Why local capital is our strongest catalyst for Uganda’s SMEs to grow

Aisha Namuddu operates a whole grain store in Kasangati, where she buys and sells maize and coffee from various traders near and far.

For the past two years, her business has been growing steadily since the coffee prices became favourable for farmers and traders. But recently, demand outpaced her supply, and she urgently needed a Shs 80 million working capital loan to purchase a large-scale coffee huller and increase her stock accordingly.

She approached three banks, but each asked for collateral she doesn’t have: a land title in an urban area or registered machinery. The few loan offers she received came with interest rates above 60 per cent per annum, which was impossible to absorb without risking the survival of her business. Aisha’s story is not unique.

It echoes across Uganda, where vibrant small and medium-sized enterprises (SMEs) and micro and small enterprises (MSMEs) form the bedrock of our economy. They contribute an estimated 70-80 per cent to our GDP and support the livelihoods of so many in our private sector workforce.

Their potential for meaningful impact is immense. Yet, this engine often sputters, constrained by a persistent challenge: access to appropriate finance. The World Bank estimates Uganda’s SME finance gap at a staggering US$4.7 billion. While our commercial banks play a role, with SME lending reaching approximately Shs 6.3 trillion by the end of 2022, the reality is that traditional debt, with its high interest rates and stringent collateral demands, remains out of reach for many promising enterprises.

What Uganda needs now is a bold shift toward mobilizing local capital to support scalable growth for SMEs like Aisha’s. This means tapping into the Shs 20 trillion currently sitting in our pension funds, Shs 4 trillion in collective investment schemes, and the assets held by high-net-worth individuals across the country.

Today, less than 2 per cent of pension assets in Uganda are invested in SME-focused vehicles. We must do better. This underutilization is a missed opportunity — not just for SMEs, but for investors themselves.

With the right technical support, credit guarantees, or blended finance structures in place, Ugandan SMEs offer some of the highest return potential relative to risk. The problem is not a lack of capital.

It is a mismatch between available capital and investable vehicles that meet the risk profiles of institutional investors. If even a small fraction of pension and fund manager portfolios were allocated to SME-friendly financial products, it would unlock billions in domestic growth, create tens of thousands of jobs, and insulate the economy from the vulnerabilities of external financing.

This mismatch is precisely what we at SHONA Capital are working to address. We’ve seen firsthand that local capital can and will move when there is a structure and a trusted partner. In our recent partnership with Cornerstone Asset Managers, we secured $500,000 (Shs 1.84 billion) from local investors, backed by the Kuo Sharper Initiative, to invest in local SMEs like Aisha’s.

This is proof of what’s possible, and we intend to build on this momentum and partnership to mobilize at least $10m over the next 5 years. We, local investors, often possess a deeper understanding of the domestic market nuances, leading to more contextually relevant support and potentially more patient capital.

What’s needed now is leadership from fund managers, pension boards, regulators, and policymakers to prioritize mechanisms that enable local capital to work as the oil for Uganda’s entrepreneurial engine. The case for local capital is not merely economic it’s strategic.

It creates jobs, strengthens Uganda’s internal markets, and aligns with the government’s policies. More importantly, it places the power of economic transformation in the hands of Ugandans.

The author is CEO, SHONA Capital