Market Bite Uganda Challenges and opportunities for MSME finance in the time of COVID-19 November 2021 Content Executive Summary: Ugandan MSMEs offer a $8.8 billion potential market Serving the MSME market in Uganda: conclusions and recommendations ........... 12 opportunity.............................................................................................................................1 i.  Addressing the quality and accessibility of credit information will Infographic 1: MSME market overview ....................................................................... 2 support the ability of financiers to assess MSMEs’ creditworthiness............. 12 MSME market context: economic growth and reforms support MSMEs................. 3 ii. Addressing informality will support access to finance for MSMEs Economic outlook: growth expected to pick back up post COVID-19.................. 3 as well as revenue collection for the government............................................ 13 Enabling environment: recent developments support MSME lending............... 4 iii. Increasing innovation and efficiency in MSME delivery models will reduce cost of serving the MSME sector.................................................... 13 Support for the MSME market: limited uptake of non-financial assistance....... 4 iv. Developing tailored financing products for MSME market segments Market Insights: 70 percent of MSMEs have unmet demand for credit................... 5 can improve reach and sustainability............................................................... 13 MSME market size .................................................................................................. 5 v.  Improving the business services market in Uganda is crucial for MSME market characteristics ................................................................................ 5 MSMEs to access funding to grow their businesses ........................................ 13 MSMEs in the agricultural value chain . ................................................................ 6 How the research was done........................................................................................ 14 MSMEs in the tourism value chain ........................................................................ 7 Acknowledgements..................................................................................................... 15 MSMEs in the construction value chain ................................................................ 8 Acronyms...................................................................................................................... 16 MSME financing: scope to build supply of MSME finance......................................... 9 Demand for MSME financing ................................................................................ 9 Infographic 2: Opportunities for MSME finance in Uganda................................. 10 Supply of MSME financing . ................................................................................... 11 Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 1 01 — Executive Summary Ugandan MSMEs offer a USD 8.8 billion potential market opportunity Uganda has a vibrant entrepreneurial business community with an estimated 1.1 Several recent developments may work to open up this market opportunity. The million micro-, small-, and mediums-sized enterprises (MSMEs) across almost all establishment of a collateral registry for movable assets in 2019 as well as Uganda’s sectors of the economy. The majority of these are informal micro-entrepreneurs, first credit bureau in 2008 are enabling MSMEs to leverage their assets and credit with about a third of all MSMEs more formalized. They all play a key role in innova- histories to access finance. The emerging and fast evolving fintech sector could simi- tion, economic growth, and employment in Uganda. larly offer new innovative methodologies to strengthen the bankability of MSMEs. MSMEs have historically not been the focus of the commercial banking sector in While the COVID-19 pandemic has had a negative impact on overall economic Uganda, but there is an increasing interest in this market from financial institu- activity in Uganda and affected MSMEs across all sectors, at the time of the survey tions. Lack of collateral, lack of credit history, inadequate business skills or financial the economy was expected to pick up again in 2021 and a majority of those MSMEs literacy, and high interest rates have traditionally been barriers to access to formal surveyed by IFC were planning to expand their operations in the next three months. financial services for MSMEs. Just over half of them also stated a need for restructured loans and short-term working capital. Approximately 10 percent of Ugandan businesses have access to a bank account or a line of credit, and it is estimated that about 70 percent of all MSMEs in Uganda have To fully realize the potential of Uganda’s MSMEs, they require access to finance. To unmet credit needs. increase access to finance to MSMEs in Uganda, there are several measures that public authorities and private sector actors could take. These include, for example, To assess the actual MSME market opportunity for formal financial services in making use of technology and innovative methods of credit assessments; encour- Uganda, IFC conducted a comprehensive survey of 833 MSMEs in the Central, aging greater formalization of MSMEs; employing alternative delivery channels Western, and Eastern regions in April 2021. The survey focused on those MSMEs to increase efficiency in serving MSMEs; developing tailored financial products for that are more formalized and larger in size to provide substantial insight on these MSME market segments; and increasing the reach and depth of business develop- market segments. ment services offered to MSMEs. Based on the survey results, the estimated demand for credit by MSMEs in Uganda For financial services providers in Uganda, this translates into an opportunity to build is approximately UGX 31.4 trillion ($8.8 billion1). The demand is highest among micro the MSME finance market and make a sustainable contribution to the domestic and medium enterprises in general, and MSMEs in the trade and hospitality sectors. business community and the economy. 1 The exchange rate for November 1, 2021 was used (xe.com). 3,559 UGX = 1 USD. Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 2 Infographic 1 94% 4% 2% MSME Market Overview Micro enterprises Small enterprises Medium enterprises 70% Informal enterprises 30% Formal enterprises Sources of MSME Financing MSME Survey Insights Micro Enterprises Small & Medium Enterprises 18.0% 38.7% 38.7% Commercial Banks Formality • 54% are unregistered businesses. • Higher share of registered businesses. 76% & sector of small and 99% medium are registered. • Focused on larger • Higher share of businesses businesses. operating in trade, other service • Higher share of enterprises in the 12.7% • However, a few banks are activities and agriculture sectors. accommodation, manufacturing and health & social work sectors. increasingly interested in SMEs. 4.8% 25.8% Age & business • Tend to be younger - 68% are less than 3 years old. • Tend to be older - 84% of small and 96% of medium are older than 3 years. Donors cycle • Majority are growing slowly - 68%. • Majority of small enterprises are 25.8% • Provide funding through impact growing fast, while medium enterprises investments and grants. are in stable and mature phase 12.7% 18.0% Premises & systems • Majority are located in street/ market stalls. 