Beyond technical skills training: The impact of credit counseling on the entrepreneurial behavior of Ugandan youth

• Author: Maria Adelaida Lopera,Benjamin Kachero,Maria Josefina Baez,Daniel Joloba,Zeridah Zigiti,Samuel Galiwango,Juliet Ssekandi,Maria Laura Alzua
• DOI: http://doi.org/10.1111/rode.12706
• Date: 01 August 2020
• Published date: 01 August 2020

750

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wileyonlinelibrary.com/journal/rode Rev Dev Econ. 2020;24:750–765.

© 2020 John Wiley & Sons Ltd

Received: 1 July 2020

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Accepted: 3 July 2020

DOI: 10.1111/rode.12706

SPECIAL SYMPOSIUM: PROMOTING YOUTH AND FEMALE

ENTREPRENEURSHIP IN DEVELOPING COUNTRIES

Beyond technical skills training: The impact of

credit counseling on the entrepreneurial behavior of

Ugandan youth

Maria LauraAlzua1,2

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Maria JosefinaBaez1

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SamuelGaliwango3

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DanielJoloba4

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BenjaminKachero3

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Maria AdelaidaLopera5

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JulietSsekandi6

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ZeridahZigiti7

1Facultad de Ciencias Económicas,

Universidad Nacional de La Plata, Buenos

Aires, Argentina

2National Scientific and Technical

Research Council (Conicet), Buenos Aires,

Argentina

3Office of the Prime Minister, Kampala,

Uganda

4Enterprise Uganda, Kampala, Uganda

5Partnership for Economic Policy,

Université Laval, Quebec, Canada

6UNICEF, Kampala, Uganda

7Ministry of Finance, Planning, and

Economic Development, Kampala, Uganda

Correspondence

Maria Laura Alzua, Facultad de Ciencias

Económicas, Universidad Nacional de La

Plata, Buenos Aires, Argentina.

Email: malzua@cedlas.org

FUNDING INFORMATION

This study was carried out with financial

and scientific support from the Partnership

for Economic Policy (PEP) (www.pep-net.

org) with funding from the Department for

International Development (DFID) of the

UK Aid and the Government of Canada

through the International Development

Research Centre (IDRC).

Abstract

There is low take-up of financial credit among youth in

Uganda because potential beneficiaries perceive associ-

ated risks as high. This study assesses the determinants of

entrepreneurial risk tolerance among Ugandan youth using

experimental data from a randomized control trial and a

real-life investment-risk experiment. Credit counseling was

provided to young men and women aged 18–35 who owned

a business to educate them about the obligations and com-

mitments associated with financial credit. The intervention

had a significant impact on demand for credit and related

intermediate outcomes such as ownership of a bank account

and investment in assets. The study finds that youth exhib-

ited lower demand for credit after business training because

of increased awareness regarding the actual risks associated

with receiving credit. Our findings reinforce national strate-

gies to promote soft skills for business entrepreneurship that

extend beyond standard business training.

KEYWORDS

credit counseling, randomized experiment, risk experiment, risk

tolerance, Uganda, youth employment, Youth Venture Capital Fund

JEL CLASSIFICATION

J1OO; M130; O16

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ALZUA et AL.

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INTRODUCTION

The empirical evidence shows a consistent pattern of positive but not transformative effects of mi-

crocredit. This lack of impact seems to be caused to some extent by low take-up and the wide diver-

sity of potential borrowers (Banerjee, Duflo, Glennerster, & Kinnan, 2015). This study adds to the

general subject of microcredit and to the literature that has investigated the links between borrowing

likelihood and unobserved characteristics as well as to the development of potential tools to enhance

take-up of microcredit.

In particular, we examine the impact of credit counseling on demand for credit through a random-

ized control trial (RCT) assessing the effect of credit counseling offered through specialized business

clinics. The evaluation involved 555 young entrepreneurs in Uganda aged 18–35years who owned

a business and were interested in applying for business expansion credit through the Youth Venture

Capital Fund (YVCF), a credit fund introduced by the Ugandan government in 2011 to promote youth

employment through entrepreneurship and innovation. Participants were drawn from six districts that

represented each geographical region of Uganda (Kampala City, which was treated distinctly because

of its purely urban nature; Mukono, where we conducted a pilot study; Wakiso, M’bale, Gulu, and

M’barara) and were selected on the basis of business ownership and interest in the YVCF. Selected

youth were randomly assigned to either a treatment or a control group. Only those in the treatment

group attended the specialized business clinics. This paper explores the impact of the treatment on

formal and informal credit expansion and on several key indicators of business formalization and

business performance.

Furthermore, we investigate the role of entrepreneurial risk tolerance among young entrepreneurs

in their demand for credit. In ways consistent with theory, Guiso and Paiella (2005) found that risk

aversion has considerable predictive power for impor tant household decisions such as choice of oc-

cupation, portfolio selection, migration, and exposure to chronic diseases. Drawing on their findings,

this paper explores whether the effects of risk aversion extend to the choice to seek business expansion

credit. Our experimental evaluation involves a real-life risk-aversion experiment embedded in a stan-

dard RCT approach. Results show that 79% of participants are willing to take risks. More than half

rate above 6 on a scale of 0–10 (risk lover to very risk averse) in their general attitude toward risk. A

high correlation exists between individuals’ “experimental risk scores and self-assessed willingness

to take risks.”

In addition, evaluation results show that youth who attended credit counseling sought a signifi-

cantly lower amount of credit than their counterparts who received no counseling. They also exhibited

a better understanding of financial management and the risks associated with borrowing funds without

a definite repayment plan, appreciated the need to use the resources effectively, and learned to make

use of sources of funding other than the YVCF.

The specialized business clinics provided not only a platform for enlightening youth on the

fundamental elements of and requirements for access to the YVCF but also vital lessons and guide-

lines on business management, on using credit to expand and improve business, and on managing

businesses appropriately to be able to pay back the borrowed funds. The training helped youth ap-

preciate the importance of better business practices such as preparing and following a business plan,

bookkeeping, and managing business credit and profits. Trained participants more likely explored

other forms of business finance such as supplier credit, grants, and loans from family and friends. In

some cases, they opted to use their own equity/savings, looking beyond formal sources of business

credit.

This research also contributes to the empirical literature that advocates the integration of credit

counseling in business training and soft-skill initiatives (e.g., Karlan & Valdivia, 2011).