SME banking - Unlocking the growth potential of an underserved segment

Small and Medium-sized Enterprises (SMEs) are an important segment in Uganda’s economy. According to the Ministry of Trade, Industry and Cooperatives, the SME sector employs over 2.5 million people (90% of the entire private sector) and generates 80% of manufactured output which contributes 20% of the gross domestic product (GDP).

Even though SMEs play a significant role in the economy, most have limited access to financing.“Less than 40% of SMEs in Uganda have access to bank loans and approximately 80% of the SMEs are unserved or underserved by financial institutions. SMEs are typically deemed riskier than large corporations due to lack of credit history, poor financial backing and governance structures, less business experience, and low business diversification,” explained Lilian Lwantale (pictured above), senior manager Advisory, Strategy and Operations Deloitte Uganda Limited.

Today, these needs are inadequately addressed by Uganda’s financial ecosystem. Although the SME loan size is growing, the amount of loans SMEs receive is still disproportionately less than corporates despite their more significant contribution to gross domestic product (GDP) and employment. The current state of SME financing remains both a sizeable gap to fill and opportunity to serve. SME loan volumes in Uganda constitute less than 20% of total loans, presenting a sizeable opportunity for banks to target and increase lending to the SME market.

Lack of financing is consistently cited by SMEs as one of the main barriers to growth. However, several key factors impede SME lending. “Financial infrastructure such as low SME coverage by credit reference bureaus increases the cost of SME credit risk assessment, inadequate distribution channels limit banks from reaching out and serving SMEs in either the physical or digital space- not to mention lack of cash flow visibility which forces banks to adopt stringent collateral-based credit risk models hindering lending,” she emphasized.

These impediments are not unique to Uganda but also prevalent in more advanced economies where SMEs have easier access to loans. In those countries, we see banks, financial technologies (FinTechs) and e-commerce providers seeking to fill the SME financing gap by adopting innovative business solutions. So what opportunities are ripe for Uganda’s case study?

“Research shows that there is a disparity between what SMEs want and expect from banks and what banks can deliver. They require access to unsecured credit and are willing to pay a higher interest rate to obtain it through reliable, convenient channels such as branches, ATMs, and internet banking. At Deloitte, on top of providing SMEs with financial oversight, we offer business advice on how to lower their business costs, improve productivity and be better prepared for the global market,” Lwantale added.

Lwantale further mentioned that in the advent of the digital age, financial institutions in Uganda have to rethink the role of banks in the SME banking space to address the financing gap and capitalize on the SME banking opportunity.

“Given the importance of SMEs to Uganda’s economy, a strong well financed SME base is key to local and regional economic growth. With sufficient financing and access to business advisory services to foster continual improvement of operational efficiency and productivity, SMEs can become more competitive and resilient, drive innovation and be sustainable in today’s competitive economic landscape.”