A look at the 'access to credit finance'- dilemma in Uganda
Updated: Jan 6, 2022
TOPIC: Why you/your Small-Medium business (S.M.E) alongside 70%+ of Ugandans' may find it difficult if not infuriating to access credit finance locally.
At one point in time, most of us find ourselves in situations where our own cash is not sufficient to meet our needs or those of our businesses. Be it to address a personal issue such as tending to a loved one’s hospital bill, paying a child’s school fees so he/she can sit that exam, bailing out a friend in trouble or ourselves when in uncomfortable predicaments among many others or be it a business need such as financing an order (better known as a Local Purchase Order-L.P.O) or being short by say Ugx. 500,000 to close a ‘hot business deal’, offsetting due salaries of your beloved workers that have been patient enough, securing equipment to boost your productivity…you name it!
However, as is known by most of us, gaining access to credit beyond your best friend and family in Uganda can, more often than not, prove to be a rather daunting and draining task that rarely gets you the finance you seek and even when it does; usually not in time for you to execute your intention!
Ofcourse there are several reasons for this including the fact that, without a doubt and spoken with 1st hand experience and as a financier and business person myself, most of our local financers have a whole slew of requirements and costs that most entrepreneurs and individuals simply do not have access to... or atleast ready/easy access. And many times even where one has these requirements, then the process itself leading to acquiring the finance becomes the problem characterized by very unconcerned communication between the financier and the client, a less than transparent requirement disclosure that results in new items popping up mid-way the process that leave the client trapped in between perhaps because these also require more cash to avail; all among quite a number of other weaknesses! This is especially the case with the larger financiers such as commercial banks and yet these are the very ones from whom one is most likely to get the lowest interest rate which is key for successful loan repayment. After all they are, indeed, at the top of the Tier of credit finance in the country, that is, Tier 1 of 4 and so typically with the largest capital portfolios which therefore allow them spread their risk and costs furthest thus allowing them afford a comparatively low interest rate…or should allow them to. A real pity this is given, indeed, there are simply too many genuine Ugandan entrepreneurs and business people with brilliant business ideas, plans and on-going concerns that haven't yet taken off simply due to a lack of access genuine impact-driven finance. Even more pitiful that many of these have given up on their dreams because of this dilemma; all the loss of our beloved country. Our commercial banks are simply but an example; this really is an industry-wide problem.
However, more on that later. Today I am here to have you know (if you didn’t already) that there are simply two most important factors that will determine whether or not or how easily you access that credit you seek across the credit Tiers in Uganda.
The first of these two factors is:
1. Cash flows or your revenue streams.
I am certain most expected me to start off with collateral...
...but on the contrary and as made hard to believe by the tainted image given to the industry by bad actors, just as important as a borrower’s collateral is to a financier if not even more, one’s cash flows/revenue streams are. This is because ultimately it is the income you earn fairly stably that shall enable you repay the credit loan you seek. This is what cashflow is all about, simply;
YOUR CASH IN - YOUR CASH OUT=NET CASHFLOW/INCOME per day/month/year etc
Whether this balance is positive(+) or negative(-) is in the details.
Intentionally sounding cliché, taking out a loan with negative, zero or insufficient income is as good as jumping out of a plane with no parachute! :_)
You WILL fall except not into instant death but instant debt. It may take a while but it’ll surely come unless you have the luck of the gods :-). Be it personal revenue streams such as your salary, an inheritance that pays you regularly (If those actually exist in Uganda :-), a government pension that actually arrives etc or business revenue from direct operations of your business, cash flow is the first factor for you to look at when considering credit.
An understanding of your (documented) cash flows also helps a professional financier understand how best to ‘structure’ your loan. That is, an individual or business reliably earning a net disposable income of Ugx. 500k (after taking off common expenses such as tax, rent, transport, accommodation, the 'life of the party' and savings ofcourse) would therefore have no business taking out a loan structured to have him repay the financer monthly instalments of anything more than Ugx. 500k. More on loan structuring another day.
Therefore an understanding of your cash flow helps a professional financier and yourself structure your loan most favorably. i.e. establish the maximum sum that can be loaned to you or your business, optimal interest rate, time period and therefore repayment frequency; that is should the borrower pay Ugx. X each month or each quarter or perhaps every 6 months. E.g. a quick computation here tells me that if a borrower, earning a relatively stable net disposable income of Ugx. 400k a month, approached a financier seeking Ugx. 20m, this would safest be possible if this financier can afford to structure this loan such that the borrower repays across 20 years at an annual interest rate of 20% in monthly installments of atleast Ugx. 350k. Such deductions are not possible without knowledge of your cash flows...or any cashflows on that note.
