Uganda: Borrowing One's Way Out of Poverty

Apr 2008
Kampala, Uganda, April, 16 2008 - Microfinance is one of the successful mechanisms to root out poverty in several developing countries, but in Uganda, the model has brought mixed fortunes.

Upon building a reputable credit worthiness profile through borrowing and paying back several loans with one of Uganda's leading microfinance institution (MFI), 46-year-old Shem Sengendo is confident of applying for more money to expand his lucrative transport business.

Three years ago, Sengendo, who ferries building materials with a tipper lorry got his first loan worth Shs150,000 through a group loan arrangement offered by Pride Microfinance Ltd, which he successfully repaid in 25 weeks. Later, he took another one of Shs300,000 ($176). Both loans were not consummate with his high consuming old lorry.

"The first two group loans I got were too little for my transport business and I therefore decided to go in for the individual loan scheme to buy a better lorry," Sengendo, married and a father of five said, adding: "With the old lorry I was always in the garage, which wasted my time and money for repairs.

My observation is that most customers do not want old vehicles." Determined with over four years experience in transport then, he approached the Pride Nakulabye-Kasubi branch manager with a proposal to borrow Shs7m that was eventually approved. "I told the manager I needed Shs7m because I had the security to mortgage and besides my business had a good turnover and I was able to pay back," Sengendo, an 'O Level' graduate said.

In May 2006, he got the loan with an eight months repayment period after mortgaging his three-bedroomed house in Nansana about eight kilometres west of Kampala and household property.

Sengendo who operates at Namungona stage located 6km west of Kampala had to sell his old lorry at Shs6m, added the proceeds of the sale with the loan to buy an Isuzu tipper lorry at Shs13m.

After settling the loan, Sengendo applied for another, for Shs10m. He sold the Isuzu lorry at Shs12m used the proceeds together with the new loan (he is set to settle this loan this month) to buy a reconditioned Isuzu Tipper lorry at Shs19.5m which he owns today.

"My initial old lorry would only manage three trips a day while the new one does five where I earn a profit of Shs20,000 per trip. Besides, the old lorry could not manage long distance contracts," Sengendo said. "I am willing to apply for a third loan of between Shs15-16m to buy a second tipper lorry to expand my business. I will use one for the loan repayments and the other for savings and personal development. I don't want to expand beyond this because of the burden of employing many people."

According to the 2005/06 Uganda National Household Survey (UNHS) conducted by the Uganda Bureau of Statistics (UBOS), some people borrow for investment with the aim of increasing income while others borrow for consumption smoothing in periods of hardship. "The latter ensures maintenance of their consumption levels without running down productive assets."

The major reason for demanding credit was to purchase inputs and use as working capital (24 percent). Other reasons included, buying consumption goods (20 per cent), meeting health expenditures (16 percent), and education expenses (15 percent) among others.

There were no major differences between sexes except that a higher number of women took out loans to purchase consumption goods or to pay for education (18 percent and 23 percent respectively).

The 2004 National Service Delivery Service (NSDS) carried out by UBOS showed that out of those who required a loan, only 37 percent applied for one, meaning the majority failed or did not make any attempt to apply. The most common purpose cited by loan applicants was setting up or expansion of an enterprise which constituted about 46 percent. The lowest percentage (4 per cent) was for health purposes.

An examination of the 2005/06 UNHS in regards to access to financial services by rural households indicates that the beneficiaries are utilising credit facilities for unproductive purposes meaning that the economy is unlikely to grow if loans are employed in consumption as opposed to real investment.

Households are utilising credit facilities for unproductive purposes - a substantial proportion of the borrowing is for consumption purposes," Ibrahim Kasirye of the Economic Policy Research Centre, Makerere University concludes in a study titled, Rural Credit Markets in Uganda: Evidence from the 2005/6 Uganda National Household Survey.

On the other hand the executive director of Association of Micro Finance Institutions of Uganda (AMFIU) Mr David T. Baguma argues that: "It depends on what the consumables are. If a client buys a TV set, a refrigerator or pays school fees for the child, in as much as it does not generate more income, it changes the status of this client."

"Although some forms of household consumption such as expenditure on education can be considered future investments, other forms of consumption loans constrain a household ability to pay," Kasirye observes in the paper he presented at the second African Economic Conference 2007 held at the UN Conference Centre in Addis Ababa, Ethiopia. "Furthermore, the economy as a whole is unlikely to grow if substantial loan amounts are used for consumption expenditures as opposed to real investments that can create jobs."

Baguma says that MFIs recognised this fact and introduced appropriate products like 'school fees.' "I agree that real entrepreneurs constitute not more than 30 percent of any community. We therefore need these entrepreneurs to invest more in small medium enterprises which will employ the 70 percent. Only then will transformation be real."

AMFIU is an umbrella organisation of more than 800 MFIs and Savings and Credit Cooperatives (SACCOS) serving close to 500,000 borrowers with a loan portfolio estimated at Shs450b. Out of 27 million Ugandans, only 1.5 million have bank accounts coupled with a low national savings rate of 6 percent of GDP.

Across regions, the northern region had the lowest proportion of loan applicants (4 percent) while western region had the highest proportion (16 percent). The highest proportion of loan applicants (24 percent) sought credit from informal sources (land lords, employers, local groups, relatives, friends and local money lenders).

There was a smaller proportion of households in the rural areas who applied for credit from formal (commercial and development banks), and semiformal sources (microfinance institutions, NGOs and cooperatives) compared to the urban areas. The reverse was true for informal sources; more households in rural areas (24 percent) applied for credit from these sources, the 2005/06 UNHS report says.

About 23 percent of households did not apply for loans because they did not want to be indebted while 19 percent did not apply due to inadequate collateral, the 2005/06 UNHS showed. 20 percent did not apply for a loan because they felt it was not necessary.

Those reporting high interest rate and non-availability of credit facilities as hindrance were only 8 percent and 7 percent respectively. The 2004 NSDS findings indicate that the major reason for not applying for a loan was that the respondents (62 percent) did not know where to apply, which loans to apply for, lack of collateral security, high interest rates, and non-availability of credit facilities. There are many people who would like to access loans and credit facilities for various purposes but lack the knowledge about the available sources.

"Lack of collateral for the loan hampers the ability of one to borrow," the UNHS report observes. Collateral in the form of salary and land was a major consideration (30 percent and 20 percent respectively) before credit was advanced in the formal financial institutions. On the other hand the majority of those who borrowed from informal source s required either no collateral (63 percent) or only mutual trust (15 percent) to take credit.

Although the financial sector has tremendously expanded in Uganda, access to financial services by rural households remains very low, Kasirye observes. "We find that rural areas have limited access to financial service providers despite being home to more than 80 percent of the Ugandan population. As such, most rural households obtain credit predominantly from informal sources - mainly friends or relations," Kasirye notes.

"I agree the outreach is about 15 percent of the potential market in rural areas," Baguma said. "This will be solved by increased efficiency of MFIs and capitalisation (long term borrowing). To attain this takes time and I do not see short cuts to this in the short run. MFIs assess the ability of the client to repay, the main reason MFIs are accused of not reaching the poor of the poorest."

Source : All Africa

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