79% have more • Majority are located in office blocks and factory plants. 74% have more Credit and Deposit taking MFIs SACCOS and VSLAS than one branch/outlet. than one branch/outlet. • Highly focused on MSMEs and • Primarily focused on rural and • Limited use of internal finance • Have greater use of internal low-income segments. low income segments. and management systems as finance and management systems • However, loans are small in size well as general IT facilities. and general IT facilities. with limited long term funding. 4.8% Starting needs • Majority were started due to the need for income and lack of employment. • Majority were started due to a need for income as well as identified opportunity in the market. Private Equity and Venture Capital • Generally require lower start up capital. • Generally require greater start-up capital. • PE is relatively nascent and focused on larger enterprises. • VC is growing and mainly targets start ups and small enterprises. Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 3 02 — MSME market context Figure 1: MSME business needs Economic growth and reforms support MSMEs since outbreak of COVID-19 % of MSMEs that expressed respective Economic outlook: growth expected to pick back accommodation services, this was in part offset by a The steep decline in economic activity due to the business needs, multiple answers possible up post COVID-19 strong rebound in the ICT sector as firms and house- COVID-19 pandemic prompted the government and 100 Uganda has achieved considerable economic growth in holds embraced online solutions to ensure some partners to introduce measures to mitigate the fallout 90 the last decade, with an average annual growth rate of continuity of business and daily life. The ICT sector grew in the MSME sector. These include a UGX 830 million 80 8.2 percent2. Although growth has slowed down signifi- by 21.9 percent in 2020, compared to an annual average (about $230.000 at the time) Small Business Recovery cantly due to the disruptions caused by the COVID-19 of around 4 percent 2016-20195. Fund for MSMEs in Northern Uganda in partnership 70 pandemic, it is expected to pick up to 4.3 percent in 2021 between the Development Bank of Uganda, UNCDF, 60 48% from a contraction of 2.1 percent in 20203. The govern- Between 2016 and 2019 the industrial sector experi- Private Sector Foundation Uganda and other financing 50 ment’s development strategies continue to focus on enced an average growth rate of 7.8 percent, driven by institutions7. The government is also providing a total 40 agriculture, industrialization, tourism, and the nascent public infrastructure and capital investments in the of UGX 50 billion ($13.3 million at the time) in seed 30 25% 21% oil industry to maintain high rates of economic growth. nascent oil and gas industry. In 2020, growth declined money grants to informal micro entrepreneurs who are 20 15% to 2.2 percent due to international trade disruptions, members of savings and credit cooperative societies8. 11% 10 Prior to the COVID-19 outbreak, structural transfor- but a pick-up in manufacturing and construction is % 0 mation was characterized by a decline in agriculture’s expected to lift industrial growth in 2021 as govern- Despite the impact of the COVID-19 pandemic on Restructured loans contribution to GDP and a take-off in industrial produc- ment continues to encourage domestic production and the economy, a majority of MSMEs surveyed by Short term capital tion, largely agro-processing. Agriculture still accounts import substitution6. IFC described their businesses as growing fast (27 Information for over a fifth of GDP and generates almost 70 percent percent) or stable/mature (24 percent). A large propor- Long term finance of employment. The sector grew at an average of 4.2 COVID-19 has added a layer of urgency to efforts to tion defined their businesses as growing slowly (38 Mentoring percent between 2016 and 2019, underpinned by high support MSMEs. Business needs as expressed in the IFC percent), but only 1 percent said they were downscaling cash crop output and an impressive performance in the survey (see Figure 1) varied by size of business. Micro- and 9 percent were starting up. When asked at the time livestock sector4. enterprises stressed a need for loan restructuring and of the survey what they plan to do in the next three 2 IMF, World Economic Outlook forecasts (WEO), 2021 short-term capital, while small businesses asked for months, over half were planning to expand (52 percent) 3 Ibid Growth in Uganda’s services sector is supported by loan restructuring and information. Medium-sized busi- while most of the others had no plans to change how 4 UBOS, Uganda Statistical Abstract, 2020 5 Ibid public spending, agricultural incomes, and growth nesses expressed a need for increased access to longer they operate (43 percent). 6 Ibid in non-trade related sectors. While recreation, enter- term financing to provide greater flexibility and to 7 UNCDF, website press release, 28 May 2020. 8 Bank of Uganda Website, Bank of Uganda (BOU) tainment, and tourism came to a standstill in 2020 fund various capital needs. put in place Credit Relief Measures, 2020 resulting in a contraction of 8.5 percent in food and Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 4 Figure 2: Obstacles to MSME growth Enabling environment: recent risk assessments of clients. However, information Medium Enterprises (FSME), for example, has 25,000 % of MSMEs that mentioned respective growth obstacles, multiple answers possible developments support MSME lending from alternative data sources like utilities, retailers members12. It provides advocacy, networking, business Uganda’s business environment is slowly improving as and others are still not part of the credit information advisory services, and training. Incubators and acceler- 100 the government tries to digitize government services, eco-system. Additionally, knowledge and coverage of ators provide space, product development, incubation, 90 improve infrastructure and remove regulatory barriers. the credit bureau remains limited. training and mentoring to MSMEs. Enterprise Uganda 80 With the onset of the COVID-19 pandemic, several runs the UN-backed Empretec program to provide 70 online systems were deployed to serve businesses Of the MSMEs surveyed by IFC, 23 percent of respon- an integrated and comprehensive range of business 60 electronically such as new company registrations and dents cited lack of access to finance as the biggest support services for MSMEs13. 50 business name registration. However, among business obstacle the firm was facing (see Figure 2). Regulatory 40 owners, there is a lack of understanding of new proce- constraints were less important, with 15 percent of The reach of these support mechanisms for MSMEs dures when it comes to starting a business. Also, the respondents saying business licensing and permits was in Uganda remain limited. Of the MSMEs surveyed 30 23% the biggest obstacle the firms were facing; 9 percent by IFC, only 15 percent have benefited from govern- online systems remain nascent and subject to frequent 20 15% 12% 12% network breakdowns9. cited tax administration and rates; and only 1 percent ment support, just over 30 percent have benefited from 10 cited labour regulations. Another significant obstacle industry association initiatives, and only 0.1 percent % 0 Even prior to the COVID-19 pandemic, Uganda had was increasing competition and/or decreasing demand stated that they had benefited from incubators. Figure Access to finance simplified tax registration through the introduction at 12 percent. 