EFFECT OF MICROFINANCE SERVICES AND LIVELIHOOD IMPROVEMENT IN

UGANDA

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study

Microfinance institutions (MFI) emerged in mid 1970s, its popularity has grown among
academicians and policymakers. Microfinance is frequently promoted as a cure for eradicating
poverty, particularly in developing nations ( Salman, & Meera, 2020). Poverty in emerging
countries is defined by characteristics such as rapid population expansion, low economic
development, unequal financial resource distribution, low income stability, and an increase in
violence, among others. All of these variables combine to create unfavorable working conditions
for the poor, such as low labor productivity, and unemployment (Drasarova & Srnec, 2019).
Microfinance is a global response to these problems and the economic crisis, particularly in the
poorest developing countries. It is regarded as one of the tools capable of alleviating poverty
(Bassem, 2019).

Microfinance is the provision of credit, savings, insurance, educational and training services, and
other financial services to the poor. The origins of the microfinance movement can be traced
back to the economist Muhammad Yunus in 1976. Muhammad Yunus began the experiment of
establishing the Grameen Bank in Bangladesh. This was initially intended for the very poor, but
it later attracted other social classes of the poor who were more economically active to start and
run their small businesses (Ledgerwood & Earne, 2013).

Several microfinance institutions operate in Uganda, providing loans and bank accounts to local
people, Money lenders, Small banks, MFIs, and MDIs such as Uganda Finance Trust Ltd,
FOCCAS, FINCA Uganda, Faulu Uganda, UGAFODE, BRAC Uganda, and Pride MF Ltd,
among others. According to the Directory of Microfinance Institutions in Uganda, there are
various businesses limited by shares and a huge number of credit NGOs, companies limited by
guarantee, cooperatives, and credit unions (Carlton, Manndorff, Obara, Walter, 2001).

BRAC International was founded in 1972 as the Bangladesh Relief Assistance Committee in
response to the humanitarian needs of thousands of refugees returning to their homes after

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Bangladesh’s War of Independence. After initially establishing relief and rehabilitation
operations, BRAC shifted its focus in 1973 from relief to long-term community development and
was renamed Bangladesh Rural Advancement Committee (BRAC) (Fazle, 2009). BRAC
international operates in four countries in Asia (Afghanistan, Myanmar, Nepal and the
Philippines) and six countries in Africa (Liberia, Tanzania, Sierra Leone, Rwanda, South Sudan,
and Uganda). Its interventions aim to achieve large scale, positive changes through economic
and social programs that enable men and women to realize their potential (Muhammad, 2020).

BRAC’s programs in Uganda can be categorized as: Core programs, Support programs, and
International programs. Core Programs include; Economic development, education, health,
social development and legal services program. Support Programs are; Training, research and
development, human rights and advocacy, public affairs and communications, publication and
audiovisual, administration and special projects, finance and accounts, internal audit, monitoring
and human resource development (Fazle, 2012).
Microfinance is the heart of BRACs integrated approach to alleviating poverty and helping poor
Ugandan women realize their potential. More than 150000 women are members of almost 6000
community-based microfinance groups throughout Uganda .They gather weekly in villages,
towns and city neighborhoods to make repayments on their loans and apply for new ones (Fazle,
2009)

Tororo District is located in the Eastern part of Uganda, Tororo District is bordered by Mbale
District to the North, Manafwa District to the Northeast, Kenya to the east, Busia District to the
South, Bugiri District to the Southwest, and Butaleja District to the northwest (Mungyereza,
2017). The District was originally created from part of the Greater Maluku, to form Bukedi
District that changed to Tororo in 1980. The District has since then altered in size giving birth to
several Districts. At the time of assessment, the current district comprised 19 sub counties and 1
municipality. Tororo has had a steadily increasing population of about 2.7% per annum. In 2012,
the mid-year population was estimated at 487,900. Tororo District is multi-ethnic with tribes
including the Jopadhola, Itesots, Banished, Samia, as well as the Kenyan Nandi (Mukasa, 2012).

