Microfinance in Uganda

Microfinance in Uganda


Problems and Purpose

Due to domestic and international flaws in top-down, institution or state-led economic development, Uganda has placed an emphasis on bottom-up development by NGO’s and microfinance since the early 2000s. This new ‘people-centred’ approach to poverty alleviation and community development (Holcombe., 1995) allows active participation and self-determination absent in the traditional market and state top-down models that discouraged popular participation and alienated citizens (Makoba., 2012).


The founding principles of microfinancing and its implementation are seen in US foreign policy during the Cold War as a means to destabilise populist movements against US-led capitalism in Latin America (Chomsky., 1994). This US led strategy continued through to the 1960’s where, microfinance was used as ‘soft power’ as a means to win ‘hearts and minds’ (Nye., 1990), providing direct support to the most vulnerable through small loans seen in the ‘Alliance for Progression’. The aim of this initiative was to prevent further Cuban-style popular revolutions and ‘bottom-up’ challenges, fearing movements such as the liberation theology (Wright., 2001). By 1972 the US government consolidated this policy directive by establishing USAID, launching its first official microcredit program in the city of Recife in Brazil (Luyrika., 2010). Despite its implementation over a number of decades, microfinance only gained global coverage through the work of Dr Muhammad Yunus and the Grameen Bank in Bangladesh, which was awarded the Nobel Peace Prize in 2006 (Grameen.com., 2017).

In contrast to countries such as Bolivia and Bangladesh, Uganda’s institutionalisation of microfinance was slowly implemented. Traditionally, the private sector in Uganda has struggled with infrastructural failings, such as a weak commercial justice system, corruption, inadequate tax and regulation management, as well as a lack of financial services (Phase 1report., 2002; Wong 1999). Over the 1990’s the closure of banks and a rise of inflexible banking practices by the Uganda Commercial Bank, segregated small businesses and low-income households from access to financial services (Carlton, et al. 2001). Furthermore, traditional banks during this time diminished Uganda’s social capital and credit culture by mishandling credit schemes, having a profound impact on the civil populations trust of traditional financial institutions (Carlton et al., 2001). 

However, more traditional forms of informal financial activities have encompassed many forms and had been used for decades (Carlton, A., et al. 2001). The first main microfinance institutions can be seen in FINCA and the Uganda’s Women Finance Trust (UWFT) in the 1990’s. Due to governmental failings in effective poverty and development policies during this time, there was a strong reliance on NGO’s, community based organisations and local ‘Resistance Councils’.

Originating Entities and Funding

With the economic crisis in the 1980’s, Uganda like many other African nations succumbed to international pressures from the World Bank and the International Monetary Fund (IMF) and as a result established recommended Structural Adjustment Programs (SAPs) (Makoba., 2012). To limit the impact of these programs on the most vulnerable, the World Bank and IMF launched the Program for Alleviation of Poverty and the Social Cost of Adjustment (PAPSCA), providing some of the first employment and income generating schemes (Makoba., 2012). Following programs such as the Poverty Eradication Action Plan (PEAP), implemented between 1995-7 showed progress but due to structural issues was later updated to Uganda’s Poverty Reduction Strategy Paper (PRSP) in 2000 (Kamanyi, 2003). These programs were institutionalised and operationalised by the Poverty Action Fund (PAF), using the Highly Indebted Poor Countries Scheme (HIPCS) and the Participatory Poverty Assessment Project (UPPAP) (Makoba., 2010). Furthermore, the influence of Dr Yunus was a significant vehicle for international development funding, making it the most generously funded anti-poverty intervention in the mid-2000s and arguably led to the commercialisation of the microfinance industry (Luyrika., 2010). In order to allow the continued evolution of this expanding industry, assemblies such as the Centre for Microfinance and more specifically the Association of Micro Enterprise Finance Institutions of Uganda (AMFIU) provides a forum for discussion and acts to lobby government on needed strategies (Carlton et al., 2001).