3 shows the training needs of MSMEs. Licensing & permits of an online system. The Uganda Registration Services Demand/competition Bureau and Uganda Investment Authority are working Support for the MSME market: limited In terms of access to finance, the Agricultural Credit Crime & disorder to create a one-stop centre for tax registration services. uptake of non-financial assistance Facility (ACF) is an example of a joint public-private Various stakeholders in Uganda indicate that the The development of MSMEs is prioritized in several initiative to support MSMEs. The ACF was set up in 2009 Figure 3: MSME training needs % of MSMEs that expressed a need for training government is also working to introduce tax incen- government policies and plans focusing on creating a by the government in partnership with financial insti- on respective topics, multiple answers possible tives for MSMEs that will significantly reduce the cost of business enabling environment, accelerating indus- tutions and the Uganda Development Bank to facilitate 100 compliance10. trialization and business linkages, and enhancing the provision of medium- and long-term financing 90 productivity and modernization at the firm and house- to MSMEs in agriculture and agro-processing. Loans 79% A positive development in terms of access to finance hold levels. under the ACF are disbursed to farmers and agro-pro- 80 for MSMEs is the recent establishment of a collat- cessors through the participating financial institutions 70 eral registry under the Security Interest in Movable The MSME National Policy 2015-202511, for example, at more favorable terms than are generally available 60 59% 53% Property Act 2019 and the Security Interest in Movable seeks to enhance MSME growth by addressing under conventional loans. Most loans are above UGX 50 Property Regulations 2019 that came into force on 30 issues such as legal and regulatory mechanisms for 20 million ($5,620), and demand for loans is three times 40% 40 34% May 2019. The Act makes provisions for the creation, competitiveness, formalization, cross-institutional the supply14. 30 protection, priority,and enforcement of security inter- collaboration to support MSMEs, access to tech- 20 ests in movable property. Albeit in its’ initial stages, nology, skills development, and access to finance. 10 it is expected that the collateral registry will enable There are also several government procurement poli- 9 Key informant interviews conducted in 2021 % 0 improved credit assessments and reduce the cost of cies to encourage local consumption of MSMEs goods. 10 Ibid borrowing in Uganda. 11 Ministry of Trade, Industry and Cooperatives (MTIC), Uganda Micro, Business expansion Small and Medium Enterprise (MSME) Policy - Sustainable MSMEs Accounting Uganda has various member-based organizations for Wealth Creation and Socio-Economic Transformation, June 2015 Customer relations The establishment of a credit reference bureau in 2008 12 FSME website, 2021 that advocate for MSMEs while providing busi- Marketing has also made it easier to access credit information 13 Enterprise Uganda website, 2021 ness support services. The Federation of Small and 14 Bank of Uganda website, 2021 Debt management and thus enabled lenders to more effectively conduct Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 5 03 Figure 4: MSME bank product use — % of MSMEs that use a given bank product, multiple answers possible Market Insights 100 90 70 percent of MSMEs have unmet demand for credit 80 70% 70 66% MSME market size The majority of the MSMEs surveyed said that access accommodation and the food services sectors, as 60 There are an estimated 1.1 million MSMEs across almost to finance was one of the biggest obstacles they faced. well as the personal and recreational services sector. 50 all sectors of the economy15, contributing close to 20 Access to finance seems to be more of an obstacle for These sectors have the highest proportion of micro 40 percent of GDP and generating over 2.5 million jobs16. micro-sized businesses with 31 percent of micro busi- enterprises. MSMEs in agriculture are mainly micro 27% 30 The majority of these businesses are informal micro nesses citing it as their biggest obstacle, compared to enterprises (71 percent), but with a significant share of 20 14% entrepreneurs, but about a third of all MSMEs are more 21 percent for small-scale enterprises and 10 percent small enterprises (18 percent). MSMEs involved in the 11% 10 formalized and about 7 percent are classified as small- for medium-sized ones. Lack of collateral and credit food processing and manufacturing sectors are mainly % 0 or medium-sized enterprises with annual turnovers of histories are common barriers to accessing finance micro enterprises (86 percent), with the sector also 10-360 million UGX ($2,800-101,150; for detailed defi- for MSMEs. High interest rates are another barrier contributing a significant share to the overall number Savings account Current account nitions see page 14)17. Most businesses are typically commonly mentioned. of MSMEs. MSMEs in sectors such as construction, finan- Debit/ATM card family-owned sole proprietorships, and their business cial and insurance services, as well as education, health, Investment account lifespans are short. Only 30 percent of businesses have The surveyed MSMEs also revealed the amounts and social services are relatively larger businesses20. Credit card been operating for longer than three years18. It is esti- they would want to borrow in the near future. mated that about 70 percent of all MSMEs in Uganda Using these results to calculate an average loan Ugandan MSMEs are concentrated in Kampala and the have unmet credit needs19. size demanded by MSMEs in Uganda, the size of Central region, which also contribute the largest share 15 Siemens Stiftung, Social Enterprises as job Creators Country Profiles, 2020 the demand for credit by MSMEs in Uganda is esti- to GDP21. These MSMEs are predominantly engaged in 16 Ibid Among those MSMEs surveyed by IFC, close to 90 mated to be worth UGX 31.4 trillion ($8.8 billion). trade related services, tourism, education, and cash and 17 Genesis Team Analysis, 2021 percent of formal MSMEs have a bank account and the Based on this methodology, the segments with the food crop production in the agricultural sector. 