Commercial bank lending terms, financial literacy and access to formal credit by small and medium enterprises in Uganda

Abstract

The study was prompted by the low access to formal credit by Small and Medium sized Enterprises (SMES) in Uganda. The reason of this study was therefore to establish the relationship between Commercial bank lending terms, Financial literacy and Access to Formal Credit by SMEs in Uganda. To achieve the above purpose, a Cross sectional and quantitative research design together with the descriptive and analytical research designs were used in this study. The study population included all Small and Medium sized enterprises(SMEs) operating in Kampala district. Simple random and proportionate stratified sampling methods were used to select samples used in the study. Self-administered questionnaires were used to collect data from SMEs owners and managers. Data was collected from 384 respondents which was analysed using SPSS 17.0 (Statistical Pakage for Social Scientist) The study found that commercial bank lending terms and Access to formal credit were significantly positively correlated. Hence an improvement in the commercial bank lending terms would lead to increase in access to formal credit. It was also found out that financial literacy and Access to formal credit were significantly positively correlated hence increased finance literacy would lead to increase in access to formal credit. The study also recommended that commercial bank lending terms such as collateral requirements and interest rates should be improved by commercial banks. In addition, commercial banks should continue educating SMEs managers and owners about financial matters.