On Credit Activities in the Rural Area in Uganda
Access to credit by people living in the rural area is an aspect in Development which requires attention, as it reduces vulnerability and promotes prosperity in such areas. There are potential benefits of credit activities which include creation of jobs, reduction of vulnerability (ability to save for an emergency, take a loan, and have insurance policies to cover for health expenses in case of illness), amongst others (Hulme, 1997). This essay discusses the benefits, as well as the inconveniences associated with engaging in credit activities. In the rural areas in Uganda especially in Hoima, Buliisa, and Masindi districts, my research made two major findings about credit activities. Firstly, people living in the rural areas participate in credit activities depending on the specific needs they want to address. Secondly, they participate in accessing credit based on the availability of credit institutions.
A variety of private sector organisations mostly provide credit services to people living in rural areas. They include: formal credit institutions, semi-formal credit institutions, and informal credit institutions (Guntz, 2011). The credit services provided by these organisations are usually tailored to meet the needs of people in the rural area.
While, Kasirye (2007) and Mpuga (2008) claim that informal credit institutions serve the rural people of Uganda to a large extent, my research discovered that the various kinds of credit institutions serve the people depending on the need to be addressed. For example, most respondents expressed that they preferred to approach the bank to obtain a business loan rather than to approach the available semi-formal credit institutions, but if they would need to get an agricultural loan, they would prefer to approach semi-formal credit institutions.
A critical examination of the preferences of the people living in the rural area explains why my findings differ from the existing literature. The people interviewed in my research responded hypothetically. That is, their replies expressed the kind of institution they would access credit from in theory, but when asked about the institutions they already approach to obtain credit, in practice, 40% mentioned semi-formal credit institutions, 20% mentioned informal institutions, and the rest claimed that they do not borrow because they are unable to guarantee repayment. Based on both the hypothetical and practical responses of the people, one can infer that the credit institutions which serve them is skewed towards semi-formal and informal credit institutions. Apparently, the people do not have the latitude to afford needs beyond daily survival in order to engage in formal credit activities since most of them survive on the little they have, and thus, approach semi-formal, and informal credit institutions to meet their financial needs. However, if they had higher income they would have the leeway to choose formal credit institutions to access credit from. A contributory factor to this inadequacy is the low income per capita of the country (Aredo, 1993).
The other determining factor of the people’s participation in credit activities is the variety of credit institutions. That is, the extent to which people who live in Buliisa participate in credit activities depends on the options of credit institutions available. To further illustrate, there exists only one bank in the whole of the district. This suggests that no other option of a formal credit institution is available for the residents if they are not pleased with the terms and conditions of the only bank. Therefore, there is limited participation in credit activities and economic activities. This is a major issue which affects the economic development of the area negatively as it leads to a low level of economic activity which further contributes to low Gross Domestic Product (GDP) of the country (Ahlén, 2012).
Furthermore in Buliisa district, another credit activity discovered was a micro-credit savings group run by the fisher-persons. It was created when Tullow oil donated a box to the fisher-persons to heap together their savings, and carry out micro-credit activities such as giving emergency loans. This small-scale credit activity enables them to save towards projects in their lives. For example, money saved and realized after a year could be used to buy a bicycle to enhance transportation.
Masindi & Hoima Districts
The presence of Small and Medium Enterprises (SMEs) seen when arriving Masindi indicated that there are a variety of credit services, unlike in Buliisa; credit institutions which provide extensive credit required to start up, and sustain SMEs were available. Based on this, one could presume that a predominant indicator of the variety of financial services in a geographic location is the presence of Small and Medium Enterprises (SMEs).
On the supply side of financial activities, recurring constraints faced include seasonality patterns, multiple loans, late repayments. The challenge of seasonality patterns as stated by the branch head of Hofokam Microfinance, Masindi is usually due to clients who are farmers that do not yield crops because of a bad planting season. She explained it as a natural disadvantage which affects repayment of loans, thereby affecting the flow of finances in the credit institution. Nevertheless, there is a late repayment penalty on the defaulting clients.
Also, the leadership of another microfinance institution, Caritas Development Organisation HOCADEO in Hoima raised the issue of late repayment of loans and ascribed it to seasonality patterns as well. He claimed that late repayment of loans by their clients adversely affects the flow of financial activities. On dealing with the challenge, he stated that because HOCADEO is a faith-based credit institution, collateral are not forcefully collected and sold as practised in formal credit institutions. Instead, they ensure that the defaulting client sells the collateral and repays with the proceeds. This highlights the various ways credit institutions deal with late repayments. Formal credit institutions collect the collateral and sell, while some semi-formal institutions encourage the clients to sell and then go ahead to collect the proceeds, others place a penalty for late repayment on the service (Solli, 2015).
Furthermore, Dahir (2015) provided a practical evidence about a challenge which credit institutions face. It stated that rural people have a misperception about credit institutions due to their new inception, poor support from government and donor funding and that frustrates their advancement. This was confirmed in Masindi as 20% of the respondents stated their preference to keep their money handy as they do not trust the new credit institutions springing up. This poses a constraint for credit institutions as they will have to prove themselves credible through time and integrity.
On the demand side, the respondents mentioned a challenge of unstable source of income to further credit activities. This suggests that a significant number of them are low-income earners who cannot afford to save, and therefore, consume all of their income. Usually, households in the rural area have a low capacity to save mainly because of the low level of per capita income in the country (Aredo, 1993). For example, a major complaint by teachers in Jordan private School in Masindi was a low capacity to save caused by salary delay. They expressed interest in participating in credit activities but feared that salary delay would cause late repayment problems as they already end up using up their earnings.
The findings of this research illuminate on the credit activities in Buliisa, Hoima and Masindi districts of Uganda. Tellingly, they provide a view into the financial lives of the rural people with respect to their preferences, and inadequacies. Also this research identified the problems, and potential benefits associated with the engagement of rural people in micro-finance. The problems discovered is a call for the government of Uganda to contribute to increasing financial activity in order for more people to engage in credit activities thereby increasing the GDP growth. On the other hand, the rural people must be hardworking, and attuned to the growth of the economy in order to take advantage of credit opportunities.
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