Microfinance Programs in Uganda: An Analysis of Household Participation and Investment Behavior

Abstract

This paper identifies a model of low-income household participation in microfinance credit programs and the effects on investment behavior from repeated access to these institutions using evidence from household survey data. The primary focus is on changes in household investment behavior, not the assessment of changes in welfare per se. The results for a representative sample of households in Uganda indicate that the most significant factors influencing the decision of a household to participate are proximity to microfinance institutions (MFIs), dual sources of household income, and income stability. This paper shows that once the decision has been made to participate, repeated use of the financial services of MFIs has a positive impact on household investment in health, education, and consumption. Repeated access to credit from an MFI significantly raises the likelihood that a household will invest more in nutrition, health and education, ceteris paribus. Through repeated access to credit, income and wealth effects are generated that may reduce vulnerability to poverty. Keywords: microfinance credit, household investment and consumption, participation Eastern African Journal of Rural Development