There are also many other informal financial services in Tororo District such as simple reciprocal
arrangements between relative/friends, neighbors, savings clubs and Rotating Savings and Credit

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Association (ROSCAs) and systems of cooperative business finance. These informal support
systems are hinged on the social network arrangements where members regard each other as a
source of support for development.

Microcredit is viewed as a critical policy tool by the Ugandan government and other
development partners in combating poverty and improving the livelihoods of the poor (Schmidt,
2012). In this context, livelihood refers to the abilities, assets (including natural, financial, social,
human, and physical resources), and activities required for a means of subsistence (Chambers
and Conway, 1992). Livelihood can also be defined as the means by which people support
themselves and the environments in which they operate. Microfinance is thought to help the poor
increase their productivity, reduce risks, increase income, and improve their quality of life;
however, this association has not been thoroughly proven among Tororo District consumers. In
this context, microfinance services and livelihood improvement in Tororo District will be
investigated in this study.

The study examines microfinance services and livelihood improvement of beneficiaries in

Tororo District. The research will be limited to Tororo District because the division is one of the
poorest in Eastern Uganda (UBO S, 2019/20). There are various MFIs in the district, but the
research also covered other issues other than livelihood improvement. Contextually, the study
covers: microfinance access by clients, lending strategies of the microfinance institutions, role on
its target beneficiaries and constraints facing the microfinance clients in the survey in Tororo
District. In relation to time scope analysis. It will be limited to the period 2022. However,
references would be made to earlier date where necessary.

1.2 Statement of the Research Problem

Microfinance is viewed as an effective tool for improving livelihoods and an approach to

empowering the poor, particularly poor women. According to independent studies, microfinance
has a slew of positive effects on the families who receive it. According to Banuri (2006),
microfinance institutions have been successful in increasing household income, decreasing
economic vulnerability, and providing better nutrition, health care, economic empowerment, and
poverty alleviation to target beneficiaries.

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According to empirical evidence from impact studies, income poverty in Uganda increased from
6.6 million in 2012/13 to 10 million in 2016/17 as a result of microfinance interventions
(Mungyereza,2018). Microfinance has been used as a poverty-eradication strategy to provide
low-income people with small grants, microcredits, and other microfinance services as an
impetus to exploit their productivity and develop their businesses, allowing them to improve
their living conditions (Andy Carlton, Hannes Manndorff, Andrew Obara, Walter Rei- ter,
2001)s.

In light of the aforementioned issues, the purpose of this research is to assess the role of
microfinance in improving livelihoods in Tororo District. This study also seeks to ascertain the
microfinance loans on beneficiaries versus non-beneficiaries. This study is also expected to fill a
gap in the literature because little effort has been made to study the microfinance services and
livelihood improvement in Tororo district.

1.3 Objectives of the Study

1.3.1 Main Objective

To assess microfinance services and livelihoods improvement in Tororo District.

1.3.2 Specific Objectives

i. To assess the microfinance lending strategies of the target beneficiaries.
ii. To examine the outcome of micro-credit on the livelihood of the target beneficiaries.
iii. To examine the factors influencing loan utilization in Tororo District.

1.4 Significance of the Study

Academicians and researchers will benefit from the study on the role of microfinance in
enhancing household livelihood in Tororo District since it can be used as a springboard for future
research. Furthermore, the data will be beneficial to policymakers, particularly district, town
councils, and the Ministry of Microfinance, who may use it to advocate policies and bylaws that
will allow more people to access microfinance and get the maximum benefits from it. The
outcomes of this study are expected to emphasize the influence of microfinance institutions on
the livelihoods of its beneficiaries, allowing policymakers to examine options for replication
across Uganda.

