Determinants of choice of credit providers among small and medium enterprises in Uganda: a case study of Iganga District

Abstract

Unquestionably, access to credit is essential for the profitability and sustainable growth of the small and medium enterprises (SMEs). The purpose of the study was to ascertain the determinants of choice of credit providers among SMEs, a case study of Iganga district with a view to establishing a coherent model directed at improving SME access to finance. The study adopted the correlational design and intrinsically it was hypothesized that age and trading/borrowing experience of the business, collateral and interest rates positively influence choice of credit providers by SMEs with the financial life cycle theory used in conceptualizing this relationship. The study used a respondent sample of 130 SMEs operating in Iganga whose owners were the unit of enquiry. The Pearson Rank correlation coefficient and regression analysis were used for data analysis. The findings revealed strong positive correlation between interest rates, collateral requirements for credit acquisition, age/trading experience and the access to credit by retail SMEs in Iganga. The correlation coefficients were 0.601, 0.600 and 0.644 respectively. The results also indicated that age/trading experience of the SMEs influences the type of credit provider highly since a unit increase in age and trading/borrowing experience of the business improves credit financing access of SMEs by 0.274 units, which is averagely 0.1 units higher than collateral (0.191) and interest rates (0.177). Correspondingly, in view of the latter observation and the realization that financial needs for small businesses change as they grow- and gain experience, the study recommends that financiers need to organize regular and comprehensive financial literacy programmes that target the growth-specific operations of SMEs. Financial literacy programmes about the benefits of asset financing, hire purchase, the importance of financial cards, regular bookkeeping and financial statement analysis, among others, would be beneficial in that regard. These programmes should in principle enhance their ability to access credit and apply it suitably.