Cost and Hurdles in Compliance Forcing SMEs Out of Business

Compliance is a key indicator in the formalisation of small and medium enterprises (SMEs), but it has increasingly become a stumbling block for business growth and continuity in Uganda.

Uganda still has a large informal sector, and while there is a strong drive to formalise businesses, for many entrepreneurs the thorn in the side is the rigour of formalisation, which is deeply rooted in compliance requirements.

Formalisation Gains and the Roadblock Ahead

Ms Ruth Apio, the founder of Nutri-focus Food Hub in Soroti, has successfully completed registration with the Uganda Registration Services Bureau (URSB) and the Uganda Revenue Authority (URA).

This achievement is significant, as her business name is now secured — a critical step in standing out in the market. Her financial records are in order, and she consistently pays her taxes.

“I am thankful to the Federation of Small and Medium Enterprises (FSME) because they taught me about business management, which has enabled me to track my business dealings,” she says.

However, her journey has been strained by the requirements of the Uganda National Bureau of Standards (UNBS).

The UNBS Compliance Bottleneck

Ms Apio explains that while the formalisation conditions set by URA and URSB are relatively few and straightforward, compliance with UNBS standards is far more demanding.

She was audited in November 2024 and submitted six products for laboratory testing. Two initially passed, while the remaining required corrections before eventually passing.

“I am only awaiting the Q-mark, but I have not heard from UNBS for eight months now. This has interrupted my market penetration,” she says.

This delay mirrors the experience of many SMEs, particularly those in the manufacturing sector, where a Q-mark is mandatory before products can be accepted by major markets.

The High Cost of Compliance

Cost remains one of the most daunting challenges.

According to Mr Charles Ocici, Executive Director of Enterprise Uganda, compliance begins with strict steps that SMEs must follow in product and service handling to meet UNBS standards.

“Moreover, the SME must continue adhering to these standards. For example, a restaurant must have specific equipment, personnel, and processes — and must maintain them continuously, otherwise it risks closure. That is why some SMEs defer compliance to a later stage,” he explains.

Operational Bottlenecks at UNBS

Mr Joshua Mutambi, Commissioner for Processing and Marketing at the Ministry of Trade, Industry and Cooperatives, highlights additional operational challenges.

He explains that business owners must also facilitate transport for UNBS officials to inspect premises.

“Even when some people pay, the money goes to the consolidated fund rather than directly to UNBS. With limited funding, UNBS officials take long to visit premises and certify products,” he says.

This year, UNBS received Shs56 billion, which according to the UNBS Executive Director, is only one-third of what the agency requires to operate effectively.

Technology Gaps in Production

Mr Mutambi further notes that some SMEs lack access to the technologies required for certification.

“UNBS must audit the production premises and the quality of products. Without the right technology in the production process, one may fail to get certified. It becomes a matter of either upgrading technology or closing the business,” he says.

Compliance Versus Market Realities

Another challenge lies in enforcement.

Many SMEs prefer to manufacture products and test the market before applying for certification. However, the law requires products to have a quality mark before they enter the market.

“That becomes a challenge because how then can they test the market? They must produce, test, improve, and get certification before producing at a commercial scale,” Mr Mutambi explains.

Meanwhile, some competitors operate without complying, yet sell in the same markets. This creates an uneven playing field.

“In the meantime, you lose market share because customers may not know that your product is of a higher standard,” Mr Ocici adds.

Short-Term Demands, Long-Term Gains

One of the biggest frustrations for SMEs is that compliance demands are immediate, while the benefits are often delayed.

“If compliance led immediately to better contracts, businesses would gladly adhere. But there is no guarantee, because marketing must happen before growth is realised,” Mr Ocici says.

He adds that compliance also depends on consumer purchasing power and awareness, which take time to improve, particularly in a country where many consumers are not yet middle-income earners.

Possible Solutions to Ease Compliance

Given that Uganda’s economy is largely powered by small businesses, experts argue that reforms are necessary.

Mr Ocici believes government should subsidise certain compliance requirements, educate the population, and enforce laws gradually.

“This should be done in a manner that recognises that formalisation is a long-term process, not something that can be enforced overnight,” he says.

Mr Mutambi also calls for reduced compliance costs, noting that while certification fees have dropped from Shs1 million to Shs500,000, SMEs still find the cost high.

Compliance as an Enabler — If Done Right

Compliance plays a critical role in accessing finance and markets, both of which are essential for business expansion.

However, if compliance remains costly, stringent, and time-consuming, the future remains uncertain for many SMEs.

As things stand, the cost and hurdles of compliance risk pushing more businesses out of the formal economy — the very outcome formalisation efforts seek to prevent.