Having cash flows however is not enough, having DOCUMENTED cash flows is the ultimate move. You don’t want to find yourself trying to convince a financier that you earn money but have no record of this cash; no bank statement, mobile money statement or even the cash itself because it was probably all spent as it came!
Even if you are on a mission to blow away your earnings all in one day or have no intentions of ever taking credit, do yourself (and the financier) a favour and have it documented by passing it through your bank or mobile or crypto accounts. You’ll be grateful you did.
2. The second key factor is Collateral or commonly referred to as security
Collateral is the backbone of credit finance business. The only financiers that will avail you credit without some form of security are your best friend, your family and yourself and I’ll dig alittle deeper into that in my next sharing.
Collateral is to a financier what your National/student ID is to a librarian...even though that might not be the strongest analogy. A financier lending you without collateral should be able to find quicker ways of throwing away his/her cash! :-)
Most financers will loan a borrower anything between 40-60% of the value of their collateral so be sure that the collateral you present for consideration is not only registered in your names but also fits within this loan-to-value range. If you are seeking a Ugx.20m loan, be sure to have collateral worth atleast Ugx. 50m.
Common kinds of collateral accepted by financiers in Uganda include vehicles, land titles and high end electronics and gadgets such as smart phones, smart T.V’s and personal computers, savings and for more technical lenders with more established borrowers; even cashflows themselves can be acceptable, insurance policies, L.P.O's, stocks and bonds.
Land/real estate and vehicles are the strongest form of collateral in Uganda (easiest acceptable) in that they hold a lot of value while electronic gadgets are often the quickest in terms of loan processing although they don’t hold much value and so allow borrowers access only to alittle loan cash. Ultimately vehicles are the best type of collateral for one seeking a quick loan with minimal hustle especially where they are willing to park the vehicle. Land tends to have a lot of encumbrances among other things that could go wrong and so financiers tend to take their time appraising land securities despite their strength.
Where collateral is not registered in your names which is common among vehicle owners, you shall need to have the person whose names appear on the title deed present at time of processing the loan…or have it transferred to your names.
Much as we all hate it, the fact is collateral is necessary to provide the financiers an alternative way of recovering their funds loaned to you in the event you totally fail. I say "totally" fail because despite being the image given to the entire credit finance industry, disposal of a borrower’s collateral is not and should not be the first option to a lender upon day 1 default by a borrower. It is not even legal as there is a process meant to be followed by financiers from the first day of default to the date of actual sale and this often takes anything between 2-6 months depending on the TIER of operation. Most borrowers do not know this and often are victim to unscrupulous lenders. However, what many borrowers also do not know or realise is the fact that each day spent in arrears damages your ability to borrow again in the future thanks to a little system known as the Credit Reference Bureau (CRB) or financial card as is better referred to. This tracks all past and present loans an individual or company are responsible for and analyses their repayment performance so as to inform future lenders of the 'quality' of the borrower being considered. However, not all financial institutions/tiers employ the service of the CRB/apply the use of a financial card. It is most common with commercial banks and Microfinance institutions. (Tier 1-3). So think about this the next time you may hesitate to pay against your loan installment despite having the ability to :-)
So there you have it. I could go on and on with this and perhaps already have so let me take a break with these finance matters. There are definitely several other requirements most financiers especially the larger ones up the TIER will ask of you but ultimately, hear it from me if not the first financier you approach; absence or presence of the above two stripped requirements shall determine whether or not you should invest time and resource pursuing credit finance (a loan).
Key take aways:
1. Documented cash flow is key. Keep proper cash flow record, that is, every single shilling that comes your way and that you spend preferably through a bank or mobile account. You could also employ the use of budget apps to help with tracking your spendings and incomes. At the end of each day or week or month, reconcile your bank/mobile statement with the transaction records stored in your app to know exactly where you money is going and coming from and how much in control you are of it.
2. Collateral is a must. Invest in your asset portfolio. Buy some gadgets, buy a vehicle or land when you can, build that asset base; it just might come to you or your business’ rescue someday.
Alright then. Peace out.
#thatfinanceguy #finablr #EnablingFinanceLimited
Oh one more thing, incase you're ready to try doing it differently this year with your financial ambitions but have no idea where to start, do check out some of these interesting resolutions from our friends at Bankrate