Policy Options and Performance Differentials of Rural Finance Sources in Sheema District, Uganda

Uganda’s financial sector has experienced rapid growth, with considerable rise in number of banks and branch outlets, and upgrading of micro-finance institutions. However, the growth has not translated into the desired financial service provision in rural areas. There is limited research examining the relative efficiency outcomes of rural finance sources, which necessitated empirical testing to generate a comparative analysis. Ordered Probit analysis on a sample of 90 respondents in Sheema District, yielded results indicating that households that depended on banks for credit had a probability of 9.4% more likely to acquire adequate credit for production than their counterparts, and banks were significantly a superior credit source. It was concluded that if government exclusively promoted Village Loans and Savings Associations (VLSAs), it would incur an opportunity cost of 20.4% in form of trade off for efficiency foregone, the value suggesting additional resources that would be required to invest in VLSAs to only match the current average efficiency outcome. The study recommended reinstatement of preferential incentives for commercials banks opening up outlets in rural areas, stepping up efforts for capacity building to micro-finance institutions as well as micro-finance institutions themselves broadening the capital-base through purchase of securities.