Free Access | June 2001

Credit accessibility and investment decisions in Uganda's manufacturing sector: an empirical investigation

Authors/Editors: Marios Obwona ,  Adam Mugume

Abstract:

The phenomenon of credit rationing andits consequences for the investment decisions is undoubtedly one of the topical issues, particularly in developing economies. This study sets out to examine the impact of credit accessibility on investment decisions in Uganda's manufacturing sector. Based on demand and supply surveys on credit allocation and using investment equation, credit investment ratio and probit model, the study hinges on the problem of information asymmetries and agency costs in investment financing. The proposition of the study analysed is that there is sectoral discrimination in credit location and that credit accessibility has impact on investment decision across the sectors. The study sheds light on the financing constraints and the subsequent policy implication. The results provide ample evidence that firms are rationed in their access to credit. Small firms and firms in agricultural sector find it most difficult to get loans from financial institutions because agency, information, enforcement and transactions costs are higher. Firms require high profits to compensate for the risks. The fact that firms typically pledge more collateral than the value of the credit they receive emphasizes the role of enforcement considerations on the part of lenders. Ugandan owned firms appear less likely to obtain credit than firms that are foreign owned. This is partly due to the fact that most banks are foreign owned and there is an element oftrust and social interaction that supplement physical collateral and therefore play a central role in the credit market. Perhaps, one of the major policy observations is that the Treasury bill rate has increasingly become a benchmark for other interest rates suggesting that monetary policy could have significant impact on real sector through interest rates. However, credit rationing and weak financial sector weaken this transmission mechanism.