World Bank, (2018a) define Financial Inclusion (FI) as the process by which all households and businesses regardless of income level have access to and can effectively use the appropriate financial services they need in order to improve their lives. CFI, (2018) also defines Financial Inclusion as a state at which individuals access a full suite of financial services at affordable prices, in a convenient manner and with respect and dignity. Such services has to be availed in a responsible and safer manner to consumers and sustainably provided in an appropriately regulated environment (Demirguc-kunt,Klapper, Singer and Oudheusden, 2015). Global and national level policy makers are taking up financial inclusion as an important development agenda and the priority it deserves. For example the G20 included financial inclusion as a main pillar at the 2009 Pittsburg Summit (Cull, Ehrbeck and Holle, 2014). There are four dimension of financial inclusion namely; access, quality, usage and welfare (Aguera, 2015). At a macro level, financial inclusion can result in to a diversified base of deposits creating a resilient financial system and increased stability (Garcia, 2016). IMF revealed that within a country’s level, financial inclusion is affected by the limitations arising from numerous macroeconomic outcomes which includes stability, equality and economic growth (Sahayet al… ,2015). Information and communication technology has greatly improved digital financing. The delivery of financial services through digital means of service provision has been increasingly emphasized by governments, development partners and service providers themselves as a good step towards financial inclusiveness (Gabor and brooks, 2017). The provision of services like mobile banking has provided with easy an electronic transfer payment to the financially excluded people and this method can help reduce theft, financial crimes related to cash transaction and reduce the risk of loss. Digital financing appears to be a better solution to those financially and socially excluded (GSMA, 2017).
Financial Inclusion Alliance (FIA) , (2018) states that the usage of Smartphone’s and broadband internet are now important for supporting access to secure and affordable financial services such as money transfers, credit and saving, payments both domestic and international. Alaxandre and Eisenhart(2013) observes that mobile technologies has provided a true imperfections of the finance. The development and the adaptation of digital innovations through partnership for financial inclusion would accelerate the delivery of financial services. Improved financial inclusion propels and plays a vital role in promoting access to credit, use of mobile and automatic teller machine (ATM), savings and easy access to payments (Dorfleitner and Roble, ,2018). The high increase in financial inclusion can be associated with increased investment level, employment opportunity, higher income level and lower poverty level and that economic growth can only be sustained if a good number of people have access to formal financial services (Umar, 2013). In order to increase financial inclusiveness to majority population financial service providers should lower down the costs of operating accounts, particularly citizens from rural areas (Eton, Mwosi, Ogwel, Edaku and Obote, 2018). There are high transaction costs in lowly populated areas coupled with rigid and complex methods of assessing the risk profile of clients in rural areas and these has been a challenge for the formal financial institutions with a business model to sustainably offer adequate and effective financial services to rural populations (FAO, 2016a).
Across-country evidence suggests that at a macro level, the financial institutions have developed a wide range of products and services being offered with a greater outreach and depth, this can reduce inequality amongst the population and increase economic growth and development (Sarma and Pais, 2011). Similarly Martinez, (2011) establishes that financial inclusion helps to increase the pace of inclusive growth and development which has to be sustainable with effective and efficient distribution mechanisms of scare resources for the wellbeing of the society. CBN, (2012) observe that financial service mobilizes greater household saving, leverage capital for investment and expands the class of entrepreneurs. Such financial services may include Loans, overdraft, Pension, insurance services and modes of payments. Sharma, (2016) notes that access to and usage of financial services has proved to be a major driver to economic growth and development. According to (Damodaran, 2013), financial inclusion helps to channel the flow of money in the economy so that both the rich and the poor access it with ease. Financial inclusiveness at household level may support more effectively the macroeconomic policy frameworks. IMF, (2018b) establishes that financial inclusion at a household level is associated with higher revenue and expenditure of Gross Domestic Product and it would equally increase the size of the fiscal multiplier and therefore would indicate that the output elasticity to interest rates will be higher for the countries with greater household financial inclusion. FI therefore covers cost effectiveness and meaningful financial services for those who are under privileged and those who find it a challenge to access financial services and most of them are rural dwellers. Ibor, Offiong and Mendie, (2017) argues that much efforts should be made by all stakeholders to increase financial access points to more rural areas and develop infrastructural services which promotes financial inclusiveness. Government should also develop policies for expansion of financial services to those who are financially excluded in rural areas.
Small Medium Enterprises
Aga, Francis and Rodriguez-Meza (2015) posits that SMEs are described as nucleus to economic growth and development and are major sources of employment.(Palmarudi and Agussalim, 2013; Kamunge, Njeru and Tirimba, 2014) also notes that SMEs are major players in economic growth and development since it provides employment opportunities to citizens and this increases their household income. However, (Turyakira & Mbidde, 2015) cites inadequate research on SMEs’ contribution in networking, which influences competitiveness a long side limited resources. Rahman (2015) demonstrates that networking among SMEs, in addition to increasing competitiveness allows sharing of employee training costs, cuts costs on consultancy and R&D, production, export and human resource and financial support. While (Breda & Fahy, 2011) does not find causal links between networking of resources combinations, information sharing and international performance, their research supports a positive relationship between a firm’s human capital network and international performance. Most SMEs operating in Sub Saharan Africa and in Uganda in particular are faced with many challenges, which affect their operations and long-term survival. It’s noted that the business failure rates are alarming with very few businesses surviving for a year of their operation. Kazimoto, (2014) opines that governments should support SMEs by ensuring that they play their roles in helping them improve their economies.
