The Executive Director of the Federation of Small and Medium Enterprises, John Walugembe, has said small and medium enterprises (SMEs) in Uganda continue to face major barriers to accessing affordable financing, forcing many entrepreneurs to rely on fast but costly money lenders.
Walugembe said the main challenge for micro, small and medium enterprises lies largely on the supply side of financing, where strict lending requirements and lengthy approval processes by formal financial institutions make it difficult for businesses to access timely credit.
“We must first look at the barriers that limit access to finance, especially from the supply side,” Walugembe said, noting that improving bookkeeping among SMEs alone will not solve the sector’s financing gap.
He explained that in the past, commercial banks were reluctant to lend to small businesses due to the lack of reliable credit information on borrowers. This changed with the establishment of credit reference systems, which helped financial institutions better assess risk.
According to Walugembe, the introduction of credit reference bureaus helped improve lending conditions in Uganda by providing banks with borrower credit histories.
In recent years, he said, new lenders have emerged using alternative data such as mobile phone usage and utility payments to determine creditworthiness.
These digital lenders analyze records such as phone activity and payments to service providers like the National Water and Sewerage Corporation** to assess a borrower’s ability to repay loans.
“This assumption is that if someone regularly pays their utility bills and uses services consistently, they are more likely to repay a loan,” Walugembe said while appearing on NBS morning Breeze Show
Despite these innovations, many SMEs still rely on Tier 4 financial institutions such as money lenders and informal microfinance operators for quick financing.
Walugembe acknowledged concerns raised by president Museveni over exploitative practices by some money lenders, but said their popularity reflects the slow processes within mainstream banks.
“People go to these lenders because of speed,” he said. “If a business person urgently needs money, they cannot wait three or four months for approvals and paperwork from formal banks.”
He noted that while money lenders provide quick access to cash, some impose unfair conditions, including agreements that effectively allow lenders to seize borrowers’ assets.
Walugembe urged commercial banks to learn from the convenience and speed offered by informal lenders while maintaining professional lending standards.
He also highlighted the growing role of mobile phone-based financial services, which he said provide a middle ground between the speed of money lenders and the regulation of traditional banks.
Beyond the supply side, Walugembe said SMEs must also address demand-side challenges, including poor repayment culture among some borrowers.
“There is a culture where some people take loans but do not want to repay,” he said, adding that improving financial discipline among entrepreneurs is essential to strengthening trust in the lending system.
Looking ahead, Walugembe said expanding financial products such as Islamic banking and insurance could further increase financing options for small businesses and support the growth of Uganda’s SME sector.