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5.8 So far so good in Uganda: Enterprise solutions to poverty

Guest post by: Shell Foundation

Article Overview: While both SME energy funds are still young, the pace of capitalisation in Uganda has been very rapid, indicating interest in the market and an encouraging depth of demand. UEF will be fully committed before the end of 2005 – well before the original close-out date.

5.8 So far so good in Uganda: Enterprise solutions to poverty

While both SME energy funds are still young, the
pace of capitalisation in Uganda has been very
rapid, indicating interest in the market and an
encouraging depth of demand. UEF will be fully
committed before the end of 2005 – well before
the original close-out date.

For UEF, out of more than 160 deals closed, nonperforming
investments are running at 2% and no
write-offs have yet been made. The expected net
return on investment of 20% on a portfolio of
deals ranging from $10,000 to $400,000 (in
Ugandan shillings) is, of course, well above the
original 5% return first anticipated.

The financial viability of the fund in Uganda has
led to direct and indirect developmental returns. For
example, 80 enterprises have received some form of
BDA in addition to the more than 160 receiving
finance so far. And an independent audit of nine
sample enterprises revealed these alone have created
386 jobs. And interestingly, despite deliberately not
having a renewables-only criteria, a majority of
UEF deals involve renewable energy sources.

Real time adaptation of the model

While the UEF’s performance is pretty solid for a
pilot, operational experience revealed aspects that
could be improved to lower costs and risk. For
example, UEF mainly offered lease finance as it
was a product that ‘worked’ for both Ugandan
entrepreneurs and our banking partner.52 But we
found that on its own, lease finance did not
provide sufficient capital or flexibility to meet the
needs of SMEs.

Second, it soon became clear it was not cost
effective for the bank operating the fund to make
large numbers of small lease deals. But increasing
the deal size was not an option because SMEs were
the target market. So we experimented in using an
intermediary to carry out business development
and part of the credit assessment role. This was
feasible where we found SMEs operating in the same
sector – dried fruit, mushrooms and honey – since
all had similar finance and BDA requirements.

So in one case, a fair trade purchaser of dried fruits
– a company called Fruits of the Nile – took on
part of the bank’s role because it already had
commercial relationships with hundreds of the
farmers our SME fund wanted to reach. This
innovation significantly lowered unit costs and in
effect greatly increased the portfolio size less than a
year after launching the fund.

Third, though our local bank partner adapted well
to the aspects of our model, the bank’s asset-lending
culture and incentive structure combined to reduce
the potential value of the BDA component and
constrain the growth potential of the funds.

Related Articles
  4.0 What are Small Scale Enterprises?: Entrepreneurship and Small Business Enterprise Growth in Uganda
  6.0 Propositions and conclusion: Enterprise solutions to poverty
  9.0 Conclusions: Entrepreneurship and Small Business Enterprise Growth in Uganda
  6.3 Come Together: Enterprise solutions to poverty
  1.15 Building an employment agenda: Working Out of Poverty

Article Tags: BDA, lease deals, lease finance, SME, UEF, Uganda



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