Taking the Credit Pulse in Uganda: The State of Over-Indebtedness

Eighty-four percent of Ugandans are routinely unable to cover food and medical expenses, and less than one quarter can pay their bills on time.

Uganda is experiencing greater financial inclusion, driven largely by mobile money. This growth is prompting financial service providers to consider expanding their portfolios, specifically credit services. The country, however, lacks an extensive central repository of information on consumers’ borrowing behavior. Credit bureau data, for instance, covers only 6 percent of adults in Uganda.

To better understand the market, the Partnership for Responsible Financial Inclusion (PRFI)—which counts FINCA among its membership—commissioned a scoping of the situation. The assessment reviewed national survey data and interviewed credit providers and other stakeholders, including the Central Bank, the Association of Microfinance Institutions and Compuscan Credit Reference Bureau.

The findings highlight promises and perils. Uganda has a young and fast-growing population, the majority—72 percent—of whom lives in rural areas still largely unserved by the formal credit market. And, at 15 percent of gross domestic product, the supply of credit to the private sector greatly lags behind the sub-Saharan average of 46 percent. Together, these factors may signal opportunities for the credit market to grow.

But formal credit services are heavily concentrated in towns, where only a quarter of Uganda’s population resides. Seventy percent of all bank branches, for example, are located in urban areas. Consequently, the urban credit markets can get crowded, leaving rural areas to rely on the informal sector. Regardless of their location, though, most Ugandans remain economically vulnerable. According to a recent financial inclusion survey, 84 percent of Ugandans are routinely unable to cover food and medical expenses, and less than one quarter can pay their bills on time. Such economic fragility, coupled with the easy access to credit in urban centers, can drive borrowers to take on credit beyond their means.

In addition, nearly half of Ugandan borrowers tend to use their credit to fund activities that do not immediately generate income. A FinScope survey found that the most common use of credit is to cover daily expenses or emergencies (29 percent), followed by education (20 percent). Such borrowers may be especially prone to over-indebtedness.

On the supply side, the PRFI assessment highlights the need to increase credit bureau coverage and to create a better understanding of the financial capabilities in Ugandan households. Intense competition in a small and crowded market can lead credit providers to adopt aggressive client acquisition strategies that don’t serve the best interests of borrowers, especially those who are less financially literate. The result may be the accelerated uptake of credit products leading to client over-indebtedness.

The conclusion of this preliminary assessment suggests that the current provision of credit in Uganda, while still low by global industry standards, could pose risks to vulnerable households. The assessment sets the stage for a more rigorous survey, including of customers’ views and experiences with credit providers, in the near future.