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1.5 Scope of the Study

The study examines microfinance services and livelihood improvement of beneficiaries in

Tororo District. The research will be limited to Tororo District because the division is one of the
poorest in Eastern Uganda. There are various MFIs in the district, but the research also covered
other issues other than livelihood improvement. Contextually, the study covers: microfinance
access by clients, lending strategies of the microfinance institutions, role on its target
beneficiaries and constraints facing the microfinance clients in Tororo district. In relation to time
scope analysis will be limited from May to July 2022. However, where necessary, references will
be made to earlier date.

1.6 Conceptual Framework

A conceptual framework is defined by Kothari (2004) as a structure that presents relationship

between the main constructs in a given study. Mugenda (2003) further adds that a conceptual
framework gives an explanation of how the researcher perceives the relationship between
variables deemed to be important in a study. The independent variables are the MFI lending
strategies while dependent variables being livelihood improvement. In this study, it is anticipated
that loan utilization is more likely to be constrained in accessing loans than their male
counterparts due to gender relations who will in-turn will affect their livelihood assets and
welfare. Likewise, those with low income levels will acquire smaller loans compared to those
with higher income levels. Moreover, it is expected that MFI clients with better access to these
assets would have improved welfare than those with less or limited access. However, important
to note is the age, gender and income differentials influences which assets are to be owned by
which type of group in a given household.

Finally, the mediating variables are the factors that influence loan utilization. It is anticipated
that high interest rate will most likely deter the beneficiaries from access and utilizing the loans
which will eventually affect their livelihood assets and welfare. Loan size will also have its own
influence because the smaller the loan size, the less productive activities households will be
engaged in hence poor standards of living. Household’s access to collateral will also affect their
access to loans, loan utilization and their quality of life. This is presented in Figure 1 below.

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 Dependent Variable Independent Variable

Microfinance
Institutions
Policies and practices Livelihood
Types of loans Improvement
Interest rates
Human capital
Credit Associations
Staffing Skills acquired and
Time of pay back knowledge
Financial asset
Increased access to
MFI Lending credit and savings,
Strategies remittances
Training people Social capital
Formation of groups Increased trust,
Partial repayments cooperation and
relationships
Physical asset
Factors that Increased access to
Influence Proper roads, tools and
Loan Utilization technology
Individual Natural asset
characteristics Land acquired and other
Type of business resources
Entrepreneurship
skills

Figure 1: Conceptual Framework

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1.7 Theoretical Perspective on Livelihood

1.7.1 Sustainable Livelihood Theory

The notion of livelihoods originates in development practice. In simple terms, ‘livelihood’ is a

means of gaining a living, or means of achieving well-being and sustaining it (Messer Norman et
al., 2003). A livelihood is defined by to Carney (1998), as comprising “the capabilities, assets
(including material and social resources) and activities required for a means of living. A
livelihood is considered to be sustainable when it can cope with and recover from stresses and
shocks and maintain or enhance its capabilities and assets both now and in the future, while not
undermining the natural resource base”. Therefore, a livelihood does not mean just activities that
people carry out to earn a living, but it means all the different elements that contribute to, and
affect people’s ability to ensure a living for themselves and their household.

The framework categorizes the “five core assets” upon which a livelihood is built. In order to
live a sustainable livelihood, the Department for International Development (DFID) sheets (April
1999) highlight that one has to be able to reach these five assets namely; human capital, social
capital, natural capital, physical and finally financial capital. In order to eradicate poverty and
live sustainable livelihoods, individuals have to acquire the above assets. It is also important to
note that these assets relate to each other, that is to say; acquiring a particular asset may lead to
acquisition of another asset and so on. For example, access to education or better skills (human
capital) can lead to being accepted in a particular community being that one can well and highly
respected based on their educational level or skills (social capital). The purpose will be to find
out how micro-credit can improve the livelihoods of beneficiaries through achieving the above-
mentioned key assets of capital, since these assets are the center upon which livelihood is based,
according to the (DFID) sustainable livelihood sheets, (1999).

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