Uganda, a country where almost 20% of the population lives below the poverty line, has been witnessing a quiet revolution. Microfinance, a concept that provides small loans to individuals and small businesses, is transforming the lives of thousands of Ugandans and boosting the country’s economic development.
While some experts have expressed concern at the high interest rates of these loans, others have highlighted the significant impact of microfinance on economic activity and livelihoods in Uganda. This is evident through the empowerment of small businesses, allowing entrepreneurs to expand, invest in equipment, and create job opportunities all of which result in a boost to local economies.
See also: The effectiveness of microfinance programs in poverty reduction and economic development
Savings have also seen a rise due to microfinance programs that instill a savings culture among participants. This not only ensures financial stability but also encourages future investments in business ventures.
In Uganda, 81% of adults use financial products and services, whether they are offered formally or informally, according to the 2023 Finscope survey. Given the advances made under the first National Financial Inclusion Strategy, this represents a rise from 77% in 2018.
OECD experts have observed that microfinance has been instrumental in lifting many Ugandans out of poverty, leading to improved living standards. With higher incomes, families can now afford better education, healthcare, and housing, ultimately enhancing their quality of life.
Financial inclusion has been a key outcome of microfinance in Uganda, as highlighted by the Uganda Microfinance Regulatory Authority. This has led to the integration of underserved individuals into the financial system, providing them with access to bank accounts and financial services that were previously inaccessible.
Economic improvements
This growth has had a significant impact on poverty reduction, with many borrowers reporting improved livelihoods and increased economic stability.
One such beneficiary is Margret Nakato, a 40-year-old mother of five from Kampala’s slums. With a microloan of UGX 500,000 (approximately US$130), Margret was able to start a small business selling vegetables at the local market. Today, her business has grown, and she is able to provide for her family and even employ two other people.
“Microfinance has changed my life,” Margret says. “I was able to start a business and provide for my family. I no longer have to worry about where our next meal will come from.”
However, she warned that, “one needs to choose those microfinance companies with lower rates, as most of them have high rates that can reach up to 20%.”
The impact of microfinance goes beyond individual success stories. According to a study by the University of Makerere, microfinance has contributed significantly to Uganda’s economic growth, with the sector generating over UGX 100 billion (approximately US$25 million) in annual revenue.
“Microfinance has been a game-changer for Uganda’s economy,” says Dr. Ezra Suruma, a leading economist at Makerere University Chancellor and former Minister of Finance. “It has provided access to capital for thousands of small businesses and individuals, creating jobs and stimulating economic growth.”
Government initiatives
The policy and regulatory environments play a significant role in shaping the effectiveness and growth of microfinance programs in Uganda. Sound policies and effective regulations ensure that microfinance institutions operate efficiently and sustainably, catering to the needs of the economically disadvantaged.
The Ugandan government has recognized the potential of the microfinance sector, and the Ministry of Finance, Planning and Economic Development has launched various initiatives to support its growth. These include the Microfinance Support Centre, the Emyooga Program, the National Development Plan, the Parish Development Model, and the Rural Microfinance Support Project. These efforts demonstrate the government’s commitment to strengthening the microfinance sector and promoting financial inclusion for the economically disadvantaged.
“Microfinance is a key component of our poverty reduction strategy,” says Hon. Matia Kasaija, Minister of Finance, Planning and Economic Development. “We are committed to supporting the sector and ensuring that it continues to play a critical role in our economic development.”
As the microfinance sector continues to grow, experts predict that it will have an even greater impact on poverty reduction and economic development in Uganda. With its proven track record of success, microfinance is poised to remain a key driver of this, according to a 2023 report by Finscope Uganda.
According to Haruna Kasolo Kyeyun, Minister of State for Microfinance and Small Enterprises, 84% of men and 79% of women in Uganda are financially included with levels of 87% in cities and 78% in rural areas.
“We must make every effort to close these ongoing inclusion gaps with the implementation of the Second National Financial Inclusion Strategy,” he stated.
The Finscope Uganda 2023 report revealed that formal financial inclusion has increased significantly in other areas, rising from 58% of adults in 2018 to 68% in 2023 and the usage of savings and credit co-operatives has also increased, rising from 5% to 14%, as a result of the advantages of implementing programs like Emyooga and the Parish Development Model.
International support and partnerships
The collaboration between the Ugandan government and international partners plays a vital role in strengthening the microfinance sector to support the country’s economic development objectives. Through these partnerships, Uganda is advancing in its efforts to alleviate poverty and enhance economic growth by providing inclusive financial services.
The European Investment Bank (EIB) has played a vital role in supporting private-sector growth in Uganda by providing more than €346 million in funding. This financial support is instrumental in helping micro-businesses to access the necessary capital to prosper.
The United Nations Capital Development Fund collaborates with Pride Microfinance Limited and the Swiss Agency for Development and Cooperation to improve financial access for marginalized groups in Uganda. Through their partnership, they aim to stimulate economic development and alleviate poverty.
International partnerships frequently include training programs that enhance financial literacy and business acumen. For instance, the EIB backs training initiatives that help refugees and local communities to acquire the skills needed to operate successful businesses.
Challenges and criticisms
Despite the numerous advantages it offers, microfinance in Uganda also faces significant challenges and criticisms. One of the main issues highlighted by experts is the high interest rates imposed by certain microfinance institutions which can sometimes become a burden for borrowers rather than being a support system. An expert analysis reveals that these high rates pose a common obstacle for many entrepreneurs, ultimately limiting the positive impact of microloans.
Another key concern is the limited reach of microfinance services despite the progress made in recent years. The most impoverished and remote populations still struggle to access these services due to infrastructure constraints and economic inequalities, as highlighted in a report by the World Bank.
The level of loan defaults is also a pressing issue within the microfinance sector. Factors such as economic volatility and unemployment contribute to higher default rates that jeopardize the sustainability of microfinance programs. Fitch Solutions predicts a potential slowdown in loan growth which signals future challenges.
While microfinance has brought about significant economic improvements in Uganda, the sector also faces considerable challenges. Addressing these issues will be crucial to maximize the benefits and ensure sustainable growth. The future of microfinance in Uganda depends on continual innovation, effective regulation, and the ability to adapt to the evolving needs of its beneficiaries.
