Ugandan Anti-Poverty Program Faces Challenges in Loan Uptake

Economist Dean Karlan has observed unexpected loan utilization patterns in a poverty reduction program in southwest Uganda. The initiative applies the Graduation Approach, a method providing financial support and coaching to establish small businesses. This approach has been implemented in approximately 20 countries.

Program Design and Initial Observations

Karlan, founder of Innovation for Poverty Action and former chief economist for the United States Agency for International Development (USAID), designed an innovation for the Uganda program. Rather than individual grants, block grants of approximately $4,000 were provided to groups of about 20 individuals for joint management. This structure allowed for larger borrowing sums, with loan interest distributed among group members. Each group established its own borrowing limits, interest rates, and repayment deadlines.

During a two-year review, Karlan noted that approximately half of the grant money remained unborrowed.

Participant Experiences and Factors Limiting Loan Uptake

Jacquerin Kabanyana, a 23-year-old refugee from the Democratic Republic of Congo, is a program participant. He and his family of 11 fled conflict in 2018, previously living on approximately $5 per week.

In 2022, Kabanyana received $74 from the grant and began raising and selling goats. His weekly income subsequently increased to approximately $13, and he expanded his business to include sheep and chickens. He is also constructing a larger home for his family. The program, known as Sustainable Market Inclusive Livelihood Pathways to Self-Reliance (SMILES), received a $28 million donation from the IKEA Foundation and supports 14,000 households, including refugees and local Ugandans. SMILES is managed by the AVSI Foundation, which also trains coaches, with monitoring by Innovation for Poverty Action.

During group meetings, participants provided several reasons for not fully utilizing the grant:

• Market Conditions: Kabanyana initially borrowed $140 for two goats to assess market conditions. He later planned to borrow $80, citing reduced market activity attributed to cutbacks in World Food Programme aid, which is scheduled to cease in spring 2025.
• Logistical Barriers: Other participants mentioned the distance to the physical bank for borrowing, which could require an entire day for travel.
• Trust and Risk Aversion: Some participants expressed distrust of banks. Antoinetta Justine, a participant, indicated concern about depleting the group's funds, stating the money was crucial for family sustenance. Rita Larok, AVSI's director of programs, encouraged increased borrowing to maximize interest earnings for the group.

Karlan suggested that the reluctance to borrow stemmed from a perceived fear of risk. He noted that households in extreme poverty often prioritize preserving existing resources due to the severe consequences of financial setbacks. The block grant was designed to provide a faster pathway for households to establish larger, more stable income sources and to reward high-performing members through interest distribution.

Impact of Foreign Aid Policy Changes

Karlan stated that USAID had been a significant funder of the Graduation Approach, with financial support increasing by nearly $500 million prior to recent policy changes. Development assistance and poverty solutions have not been included in the current U.S. foreign aid strategy. NPR reported on a USAID-funded graduation program in Uganda by AVSI Foundation that was terminated before its launch. Karlan expressed that block grants could offer a more efficient use of available funds given this new environment.

Program Adjustments Implemented

Following discussions with participants and coaches, Karlan and the AVSI team implemented modifications to the program:

• Participants will be able to access funds from the block grant via mobile money, an electronic wallet system prevalent in many lower-income countries.
• Coaches will continue to encourage participants and build confidence in financial risk-taking.

During one meeting, a group leader, Tumurhiwe Justine, requested assistance in acquiring a tractor for farming. Karlan responded by indicating that the group's unutilized block grant funds could be used for such a purchase.