18 MicroSave, MSME Finance in Uganda – Status and Opportunities for Financial Institutions, 2017 same is true for just over 40 percent of informal enter- highest number of MSMEs are estimated to have 19 Ibid prises. A further 20 percent of informal businesses have the greatest demand for credit at an aggregate level. The following sections cover the characteristics of 20 Genesis Team Analysis estimates, 2021. These estimates are based on the Census of Business a bank account but do not use it for business purposes. These segments are micro enterprises, medium enter- MSMEs in the agriculture, construction, and tourism Establishments (COBE) 2010/11 data on the sector Most of the businesses that are banked either have a prises, and MSMEs in the trade and hospitality sector. value chains, which together contribute about 52 split of MSMEs in Uganda and average year-on-year percent of Uganda’s GDP. These value chains were growth rates per sector between 2014 and 2019. savings or current account or both (see Figure 4). Most 21 Genesis Team Analysis estimates, 2021, based on businesses do not use any finance product or service MSME market characteristics chosen because they are very distinct, but also traverse the regional distribution of MSMEs reported in offered by their banks. Only 10 percent of surveyed The majority of Ugandan MSMEs are concentrated several sectors. COBE 2010/2011 and analysis based on regional contribution to GDP as reported in the USAID businesses had access to a bank loan or line of credit. in the services sectors, mainly in the trade and report on Estimating District GDP in Uganda Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 6 MSMEs in the agricultural value chain growing slowly. About a quarter, 23 percent, described use one of three banks serving clients in this sector24. Uganda’s agricultural potential is not yet fully real- the business as growing fast, while 21 percent said the An analysis of the survey results in relation to other ized with only about 35 percent of arable land currently business was stable/mature. Only 6 percent were factors in the value chain suggests the potential for in cultivation22. Yet, the agricultural sector plays an starting up and none were downscaling (see Figure 5). MSME finance is biggest in the primary and complete important role in the economy and about 70 percent of processing stages, as shown in table 1.1. Ugandans depend on agriculture for their livelihoods23. IFC’s survey shows that a lower share of MSMEs in the Manufacturing, specifically agro-processing, is a key agricultural sector are banked; 61 percent as compared The majority of banked respondents in the agriculture focus of the government’s economic development plans to 73 percent for MSMEs generally. A lower share of agri- sector make use of a savings account or current account and will likely remain so in the medium-term. businesses got financing through a bank loan or an MFI (both 71 percent), while 41 percent use a debit card and (19 percent vs 31 percent) while more got capital from 22 percent an investment account (above average). In The agricultural value chains for cash crops, food crops, their own savings (24 percent vs 17 percent). A majority terms of channels, MSMEs in the agriculture value chain Figure 5: Business state among surveyed and livestock cut across the primary, secondary, and of respondents said they consider seeking finance for primarily make use of bank branches (92 percent), ATMs MSMEs in the agri sector tertiary sectors and include traditional farming activ- the business (76 percent), with 48 percent expressing (45 percent) and bank agents (33 percent). Just under a % of MSMEs that described their business as expanding, stable or downscaling ities, agro-processing, chemical manufacturing, and a need for restructured loans and 29 percent requiring fifth of MSMEs in this sector (18 percent) make use of trade. MSME activity in the agricultural value chain is short term capital in response to the COVID-19 crisis. mobile banking, and 12 percent use internet banking. mainly concentrated in the inputs, processing, distribu- 6% tion, and retail stages. Microfinance Deposit Taking Institutions (MDIs) and 21% MFIs issue the highest number of loans to MSMEs in the Of the 84 MSMEs in IFC’s survey that were active in the agricultural value chain. Of those MSMEs surveyed that agricultural sector, exactly half said the business was access financing from commercial banks, two thirds 50% 23% Table 1.1 MSME financing in the agricultural value chain 1. 2. 3. 4. 5. AGRICULTURAL PRIMARY INTERMEDIATE COMPLETE DISTRIBUTION INPUTS ACTIVITY PROCESSING PROCESSING AND RETAIL Starting up Presence of MSMEs Moderate Low Moderate Moderate High Growing slowly Growing fast Stable/mature MSME Downscaling funding need MSME financial Training and skills Assistance Training and skills Training Support to 22 FAO, Food and Agricultural Organization / non- financial development in managing development and skills expand their Statistics (FAOSTAT), 2020 needs fincances development business 23 UBOS, Uganda Statistical Abstract, 2020 for cyclical 24 The graphic reflects Genesis Team businesses Analysis, based on IFC survey results and Not a need An urgent need UBOS Statistical Abstract, 2021 Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 7 MSMEs in the tourism value chain operating in the transportation stage of the value chain transaction and investment accounts such as checking The tourism industry in Uganda accounts for 7.8 percent are likely micro and informal. In the accommodation and savings accounts. Across the stages of the tourism of GDP and 6.7 percent of total employment25. Much of stage there are smaller hotels and B&Bs, most of which value chain, MSMEs express a need for loan restructuring, the tourism is international ecotourism at high value are medium to small businesses. There are many MSMEs short-term working capital and long-term funding, as per traveler. Business travel is also an important compo- in the food services industry, operating as restaurants well as business training and skills development. nent, particularly in Kampala, and accounts for some and caterers. Most businesses operating in the excursions 40 percent of total tourism receipts and 17 percent of and discretionary expenses segment are also MSMEs. In terms of channels, MSMEs in transport and accom- arrivals26. modation sectors primarily make use of bank branches Most MSMEs in the tourism sector surveyed by IFC are (91 percent and 93 percent respectively), bank agents Figure 6: Business state among surveyed MSMEs in accommodation, food and Compared to neighboring Kenya and Tanzania there small businesses (70 percent) followed by medium (23 (39 percent for both), and ATMs (39 percent and 37 entertainment could be room to expand the Ugandan tourism sector. percent) and micro businesses (7 percent), 58 percent of percent). Fewer make use of mobile banking (17 percent % of MSMEs that described their business as In Kenya and Tanzania, 75 percent of visitors come for whom were owned by men and 42 percent by women. and 13 percent) and internet banking (13 percent and 10 expanding, stable or downscaling leisure. These countries also receive three and six times More businesses said they were growing fast (35 percent) percent). more visitors from Europe than Uganda does27. than growing slowly (33 percent), while 22 percent said 1% they were stable/mature. Eight percent were starting up An analysis of the survey results in relation to other 8% MSMEs are active in all parts of the tourism value chain; and only 1 percent was downscaling (see Figure 6). factors in the value chain suggests the potential for 22% tour operators, transportation, accommodation, restau- MSME finance is biggest among travel agents, transport rants, and excursions. Most of the tour operators are Of the firms in the tourism sector surveyed by IFC, just companies and firms offering excursions or similar, as MSMEs, though the market for Ugandan-based actors over 70 percent of MSMEs in the accommodation and shown in table 1.228. is limited by international competition. Most MSMEs restaurant sectors are banked. The majority only use basic 33% 35% Table 1.2 MSME financing in the tourism value chain 1. 