THE EFFECT OF SMALL SCALE ENTERPRISES ON THE GROWTH OF TOWNS IN UGANDA:
A CASE STUDY OF BANDA PARISH, NAKAWA DIVISION, KAMPALA DISTRICT
CHAPTER ONE
INTRODUCTION
1.0 Introduction
This chapter provides an overview of the study, presenting the background, problem statement, purpose, objectives, research questions, scope, significance, justification, and operational definitions of key terms.
1.1 Background to the Study
Globally, the development and performance of small-scale enterprises can be traced back to the 17th and 18th centuries when communities struggled to overcome hardships and establish livelihoods from limited resources (Hill, 2001). According to Donald (2011), as populations grew and urban centers became more economically significant, the desire for self-employment evolved to include small merchants, craftsmen, and independent professionals—marking the rise of small enterprise activity and growth.
In Uganda, small enterprises have historically been rooted in peasant agricultural production since the pre-colonial era (Kikonyogo, 2000). Although there existed vibrant trade in commodities such as ivory and animal hides with the East African coast long before European colonization, the majority of Ugandans were subsistence farmers. Following the declaration of Uganda as a British protectorate in 1893, the colonial government implemented economic policies that integrated Uganda into the global economy, mainly to support Britain’s textile industry in the late 19th century.
The performance of small enterprises in Uganda has been influenced by multiple factors including managerial competence, government support, access to finance, and the general business environment. Byaruhanga (2008) notes that although Uganda was endowed with abundant natural and human resources and favorable climatic conditions conducive to economic growth, by the late 1980s the country was still recovering from prolonged political and economic instability that had eroded its reputation as the “Pearl of Africa.”
In response, the Government of Uganda introduced the Economic Recovery Programme (ERP) in 1987, followed by a series of development and rehabilitation plans (Kasekende, 2003). These initiatives prioritized the revitalization of production sectors and infrastructure, particularly small enterprises that formed the foundation of the national economy. The government also liberalized trade, promoted exports, and implemented a vigorous privatization policy to encourage private sector growth. Over half of state-owned enterprises were divested, creating more space for small and medium-sized enterprises (SMEs) to thrive.
According to Hall (2002), microfinance institutions play a pivotal role in supporting micro-entrepreneurs and small businesses by providing financial services that stimulate local economic activity and urban development. However, small enterprises continue to face constraints such as limited access to formal banking services due to high transaction costs and inadequate collateral. The Financial Institutions Act (2004) outlines two major mechanisms for providing financial services to this group—relationship-based banking for individual entrepreneurs and group-based lending models. While the latter approach enables collective borrowing, many small business owners still face difficulties in meeting financial institutions’ requirements (Donald, 2011).
Government intervention remains critical in enhancing small enterprise performance through initiatives such as business training, financial support, infrastructure development, and monitoring systems to guide business operations (Mukras, 2003).
This study therefore focuses on understanding how small-scale enterprises contribute to town development—reflected in improved welfare, infrastructure, local revenue, and asset accumulation. The research particularly explores the influence of small-scale enterprises on the growth of towns in Uganda, with Banda Parish as the case study.
1.3 Statement of the Problem
In Uganda, the number and size of small-scale enterprises have grown considerably (Kasekende, 2003). In Banda Parish, local authorities have made deliberate efforts to enhance the performance of these enterprises through initiatives such as the Competitiveness and Investment Climate Strategy (CICS), which emphasizes the development of physical infrastructure like roads and water supply systems. Additionally, Banda’s business environment is relatively favorable, with several microfinance institutions, Savings and Credit Cooperative Organizations (SACCOs), and Rotating Savings and Credit Associations (ROSCAs) providing access to financial services.
Despite these interventions and the significant role small enterprises play in job creation and income generation, their performance in Banda Parish remains below expectations. According to UBOS (2010), approximately 60% of small businesses in the area fail before their fifth year of operation. This persistent challenge highlights a gap in understanding the factors influencing the performance of small-scale enterprises, which in turn affects town growth. Therefore, this study seeks to investigate these underlying factors and provide empirical evidence to support the improvement of small enterprise performance in Banda Parish.
1.4 Purpose of the Study
The purpose of this study is to examine the factors influencing the performance of small-scale enterprises in Uganda, with specific reference to Banda Parish.
1.5 Objectives of the Study
The study will be guided by the following objectives:
a) To assess the benefits of small-scale enterprises on the development of Banda Parish.
b) To examine the challenges faced by small-scale enterprises in the development of towns such as Banda.
c) To determine the relationship between small-scale enterprises and the growth of towns in Uganda.
1.6 Research Questions
The study seeks to answer the following questions:
a) What are the benefits of small-scale enterprises on the development of Banda Parish?
b) What challenges do small-scale enterprises face in developing towns such as Banda?
c) What is the relationship between small-scale enterprises and the growth of towns in Uganda?
1.9 Significance of the Study
The findings of this study will be valuable to multiple stakeholders in Banda Parish and beyond. They will provide both local and central government authorities with critical insights into the factors affecting the performance of small enterprises, thereby informing future policy and intervention strategies.
For policymakers, planners, and economists, the study will serve as a source of evidence-based information to guide decision-making and development planning at national and district levels.
For the academic community, the research will contribute to the existing body of knowledge on small enterprise performance and urban development. It will also highlight knowledge gaps to inform future studies and encourage further exploration into strategies for improving the sustainability and impact of small-scale enterprises in Uganda.