The Design of Micro Credit Contracts and Micro Enterprise Finance in Uganda

Winifred Tarinyeba-Kiryabwire

Description

Studies have shown that the negative effects of credit market inefficiencies are most felt by smaller firms. Therefore, in countries such as Uganda, where micro enterprises are at the bottom of the economic pyramid, moral hazard and adverse selection severely affect their ability to access formal credit hence limiting their growth potential. Microfinance has been heralded for its use of innovative lending methods to improve access to credit. The last decade has witnessed an unprecedented increase in the outreach of micro lending institutions and the development of financial products suited to the needs of the economically active poor, who often, are unable to obtain credit from mainstream financial institutions. This book analyzes the law and economics theories on access to credit and enterprise finance and based on case studies in Uganda, presents empirical findings of the promise and limits of contractual innovations in micro credit.

Sujets

• Law

Informations

• Publié par: LawAfrica Publishing Ltd
• Date de parution: 29 décembre 2010
• Nombre de lectures: 2
• EAN13: 9789966031976
• Langue: English
• Poids de l'ouvrage: 6 Mo

Extrait

T HE D ESIGNOF M ICRO C REDIT C ONTRACTS AND M ICRO E NTERPRISE F INANCE IN U GANDA

T HE D ESIGNOF M ICRO C REDIT C ONTRACTS AND M ICRO E NTERPRISE F INANCE IN U GANDA

Winifred Tarinyeba Kiryabwire September 2010

Published by:

LawAfrica Publishing (U) Ltd Crown House, 1st Floor Plot 4A, Kampala Road P.O. Box 6198 Kampala, Uganda Phone: [phone] Fax: [phone]

LawAfrica Publishing (K) Ltd Co-op Trust Plaza, 1st Floor Lower Hill Road P.O. Box 4260 - 00100 GPO Nairobi, Kenya Phone: [phone] Fax: [phone]

LawAfrica Publishing (T) Ltd Twiga Towers, 6th Floor P.O. Box 38564 Dar-es-Salaam,Tanzania Phone: [phone] Fax: [phone]

Email: [e-mail] Website: www.lawafrica.com © Winifred Tarinyeba Kiryabwire; LawAfrica ISBN 9966-1511-4-8

Preface Dedication Acknowledgement List of Tables List of Figures List of Abbreviations

T ABLE O F C O NTENTS

Chapter One 1.0 ACCESS TO MICRO CREDIT IN UGANDA 1.1 Introduction 1.2 Research Problem and Research Questions 1.3 Motivation for the Study 1.4 Research Methodology 1.5 The Research Population 1.6 Selection Criteria 1.7 Limitations 1.8 Data Analysis

Chapter Two 2.0 FINANCIAL DEVELOPMENT, AND ECONOMIC GROWTH: CREDIT, CONTEXTUALIZING THE THEORIES 2.1 Financial Development and Economic Growth: Is there a Nexus? 2.2 Missing Credit Markets in Low Income Countries and the Implications for the Finance-Growth Trajectory 2.3 Credit Markets in Low Income Countries 2.4 “Innovative Lending” and the Role of Micro Credit in Bridging the Access Gap

Chapter Three 3.0 CREDIT MARKETS IN UGANDA 3.1 A Profile of the Financial Sector in Uganda: Dualism in the Financial Market 3.2 Commercial Banks and Micro Enterprise Access to Credit 3.3 Credit Institutions and Micro Enterprise Access to Credit

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W. M.Tarinyeba Kiryabwire The Design of Micro Credit Contracts and Micro Enterprise Finance in Uganda

3.4 Microfinance Deposit Taking Institutions and Micro Enterprise Access to Credit 3.5 Microfinance Institutions (Non-Deposit Taking) and Micro Enterprises Access to Credit 3.6 Informal Financial Institutions 3.7 Factors Contributing to the Costs of Providing Credit

Chapter Four 4.0 MICRO CREDIT AND THE PROMISE OF MICROFINANCE: BRIDGING THE ACCESS TO CREDIT GAP 4.1 The History of Micro Credit in Uganda 4.2 Microfinance Institutions: Outreach and Product Development 4.3 Micro Credit and Micro Enterprise Access to Credit: Anecdotes of Small Loans Producing Big Changes

Chapter Five 5.0 MICRO ENTERPRISES IN UGANDA: DEFINING CHARACTERISTICS AND DETERMINANTS OF FINANCING DECISIONS 5.1 Micro Enterprise Characteristics 5.2 Micro Enterprise Finance: Determinants of Financing Decisions 5.3 Costs of Credit and Micro Enterprise Finance

Chapter Six 6.0 MICRO CREDIT: LENDING METHODS AND ACCESS TO CREDIT 6.1 Ex-Ante Screening of Loan Applicants 6.2 Lending Methods Used by Micro Credit Institutions 6.3 Borrower Monitoring 6.4 Enforcement of Micro Credit Contracts

Chapter Seven 7.0  MICRO CREDIT: INNOVATIVE LENDING AND PERSISTENT ACCESS TO CREDIT BARRIERS 7.1 The Changing Nature of Micro Credit Lenders and Lending Methods 7.2 Negative Perceptions about the Screening Process 7.3 Expected Consequences of Default 7.4 Cost of Credit

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Table of Contents

7.5 The Limitations of Contingent Credit 7.6 The Costs and Benefits of Group Homogeneity 7.7 Exploitation and Harassment of Borrowers 7.8 Business Environment Uncertainties 7.9 Limitations in Choice of Lender Conclusion Appendix I: Commercial Banks in Uganda as of December 2009 Appendix II: Credit Institutions and Microfinance Deposit Institutions in Uganda as of December 2009 Bibliography Index

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P REFACE This book is an updated version of my doctoral thesis titled “The Design of Micro Credit Contracts and Costs of Credit: A Case Study of Micro Enterprise Finance in Uganda.”The study was conducted between 2006 and 2009 and subsequently updated in 2010.

Several factors affect the efficient performance of credit markets.Uganda,like any other least developed country,has a credit market characterized by what economists call “market imperfections” that affect access to credit. These imperfections can broadly be summarized as information asymmetry and moral hazard.Their effects on the functioning of credit markets vary from one jurisdiction to another. In most developing countries, efforts to improve access to credit have largely focused on lending techniques in which contracts are structured in such a way as to overcome the credit market frictions ordinarily faced by lending institutions. Microfinance has been heralded for its use of innovative lending methods to improve access to credit. The last decade has witnessed an unprecedented increase in the outreach of micro lending institutions and the development of financial products suited to the needs of the economically active poor who often are unable to obtain credit from mainstream financial institutions such as commercial banks.

This book seeks to establish why, despite measures aimed at improving access to micro credit, the majority of micro enterprises in Uganda opt for informal rather formal sources of credit. I present the results of an empirical investigation involving 602 micro enterprises located in various parts of Uganda and 105 lending institutions. The findings show that despite innovative contractual arrangements designed to enable micro lenders mitigate the problems of adverse selection and moral hazard, there are several factors that continue to hinder micro enterprise access to credit.

Factors such as the evolving nature of micro credit lenders,the lack of flexibility in structuring micro loans, the negative perceptions about loan applicant screening processes,the harsh expected consequences of default,the disincentives of contingent credit and the blind sanctioning of default, impede micro enterprise access to formal credit.Therefore, unless addressed, informal credit will continue to play a more significant financing role than formal credit.