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CHAPTER ONEINTRODUCTION1.0 Introduction
This chapter presents the background of the study; statement of the problem; purpose of thestudy, specific
objectives, research questions, research hypotheses, scope of the study,significance of the study, and the
operational definitions of the study.
1.1 Background of the study
It is the dream of every country to have an economy that is self sustaining; with yet in
Africa poverty is the heart of its problems especially in sub-Saharan Africa. In Uganda
poverty has been increasing at the rate of 2.5% every year since 2004 due to higher increase in population
, Corruption of some big members of government, lack of social services liketransports and
communication to some part of the country etc. Increase in poverty has causedmany problems like
increase in environmental destructions, low income to the peopleespecially central part of the country and
poor economic-social empowerment. (PEAP; 2007)
Beginning in the late 1970’s some highly inventive non
- profit making agencies and banks pioneered techniques to issue loans to the self-employed who
know their trade well, but lackconventional means to secure a loan. Micro-
finance institutions (MFI’s) as these innovations
are now called, have prospered in some of the poorest countries of Africa, Latin America andAsia.The
financial system in Uganda is composed of formal, semiformal and informalinstitutions. The
formal institutions include banks, Microfinance Deposit-taking institutions,Credit Institutions, Insurance
companies, Development Banks, Pension Funds and CapitalMarkets. The semi informal institutions
include Savings and Credit CooperativeAssociations (SACCO) and other Microfinance institutions,
whereas the informal ones aremostly village savings and loans associations (B O U, 2005). Formal
institutions are
less prominent in rural areas than urban areas and they only serve 14% of the rural population.Informal
institutions play an important role in the rural service provisions and serveapproximately 12% of the rural
population.In Uganda, micro-finance institutions started early 1986 aiming at provisions of micro
creditand savings services to low income earners but economically active poor. Generally the
 
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focuses on the group already engaged in one or several small scale activities, clients borrowand invest in
their activities, repay their loans and borrow again. There are so manymicrofinance institutions operating
in Uganda, the most prevailing are PRIDE and FINCAwhich provide credit and savings to the poor
people without collateral (Kaplan & Norton,1992)By early the 1990s, the banking sector was comprised
mainly of four foreign banks (StandardChartered, Standard Bank, Barclays and Baroda), and the two
large indigenous banks (UCBand Co-op) that controlled 70 percent of the banking assets and liabilities
but wereinsolvent. By the end of 2005, the system had substantially grown and was made up of aformal
and an informal sector. The number of commercial banks increased to 20 in 1996,when a moratorium on
banking licenses was imposed and after the closure of some banks andconsolidation, fell to 15 (B O U,
2005).Microfinance is the provision of finance services to low income clients including consumersand the
self employed that traditionally lack access to banks and related services (Nuwagaba,1997). Microfinance
institutions are therefore institutions that provide finance services to lowincome earners who lack access
to banks and banks related services (Georgina, 2001).According to Garner(1996) the object of
microfinance institutions is a world in which asmany poor and near poor households as possible have
permanent access to an appropriate rateof high quality services,
including not just credit but also savings, insurance and fundtransfers, those who promote microfinance
institutions have believed that such access of poor or near poor people to an appropriate rate of high
quality financial services of credit andsavings will help poor people out of poverty and lead to rural
development ( Agarwal, 1990).This study is based on Theory of Change (TOC)-based approach to M&E,
impact assessment by Weiss, C.H. (1995).
The classic microfinance theory of change is simple: poor persongoes to a microfinance provider and
takes a loan (or saves the same amount) to start orexpand a micro enterprise which yields enough net
revenue to repay the loan with majorinterest and still have sufficient profit to increase personal or house
hold income enough to
raise the person’s
standard of living.The theory of change provides a model of how a program or business can be supported
andled to growth through proper financial support that increases performance of small business