An assessment of clients of microfinance programs in Uganda.

AuthorBarnes, Carolyn

Abstract

This paper looks at three microfinance programs in Uganda, representing best practices, to determine how they impacted households and entrepreneurs, particularly in reducing poverty and empowering borrowers. Evaluation results showed the programs positively and significantly improved the quality of life of participants, both economically and socially.

Introduction

Microenterprises are a vibrant part of the Ugandan economy, providing a wide range of goods and services. In 1995 an estimated 22% of all households were engaged in some kind of business activity (Impact Associates, 1995). These households were usually micro in scale and home-based. Twenty-nine percent of the working age population in 1995 were estimated to be employed in micro and small enterprises. These statistics underscore the prevalence of microenterprises, but mask the importance of microenterprises as a vital source of income for the urban and rural poor. Microenterprise business activities are often the major source of household revenue.

These poor microentrepreneurs, especially women, have had limited access to financial services offered by the commercial banks (Duval, 1991; Morris et al., 1995; Mugyenyi, 1992). Widespread recognition of this lower accessibility to formal credit has led to recent endeavors to target the poor, especially women entrepreneurs, through development programs that provide financial services. In addition to the provision of credit, these programs also facilitate the establishment of savings accounts. Thus, these semi-formal financial institutions provide low-income clients (particularly women) with financial services not previously provided by commercial banks.

Since the mid-1990s, as part of its strategy to alleviate bottlenecks to private sector development, USAID/Uganda has provided financial and technical support to a number of organizations providing microfinance services for poor microentrepreneurs. These organizations vary in terms of target clientele, maximum size of loans, program strategies, geographic coverage, size of the loan portfolio, and financial security.

The objective of the Uganda assessment is to provide data on the impact of USAID-supported microfinance programs on clients, their households and enterprises. The assessment will also provide information on the linkages between microentrepreneurs and the agricultural sector. It should be noted that no attempt is being made to distinguish between use of USAID funds and other funds, as these microfinance programs are normally financed through a mix of sources and funds tend to be fungible.

Do programs providing microfinance services make a positive difference in the lives of microentrepreneurs, their households, and enterprises? This problem statement can be framed as a series of questions. What is the nature, extent, and distribution of these impacts? Have microfinance programs helped to reduce proverty in the households of microentrepreneurs? Has support to microentrepreneurs in urban areas increased the flow of transfers and remittances to rural areas? Have programs helped microentrepreneurs, particularly women, to gain more control over the income they generate? The baseline assessment answers the above questions also and an ancillary, but important, question: What are the linkages between microfinance program clients and the agricultural sector?

Three microfinance organizations which follow what are considered to be "best practices" were selected for inclusion in this study: FOCCAS (Foundation for Credit and Community Assistance), FINCA (Foundation for International Community Assistance) and PRIDE (Promotion of Rural Initiatives and Development Enterprises) Uganda. The three districts covered by the assessment were purposively selected to provide a range of socioeconomic contexts, since geographic location can influence the impact of a program. The locations selected were: Kampala, a vibrant metropolitan capital center; Masaka, a small urban center in southern Uganda, and rural Mbale, a highly populated, good farming area in the east near the Keyan border.

Microenterprises provide an individual with access to microfinance programs, but these individuals are also members of households. Resources within a household are fungible and may flow between households (such as from urban to rural households). At the same time, particularly given the ramifications of gender, the household economic portfolio is likely to include individually controlled resources and activities. Thus, the assessment framework has a wide lens to detect impacts at the client, household, and enterprise levels as well as upon rural networks.

Study Site Profiles

The two-stage study covers three districts: Kampala, Masaka, and Mbale. Study sites in Kampala were located in urban and peri-urban areas. In Masaka respondents were interviewed in urban, peri-urban, and peripheral rural areas. Mbale respondents were all located in rural areas. Basic information about the districts where the baseline study was conducted is presented in Table 1 and Table 2.

The Microfinance Programs

The three microfinance programs (MFIs) whose clients were selected for inclusion in this study are FOCCAS (Foundation for Credit and Community Assistance, allied with the international NGO Freedom from Hunger), FINCA (Foundation for International Community Assistance, and international NGO), and PRIDE (Promotion of Rural Initiatives and Development Enterprises) Uganda (associated with PRIDE Africa). The distribution of survey client respondents among three microfinance programs in three districts represents an intentional effort to capture data from a spectrum of microentrepreneurs representative of the diversity of businesses and living conditions in Uganda.

The missions of these organizations vary. FOCCAS promotes self-help programs to enhance the economic productivity and family health and nutrition of the predominantly rural poor. It provides groups of poor women with credit and savings services for income-generating activities, and provides non-formal education on the topics of health, nutrition, family planning, HIV/AIDS prevention and better business management. Working with solidarity groups, FOCCAS/Uganda integrates practical education into a village banking methodology. The FINCA program is committed to assisting hard working women entrepreneurs who are willing to organize themselves into groups for economic development. FINCA offers a credit and savings scheme called village banking that targets low-income women who are organized in groups. While the FINCA and FOCCAS programs center on women, PRIDE/Uganda has the objective of providing financial services to female and male microentrepreneurs who operate businesses in predominantly urban areas. As part of its programming focus, PRIDE seeks to integrate the individual borrower and saver into the formal financial system by requiring clients to have a savings account with a commercial bank.

These three MFIs were chosen because each has demonstrated use of "best practices," a constellation of recognized practices which the most successful MFIs employ worldwide. The "best practices" common among these three MFIs include: the formation of a credit group consisting of individual members each of whom owns and operates a business that produces at least a weekly cash flow, the entire group's guarantee of the loan made to each member of the group, the use of an interest rate that supports the administrative costs of the MFI (sustainability), a mandatory savings requirement, a weekly mandatory group meeting for loan repayment, a demonstrated high rate of repayment (close to 100%), and the ability of the program to serve (either currently or in the future) significant numbers of individuals. Additionally, each of these programs has operated a successful microfinance program in Uganda or elsewhere in Africa. The characteristics of the three programs are compared in Table 3.

FOCCAS is the most recently established of these three MFIs and has the most rural clientele. It commenced lending late in 1996 and by December of 1997 had 3,297 borrowers and savers. FOCCAS operates almost exclusively in the rural areas of two adjacent districts, Mbale and Tororo. For this baseline study only Mbale residents were selected as survey respondents.

At the time of the survey FINCA, which began working in Uganda in 1992, had operations in nine districts, serving more than 10,000 individual clients. This study surveyed FINCA clients in Kampala, in areas ranging from densely settled, poor urban neighborhoods to peri-urban settings, and also in Masaka District, where the clients were situated in either the urban center of Masaka town, in commercial areas along the main road from Kampala to the southwest, or in villages and rural areas extending up to ten kilometers outside the town. In addition to the geographic differences between the Kampala and Masaka FINCA clients, the Kampala clients were more likely to be experienced MFI participants. The Kampala respondents belonged to groups who had been borrowing and saving for at least three months, some more than a year. Since FINCA's presence in Masaka was quite new, virtually all the Masaka clients were working with their first loan.

While PRIDE operated in six districts at the time of the survey, its operation in Masaka was new and all but a handful of the PRIDE clients were also working with their first loan. PRIDE initiated its lending programs in Uganda early in 1996 and had 3,283 borrowers, about the same number as FOCCAS, by December of 1997. PRIDE had also registered more than 2,300 additional clients as savers who were poised to become borrowers within weeks of the conclusion of the survey.

The three programs have several characteristics in common but also differ in ways that may influence the profile of the client who joins and the group dynamic. The most obvious distinction is that PRIDE offers...

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