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Uganda: How to Engage the Informal Sector in Money Markets
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The Monitor (Kampala)
OPINION
13 May 2008
Posted to the web 12 May 2008
Edgar Rutaagi
Kampala
Last week we saw how essential the capital markets are in the massive build-up of local capital geared to eventually getting us off the path of donor dependency.
Now let's explore how we can get a largely unregulated informal sector on board appreciating that while this task is not an overnight job but rather a long term venture, we can get there.
This informal sector is largely composed of Small and Medium Enterprises (SMEs) many of which are unregistered. As an initial step, the government and stakeholders have a huge challenge of encouraging businesses to formalise their operations.
Businesses, for so many reasons, prefer to operate incognito, top of the list being taxes and a general misconception that operating informally allows some cost saving therein. Thankfully the government through Enterprise Uganda, Private Sector foundation and with support from development partners, is stepping up efforts in this regard with business clinics and mentorship programmes.
This has since its inception seen the transformation of a number of businesses setting them on the path to success.
Momentum in this regard is of the essence because of the benefits that accrue to businesses that are properly operating in the formal sector and these benefits include but are not limited to participation in the capital markets.
Incentives have often seemed to provide some initial impetus. This strategy has aided Uganda's efforts to attract foreign investment into the country.
Recent figures from the Investment Authority show an upsurge of the numbers of foreign investors coming in thereby contributing to making Uganda a yet more attractive investment destination.
Some critics however argue that these incentives have for a long time been misdirected concentrating on foreign investors, a situation that has since changed as seen in UIA figures showing Ugandans at the top of the list of new investors in the first quarter of the year. The government has been challenged and is as such making tremendous effort to address challenges faced by local investors.
Emphasis should be placed on developing incentives and support mechanisms that primarily promote indigenous investors.
Local investors have for long felt left out and without the much needed Government support, businesses lack the drive to innovate and have the sort of dynamism that is required to compete in the global economy.
A case in point is the huge gap in agro-processing which President Museveni is always complaining about and challenging players to invest in processing raw produce so that Ugandan products can fairly compete both locally and globally.
One of the biggest drawbacks being inadequate financial resources, it is needless to say that the capital markets present a window of opportunity that could eventually help to address this gap in terms of capital mobilisation.
The third and most crucial aspect can best be termed as "revolution". There is need for business revolution in Uganda and that's what Enterprise Uganda and other partners are essentially driving at.
There is need for a mental shift in the minds of businesses owners that will translate into a new business culture and practices.
Business must take on a new face and this begins with the owners who essentially need to move from treating their businesses as personal bank accounts and employ sound financial and corporate governance practices that separate the owner from the business.
This gradual shift will result in more formal healthy progressive and long term businesses that can in turn easily secure debt and equity financing through the stock exchange to finance growth and expansion.
Consistent effort in the above three areas will result in more sound businesses that can take advantage of the opportunities available on the stock exchange through the Alternative Investment Market Segment, a platform for SMEs to participate in the stock exchange and it's only last year that the Stock Exchange revised the requirements under this segment making it more realistic and appealing to SME businesses.
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However the sensitivity of the capital markets can not engage SMEs without the much need structural adjustments in the sector, which helps address high risk to ensure that public funds are protected.
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