2. 3. 4. 5. TOURISM SERVICES TRANSPORT ACCOMMODATION RESTAURANTS EXCURSIONS & (Travel agents etc) DISCRETIONARY Starting up EXPENSES Growing slowly Growing fast Presence Moderate Moderate of MSMEs Low High High Stable/mature to high to high Downscaling MSME funding need 25 World Bank, Data Indicators, 2021 26 International Growth Centre, COVID-19 MSME financial Tailored market Support to Training and skills Training Support to and Uganda’s tourism sector, 2021 / non- financial intelligence, digital expand their development and skills expand their 27 Ibid needs skills development businesses development businesses 28 The graphic reflects Genesis Team Analysis, based on IFC survey results, UBOS Statistical Abstract, Not a need An urgent need 2021, and World Bank Data Indicators, 2021 Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 8 MSMEs in the construction value chain In 2019, just under 60 percent of the plans submitted A majority of MSMEs consider seeking finance for Uganda’s construction sector has been growing rapidly were approved for residential buildings while close to their businesses (80 percent or more depending on over the past decade. This growth in the construction 29 percent were approved for commercial buildings30. sector), primarily to expand the business. In response sector is largely attributed to an accelerated rate of There is a high presence of MSMEs in the mining and to the COVID-19 crisis, surveyed MSMEs in this value public investment in energy and infrastructure. The quarrying stage of the value chain, medium presence chain expressed a need for restructured loans, short upward trend in public investment is consistent with of MSMEs in the manufacturing stage, mainly in metal term capital and long term financing. Only a very small the strategy outlined in the National Vision 2040 and works, and a large number of informal real estate agents number said they had no financing needs. An analysis Figure 7: Business state among surveyed the second National Development Plan, which focus on in the final stage of the value chain. of the survey results in relation to other factors in the MSMEs in construction addressing infrastructure deficits and to build produc- value chain suggests the potential for MSME finance is % of MSMEs that described their business Close to half of the surveyed MSMEs in the construc- biggest in the mining and construction industries, as tion facilities in preparation for exploitation of the as expanding, stable or downscaling country’s oil resources. Estimates from the Petroleum tion industry, 49 percent, said they were growing fast shown in table 1.331. 2% Authority of Uganda put the total value of investments and 32 percent said they were stable or mature (see that will be made over the next three to five years at Figure 7). Only 17 percent said their businesses were over $20 billion29. These will include the construction growing slowly, and none were downscaling. Almost 17% of an oil refinery, an oil export pipeline, a new interna- all of the sampled MSMEs in the construction industry, 32% tional airport, and regional road networks. 92 percent, are banked. Of those that didn’t have a bank account, 40 percent said it was because they do not trust Growth in the construction industry is also driven by banks. The majority of banked MSMEs only used basic Uganda’s growing population, which offers signifi- transaction and investment accounts such as checking cant scope for construction of residential dwellings. and savings accounts. 49% Table 1.3 MSME financing in the manufacturing value chain Starting up 1. 2. 3. 4. 5. Growing slowly MINING AND MANUFACTURING BUSINESS CONSTRUCTION REAL Growing fast QUARRYING SERVICES ESTATE Stable/mature Presence Downscaling of MSMEs Moderate Low Moderate Moderate High MSME 29 The Uganda Report, 2018. funding need https://uganda.the-report.com/ 30 Centre for affordable housing and finance, Uganda's Housing Construction and Training Assistance Information on Information, Information, Housing Rental Activities, 2020 MSME financial and skills in managing business tips and Training Training / non- financial development fincances for support services and skills and skills 31 The graphic reflects Genesis Team Analysis, based needs cyclical businesses development development on IFC survey results, Centre for affordable housing and finance: Uganda's Housing Construction and Housing Rental Activities, 2020, and 2019 Baseline Assessment of Development Minerals in Uganda, 2018. Not a need An urgent need Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 9 04 — Figure 8: Purpose for borrowing in the future % of MSMEs that mentioned respective reasons for taking out a loan in the future, multiple answers possible 100 90 MSME Financing 80 70 Scope to build supply of MSME finance 60% 60 50 The IFC survey confirms that micro-enterprises make main bank channels used by MSMEs are branch tellers, finance in Uganda. The opportunity for formal financial 40 less use of business accounts and have lower uptake of bank agents, and ATMs. The use of alternative channels institutions to grow their MSME businesses within the 29% financial products and services. This market segment is is higher among MSME segments that use retail accounts major MSME segments can be assessed based on the 30 22% 26% 19% currently primarily served by microfinance institutions. more, such as micro, informal, female-owned, and trade- number of MSMEs, the general uptake of formal finan- 20 10 MSMEs that are formalized and larger in size make use of sector MSMEs. cial services, and the effort that would be required to % 0 a broader range of financial products and services, and a effectively serve each segment. Based on these criteria, higher portion source financing from commercial banks. Cash is the prevalent payment acceptance instrument formal SMEs presents a given opportunity. These kinds Expand premises among MSMEs. Its use is higher among smaller, informal of MSMEs are fairly common and are growing. They Start business In 2019, the financial sector in Uganda supplied an esti- and women-owned MSMEs. Its use is also high in the have a moderate uptake of electronic payments and Buy equipment mated UGX 6.1 trillion ($1.7 billion) in financing to trade and hospitality sector. The survey not only revealed some use alternative banking channels. Buy stock No need for credit MSMEs32. Commercial banks dominate the financial a high acceptance of cash payments by MSMEs, but also system, accounting for over 70 percent of financial assets a preference for cash use and acceptance among MSMEs. On the sectoral side, the greatest opportunity to generate and contributing the largest share of MSME finance This preference is driven by the ease of using cash and income from transaction processing (i.e. non-interest 32 Genesis Team analysis based on Moody’s Analytics supply33. In practice, bank lending to MSMEs remains the speed of settlement of cash transactions. income) lies in the sectors with high volumes of retail Bank Focus 2021, BoU Financial Stability limited in comparison to overall loan portfolios. In 2019 payments – trade, hospitality, and