Internal controls and access to commercial loan financing for small scale enterprises in Uganda

Abstract

The main financial challenge facing small and medium enterprises (SMEs) is access to affordable credit over a reasonable period. Despite the financial reforms aimed at improving SMEs, access to finance to improve their performance and growth, access to finance for SMEs remains a recurrent problem. This is even more pronounced for commercial loan financing and as long as banks apply the same lending principles to SMEs as to big firms, small businesses will be deprived of key access to finance. The structure and management of majority of SMEs is less developed with weak internal controls making the availability of information for risk analysis by the banks and micro-finance lenders inadequate. This research therefore led to an argument that the inherent weaknesses in the internal control structures of SMEs deny them access to commercial loan financing. SMEs in Uganda, suffer from constraints that lower their resilience to risk and prevent them from growing. Findings of the study indicated that the soundness of the various internal controls was a significant predictor for access to commercial loan financing. More specifically firms with sound asset control and an independent review stood a better chance of accessing funding. It was thus recommended that; SMEs work on setting up or improving their preventive and detective internal controls and risk management systems while ensuring that the installed systems are appropriate to their size and organizational complexity in order to improve their chances of accessing the much desired capital. Key words: Soundness, internal, controls, access, loan, financing, small and medium enterprise (SME).

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