Access to debt finance and its determinants in Uganda : an empirical investigation of small and medium-sized enterprises (SMEs)

The main objective of this research was to investigate the extent of access to debt finance and its determinants among SMEs in Uganda using the “Applied and Received” approach (ARa). In addition, supplementary to the main research objective, the thesis had two subsidiary objectives; firstly, to examine the effect of measuring access to debt finance by comparing two approaches, the “Received” (Ra) and “Applied and Received” (ARa), to the extent and determinants of access to debt finance. Secondly, to examine if there are significant differences in the way SMEs and financiers perceive effective lending rates, transaction costs, firm age, firm size, industry, financial transparency, collateral, education, entrepreneurial experience and gender as determinants of access to debt finance. To achieve the main objective and two subsidiary objectives, a survey was conducted based on a population of 128,000 SMEs, out of which a sample of 384 was considered appropriate, according to random tables by Sekaran and Bougie (2013). From the financiers’ side, a population of 25 commercial banks, 22 insurance companies, 50 registered trade credit suppliers and a sample of 10 credit service bureaus, 10 MFIs and 10 SACCOs were used for the purposes of this study. The response rate was 57% from the SMEs and 62% from the financiers. In terms of analysis, the extent of access to debt finance was examined using descriptive statistics. In addition, Pearson’s correlation coefficient was employed to determine the relationship between access to debt finance and its determinants and binary logistic regression analysis was used to determine the strength of the relationships between access to debt finance and the determinants. Overall, the model explained up to 73.3% of the variation in access to debt finance. Finally, the independent samples t-test was used to determine if there were significant variations and consensus between SMEs and financiers with regard to the determinants of access to debt finance. The findings of the study contribute to the literature in a number of ways; first, the conventional measures (“Received”, “Loan size” and “Frequency of acquisition” approaches) have understated the extent of access to debt finance, while the “Applied and Received” approach (ARa) is a superior measure of the extent of this among SMEs in Uganda. This is because the ARa focuses on active borrowers and not discouraged borrowers or those SMEs that have voluntarily excluded themselves from external credit. Second, the study provides empirical evidence of the determinants of access to debt finance for the first time in Uganda where such evidence was previously unknown. Third, the study documents significant differences in the perceptions of the determinants of access to debt from the SMEs and suppliers of debt finance. However, the ARa has limitations; for example, the degree to which discouraged borrowers can be excluded is open to debate. This is because, unlike voluntary excluded borrowers (not seeking funding at all), discouraged borrowers want debt but do not seek it because they think it will not be granted. The most important implication of this research to policy makers and academics is the methodology of operationalising access to debt finance using the ARa. This approach deals with voluntary exclusion and reports higher rates of access to debt finance compared to the Ra, which helps policy makers to estimate the financing gap among SMEs in Uganda. Likewise, the ARa includes additional determinants of access to debt finance variables, which suggests that SMEs seeking finance are aware of the factors that financiers consider in the credit scoring process. Secondly, for SMEs and financiers, the findings concerning the consensus and variations in the determinants of access to debt finance are of great value to educate policy makers on the information gap existing between the demand and supply sides. Knowledge of the determinants of access to debt finance from the financiers’ side will improve access among SMEs in Uganda because financiers play a pivotal role in the issue of this finance.