The Effect of Bank Credit on Performance of Small and Medium Enterprises Case Study of Kampala District

Abstract

This paper looks at the effect of bank credit on the performance of small and medium sized enterprises in Kampala. The research builds from the fact that the following objectives are looked at critical to arrive at relevant analysis; the effect of bank credit on the performance of Small and Medium size enterprises in Kampala, the sources of finance for SMEs in Kampala, the factors inhibiting SME’s access to bank credit/loans in Kampala and suggest solutions.

In carrying out the research, the methodology of the research was made up of the research design which was descriptive, and quantitative data was collected using open and closed ended questionnaires. The target population was that of the small and medium sized entrepreneurs in Kampala with a sample size of 60. The data analysis made use of tables and bar charts, which helped show how effective bank credit is on the performance of small and medium sized enterprises in Kampala, mainly to the SMES in Nakawa, Katwe and Kajjansi. The findings or results indicated that, bank credit greatly improved on the profits of the business. Lack of sufficient capital also was noted as being the cause of poor performance of SMES. Lack of sufficient capital did stand out a factor leading to poor performance of the SMES in Kampala and many people feared to get loans due to the fact they lacked collateral security and also the payment became very difficult. Low savings due to low income earned caused the fear to show the financial statements since this was not enough to meet up to the high loans the business wanted and it was established that gender was a factor that determined access to credit because the numbers were skewed towards women. It is however important to point out that age was not a factor in considering one for credit.

Various studies and literature put forward the fact that vigorous provision of credit to various entrepreneurs could help to boost their businesses and consequently eradicate poverty and therefore bring about growth in the economy.

Definition of key concepts

•Finance: A branch of economics concerned with resource allocation as well as resource management, acquisition and investment. Simply, finance deals with matters related to money and the markets, to raise money through the issuance and sale of debt and/or equity.

•Entrepreneurs: This refers to a person/entity who uses scarce/available resources to bring into existence a product or service that was not in existence or makes better changes on what was existing.

•Bank credit: The borrowing capacity provided to an individual by the banking system, in the form of credit or a loan. The total bank credit the individual has is the sum of the borrowing capacity each lender bank provides to the individual.

•Loans: A loan is a financial transaction in which one party (the lender) agrees to give another party (the borrower) a certain amount of money with the expectation of total repayment. The specific terms of a loan are often spelled out in the form of a promissory note or other contract. The lender can ask for interest payments in addition to the original amount loaned (principal). The borrower must agree to the repayment terms, including the amount owed, interest rate and due dates. Some lenders can also assign financial penalties for missed or late payments.

•SMEs: According to the OECD Observer, (2000), SMEs are defined as non subsidiary, independent firms which employ less than a given number of employees. This number varies across national statistical systems. The most frequent upper limit is 250 employees. According to (Obed. B. T 2013) a small enterprise is an enterprise employing a maximum of 50 people; annual sales/revenue turnover of maximum, Ushs 360 million, while a medium enterprise is an enterprise employing more than 50 people, annual sales/revenue turnover of more than Ushs 360 million and total assets of more than Ushs 360 million.

•Entrepreneurship: According to Hisrich,D. Peters. S, (2009) entrepreneurship is the process of creating something new with value by devoting the necessary time and effort, assuming the accompanying financial, psychic, and social risks, and receiving the resulting rewards of monetary and personal satisfaction and independence.

•Investment: An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

•Funding: Funding refers to providing financial resources to finance a need, program, or project. In general, this term is used when a firm fills the need for cash from its own internal reserves, and the term 'financing' is used when the need is filled from external or borrowed money.

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