4 Ownership of the enterprises 35

b) Less equipped in terms of human and capital resources: 39

b) Awareness of financial institution 41

c) Financial institutions only target large firms 42

d) Financial institutions are profit making: 42

4.5.2 Rating of SMEs using performance indicators 44

b) Employment level 45

4.6 Relationship between access to finance and performance of small and medium enterprises 46


5.0 Introduction 47

5.1 Summary of findings 47

5.1.1 Factors limiting access of finances by SMEs 47

5.1.2 Performance of small and medium enterprises 49

5.1.3 Relationship between access to finance and performance of small and medium enterprises 49

5.2 Conclusion 50

5.3 Recommendations 50

5.4 Areas of further research 52




Table 1: Age distribution among the respondents 31

Table 2: Gender of respondents 32

Table 3: Education levels of respondents 33

Table 4: Number of employees 34

Table 5:  Duration of enterprise 35

Table 6: Preferred financial institution 36

Table 7: Response on loan application 36

Table 8: Purpose of the loan application 37

Table 9: Successful loan application 37

Table 10: Financial assistance is important for growth 38

Table 11: Conditions viewed as risky ventures 39

Table 12: Less equipped in terms of human and capital resources 39

Table 13: Inadequate accounting systems 40

Table 14: Uncertain repayment capacity 40

Table 15: effort to reach SMEs by financial institution 41

Table 16: Awareness of financial institution 41

Table 17: Financial institutions only target large firms 42

Table 18: Financial institutions are profit making 42

Table 19: financial institutions terms and conditions could change with changes in business environment 43

Table 20: factors that have direct effect on performance 43

Table 21: Production volume 44

Table 22: Employment level 45

Table 23: Profitability level 46


Figure 1: Graph of the martial of the respondents 33

Figure 2 : Graph pie chart showing the locations of enterprises 34

Figure 3: Shows the pie chart showing forms of ownership 35

Figure 4: A bar graph shows the factors that have direct effect on performance 44


1.1 Background of the study 

Finance has been identified in many business surveys as the most important factor determining the survival and growth of small and medium –sized enterprises in both developing and developed countries. Access to finance is the ease with which Small and Medium Enterprises (SMEs) can get finance to undertake productive investments to expand their businesses and to acquire the latest technologies, thus ensuring their competitiveness and that of the nation as a whole (UNCTAD 2002) or it can be defined as an absence of price and non price barriers in the use of financial services (world bank 2008). While performance is process or manner by which SMEs execute their function. Firm performance can be measured with different indicators, such profitability, and growth in employment, production level, or even sales. In addition, firms also have their own performance indicators (Meyanathan and Munter 1994; McCormick and Atieno 2002; Okech, Mitullah and Atieno 2002).

Access to finance refers to the possibility that individuals or enterprises can access financial services including credit, deposit, payments, insurance, and other risk management services (Honohan 2008). Access to finance refers to whether or not a person has an account with a given financial institution or has made use of it (Anjali,2005). Access to finance is indicated by access to savings, access to credit, access to financial markets, government involvement for example providing grants to developing enterprises, level of profits, company dividends decision (Anjali 2005). Access to finance is categorized into voluntary and involuntary non-users of financial services (Porteous May 2005). Access to finance can influence the growth of entrepreneur behaviors among small and medium enterprises. SME’s can acquire new technologies, compete in the global markets and also establish linkages with larger firms (Ruicupero Dec. 2002).

Small Enterprise businesses operate from fixed premises that are of a permanent nature e.g. shops. They employ family labor (including extended family) but the total number of people employed may not exceed 20 people. They require little capital to be started. Their periodical sales are relatively higher than those of micro businesses. They may use some basic and some technology in their production systems. They are generally easy to start and operate and may not require formal registration. Examples of small businesses include shops, bakeries, millers, etc. The relatively well established small businesses may produce for export either directly or through large businesses. However, the majority of small businesses produce for the local market.

 A Medium Enterprise these are very well established businesses, which may employ up to 100 people. They operate from well-established and permanent business premises. They use advanced technology and produce on a relatively large scale. They require a lot of capital to be started and such businesses are formally registered as limited liability companies. These businesses may be producing for the local as well as the export market. Examples of such businesses include big bakeries, milk processing and packaging businesses, coffee hulling factories, mattress manufacturing factories, etc. 

