The concept of microfinance is probably a couple of centuries old. Some theories locate it as far back as the 1800s, while others talk of years before or after the 18th century.

For a very long time, the microfinance system had mainly been an informal setup until the 1970s when Mohammad Yunus, who many refer to as the grandfather of microfinance, created a recognisable structure that defines modern-day microfinancing.

He and Akhtar Hameed Khan are documented as some of the pioneers in microfinance whose efforts were geared explicitly at creating a system that could lift the poor out of poverty.

The two men, especially Mohammad Yunus of Bangladesh, who was awarded a Nobel Peace Prize for his innovations, laid the foundations of microfinance which have now spread throughout the world as a social enterprise that extends financial inclusion beyond the elite populations.

Whereas Mohammad Yunus had earlier tried out the concept of microfinance with his Grameen Bank of Bangladesh, historians and researchers indicate that Shorebank was the first microfinance and community development bank founded in 1974 in Chicago, US.

That was when microfinance programmes started to gather evidence of trust in people to repay loaned money and create a belief that it was possible to provide market-based financial support, including services, to poor people, which would be repaid in manageable instalments.

In East Africa, particularly Uganda, whereas credit schemes had started emerging as side components of social welfare programmes as early as the mid-1980s, the first true example of microfinance set up had not been in existence until the early 1990s.

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According to a December 2001 study commissioned by the Department for Development Cooperation of the Austrian Ministry of Foreign Affairs, the “first actual microfinance institutions such as FINCA and Uganda’s Women Finance Trust appeared in the early 1990s, operating only in limited spaces with a few clients’ outreach programmes.

However, the desire by donors and non-government organisations to help lift households out of poverty through offering sustainable financial services, in a way, helped the microfinance industry to deepen in Uganda, thereby attracting large funders such as USAID, which pushed the agenda of sustainable financing alongside mainstream banking.

For the first time, the concept of microfinance was well explained, thus forming a solid background on which the industry has proceeded to register about 138 non-deposit-taking institutions, according to details contained in the 2019/20 Uganda Microfinance Regulatory Authority (UMRA) annual report of the Auditor General.

The growth illustrates the vital role of microfinance in poverty alleviation and expanding financial inclusion.

Therefore, it is essential to point out how microfinance, has since its inception, impacted lives among East Africans and how it has helped to improve the lives of vulnerable households.

Financial inclusion

East Africa is still largely informal with limited access to banking services and the money economy; a greater mix of financing, such as micro-lending that has limited caps in terms of collateral and penetrates the rural and vulnerable urban population, is an important development. Not only has it helped improve access to credit, but it has also lifted people out of poverty and created sustainable growth patterns on which households can build on to live sustainable lives.

In their study “Microfinance in Uganda“, Andy Carlton, Hannes Manndorff, Andrew Obara, Walter Reiter, and Elisabeth Rhyne established that microfinance was one of the best ways low-income households in both rural and urban areas would be reached and served with products that speak to them.

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Beyond this, the study indicated other benefits of microfinance, which includes reduced vulnerability to economic risks resulting from illness or death of a breadwinner, strengthening linkages between households and the agricultural sector, and acquiring valued business-related knowledge and savings skills.

There has been some good progress. An article published by Rachel K. Sebudde, a senior economist with the World Bank’s Africa Poverty Reduction and Economic Management Unit, notes that Ugandan’s access to financial services has improved dramatically in recent years, with more than half of the adult population having access to an account at a formal financial institution.

She notes, however, that though the increase in access to the account has doubled as much as in 2009, still, the positive development remains a puzzle, given that only a tiny proportion of households and firms can utilise the formal financial system.

Safe way to keep and multiply the money

Only 16 per cent of the adult population, Mrs Sebudde notes, keep their savings in formal deposit-banking institutions – including banks, microfinance institutions, and savings and credit institutions. Up to 60 per cent of Ugandan adults still keep their savings at home and in the form of assets such as livestock.

This challenge notwithstanding, Ms Sebudde notes Uganda has come a long way. It is important that government expands commitment to increasing financial inclusion, which will help improve household incomes and enable the government to widen growth as well as improve the general outlook of the tax base.

Low-interest rates and accessibility

For Small and Medium-Sized enterprises, microfinancing is almost the most practical way of accessing credit for two main reasons; accessibility and low-interest rates.

A study by CGAP indicated that MFI rates were significantly lower than consumer and credit card rates in most of the 36 countries,

For small businesses which constantly face liquidity challenges, being able to access finance is a game-changer.

In conclusion, we believe microfinance should play a significant role in financial inclusion and poverty alleviation.

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