The impact of credit rationing on the growth of small and medium enterprises in Mukono district
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Date
2026-04-27
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Uganda Christian University
Abstract
This study explored the effects of credit rationing on the growth of SMEs in Mukono District, Uganda. Credit rationing, in terms of loan denial, restricted loans, interest rates, and collateral conditions, is still affecting SMEs adversely in terms of profitability, growth, and sustainability. The objectives of this study were formulated based on three major areas: relationship between credit rationing and SME profitability; alternative methods of financing employed by SMEs to improve growth; and how credit rationing affects investments and growth. The methodology chosen for the study was a cross-sectional descriptive research design. The population of this study consisted of 300 SME business owners licensed in Goma Division of Mukono Municipality, Uganda, from which 171 respondents were sampled using Yamane's (1967) formula under simple random sampling method. Structured questionnaires were used as an instrument for data collection. The return rate of 164 questionnaires out of 171 distributed translated into 96.1% response rate. SPSS was utilized to analyses collected data using means, standard deviations, Pearson correlations, and regressions. Correlation findings reveal a negative relationship between credit rationing and SME profitability (r = -0.685), as well as between credit rationing and SME expansion (r = -0.710). Findings reveal strict collateral policy (mean = 4.50) and high interest rate (mean = 4.35) to be the most significant credit rationing problems. In terms of coping strategies, alternative sources of finance like retained profits (mean = 4.60) and SACCOs (mean = 4.15) are reported. Regression analysis finds that credit rationing accounts for 57.0% of SME growth results (R² = 0.570, p < 0.001). The study has established credit rationing as one of the significant obstacles to SME profitability, growth, and expansion in Mukono District. The paper therefore recommends adoption of cash flow-based lending models by banks, streamlining of government recovery programs, and investment in financial records by SMEs. These are critical in tapping into growth opportunities of SMEs and their contribution to the country's economy.
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Undergraduate