Microfinance and Poverty Reduction in Uganda: Achievements and Challenges

This study investigates the achievements and challenges of microfinance as an instrument of poverty alleviation in Uganda. Public policy in Uganda articulates increasing access to credit by the poor. It also emphasizes MFI sustainability.

The MDI Act (2003) aims to enhance the efficiency of the Ugandan microfinance sector. It provides opportunities for MFIs to be licensed under Tier 3 and to intermediate public savings. Microfinance’s achievements in poverty alleviation in Uganda include its potential for financial sector deepening, innovation in lending technologies for the poor and employment creation. Its challenges include restricting targeting to the economically active poor, lack of access to savings services for the poor, high interest rates, being urban-based, inability to design appropriate financial products for the poor and misunderstanding of gender issues. Policy recommendations to enhance the performance of microfinance as an instrument for poverty alleviation include:

• Provision of incentives to sustainable MFIs to extend services to rural areas;
• Capacity building of MFIs to develop appropriate policies, procedures and products that enhance the participation of both men and women;
• Publication of interest rates and fees charged by MFIs to stimulate sector competition and efficiency.