The stronger the countries’ economies the bigger are the opportunity for the citizens of those countries. Kongolo, (2010) posits that globally SMEs operate in similar way have the same characteristics and face almost the same challenges but differ in their understanding of how they contribute to economic growth and development. Hatch and Cunliffe, (2012) observes that most of the African SMEs are operating in a highly hostile and difficult conditions compared to their counterparts in a more developed economies of the world. Olawale and Garwe, (2010) establishes that SMEs in Africa finds various obstacles in doing businesses due to unfavorable business conditions arising from unrealistic requirements like higher taxes, higher inflation rates, fluctuation and unstable exchange rates therefore making it very difficult for their operation. Ocioo, Akaba and Worwal-Brown, (2014) observes that SMEs are faced with the challenge of competition and globalization. Globalization ushered in technological changes where new products are being developed and this therefore creates stiff competition within the SMEs sector. Egesa, (2010) notes a correlation between technological uptake and a higher business failure rates in Uganda. Notably, the constraints SMEs are faced with could also include weak operational capabilities and limited resources (Sok, Snell, Lee, and Sok, 2017) and particularly in Africa with higher challenges such as technology, innovation, and human capital are a big obstacle to business enterprises (Akeyewale, 2018).
The study conducted by Tinarwo, (2016), also established that some of the challenges hampering the growth of SMEs were stiff competitions, lack of markets, unfair treatment exhibited by local authorities and lack of government support, inadequate information and communication technology and training, which has greatly affected most of our SMEs. Dugassa, (2012) establishes that inadequate training and market size has been a major challenge amongst the SMEs in the region. Lack of training makes the SMEs to produce substandard products, which eventually affect the marketing of their products. Therefore, training of the SMEs would help sort out these mess and solve such a challenge. Katua, (2014) argues that government should open up institutions specifically to support the training of entrepreneurs that would offer them relevant skills that would improve on the performance of SMEs. Sempala and Mukoki, (2018) observes that there is need to train enterprise owners, managers and other operators in order to equip them with the relevant skills and knowledge specially those tailored towards impacting various business management practices. Eton, Okello-Obura, Mwosi, Ogwel, Ejang and Ogia, (2019) argues that training institutions should strengthen the information and communication technology training programs by a aligning them to the required job demands as dictated in the field of business.
Gombarume and Mavhundtse, (2014) posits that SMEs had the challenge of accessing cheaper loans from the formal financial institutions and this has been a limiting factor in the growth sector. Inadequate access to cheaper credit is recognized world over as a major challenge facing SMEs and these therefore constraints the growth of the existing SMEs. Shah, Nazir, Zaman and Shabir, (2013) opines that it’s very difficult to access financial services from formal financial institutions due to their unrealistic demand for collateral; loan guarantees securities and high interest rates. Prohorovs and Beizitere, (2015) posits that access to finance and financial services has been some of the major factors constraining the growth and development of SME. Fowowe, (2017) establishes that the inadequacy of capital is believed to be one of the major factor affecting SMEs to reach their full potential. Credit availability is very significant for the growth and survival of SMEs (Eton, Mwirumubi and edaku, 2017). They also revealed that policy makers should advocate for financial sector policies that supports financial intermediaries that design relevant products and services for SMEs which are flexible and affordable and thus creating favourable environment that supports creativity and innovation. Government should avail funds to SMEs at low interest rates since SMEs are the driving force in the economy which should be supported (Taiwo, Temitope and Agwu, 2016)
The cost of electricity is abnormally higher in Uganda as compared to other countries in the region which affects the SMEs businesses (Turyahikayo, 2015). The increasing cost of electricity eventually affects the price of the products where the consumer bares the final burden. Reliability of electricity is also a challenge in doing business in Uganda, business owners complain a lot and until now no substantial answer can be given. World Bank, (2010) establishes that electricity is still a challenges faced by SMEs in Africa followed by access to capital. Enterprises in Uganda are still small with limited resources at their disposal and they are left with only option of leveraging on the synergy of resources to complement each other. Fujita and Thisse, (2013) observes that accessibility of resources and their availability to SMEs can help them maximize the benefit and market share as a result of economies of scale as well as internationalization. Sorasalmi and Tuovinen, (2016) argues that SMEs are confronted with diverse challenges which include technological knowhow and hostile business environment that affects their survival as compared to developed economies. Kamukama, (2013) observes that technological advancement is growing at a faster rate and therefore SMEs should recognize and appreciate technology to compete favorably in the market. The success of any SMEs would depend on the ability to innovate in order to meet consumers taste and preferences and this will increase market coverage, which means a firm may have competitive advantage over others (Idris, 2016). The level of competition is increasing on daily basis therefore, SMEs need to be creative and innovative and focus on improvement of their products and services, quality, quantity, and this