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2007 AEC - Rural Credit Markets in Uganda: Evidence from the 2005/6 National Household Survey

15-Nov-2007

Although the financial sector has tremendously expanded in Uganda, access to financial services by rural households remains very low. This study examines the rural credit markets in Uganda using the 2005/06 Uganda National Household Survey data. Specifically, we investigate the extent to which both formal and informal service providers meet the borrowing needs of rural farmers. Also, we examine the factors associated with the likelihood of a household applying for loan. We find that rural areas have limited access to financial service providers despite being home to more than 80 percent of the Ugandan population. As such, most rural households obtain credit predominantly from informal sources—mainly friends or relations. Other household characteristics indicate that households who do not applied for credit have a poverty headcount more than twice that of households that have applied for credit at least once, in the past 12 months. Regression results point to having a savings account as key determinant of credit applications by rural households. Consequently, it is not only the accumulation of assets but also the extension of financial services to rural areas—they by enabling rural households to open and operate accounts, that is necessary for the growth and promotion of rural financial markets in Uganda.

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