Does Collateral Security Still Determine Performance of SMEs? An empirical Study from Arua Municipal Council, Uganda

Abstract

Collateral security is viewed by many scholars as factor that has a direct influence on the performance of SMEs. This paper therefore examined the relationship between collateral security and the performance of Small and Medium Enterprises (SMEs) in Arua Municipal Council, Uganda. A cross sectional design adopting both the qualitative and quantitative approaches was utilized. With a population of 224 SMEs, a sample of 149 respondents was drawn using both purposive and simple random sampling techniques and this yielded a response rate of 87.3%. Validity and reliability of instruments was taken care of, and data was collected using self-administered questionnaires and interview guide. Quantitative data was analysed using SPSS while the qualitative data was based on the content analysis. The results indicated that, there is a positive relationship between collateral security and the performance of SMEs in Arua Municipal council with insignificant correlation coefficient (r = 0.052, sig = 0.01). In conclusion, the paper established that though collateral security does not influence SMEs performance, it hinders SMEs access to financial services as MFIs prefer collateral security as precondition for loan disbursement. Though collateral security plays an insignificant role in SMEs performance, SMEs’ access to microfinance is vital for its performance and should be softened through government guarantee.