the education sectors. Report June 2019, BoU Banking Statistical Report 2019, BoU Banking Statistical Abstract lending to MSMEs only represented 17 percent of total More than half of the sampled MSMEs were not using To unlock these opportunities will require a great deal 2019, GIIN The Landscape of Impact Investing loans outstanding34. any credit products. The share of MSMEs not using credit of innovation, more so in the competition with cash as In Uganda 2015, CIIP Financing of Small and Medium-Sized Enterprises in Uganda 2016, products was highest among informal, micro, female- a payment instrument. With the right partnerships and and financial statements, annual reports and Demand for MSME financing owned MSMEs as well as MSMEs in the education and innovations, digital payment and finance tools can be websites of relevant financial institutions. The IFC survey shows that bank account ownership professional services sector. The main credit products developed. Because of their convenience and efficien- 33 Bank of Uganda, Financial Stability Report, June 2020 among MSMEs is higher among larger, formal, urban- used by those accessing formal credit were working cies, they compete with cash and they enable financial 34 MSME share of loans is estimated using based and male-owned MSMEs. Account ownership is capital finance and term loans. MSMEs are primarily institutions to serve MSMEs more effectively. the average share of MSME loans to total gross loans of eight banks, with informa- higher in larger industry sectors. Conversely, the use of seeking finance to expand the business (see Figure 8). tion sourced from Moody’s Analytics Bank retail accounts for business transactions is higher among Focus, 2021, Financial Statements and smaller, informal, female-owned, and rural MSMEs. This Infographic 2 on page 10 highlights some of the the key Annual reports of Banks, and Bank of Uganda Financial Stability Report June 2020 practice is also more prevalent in the service sectors. The factors required to analyze the opportunities for MSME Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 10 Infographic 2 MSME Segment Prevalence Uptake of Uptake of formal Effort required to Current penetration transaction services FI financing serve segment by banks Opportunities for MSME finance in Uganda Micro Very High Small Moderate Medium Low Formal Moderate Informal High Female owned MSMEs Moderate Male owned MSMEs High Agriculture Low Manufacturing Moderate Construction & real estate Low Trade Very High Hospitality High Professional Services Low Education Low Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 11 Supply of MSME financing field staff to boost productivity, and build strong credit operators and financial institutions to provide digital Some of the large financial institutions in Uganda have underwriting skills to ensure portfolio quality. solutions that improve efficiency in serving clients. an MSME offering, however, this lending is mostly to There are a couple of fintechs in partnerships with Figure 9: Level of satisfaction among banked medium and large enterprises. Six of the 13 largest banks Overall, banks offer relatively basic MSME products MNOs targeting semi-formal MSMEs offering fast and MSMEs with their bank have a high focus on MSME clients, while a further three with limited tailoring for women entrepreneurs or the unsecured working capital loans based on algorithms % of MSMEs that expressed respective satisfaction levels have a moderate focus on MSMEs. Four banks have a agricultural sector. Of the top eight commercial banks assessing behavioural data to judge credit worthiness low or no focus on MSMEs35. serving the MSME segment, only four offer specialized and disbursing loans via mobile money. Other fintechs products to MSMEs in, for example, the agricultural offer digital loan repayments or focus on the special The banking industry mainly lends to the construc- sector, and none offer specialized products to women- needs of MSMEs in the agricultural sector. 11% 13% tion and real estate sector (21 percent), households (18 owned businesses. percent) and trade and commerce sectors (17 percent), IFC’s survey shows that formal and informal businesses making up 54 percent of the loans from banks to the MFIs and MDIs are becoming important providers mainly choose a bank based on consistently good private sector. This is followed by the manufacturing of financial services to MSMEs. Credit institutions service or based on recommendations by other busi- sector (13 percent), agricultural sector (12 percent) and extended over UGX 420 billion ($115 million at the ness owners. Service and location are important factors community and social services sector (8 percent). The time) to MSMEs in 2019, while MDIs extended UGX when choosing a bank, and MSMEs also tend to choose transport and communication sector makes up 5 percent 367 billion ($100 million at the time) in loans to MSMEs the same banks that the customers of the business use. of total lending to the private sector and the mining and the same year38. Jointly this accounts for 34 percent of 76% quarrying sector makes up 4 percent36. the amount of credit extended to MSMEs by commer- Bank branches are the main method of connecting to a cial banks, which was approximately UGX 2.3 trillion bank, followed by bank agents and ATMs. Almost half Very unsatisfied Smaller, MSME-focused banks in Uganda have lower ($627 million at the time). Most of this lending was of respondents (49 percent) would consider opening a Unsatisfied efficiency ratios with high operating costs and high concentrated in the trade and agricultural sectors. savings or checking account via a mobile app or a bank Indifferent dependence on interest-bearing assets to cover over- agent, while only 11 percent would want to apply for a Satisfied heads37. A key contributor to this is the higher cost of MFIs use informal and underdeveloped credit scoring loan through a mobile app. Very satisfied serving MSMEs, more so on the lower end of the market, models with much of the lending approach being rela- due to a low uptake of digital channels.Leading banks tionship based. High operating costs result in high cost A large majority, 87 percent, of respondents are satis- focusing on MSMEs are, however, able to achieve to income ratios and low profitability. MFIs and MDIs fied or very satisfied (11 percent) with their current bank 35 Moody’s, Analytics Bank Focus, 2021; Financial reasonable overall values for cost to income, non-per- tailor their products to meet individual client needs. (see Figure 9), and 69 percent said they are likely or very Statements and Annual reports of Banks; Bank of Uganda, Financial Stability Report, June 2020 forming loans, and net interest margin. In general, However, generally they offer short term loans and agri- likely to recommend their bank to another business. 