MICROFINANCE AND POVERTY ALLEVIATION INUGANDA BY SSEMBAJJWE BEN SUBMITTED IN FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF ECONOMICS IN THE FACULTY OF BUSINESS AND ECONOMIC SCIENCES AT NELSON MANDELA UNIVERSITY SUPERVISOR: PROF. RONNEY NCWADI 2018 DECLARATION NAME: SSEMBAJJWE BEN STUDENT NUMBER: 213398745 QUALIFICATION: PhD Economics TITLE OF PROJECT: Microfinace and Poverty Alleviation inUganda In accordance with Rule G5.6.3, I hereby declare that the above-mentioned thesis is my own work and that it has not previously been submitted for assessment to another University or for another qualification. ……………………………………….. SIGNATURE ……………………………………….. DATE i ACKNOWLEDGEMENT I would like to thank my supervisor, Professor Ncwadi Ronney, for hisinvaluable advice and support over the past three years. I appreciate the time and effort you took to improve my work and this has led to my better understanding of economics. It is due to your guidance and teaching that my economics skills have grown and improved. I would also like to extend my gratitude for the help and advice from Mr. Jonah Kiberu, Prof. Kigongo Bukenya, Dr. Aminah Nantumbwe, Dr. Ronald Kyagulanyi, Dr. Musisi Fred Kamoga, Mubeezi Richard, Joseph Kiggundu, Florence Nampijja Kirabo, Nakabiri Lydia and Ocan Johnson. My appreciation also goes to the remaining members of staff at the Muteesa I Royal University, the non-academic and academic staff whose work has not gone unnoticed. I would like to thank the numerous PhD students in addition to the various academics for their comments and discussions that have led to substantial improvements in this thesis. A vote of thanks goes to all my friends who have offered support to me over the past few years. In particular, Walusimbi Leonard, Hon Mpuuga Mathias, John Bosco Kavuma, Nviri Godefrey, Nsereko Mike and Mwanje John deserve special mention. This extends to my colleagues who I can now call dear friends, especially Kaddu Willies and Bazongere Paul. I honestly appreciate the efforts Mrs Steenburg Redene and the language and technical editor Mrs Van Niekerk for the professionalism and commitment that she demonstrated when editing this thesis. Last, but not least, I would like to thank my family, especially my wife Justine Naluzze. It is with her continued belief and support that I have managed to attain the levels that I have, personally and academically. ii DEDICATION I dedicate this thesis to my mother, Mrs. Zavelina Kayongo and my father, the late Paul Kayongo, for giving me a good foundation in education. iii ABSTRACT Microfinance began in Uganda in the early 1990s as a response to the failure by formal financial institutions to extend financial services to the poor because of the high transaction costs involved. These microfinance institutions provide financial and non-financial services to the poor in order for the poor to generate incomes and consequently alleviate poverty. The advent of microfinance institutions was not accidental but rather in response to the people’s needs and they have therefore been beneficial for the people of Uganda. Because of that, several MFIs have been initiated to help the poor. Although many services are provided, the study focused on credit services. As most of the MFIs have to balance the business goal of profit maximization and the social goal of poverty reduction, the main objective of this study was to explore whether microfinance in Uganda is an effective tool for poverty alleviation. The study was conducted in four districts, namely Mukono, Mpigi, Wakiso and Luwero. Using random probability sampling, a sample of 170 was drawn from a pool of 300 MFI clients. and all of them responded. MFI officials were also interviewed. A total 136 officials were obtained from 47 MFI branches. The study used descriptive methods of analysis, a Likert scale to derive means, as well as a Principal Component Analysis technique. Analysis of variance (ANOVA) was used to detect if there were any statistically significant differences among the demographic variables used in the study. A Probit Regression Model was used to determine the impact of certain variables drawn from Principal Component Analysis (PCA) on poverty in Uganda. The results obtained proved that MFIs in general are effective in combating poverty in Uganda. Variables that are significant in poverty reduction through loan use are land, education, employment, household incomes and occupations of the respondents, loan sizes and improved livelihoods. Despite the positive impact of MFI loans in Uganda, the MFIs are faced with a number of challenges. The results from the interviews with the MFI officials indicated that MFIs are iv challenged by increasing competition, bad debt, multiple borrowings by clients, and information asymmetry. The study recommended reduced interest rates on agricultural, education and business loans. The public must also be sensitised about borrowing and there should be increased monitoring and supervision of clients, improved assessment of creditworthiness, and government should ensure an enabling environment and encourage group loans. Effort should be exerted to create employment opportunities. The study also recommended improvement in market intelligence and to be alert in gathering information on client profiles. it was recommended that microloan insurance and savings must be encouraged, operational costs be reduced, portfolios be expanded to increase loans and outreach must be maximised. Lastly, the thesis put forward some potential areas for further studies. Keywords Microfinance, Poverty, Poverty Alleviation, Poor and Uganda v TABLE OF CONTENTS DECLARATION....................................................................................................................... i ACKNOWLEDGEMENT ....................................................................................................... ii DEDICATION......................................................................................................................... iii ABSTRACT ............................................................................................................................. iv LIST OF ANNEXURES ...................................................................................................... xvii LIST OF TABLES .............................................................................................................. xviii LIST OF FIGURES ............................................................................................................... xx LIST OF ABBREVIATIONS AND ACRONYMS ............................................................ xxi CHAPTER ONE INTRODUCTION AND BACKGROUND OF THE STUDY 1.1 INTRODUCTION ......................................................................................................... 1 1.2 BACKGROUND OF THE STUDY .............................................................................. 2 1.3 STATEMENT OF THE PROBLEM ............................................................................. 6 1.4 OBJECTIVES OF THE STUDY ................................................................................... 7 1.5 RESEARCH HYPOTHESES ........................................................................................ 8 1.6 RESEARCH METHODOLOGY ................................................................................... 8 1.7 EMPIRICAL LITERATURE REVIEW ........................................................................ 8 1.8 SIGNIFICANCE AND RATIONALE OF THE STUDY ........................................... 11 1.9 DELIMITATION OF THE STUDY ............................................................................ 12 1.10 OVERVIEW OF THE THESIS ................................................................................... 13 1.11 DEFINITION OF KEY CONCEPTS AND TERMS .................................................. 14 1.12 CONCLUDING REMARKS. ...................................................................................... 15 vi CHAPTER TWO THEORETICAL LITERATURE REVIEW 2.1 INTRODUCTION ....................................................................................................... 16 2.2 THEORIES OF MICROFINANCE ............................................................................. 16 2.3 PRINCIPAL AGENCY THEORY .............................................................................. 18 2.3.1 Adverse selection ........................................................................................... 20 2.3.2 Moral hazard .................................................................................................. 20 2.4 STAKEHOLDER THEORY ....................................................................................... 23 2.5 SUPPLY LENDING FINANCE THEORY ................................................................ 24 2.6 WELFARISTS’ SCHOOL OF THOUGHT ................................................................ 25 2.7 THE INSTITUTIONAL SCHOOL OF THOUGHT ................................................... 25 2.7.1 The Concept and Measurement of Poverty .................................................... 27 2.7.2 Measurement of Poverty ................................................................................ 29 2.7.3 Absolute Poverty Measure ............................................................................. 29 2.7.4 Relative Poverty ............................................................................................. 30 2.7.5 Subjective Measure .......................................................................................