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Micro credit: Good or bad for Uganda’s poor population?

Annet Nakaunde Mulindwa, the managing director at the Finance Trust Bank, says with the innovation in the information and communication technology, financial institutions are now creating micro-credits to customers that were initially deemed unbankable.

“…formal banks have been reluctant to offer services to the poor who cannot supply sufficient collateral to secure loans. As a consequent, poor households tend to be excluded from formal financial services, not only borrowing but also savings and insurance, which in turn prevents the poor from investing in various profitable projects, smoothing consumption, and improving their ability to cope with various unexpected shock,” she told The Independent in an interview.

As an alternative, she says, financial institutions are coming up with new ways of including the unbankable population to their services riding on telecom networks to not only alleviate them from poverty but also enable financial institutions grow their loan portfolios.

This new development comes at the time mobile money users have grown exponentially over the past few years surpassing bank account holders.

Latest data from Bank of Uganda shows that mobile money users have increased to more than 19million customers since mobile money was introduced eight years ago while the value of transactions has increased from merely Shs490million in March 2009 to Shs4.96trillion as at the end of March 2017.

A source in the industry, who spoke to The Independent on condition of anonymity because  is not authorised to speak to the media, said the surge in demand for micro-credit has been driven by the high demand for quick short term loans.

“The customers applying for this kind of credit are interested in solving an immediate need. For instance, he/she has ran out of fuel in the car or simply need to boost his financial capability to enable him/her go through the month,” the source said.

The source defended the high interest charged on the micro-credit saying the risks involved are very high as there’s no collateral for the credit advanced.

One of the micro-credit beneficiary is David Mutiba, 33, a small trader in downtown Kampala, who deals in buying and selling of new polythene packaging paper bags for three years now, says MoKash has kept on boosting his business.

He says while micro-credits may be expensive, it also saves him of time and costs of moving up and down to mobilise more funds in case he wants to purchase more products.

“I always borrow between Shs40, 000 to Shs100, 000 via my mobile money account every time I realise I need to buy more products yet I don’t have enough money,” he told The Independent.

Fred Muhumuza, an expert on financial inclusion and one of those who negotiated with Bank of Uganda to roll out MoKash, said the increase in demand for the micro-credit is attributed to the growing need for small amount of money to solve short term challenges.

“The customers applying for these small loans are interested meeting their needs at that particular time,” he said “You have a patient or a business deal and the only thing you need is some money immediately.”

He says many people are also interested in micro-credits because the loan application and approval process is faster compared with the traditional banking model.

Muhumuza said it is as a result of the surging demand for micro-credit that financial institutions are now coming up with new credit facilities targeting low income earners facilitated with technological innovations.

“The availability of technology is making loan processing cheaper and therefore these financial institutions can afford to give small loans and charge a little of interest rates. The target customer segment may be borrowing little but they are very many and at the end the financial institution benefit,” he said.

He added that the stiff competition in the financial sector is also forcing financial institutions to think ‘outside the box’ and come up with products that cuts across customer segments to grow their revenues.

Following Kenya’s footstep

The high uptake of micro-credit in Uganda appears to be following Kenya’s footstep, which has lately seen a surge in demand, boosting financial inclusion.

For instance, Mobile-based bank account KCB M-Pesa disbursed a total of Kshs10.3 billion (Shs 357.1bn) in loans to its customers since March last year, indicating a growing appetite for short-term loans.

The platform is said to have been advancing between Kshs25 million (Shs 866.9million) and Kshs30 million (Shs1.04bn) in loans daily since it was unviled in 2015.

The joint venture between the bank and Safaricom has signed up 6.4 million account holders with over Ksh286 million (Shs 9.9bn) saved on the platform.

The platform allows registered customers to save up to Sh1 million, earning up to 6% in interest. Account holders can also access up to Kshs1 million (Shs34.6million) in instant loans, accessible on the M-PESA menu. The loan can be repaid in up to 180 days.

Loans and credit disbursed via mobile banking has been growing despite banks seeing the stagnation of their loan books in the first six months of the year.

Similarly, CBA has also partnered with Safaricom to offer short-term loans through its mobile money platform.

The product dubbed M-Shwari currently has 13 million customers and disburses loans for a period of 30 days for a one-off interest rate of 7.5 %

The maximum amount was initially capped at Kshs20, 000 but individuals with good repayment history can receive up to Kshs50, 000 disbursed into the mobile phones.

The lowest amount one can borrow is Kshs100 (Shs3, 400). M-Shwari is said to processes an average of 70,000 loans daily. CBA has also unveiled a similar service in Tanzania and Rwanda dubbed M-Pawa and MoKash in partnership with Vodacom and MTN Rwanda, respectively.

However, it remains unclear on how Uganda’s financial institutions plan to handle loan defaulters compared with their Kenyan counterparts.

For instance in 2014, CBA blacklisted more than 140,000 users of the mobile phone based bank account M-Shwari for defaulting on loans.

The bank forwarded names of  defaulters to credit reference bureaus locking them out from accessing the loans market for at least five years or consigning them to high borrowing charges.


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  1. Mr Ntoni Timbyetaho, CEO Financial Planning Campaign- East Africa.

    Dear Independent,

    Is there a way we can do without loans. May be be we need to boost our own savings first and then latter use it for borrowings. Remember the culture of saving money here in Uganda is still lacking. Its is also clear that the risk and cost of borrowing is still high.

  2. MoKash allows borrowers loans of up to Shs 1 million repayable within 30 days at an interest rate of 9% per month, which translates into 108% interest rate annum. On the other hand, savers earn 2-5% as interest during the same period under review. Lord!! this is why I don’t save with banks, I just let them hold my money for a bit [grins]

  3. I think there’s a misconception about micro-loans. They are intended to serve a specific short term need, hence its not fair to annualize their interest rates (108% p.a) for a loan that’s intended to not exceed 30 days. Remember these are unsecured loans, so the exposure to the lender is very high, its a risk they take in lending to someone they have never met, or who doesn’t give any asset in return.

    Again – i don’t think anyone says “that hotel charges $73,000 in accommodation per year”, in the same sense the interest rate can’t be computed annually for a short term loan.

    These loans are helpful in emergencies and for SME’s that don’t have good cashflows. The multiplier effect over these 30 days makes the short term loan very handy.

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