Determinants of access to informal credit among households in Uganda

Abstract

Uganda’s credit system is divided into two that is; informal credit and formal credit. Informal credit system happens to be the dominant one. Informal credit involves loans provided by informal financial institutions not under the control of government or bank of Uganda. This dissertation examines the determinants of access to informal credit among households in Uganda. A logit model was used to establish the extent to which independent variables could explain access to informal credit among households in Uganda. Uganda National House hold survey (UNHS) data (2019/2020) was used. The results revealed that informal credit was positively and significantly influenced by; region, education, income, sector of employment and marital status. However, access to informal credit in Uganda was negatively and significantly influenced by residence as well as gender of the household head. The key policy recommendations; evidence showed that education had a positive association with access to informal credit therefore, for better access and utilization of informal credit, government should widen and strengthen its financial literacy programs and preferably translate financial literacy materials to the local languages for better understanding. Government can as well use community based and multimedia platforms like radios, newspapers as well as televisions for promoting financial literacy. On the sector of employment, evidence indicated that informal credit was accessed mostly by people employed in the production sector. In Uganda the production sector is composed of mainly small and medium enterprises (SMEs) Given that SMEs play an important role in production and generation of employment, government should provide tailor made credit specifically for SMEs to boost production. Government can also promote value addition in the small and medium enterprises so that they can generate more income to pay back the credit. Additionally, evidence from the results also revealed that informal credit was accessed more by women. The policy recommendation is that government should widen and strengthen gender friendly policies and programs in support of informal financial sector directed to women financial needs in the economy. Concerning variable income, findings indicated that income had a positive association with access to informal credit. The policy recommendation therefore is that government should strengthen its socio-economic empowerment and livelihood programs to enhance household incomes so that households are able to invest and pay back the loans.