Participant Recruitment and Selection

Using Arnsteins typology of eight levels of participation, it is possible to assess the usual consumer of microfinance and the extent of their citizens’ power as rarely extending beyond ‘manipulation’ and ‘therapy’. However, the role that microfinance can have on increasing the power and influence of the ‘have-nots’ in decision making allows for progression up the ‘ladder’(Arnstein., 1969). While this can have a massive impact on low-income households across Uganda, mainstream microfinance enterprises often don’t impact the poorest in society. A typical client is a married, female with a sufficient education, between 30 and 39 years old (Carlton et al., 2001). Women are often in need for alternative financial sources as traditional banks often exclude them, making up an estimated 76% of microcredit customers according to the UN (Bordreax., 2008). Those significantly below the poverty line with little to no assets, are often excluded by commercial microfinance, due to a lack of appropriate products, inflexible repayment practices and a lack of accessible savings services (CGAP 2000; Wright et al., 1999). Furthermore, despite three quarters of Ugandans are living in rural areas microfinance is largely concentrated in urban areas (Wright and Rippey., 2003).

Methods and Tools Used

Microfinance and microentrepreneurs form the basis of the Ugandan economy, with one third of the working population employed by small businesses (Impact Associates, 1995) and 79% of credit coming from informal sources. Microfinance is a broad concept encompassing many commercial services, such as credit, savings, deposits and insurance to micro-entrepreneurs and disadvantaged households (Ciccaglione., 2014). Due to a strong domestic demand for these services, as well as significant international interest, the microfinance sector has become highly competitive with NGO’s, cooperatives (SACCOs), informal and formal organisations and a resurgence of traditional commercial banks (Wright and Rippey., 2003). This interest has sparked a contemporary debate into the effects of microfinance,  focused on the dimension of poverty alleviation and socio-economic development and how this works to empower citizens. It is strongly argued that microfinance helps poverty mitigation and economic growth, as well as economic inclusion and the expansion of social capital. These benefits additionally work to encourage and develop citizen participation, increasing political awareness and empowerment among the ‘have-nots’ of society (Arnstein., 1969).

Deliberation, Decisions, and Public Interaction

Prior to the liberalisation of its markets, the state of Ugandan centralised and nationalised its financial sector, offering little to no deliberation or alternatives. Since the opening of the markets and the spread of MFIs, practitioners, donors and the government have opened up dialogue, allowing for cooperation and coordination (Carlton et al,. 2001). In an effort to stabilise MFIs in the region during Iin 1996, USAID subsidized seminars promoting commercial knowledge and sustainable practices.

The establishment of the Association of Micro Enterprise Finance Institutions of Uganda (AMFIU) provided a much needed platform and advocacy group, followed by the Microfinance Forum, which met monthly and was chaired by the Ministry of Finance, Planning and Economic Development (Carlton et al,. 2001). More specific coordination can be seen in the Donor Group and its Private Sector Donor Sub-Group (PSDSG), which also meets monthly and invites government officials and private sector delegates through the Private Sector Foundation (Carlton et al,. 2001). In addition, a greater focus is now being placed on public engagement and support, occasionally seen as part of the loan itself. Aspects of this can be seen in the government owned Microfinance Support Centre Limited (MSC).

Influence, Outcomes, and Effects

Over 1,000 microfinance institutions are now operational in Uganda, with approximately 600,000 customers (Wright and Rippey., 2003). Despite a wide variation in practices and approaches the growth of this industry has been consistent, with larger MFIs operating in 40 of the 56 districts (Wright and Rippey., 2003). While the extent to which MFIs have impacted social empowerment and facilitated a transfer of power is unknown, microfinance has demonstrated an alternative form of governance for the progression of the poor. Traditional financial institutions within Uganda provided no opportunities or frameworks for the progression of the economically active poor, however interactions with MFIs and the broader private sector have encouraged the government to make changes. With the implementation of the PEAP and PRSP programs the economy saw significant growth rate, which allowed for further democratic innovation and a greater emphasis on social capital. Placing a consistent focus on the latter, the role and influence of MFIs has produced greater civic engagement and communal health (Putnam., 1993). Additionally, social capital has been able to reduce the cost of information and works to resolve collective action problems within communities (Ciccaglione., 2014). Furthermore, the wide implementation of group lending within Uganda, accounting for 63% of loans (Wright and Rippey., 2003) has been seen to stimulate cohesion and reinforce social networks, as well as instilling community development towards a unified goal of poverty alleviation (Feigenberg et al., 2010).