36 Bank of Uganda, Financial Stability Report, financial institutions that most successfully serve culture loans with limited leasing or gender specific The surest way to improve bank customer satisfaction June 2020 MSMEs offer well designed products tailored to the products. would be to reduce rates and fees. 37 Bank of Uganda, Working Paper No. 06/2018, What Explains High Lending Interest needs of different segments, level a degree of automa- Rates in Uganda, June 2019 tion to run efficient operations, price appropriately to Fintechs are not authorized to offer loans to MSMEs, 38 Bank of Uganda, Banking Statistical Abstract, 2019 cover costs and still remain competitive, incentivize however, they can partner with local mobile network Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 12 05 — Serving the MSME market in Uganda Conclusions and recommendations To fully realize the potential of Uganda's over one million MSMEs and their contribu- • Allow for the integration of the credit information system with other public databases tion to the economy, they need better access to finance. In order to increase MSMEs’ (i.e., business registration, insolvency, collateral registries, the National Identification access to finance in Uganda, public authorities and private sector actors can take several and Registration Authority (NIRA), utility companies and court records) approaches. For financial services providers in Uganda, this translates into an oppor- • Expand information sharing through onboarding of non-bank financial institutions tunity to build the MSME finance market and make a sustainable contribution to the that are not currently submitting information to the bureau. business community and the economy. • Support the adoption and usage of alternative data, including mainstreaming sharing of for example utility data with bureaus, for credit decision making and portfolio Measures to improve access to finance for MSMEs center around five areas that cut performance monitoring. across various dimensions that are necessary for MSME growth and development. Recommendations for financial institutions i. Addressing the quality and accessibility of credit information will support the • To actively work with the Bank of Uganda, Credit Bureaux and the Security Interest in ability of financiers to assess MSMEs’ creditworthiness. Movable Property Registry System (SIMPO) to provide capacity and increase aware- Lack of traditional and alternative credit information makes scoring of credit appli- ness and usage of these tools among existing and potential MSME clients. cants difficult, which adds to the real and perceived risk of lending to MSMEs. Similarly, • Support the adoption and usage of alternative data for credit decision making and collateral is a key barrier for MSMEs to access financing. This is due to the lack of owner- portfolio performance monitoring through the digitization of MSMEs and develop- ship of fixed assets as well as the lack of recognition of movable or alternative assets. ment of alternative data scoring models. Finding alternatives to traditional lending based on fixed collateral and creating the • Support the implementation of cashflow-linked agriculture risk assessment solutions regulatory and institutional frameworks to support such lending methods can enable for efficient assessment of agriculture lending risks that enable expedited lending MSMEs to access the resources they require to launch, operate, and grow their busi- decisions by financial institutions. nesses. An important step towards this is to improve awareness and usage of credit • Expand information sharing from non-bank financial institutions providing support to bureaus and the collateral registry. small lenders to adopt technology to digitize their operations and submit data to the credit reporting service providers (CRSPs) through shared loan management systems. Recommendation for government and public authorities: • Leverage fintech and innovative technology tools to support the development or deep- • Prioritize ongoing and planned projects to improve MSME credit information sharing. ening of secondary markets for movable assets (i.e. marketplace platform - mobile and This will support the financial sector to better serve the banking needs of MSMEs, web application); capacity building; marketing and consumer awareness. support value-chain development and inform business linkages. • Develop asset-based lending products such as invoice discounting and leasing. • Implement and enforce policy to report full file credit information to credit reporting service providers. Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 13 ii. Addressing informality will support access to finance for MSMEs as well as revenue collec- iv. Developing tailored financing products for MSME market segments can improve reach and tion for the government. sustainability. The large number of informal enterprises in the MSME sector are often not banked nor do they keep MSME product offerings are quite standard with limited segmentation, particularly for women entre- proper record-keeping processes in the form of financial accounts or audited financial statements. As preneurs and the agricultural sector. There is a need to design and implement new products based on a result, loan origination and assessment processes are costly or unviable. This is especially true with market needs. micro-entrepreneurs. Recommendations for government and public authorities: Recommendations for government and public authorities: • Develop more risk-sharing arrangements with financial institutions to increase funding to specific • Prioritize and enhance ongoing efforts to improve usage and uptake of the online one-stop-shop MSME market segments. center and registration process. Recommendations for industry associations: • Ministry of Finance to introduce tax incentives for MSMEs that could significantly reduce the cost of • Provide information to financial institutions on the product needs of MSMEs along parameters such compliance and encourage formalization. as industry, geography, asset size, turnover etc that can serve as a basis for financial institutions to Recommendations for industry associations: explore tailored products for such market segments. • Enhance ongoing efforts to provide business development services to MSMEs that include informa- Recommendations for financial institutions: tion on the benefits of formalization. • Develop tailored products and offerings for MSMEs, for both assets and liabilities offerings, as per Recommendation for financial institutions: the needs of key segments. • Work with public authorities, business associations and other relevant stakeholders to inform existing and potential MSME clients on the benefits of formalization. v. Improving the business services market in Uganda is crucial for MSMEs to access funding to grow their businesses. iii. Increasing innovation and efficiency in MSME delivery models will reduce cost of serving While Uganda has a vibrant entrepreneurial business community, there is a need for quality business the MSME sector: services to support Ugandan entrepreneurs to the next level. There are a number of business devel- High operational costs and inefficiencies prevent financial institutions from effectively serving the opment services (BDS) providers in Uganda, but awareness of such services by MSMEs is low. There is MSME market. Inefficiencies can be addressed along the customer journey, from marketing to loan also scope to improve the quality and depth of some of the BDS available to MSMEs. repayments. Recommendations for government and public authorities: Recommendations for government and public authorities: • To scale the reach and impact of capacity-building initiatives to create an enabling support network • Bank of Uganda to develop open banking regulations that support tech-integration and informa- of training institutions to provide customized training and mentorship programs for MSMEs. Key tion-sharing among financial institutions and DFS providers. areas of focus should be financial literacy, governance, and market intelligence. • Increase interoperability in the DFS system to encourage more competition and innovation. Recommendations for industry associations: Recommendations for financial institutions: • Raise awareness of existing public and private sector BDS services to MSMEs through sensitization • Explore non-traditional delivery channels and distribution arrangements and look into reaching campaigns in partnership with government and industry. MSME market through agent, electronic and mobile banking. This may include collaboration or part- Recommendations for financial institutions: nerships with fintechs or other non-traditional market actors. • To design appropriate non-financial services packages that will help to secure portfolios by building capacity of clients as well as serve as important marketing tools for financial products targeted at MSMEs. Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 14 06 — How the research was done This report is based on a survey of 833 MSMEs in Uganda conducted in the Central, Table 2.2: The IFC definition of MSMEs Western, and Eastern regions in April 2021, in combination with 20 stakeholder inter- Indicator/ Size of Medium-size views and desktop research of relevant reports and statistics. Micro Enterprises Small Enterprise the Enterprise Enterprise The MSME definition in Uganda includes all types of enterprises irrespective of Employees <10 10<50 50-300 their legal form (such as family enterprises, sole proprietorships, or cooperatives) Annual turn- or whether they are formal or informal enterprises. The Uganda National Bureau of <100K 100K- 3M 3M -15M over (USD) Statistics (UNBS) has adopted a categorization of enterprises based on the fulfilment of the minimum requirements of the following criteria: 1) number of employees, and Total Assets <100K 100K<3M 3M-15M 2) annual sales turnover. The table below shows this official definition by the UNBS39: (USD) MSME loan Table 2:1: The Uganda National Bureau of Statistics definition of MSMEs <10K 10K-100K 100K – 1M or 2M size proxy Indicator/ Size of Medium-size Micro Enterprises Small Enterprise the Enterprise Enterprise This report uses a combination of the above two sets of definitions to categorize Annual turn- enterprises by size. The definition of MSME size categorized by employee numbers <10M 10M-100M 100M – 360M takes the UNBS definition of micro enterprises but sets the upper limit of the defi- over (UGX) nition of medium enterprises to be in line with the IFC definition. There is a large Annual turn- <3K 3K- 27K 27K -97K disparity between the two sets of definitions for the annual turnover criteria. To over (USD)* bridge this, the IFC definition by turnover was scaled down using the price level ratio Employees 1-4 5-49 50-99 of PPP conversion factor (GDP) to market exchange rate (34.8 percent). Thus the following definitions by number of employees and annual turnover was used to cate- 39 Ministry of Trade, Industry and Cooperatives (MTIC), Uganda Micro, Small and Medium The World Bank and IFC have the following global definition of MSMEs based on gorize MSMEs in this report. Enterprise (MSME) Policy - Sustainable number of employees, annual sales turnover, total assets and loan size proxies for MSMEs for Wealth Creation and Socio- Economic Transformation, June 2015 *Average micro, small, and medium-size enterprises. exchange rate in 2019 of 1 USD = 3,705 UGX and rounded off to the nearest thousand. Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 15 Table 2.3: Definition of MSMEs used in this report Indicator/ Size of Medium-size Acknowledgements Micro Enterprises Small Enterprise the Enterprise Enterprise This research study was supported by the Foreign, Commonwealth & Development Annual turn- Office (FCDO). IFC commissioned Genesis Analytics to conduct this study and to < 120M 120M – 3.5B 3.5B – 20B over (UGX) collect primary data. The team would like to extend special thanks to Tito Gachuhi Annual turn- Tibi and Ndodzo Mawela from Genesis Analytics as well as Wael Makki, Matthew < 35K 35K – 1M USD 1M – 5M over (USD) Leonard, Dan Kasirye, Anita Nabirye Mwandha, Amena Arif, Sanjay Kalpage, Vivian Owuor, Luz Maria Salamina, Collen Masunda, Janet Opolot, Tim Ferber, Sinja Buri, Employees <5 5 - 49 50 - 300 Sten Te Vogt, Anna Koblanck and Elena Franchi at IFC for their valuable input and feedback during the project and for this publication. The survey sample was skewed towards MSMEs that are more formalized and larger in size (40 percent were micro-enterprises; 44 percent small firms; and 16 percent were medium-sized firms). There were more male-owned firms (57 percent) than women- owned businesses (43 percent), and about two thirds of proprietors were between 30 and 49 years old. The sectors most prominently represented in the survey sample were wholesale and retail trade (14 percent), other service activities (14 percent), accommoda- tion and food services (10 percent), agriculture (10 percent), manufacturing (9 percent), and health services (9 percent). The survey covered up to 300 questions on topics such as business performance, financial services, and financial literacy. Additionally, in-depth interviews were held with 20 stakeholders representing the public, private, financial and NGO sectors to corroborate data and deepen under- standing of the MSME market context. Stakeholder interviews covered topics such as how MSME policy priorities are translating into actions that benefit MSMEs, feed- back that stakeholders are receiving from MSMEs on the support they need to access finance, and the benefits and challenges MSMEs encounter when working with finan- cial services providers. Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 16 Acronyms DEFINITION DEFINITION ACF Agricultural Credit Facility MDI Microfinance Deposit Taking Institution BDS Business Development Services MFI Microfinance Institution BoU Bank of Uganda MSME Micro, Small and Medium Enterprises CIIP Competitive Industry and Innovation Program NFS Non-financial services COVID-19 Coronavirus 2019 PE Private Equity DFS Digital Financial Services PPP Purchasing Power Parity EU European Union SACCO Savings and Credit Cooperative Organization FI Financial Institution UBOS Uganda Bureau of Statistics GDP Gross Domestic Product UGX Ugandan shilling GIIN Global Impact Investing Network UNBS Uganda National Bureau of Statistics GoU Government of Uganda UNCDF United Nations Capital Development Fund ICT Information, Communication and Technology USD United States Dollar IFC International Finance Corporation VSLA Village Savings and Loan Associations IMF International Monetary Fund Market Bite Uganda - Challenges and opportunities for MSME finance in the time of COVID-19 IFC Market Bites IFC Market Bites is a series of reports based on comprehensive market assessments conducted by IFC’s Financial Institutions Group to provide market knowledge and support financial inclusion in Africa. www.ifc.org Contact IFC Uganda IFC Financial Institutions Group IFC Applied Research & Learning Anita Mwandha Sanjay Kalpage Sinja Buri Country Officer Senior SME finance specialist Market Research Coordinator amwandha@ifc.org skalpage@ifc.org sburi@ifc.org