Business Featured

SMEs in Uganda’s oil sector struggle with high interest rates and capacity barriers

Ronald Aheebwa (not real name) recently secured a contract to supply 80 chickens per week for a 10-month period to feed oil workers in Uganda’s Albertine Graben.

However, with only 400 chickens and lacking the resources to expand his business to meet his contractual obligations, he had to forego the opportunity.

This situation highlights the challenges faced by many small business owners in the oil-rich Bunyoro sub-region who aspire to participate in the oil and gas industry but lack the necessary capacity to supply goods and services in this capital-intensive sector.

One major obstacle for these entrepreneurs is the high interest rates on commercial bank loans and the requirement for collateral security, making it difficult to access credit for business growth.

According to a recent study by Financial Sector Deepening (FSD) Uganda, 74% of Small Medium Enterprises (SMEs) struggle to secure financial credit.

The World Bank’s 2015 report also noted that the country’s banking system does not favour Small and Medium Enterprises (SMEs), and lending institutions consider oil and gas industry suppliers to be risky.

As a result, some businesses, like Aheebwa’s, which secured contracts, have opted to transfer them to larger companies with the necessary capacity.

Aheebwa lamented, “I gave up on the loan after being tossed up and down. The bank asked for so many documents as well as collateral, which I did not have.”

Other factors hindering local participation in the oil sector include meeting industry-specific standards and understanding how to prepare bids.

The recent Final Investment Decision (FID) reached by oil companies in February 2022 is set to inject $10 billion into the Ugandan economy, including a refinery, a multi-purpose pipeline, and a crude oil export pipeline from Hoima district to Tanzania.

The Petroleum Authority of Uganda (PAU) aims to retain 40% of this investment through national content.

With thousands of people expected to flock to the oil-rich Albertine region during oil production, there will be a significant demand for services, including foodstuffs, Information and Communication Technology (ICT), logistics, building materials, among others.

Experts believe that local business participation will boost competitiveness and increase Uganda’s Gross Domestic Product (GDP) by 20%, creating job opportunities for thousands of people.

Geofrey Beraheru, an educationist in Hoima City, emphasises the need for a local bank offering loans at low interest rates, as high interest rates are a major obstacle for local businesses.

He suggests that the government should facilitate access to credit by removing limitations on credit granting by commercial banks.

The issue of limited access to loans is exacerbated by high interest rates resulting from the government’s local borrowing through the Bank of Uganda (BoU) to fund the national budget.

Dr. Lawrence Bategeka, an economist, suggests that the government should primarily borrow internationally or from the central bank, ensuring that the private sector is not crowded out by government borrowing.

“Lower interest rates would encourage more lending to local businesses,” he added.

Uganda faces a budget deficit, where it can only collect a portion of its budget through taxes, further contributes to high interest rates on loans.

Currently, Uganda’s commercial lending rate to businesses stands at 20% per annum.

Foreign-dominated firms often have the upper hand over local SMEs due to their countries of origin incentivising credit.

The lack of a locally owned bank for oil exploration has made it difficult to secure financing for crucial projects.

Local businesses need formal contracts and advance payments to access credit, which is often lacking.

Delayed payments from main contractors further exacerbate the challenges faced by local subcontractors.

While some local contracts have been awarded, foreign banks operating in Uganda are seeking new foreign currency deposits to take advantage of lending opportunities in Uganda’s oil sector, as well as the rollout of the African Continental Free Trade Area (AfCFTA).

The Government of Uganda has initiated a project to enhance the capacity of SMEs targeting businesses along the East African Crude Oil Pipeline (EACOP) route, funded by the African Development Bank (ADB).

Stanbic Business Incubator Limited (SBIL) and other partners are working to build the capacity of Ugandan enterprises to compete for contracts in the oil and gas sector.

To address these challenges, experts suggest that the government should revive national banks, elevate and capitalise tier-one banks, and increase access to banking services in underbanked rural areas.

Individual responsibility and collateral, such as land titles and houses, are seen as essential for benefiting from the oil and gas sector.

Leave a Reply

Your email address will not be published. Required fields are marked *