Home » Uganda’s predictable business failures.  What lessons?

September 30, 2022    By Robert Katuntu


“12,000 Schools on Sale Over Loans” proclaimed The New Vision headline on 30 September 2022.   The newspaper reported that one of the affected entrepreneurs lost a school valued at UGX5billion (USD1,320,000) after failing to clear a five-year loan of UGX1.6bilion (USD430,000)   

To service this loan at a typical interest rate of 22% per annum, the school located in Buyangabu district in western Uganda, would have to pay the bank UGX44 million (USD11,600) per month!  In addition, the school would have to generate sufficient cash flows to cover operating expenses including staff salaries, utilities and food. 

A business with such fixed contractual cash commitments, would be hard-pressed to survive even the slightest disruption to its plans.  The Covid19 induced school closures, was a catastrophic event for most schools.  Predictably, those schools that had taken on significant debt were particularly impacted.

Businesses in Uganda were vulnerable long before Covid19.  Depending on who you believe, any where up to 90% of businesses started in Uganda fail before their fifth anniversary.  Distressing!

Yet, faced with a rapid population growth rate, a receding public sector and consequent skyrocketing unemployment, Ugandans have little choice but to venture into entrepreneurship.

What lessons should nascent business owners take from these heartbreaking events?

  • Debt is not your friend.  It is a bad idea to use debt in lieu of shareholders’ capital, particularly in high interest markets such as Uganda.  Another name for debt is leverage; it magnifies a business’ strengths and weaknesses.  Because many businesses have a very weak equity base, their weaknesses are magnified by taking on inappropriate debt.
  • Stop paying lip service to SME funding. If indeed SMEs are the backbone of Uganda’s economic development, we ought to address the issue of appropriate SME finance.  It is not tenable for SMEs to rely on expensive debt finance as their primary source of finance.  Debt is designed to complement, not replace owners’ equity.  Many of the solutions proffered by policy makers in Uganda revolve around (affordable and accessible debt).  This is inadequate and merely postpones the day of reckoning as we are currently witnessing.
  • Uganda is a high-cost business environment. In addition to the implicit costs, business plans should incorporate hidden costs of doing business including bureaucratic delays, infrastructural dysfunction, unfair competition and tax shocks.  Murphy’s law states that “if anything can go wrong, it will”. 
  • Business ideas should be broadly researched and stress-tested before execution.  Business plans tend to be overly optimistic and are often based on hearsay (so and so is making a lot of money from their business, so I will also start a similar one).  The reported cash balances may be debt driven sales and not profits!
  • Business is a profession.  To increase the likelihood of success, one must have access to the requisite skills and competencies.  The fastest way to lose money is running a business as a “side hustle”, without due regard to the complexity of the venture.  Businesses do not run themselves; they need to be nurtured to succeed.