Microfinance institutions in Uganda have over time increased especially after the liberalisation of the economy in the 1990s.
Since independence, the government has initiated credit funding, anticipating a significant reduction in household poverty. However, recent studies indicate that poverty is more of a socio-cultural problem that manifests itself economically to its victims.
With microfinance support coming on board, it had been anticipated that poverty would reduce significantly. However, the current structure of micro financing may not reduce household poverty in the short and medium terms. There are a number of reasons why this cannot happen.
First of all, all microfinance institutions are entities whose stated objective is not the intended outcome. I have not seen any microfinance institution whose aim is to provide funding to enable poor households come out of poverty. All microfinance institutions that exist in Uganda are mainly profit-driven.
There is none, as of now, whose interest rate is five per cent per annum. In case there is any, that institution should be applauded and needs to be supported further. Most microfinance institutions charge an interest of about two-to-three per cent per month. This translates to 24 per cent to 36 per cent per annum. There is almost no business that can make that return on their investment.
Secondly, most people that microfinance institutions target are low-income earners who do not have profit-making businesses. They do not have a business plan that has projections on what is likely to be made as a profit.
The third reason is that the needs of poor people are not how to do business and make profits but how to deal with short-term needs. Most people who borrow come with their business plans.
The purpose is not to fulfil their plans, but to access what they do not have. As a result, after getting the money, the first expense is not on the business but buying what they need most like mobile phones, meat, blankets, airtime for calling radio stations and sending greetings to their wives when they are seated with them, etc.
This is why women groups are succeeding. Whenever they pool money together and give it to one of them, the beneficiary meets household needs. Very few of them are engaged in income-generating activities.
Another problem is that there is a mindset problem among the poor people. Many of them do not believe that they can come out of poverty if they work hard. In any case, the poor do not look at using money for production but, rather, for consumption.
Instead, when they get money, some go to witch-doctors first to consult on what the future holds, others pay bride wealth or introduce their dear ones, none of which is profit-making. In the end, many borrowers default on their loans. It is common to go to villages and find houses written on “for sale” while poor people’s land has posters with the same wording.
However, microfinance institutions must be hailed in areas like availing loans for school fees. There are many people who borrow to pay tuition for their children and other dependants. Without their existence, access to education would be a nightmare for many poor households.
As we all possibly know, education is a sure way to success because that’s where we access knowledge. This is the long-term investment I talked about. The institutions should also be applauded for providing capital to small businesses that would not get loans from conventional banks. Without them, it would be hard for some traders that need to expand their businesses.
As microfinance institutions continue to make profits, they should put in place a mechanism to reward those who service their loans on time. However, that is not enough. Something tangible needs to be put in place to benefit those who pay up. This would encourage defaulters to work hard and benefit from such rewards.
The writer is a lecturer at Makerere University.