Financial services and financial performance of small and medium enterprises in Uganda : a case of Kampala Capital City

Abstract

The general objective of the study was to examine the relationship between financial services and financial performance of SMEs in Kampala Capital City. The specific objectives of the study were; (i) to examine the relationship between credit services and financial performance, (ii) to establish the relationship between investment services and financial performance, and (iii) to investigate the relationship between saving services and financial performance of SMEs in Kampala Capital City. The study considered a correlation research design considering a quantitative research approach. The study targeted 381owners of SMEs but 278 managed to respond back hence showing 73.0% response rate. Data was collected using a questionnaire. Spearman’s rank correlation analysis was used to examine the relationship between the independent and dependent variables. The study revealed that there is a moderately positive and significant relationship between credit services and financial performance of SMEs in Kampala Capital City (r = 0.423, N=278, P-value=0.000) at a 0.01 level of significance. Furthermore, credit services were positive significant predictors of financial performance by 21.6% (Adjusted R Square = .216, p<0.05) with β value (.451**). The study also revealed that there is a moderately positive and significant relationship between investment services and financial performance of SMEs in Kampala Capital City (r = 0.449, N=278, P-value=0.000) at a 0.01 level of significance. Furthermore, investment services positively and significantly predicted the financial performance of SMEs by 17.4% (Adjusted R Square = .174, p<0.05) with β value (.276**). The study further revealed that there is a moderately positive and significant relationship between saving services and financial performance of SMEs in Kampala Capital City (r = 0.477, N=278, P-value=0.000) at a 0.01 level of significance. Furthermore, savings services were the highest significant predictor of financial performance of SMEs by 25.2% (Adjusted R Square = .252, p<0.05) with β value (.409**). Additionally, over financial services with the constructs of (credit services, investment services and saving services) combined influenced the financial performance SMEs in Kampala Capital City by 31.4% (Adjusted R Square = .314, p<0.05) with β value (.206*). The study concluded that effectiveness and efficiency in the financial services (credit services, investment services, and saving services) significantly influences the financial performance of SMEs in Kampala Capital City. The study recommended that SMEs owners and financial institutions need to sit down and make a comprehensive assessment of the existing credit services. There is need to iron out challenges and barriers faced by businesses in accessing credit channels, such as complexities in loan application processes, affordability of interest rates, and removing the physical collateral requirements. It was also recommended that financial institutions need enhance their communication and educational outreach efforts to businesses regarding the diverse investment options available and lastly, it was recommended that banks focus on improving transparency and create more awareness about their savings products, ensuring competitive interest rates, and facilitating more open communication with businesses regarding negotiated terms.