While the Ugandan economy saw growth between 1992 and 2000, poverty and inequality actually increased during this time in rural areas (Deininger and Okidi., 2003). Despite the redevelopment of Uganda’s macroeconomics and social services, the benefits have not been equally distributed between regions, classes or genders, consisting in ‘at least two distinct yet interconnected “states” or “economies” (Shaw and Mbabazi., 2004). The majority of the relief created by MFIs have mainly been seen in central and southern regions. Furthermore, evidence suggests the programs focussed in rural areas have failed to include the most vulnerable and handle corruption and political interventions (Muhumuza., 2008).

Analysis and Lessons Learned

To accurately analysis the broad outcomes of microfinance institutions using the characteristics of outreach, financial sustainability and socio-economic impact is extremely difficult due to varying levels of interaction and the way in which a program is implemented (Carlton et al., 2001). By using the single case study of DEKI, a small microfinance charity based in the city of Bristol, within the United Kingdom, this report is able to formulate limited findings into the role and impact of the programs offered that can be used to project broader hypothesis. DEKI provides ethical microloans and training to entrepreneurs living in poverty in an effort to felicitate sustainable livelihoods and boost their local economies. Providing a crowdfunding platform for donors to loan money to entrepreneurs, their fully vetted ‘not for profit’ field partners distribute the loans and provide necessary support. The charity is committed to empowering people how would not usually have an influence, encourage positivity and innovation, while maintaining a high levels of accountability and transparency. By providing financial, business and social training DEKI is able to empower disadvantaged and marginalised individuals in the developing world. In recognition of the fact that 43% of people living in poverty are in Sub-Saharan Africa it has focused its efforts in alleviating these struggles lending £1,317,426 since it was incorporated in 2008. Additionally, the work of DEKI tries to counteract prevailing gender inequality, which can be seen in 70% of loans going to women. In Uganda DEKI focusses on loans between 4 and 12 months, using their field partner, New Home in Kasese, entrepreneurs are able to become stakeholders in the project that is benefiting them. Each DEKI loan is estimated to have a positive impact on six people, enabling entrepreneurs to achieve economic independence and support their extended family, lifting others out of poverty as well as themselves.


Secondary Sources

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Boudreaux, K. & Cowen, T. (2008) “The Micromagic of Microcredit,” The Wilson Quarterly 32(1), 27-31.  [online] Available at: http://www.jstor.org.ezproxy.lib.uconn.edu/stable/40262341 [Accessed 8 Nov. 2017]

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Chomsky, N. (1994). World Orders, Old and New. London: Pluto Press.

Ciccaglione, K. (2014) "From Inclusion to Empowerment: The Political Implications of Microfinance" Honors Scholar Theses. 386.

Deininger, K. and Okidi, J. (2003), Growth and Poverty Reduction in Uganda, 1999–2000: Panel Data Evidence. Development Policy Review, 21: 481–509. doi:10.1111/1467-7679.00220

Dowla  (2006) In credit we trust: Building social capital by Grameen Bank in Bangladesh, The Journal of Socio-Economics, 35(1), 102-122, [online] Available at: http://www.sciencedirect.com/science/article/pii/S1053535705001009 [Accessed 7 Nov. 2017]

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Holcombe, S. H. (1995). Managing to empower. Atlantic Highlands, New Jersey: Zed Books Ltd.

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Luyirika, M. (2010). The role of microfinance in the socio-economic development of women in a community: A case study of MPIGI town council in Uganda. Masters. University of South Africa.

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External Links

Uganda - OECD Website: http://www.oecd.org/countries/uganda/

The Association of Microfinance Institutions of Uganda: http://www.amfiu.org.ug/

The World Bank's Review of the Ugandan Microfinance Sector: http://documents.worldbank.org/curated/en/221431468113361691/Uganda-micr...

Case Data


Uganda KAS
Kasese UG
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