Credit eludes local investors

By Umaru Kashaka

Access to credit continues to be a challenge to domestic investors in Uganda with more than 70% of firms financing their investments through retained earnings, according to the investor survey report for the 2012/2013 financial year, MPs have said.

This is contained in the national economy committee report on the performance of the economy during the financial year 2012/13 that was adopted by the House recently.

Legislators further noted that the noticeable weak link between private sector credit economic growth implied that credit is predominantly channeled to consumption rather than production.

“Despite largely favourable investment conditions, it’s possible going forward that investment may decline and affect economic growth; this will stifle economic recovery,” the committee chaired by Buliisa County MP, Stephen Mukitale, warned.

They said Uganda’s economy had shifted from public to private sector investment, but high lending rates and low credit availability had stifled private sector and household investment, causing focus to shift more upon cost reduction and lesser risk exposure.

“In order to boost the real economy, bank business models should be modified to increase services to small and medium enterprises (SMEs) as the availability of financing and leasing facilities are not available to them,” they stressed.

Industrial growth, the committee noted, is highly concentrated to the public construction subsector, with the exception of electricity production meaning other subsectors are registering minimal growth.

During the financial year 2012/13, real GDP growth grew at 5.8%, mainly driven by services (6.5%) and industry (6.8%) sectors.

They said growth, which had been broad based with largest contributions coming from telecommunications, construction, services and manufacturing, had recovered with a stronger than expected rebound from its lowest levels in a decade of 3.4% in financial year 2011/2012.

“Aggregate demand has been boosted by an increase in net exports, while aggregate supply has benefitted from the expansion of electricity generating capacity and better agricultural harvests,” they stated.

Legislators said a pickup of private sector credit, although skewed towards foreign currency lending to large firms, also contributed to the recovery of the economy.

“In contrast, domestic currency lending stagnated because of a combination of high lending rates and structural factors, including the closure of the Land Registry, which administers the land titles needed for loan collateral,” they remarked.