would motivate employees (Farrokhian and Soleimani, 2015). SMEs with effective technological capabilities can easily adapt to the changing market environment whose consumer tastes and preference are rapidly changing (Ajonbadi, 2015). According to Murrithi, (2017) the study establishes that inadequate information is an obstacle facing SMEs in Africa and this challenges affects Uganda as well. The information related would include marketing, laws regulating to their operations and any other information, which can be of help to their businesses. Eton, Mwosi, Mutesigensi and Ebong, (2017) argues that information is critical since financial institutions would want information related to personal characteristics and credit worthiness of information on guarantors which are very essential in giving out loans. Based on the above, researchers have established that SMEs have failed to achieve their long-term targets in the economy. For example, (Ali, Rashid, & Khan, 2014) establishes a negative impact of small-scale industries on poverty output in Pakistan. They recommended simplification of lending procedures, enforcement of credit rights and reduction in credit costs. Beck, Demirguc, & Levine (2003) demonstrates that SMEs are not robust in reducing poverty. The authors could not establish a causal link between SMEs growth and poverty. The growth impact is rather spread across both large and small firms. Similarly, (Straka, Birciakova, & Stavkova, 2015) show that the argument for SMEs contribution to household income is a relative one in Pakistan. Households’ opinion that SMEs contribute to standards of living depends on the environment in which households live and work.
Financial Inclusion and Small Medium Enterprises
Financial Inclusion (FI) refers to a change in ones mindset as an economic agent on how to see money and profit and aims to eliminate any barrier in accessing and utilization of financial services and this is supported by the existing infrastructure. Its noted that more than half of the world economic challenged adults do not have bank accounts and this therefore leave them vulnerable to exploitation, theft and this results in to heavy losses (World Bank, 2012).Promoting FI in a global perspective would widen economic inclusion and this will improve on the financial condition of the population and thus uplift the standard of living of those disadvantaged SMEs who are financially excluded (Khan, 2011). Financial inclusiveness would encourage the sustainability of SMEs through enhancing their access to cheaper sources of finance which would be vital in supporting their growth (Batance et al…..,2018). The intermediation between savings and investments with efficient financial inclusion are most likely to improve the efficiency of SMEs and facilitate a better financial system (Aduda and Kalunda, 2012).While we have noted that under utilizing capital is one of the causes of growth constraints amongst the SMEs, they are very important in the investment strategy and expansion of small and macro enterprises amongst the rural therefore increasing financial inclusiveness of the citizens (Aldaba, 2011).SMEs are financially constrained and the relaxation of credit constraints or accessibility to finance amongst the SMEs compared to larger firms will most likely lead to employment and the gains in the labour productivity therefore contributing to economic growth and development (Ayyagari et al., 2016).Its observed that the establishment and growth of SMEs will lead to employment and labour productivity across the country which leads to access to formal finance. World Bank, (2018) also notes that the gains found from implementation of policy reforms geared towards boosting the growth of SME by establishing credit bureaus across the country will improve financial inclusiveness of the citizens. Beck and Cull, (2014) observes that financial inclusiveness is significant for the growth of SMEs in sub-Saharan Africa.
There are various factors that affect the level of a country’s financial inclusiveness and financial development, including the quality of the formal financial institutions, availability of relevant information, income per capita, governance and the regulatory framework (Park and Mercado ,2015). Most SMEs in Sub-Saharan Africa do not even attempt to apply for a bank loan due to challenges of complicated collateral requirements, high interest rates, and complicated documentations. UNIDO, (2015) opines that the cost associated with capital transaction is always too high which greatly affect the performance of SMEs. World Bank, (2016) establishes that high concentration, weak competition and the prevalence of public ownership in the financial intuitions are specifically some of the key constraints in financing SMEs. Financial inclusiveness supports the principle of financial stability which provides a strong risk management and financial facilities. It would also close the financial inclusion gap within the SMEs and these can bring a significant gain in the growth. However a very low financial inclusion in the region suggests important untapped potential for the growth of increased access to finance by SMEs. Popov and Rocholl, (2016) posits that increased constraints to financing during recession may put more pressure on employment by SMEs than by large firms. Kazimoto, (2014) observed that governments and other stake holders should therefore avail financial facilities and access to finance at a reasonable interest rate and use up to date information and communication technology in business and marketing and these can be through improved network and training. Legas, (2015) establishes that SMEs in Africa face a lot of challenges and among them includes financial inclusion, non-favorable laws, regulations, and poor infrastructure, which affects the growth of SMEs. The government should take the responsibility of providing SMEs with a conducive environment for their growth and development, seeking for international and local opportunities for its SMEs, develops fair and encouraging policies and making it easy for SMEs to access financial facilities at a fair and affordable rate (Fariza, 2012).