Evaluation of Factors Affecting Credit Flow from Banks to SMEs in Uganda

Abstract

We contribute to the existing literature on SMEs credit conditions in developing countries by investigating the structure of the SMEs lending market in Uganda with the aim of understanding the factors that influence the main aspects of credit demand and supply. The study makes use of SMEs micro data from the World Bank Enterprise Survey. We conclude that credit demand and supply are positively affected by the level of capital financed by internal funds or banks. Firms that report falls in sales may find it harder to apply for loans, and they are also more likely to be charged higher interest rates on loans. Banks’ profitability affects their decision to supply credit and their lending terms and conditions. GDP growth rate positively affect credit demand but it tends to have a negative effect on aspects of credit access and its terms and conditions. The findings of this study could be linked to a significant number of similar African countries as well as provide an opportunity to compare and contrast with the other studies from developed countries.

Keywords Credit, Supply and demand, Bank market power, Bank profitability, Uganda