Small and Medium Scale Enterprises (SMEs) as defined by the National Council of Industries (2009) refer to business enterprises whose total costs excluding land is not more than two hundred million naira (N200,000,000.00) only. Although, there exists no consensus among policy makers and scholars concerning the point at which a business firm is deemed to be small or medium. Indeed, there is no universally or even nationally acceptable standard definition except that the scale of business needs to be defined for a specific purpose. The problem of SMES identification is more acute in the developing countries because apart from the fact that , small and medium scale business are difficult to count, they are also difficult to measure individually, hence statistics on the number, size, geographical distribution and activities of enterprises and the SME sub-sectors are partial and highly unreliable (USAID,2004).

Developing nations such as Nigeria are characterized as low income earners by the World Bank, value small and medium scale enterprises (SMEs) for several reasons. Viewed in statistic terms, the main argument is that SMEs, on average achieve decent levels of productivity especially of capital and factors taken together (that is, total productivity factor) while also generating relatively large amount of socio-economic development. In dynamic terms, the SMEs sector is viewed as being populated by firms most of which have considerable growth potential. SMEs in developing countries achieve productivity increases to a great extent simply by borrowing from the shelf of technologies available in the world (Christopoulos and Tsionas, 2004).

In Uganda, SMEs are increasingly taking the role of the primary vehicles for the creation of employment and income generation through self-employment, and therefore, have been tools for poverty alleviation. SMEs also provide the economy with a continuous supply of ideas, skills and innovation necessary to promote competition and the efficient allocation of scarce resources. In 2010, Uganda was estimated to have over 1,500,000 enterprises classified as SMEs and forming 90 percent of Uganda's private sector. SMEs employ approximately 1.5 million people equivalent to 90% of total non-farm private sector worker (John Walugembe Presentation), most of SMEs are involved in trading, agro processing and small scale manufacturing. Majority of SMEs are located in Mbarara Municipality and the south western region. 

1.2 Problem statement 

Despite the increase in credit institution, SMEs have little access to finance from MFIs, which hamper their performance and eventual growth Mosley (2001). Also SMEs operate with limited capital which has not been enough for them to meet the costs of operation. As a result, many of them have resorted to borrowing basically from MFIs institutions with the intention of acquiring more funds for expansion in order to enjoy economies of scale and become competitive in the market and boost their financial performance (Okurut and Bategeka, 2006).

Despite of the above, many SMEs in Uganda have continued to register poor performance. From a pilot study of SMEs In Mbarara municipality areas, the findings were: out of 10 shops in each area, an average of 4 source money from MFIs and other financial institutions while the rest rely on donations or personal savings and performance of SMEs has continued to decline by 5% from 2006 to 2008 and by 10% from 2009 to 2010 (Mbarara Municipal report, 2010). This could be due to failure to cope up with high interest rates, collateral requirements, high and multiple transaction costs that include application fees, processing fees, insurance and compulsory savings. Most banks perceive SMEs as being risky. The perception is that small clients do not have stable, viable businesses for which to borrow and from which to generate loan repayment. This study was therefore intends to examine the extent to which access to finance affects the performance of small and medium enterprises. 

1.3 Purpose of the study 

The purpose of the study was to establish the extent to which access to finance affects the performance of small and medium enterprises. 

1.4 Objectives of the study 

The study was guided by the following specific objectives: 

i. To establish the major source of finance to SMEs. 

ii. To determine factors that influences the performance of SMEs. 

iii. To assess the relationship between access to finance and the performance of small and medium enterprises 

1.5 Research questions 

i. What are the major sources of finance for SMEs? 

ii. What factors influences the performance of SMES? 

iii. What is the relationship between access to finance and the performance of small and medium enterprises? 

1.6 Scope of the study 

1.6.1 Geographical scope

This study was carried out in Mbarara Municipality, Mbarara district of Western region of Uganda. Mbarara Municipality was selected because it has many small scale enterprises and financial institutions. It is also easier to access these small scale enterprises by the researcher because most of them are situated in the center of the Municipality.

1.6.2 Content Scope

The study was sought to find out the effect of access to finance on the performance of small and medium enterprises. The study was conducted in Mbarara Municipality in Mbarara district and the study findings will relate to the period between 2008 and 2014 

1.7 Significance of the study 

The information that was captured in this research is aimed mainly to assist owners of SMEs in determination of procedures and policies adopted by MFIs and other financial institutions from which they obtain financing.

 It was to help small entrepreneurs in tackling the stringent terms and conditions required by the financing institution. Micro-finance institutions also use the information obtained from this study to determine in depth the various challenges SMEs face in their access to financing from inception through all stages of development. 

A broader access to financial services and credit help the country as a whole in achieving its objective of improving income distribution while expanding opportunities through enhancement of entrepreneurial capabilities in the SME sector.




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