Factors that Influence Lending to Small and Medium Business by Commercial Bank in Uganda: A Study of Arua Municipality

Abstract

The purpose of the study was to assess factors that influence lending to small and medium businesses by commercial banks in Uganda, a case study of Arua district. The research was guided by the following objectives: to determine the influence of firm’s characteristics on SMEs access to credit in Arua, to determine entrepreneur’s characteristics on SMEs access to credit in Arua, to establish the influence of financial characteristics on SMEs access to credit. A descriptive research design was employed to gather quantifiable information through use of open and close-ended questions. The target population was 200 SMEs in agriculture sector that have been in operation for more than 3 years. Stratified random sampling was used to select a sample size of 67. Pearson correlation and regression analysis was done to determine the influence of independent variables on the dependent variable.

The findings on firm characteristics and access to credit revealed that majority of the respondents agreed that size of a firm and location affects access to finance and older firm (more than 3 years) have more experiences of applying for loans than younger firms below 3 years. Credit does not enable SMEs to meet their expansion plan. The findings on financial characteristics and access to credit revealed that respondents agreed that they have adequate book keeping records hence easy access to credit and audited financial statements and lack of collateral affects access to finance. Financial institutions are more reluctant to provide long term finance to SMEs and credit does not have a positive effect on business performance and growth. The findings on entrepreneur characteristics and access to credit revealed that banks prefer women to men when issuing credit. Use of networking does not influences access, groups/cooperatives to finance use of political ties and level of education / training does not influence access to finance.

The study concluded that Banks prefer lending to women than men, access to finance is not influenced by networking, applying as a group, political ties, level of education and training and skills entrepreneurs have. It is recommended that financial institutions should develop products that will target SMEs located in rural areas. Awareness should also be created. Through this SMEs will be encouraged and motivated to access credit from financial institutions.