Saving associations most popular source of borrowing

Majority of Ugandans borrow from Village Savings and Loan Associations because their requirements are less rigorous. PHOTO | EDGAR R. BATTE

What you need to know:

  • The survey, was conducted among 3,338 households, representative of 22.8 million adults of 16 years and above, also found the two sources of loans might be popular due to the ease with which members are able to access loans. 

Village Savings and Loan Associations are the largest source of borrowing, according to data from Bank of Uganda. 

The data contained in the Bank of Uganda Financial Capability Survey, indicates that 47.7 per cent of borrowing Ugandans draw their loans from Village Savings and Loan Associations, which are self-managed savings and credit group that do not receive external funding. 

They are mostly popular in rural areas and low income urban areas.

The report also indicates that Village Savings and Loan Associations are followed by Saving Credit and Cooperative Organisations (Saccos), which make up 21.8 percent of loan uptake. 

The survey, was conducted among 3,338 households, representative of 22.8 million adults of 16 years and above, also found the two sources of loans might be popular due to the ease with which members are able to access loans. 

For instance, the survey noted, that 64.4 percent of loan applicants consider the ease and speed of loan approvals while borrowing. 

Village Savings and Loan Associations and Saccos on average take 24 hours to approve a loan, if finances are available, while for financial institutions on average take a week.

The survey also found that at least 38.2 percent of borrowers draw out loans to grow their business while 28.9 percent borrow for emergencies. 18.7 percent borrow to boost their start-ups.  

The report also noted that even at the lowest level a number of defaults have been registered with at least 62.1 percent of the people failing to pay because of loss or lack of income. 

However, the survey doesn’t not provide data on the composition of formal financial institutions that constitute the largest proportion of lending in terms of value. 

Mr Joseph Lutwama, the Financial Sector Deepening Uganda acting executive director, said yesterday that Village Savings and Loan Associations are the most preferred sources of loans because they require less requirements than formal financial institutions. 

“Most of these groups are not necessarily set up for profit making but to manage shocks within the community and it’s in their interest that everyone is catered for,” he said, noting that there is need to study and understand the Village Savings and Loan Associations model with the view of making it more efficient. 

The low collections       

According to a United Nation Capital Development Fund digitising Village Savings and Loan transactions will be key in creating credit history, which goes a long way to dispel the assumption that low income earners are not creditworthy. 

Further, there is need for a well-designed solution that integrates other financial and mobile services to create a richer data profile.  Some Village Savings and Loan Associations have managed to open special group accounts, which helps to keep savings safe as well as provide individual group members an opportunity to have personal accounts. 

“In this scenario, Fintech solutions such as mobile know your customers and mobile money can play a vital role to lower cost and extend access in hard to reach communities,” a UNCDF case study says. 

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