A borrowing cost model for effective performance of SMEs in Uganda
| DOI | https://doi.org/10.1108/WJEMSD-03-2014-0009 |
| Published date | 11 May 2015 |
| Pages | 74-89 |
| Date | 11 May 2015 |
| Author | Sulait Tumwine,Richard Akisimire,Nixon Kamukama,Gad Mutaremwa |
| Subject Matter | Strategy,Business ethics,Sustainability |
A borrowing cost model for
effective performance of SMEs
in Uganda
Sulait Tumwine
Faculty of Vocational and Distance Education,
Makerere University Business School, Kampala, Uganda
Richard Akisimire and Nixon Kamukama
Department of Accounting, Makerere University Business School,
Kampala, Uganda, and
Gad Mutaremwa
Jinja Study Centre, Makerere University Business School, Kampala, Uganda
Abstract
Purpose –The purpose of this paper is to develop an effective cost borrowing model of qualitative
factors that are relevant to micro and small enterprises (SMEs) better performance.
Design/methodology/approach –A valid research instrument was utilized to conduct a survey
on 359 SMEs (131 retail businesses, 125 service businesses, 48 farming businesses and 55 other
businesses) and 897 respondents that are representative of 397 SMEs and 1,087 respondents.
Correlation and regression analysis were conducted to ascertain the validity of the hypotheses.
Findings –It was established that cost of borrowing elements (interest rate and loan processing costs)
are associated with SME performance. Furthermore, cost of borrowing as a whole accounts for 31.1
percent of the variation in performance Uganda’s SMEs.
Research limitations/implications –Only a single research methodological approach was
employed, future research through interviews could be undertaken to triangulate. Multiple
respondents in SMEs (owner, manager and cashier) were studied neglecting others. Furthermore,
the study used the cross-sectional approach –a longitudinal approach should be employed to study the
trend over years. Finally, cost of borrowing was studied and by the virtual of the results, there are
other factors that contribute to SME performance that were not part of this study.
Practical implications –There is need to intensify initiatives to encourage greater understanding
and acceptance of cost of borrowing, select appropriate elements that includes interest rate and loan
processing costs in order to have affordable source of financing to establish and grow SMEs, provide
employment, competitive and contribute to countries GDP.
Originality/value –This is the first paper in Sub-Saharan Africa to test empirically the relationship
between cost of borrowing and performance of SMEs in the Ugandan context.
Keywords Performance, SME, Cost of borrowing, Interest rate, Loan processing fee, Membership fee
Paper type Research paper
1. Introduction and motivation
Micro and Small Enterprises (SMEs) dominate the business sector in Sub-Saharan
Africa accounting for 60 percent of the total number of enterprises (Nuwagaba, 2012).
In Uganda, the business sector has since 1990’s to-date gained a commendable
8 percent growth per annum contributing 28 percent to Uganda’s GDP and to its
growth by 37 percent (Uganda Bureau of Statistics (UBOS), 2013; Nuwagaba,
2012). According to Nkundabanyanga et al. (2013), Kakuru (2008), Kazooba Charles
(2006), SMEs constitute over 60 percent in low-income countries and account for
41 percent of economic growth in Sub-Saharan African countries for a period between
World Journal of
Entrepreneurship, Management
and Sustainable Development
Vol. 11 No. 2, 2015
pp. 74-89
©Emerald Group Publishing Limited
2042-5961
DOI 10.1108/WJEMSD-03-2014-0009
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2042-5961.htm
74
WJEMSD
11,2
1998 and 2010 while the industry sector contributes 25 percent, service sector
30 percent and the agriculture sector 17 percent. Therefore, for Sub-Saharan African
countries and Uganda in particular to grow, they need to put emphasis on the business
sector especially SMEs because in addition to their GDP contribution, they create
employment to the skilled, semi-skilled and the unskilled labor, need lower investments
and offer a method of ensuring a more equitable distribution of national income leading
to economic growth and development (Kakuru, 2008). They also increase on national
establishment that enables customers get goods and services easily and at reduced
prices because of market competition and competitiveness though the service
and manufacturing sectors benefit countries in terms of trade preferences and
secondary goods (Kazooba Charles, 2006). Despite the great importance attached to
SMEs, they face a challenge of accessing capital to finance their establishment due
to the high cost attached when it comes to borrowing. This hampers their emergence
and eventual growth (Stiglitz and Weiss, 1981).
The main sources of capital for SMEs is mainly retained earnings, informal savings
and loan associations, which are unpredictable, not very secure and have little scope
for risk sharing because of their regional or sectoral focus (Enterprise Uganda, 2012).
Access to formal finance by SMEs is difficult because of the high risk of default,
poor guarantees, lack of information about their ability to repay loans as well as
inadequate financial capabilities (Stiglitz and Weiss, 1981).
Like other developing countries, Uganda’s, SMEs operate with limited capital cited
in the lack of access to finance as a significant constraint on their operations
(Nuwagaba, 2012). This is often associated with financial policies and bank practices
that make it hard for banks to cover the high costs and risks involved in lending
to small firms. Financial institutions that lend to SMEs have registered high
administrative costs in loan processing and monitoring and yet the return is
low because of small amounts borrowed as well as high risks and default rate since
these business enterprises do not have collateral securities (Kuang, 2008). This has
resulted in financial institutions shifting the burden to SMEs by way of increasing
interest rates, monitoring costs, membership fee to access finances which has affected
their performance. As a result, SMEs find them trapped into vicious cycle of poor
financial performance brought about by high production costs because they operate
on little capital (Kalyango, 2012; Ortiz-Molina, 2007).
The purpose of this study is to develop an effective cost borrowing model of qualitative
factors that are relevant to SMEs better performance. This was necessary because
the financial constraints SMEs are facing (low sales, high production costs and limited
asset base) emanating from limited capital that has resulted into poor product quality,
limited output and market and closure because of competitive pressure. In addition,
understanding the nature of the costs SMEs meet in financing their businesses
is important to management research since it focusses directly on to the costs ought to be;
for better performance (Enterprise Uganda, 2012). Coupled with this, attempts by scholars
have focussed on financial intermediation (Kamukama, 2013), supply and demand factors
for credit (Kakuru, 2008), cause of business failure (Kazooba Charles, 2006) but none of the
studies has provided a suitable cost borrowing model that SMEs and micro finance
institutions (MFIs) can adopt to enable their growth and better performance.
The paper is organized into five sections and begins with the brief overv iew of
the research study followed by the theoretical reviewed related literature and
hypothesis, methodology, results and discussions, summary and conclusions,
and lastly research implications, limitations and suggested areas for further research.
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Performance
of SMEs
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