Why green enterprises struggle to thrive

Local Green Enterprises consist of informal and formal Micro, Small and Medium Enterprises and Social enterprises that are using green business models, developing green products or greening their business practices.

They exhibit gender equity, social inclusiveness, cleaner production technologies, climate resilience and environmentally friendly businesses, In Ugandan context, the list of green MSMEs includes enterprises dealing in renewable energy such as solar equipment, batteries, accessories, installations and repairs; waste treatment, management and recycling, provision of environmental and energy consulting services, among other.

One of the key issues and main barriers affecting local green enterprises in Uganda is access to affordable financing for expansion, maintenance and even starting a business, especially for local green entrepreneurs. The key factor that accounts for this challenge is the high cost of credit indicated by the high interest rates imposed on borrowed capital. Whilst the Bank of Uganda attempts to lower its Central Bank Rate to trigger commercial bank to lower their interest rates, the expected response by the latter is never realised. Indeed, a recent publication by the Bank of Uganda indicates that due to pressure to contain domestic demand while accommodating and supporting economic recovery, the Central Bank kept the central bank rate unchanged for the second time in a row at 10 percent on February 6.  The lending rates by commercial banks have been stuck at a high average of 19.2 percent, according to a report by National Planning Authority.

The non-responsiveness of commercial banks is due to the high overhead and operational costs faced by financial intermediaries and the high domestic borrowing by government, which triggers increases in the interest rate. The persistence of high interest rates is also attributed to high risks and uncertainties faced by commercial banks in lending to MSMEs and the limited availability of long- term capital.

Besides interest rates, the other factors that undermine financial access by local green enterprises include: Low levels of financial literacy in terms of financial management thus falling short on credit worthiness; high collateral requirements for accessing financing which local green enterprises lack most of the time; informality of several local green enterprises, especially in the agriculture sector which hampers their ability to benefit from formal support rendered by government to formal MSMEs. While there are barriers to access to finance, there are also instances of limited demand or underutilisation of the available financial resources by local green enterprises.

In terms of ranking the above challenges, the high interest rate is the most important as it affects all green MSMEs across the board including those in the formal and informal categories, financial literacy comes second because it impedes full access to existing financial products and services, high collateral requirements comes third which even affects those that are able and willing to pay the high interest rate yet lack the required collateral requirements, in fourth position is the issue of registration, especially in collective member organisations, local governments and tax bodies to evade paying taxes and licences. Lastly, informality also curtails access to finance and credit. Informality is largely driven by low financial literacy and lack of exposure to Business Development Services, among others.

Innovatively, local green enterprises can get financing through contract financing to implement some of their business activities, in this financing mechanism, once a local green enterprise gets or wins a contract from a client, it uses the contract to acquire a loan from the bank at a cheap and affordable interest rate without providing collateral security. The bank then does due diligence to check the credit worthiness of the client before issuing the loan to the Local Green Enterprise.

Mr John Okiira, Research Officer, Advocates Coalition for Development and Environment