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FINANCIAL SYSTEMS AND RISK MANAGEMENT: THE NATURE AND ROLE OF FINANCIAL SERVICES FOR MANAGING POOR URBAN LIVELIHOODS IN KAMPALA, UGANDA IN 2000 by JULIE LOUISE GIFFORD A thesis submitted to the University of Birmingham for the degree of DOCTOR OF PHILOSOPHY International Development Department School of Public Policy University of Birmingham April 2006 University of Birmingham Research Archive e-theses repository This unpublished thesis/dissertation is copyright of the author and/or third parties. The intellectual property rights of the author or third parties in respect of this work are as defined by The Copyright Designs and Patents Act 1988 or as modified by any successor legislation. Any use made of information contained in this thesis/dissertation must be in accordance with that legislation and must be properly acknowledged. Further distribution or reproduction in any format is prohibited without the permission of the copyright holder. ABSTRACT Africa is acknowledged as one of the fastest urbanising regions in the world today and the number of urban poor is growing at the same rate, with the urban poor increasingly reliant on a cash economy. The concept of urban poverty has developed from a static income-based absolute approach to a holistic dynamic and complex state, embedded in livelihood assets and a vulnerability context. A variety of livelihood assets including labour, housing, intra-household relations, human capital and especially social capital are important for risk management strategies. Microfinance has been seen as a key panacea for livelihood development. Using the livelihoods framework this research analyses the nature of livelihoods and financial services within Bwaise, an area within Kampala, Uganda that is a poor densely populated area with a mixture of residential and commercial activities. Financial services were diverse, ranging from formal banks, donor-led microfinance and cash rounds to informal loans. These financial services, mainly developed by the poor, were used to secure livelihoods, with a cumulative nesting of use by the poor. The influence of external factors was high and significantly affected how the poor managed their livelihoods and impeded livelihood development. Theft, ill health and unstable employment were key factors contributing to a highly insecure environment. The complexity of urban livelihoods created the need for diverse financial services because expenditure requirements often outstripped income flows, which was why financial services were so important in managing livelihoods. A diverse range of financial services have become a vital part of income and consumption smoothing risk management strategies, which were key strategies for protecting and managing livelihoods. MAP OF UGANDA Map i MAP OF KAMPALA DISTRICT Map ii MAP OF KAWEMPE DIVISION 1 1 Bwaise II and III denote the research area. Map iii ACKNOWLEDGEMENTS Firstly I wish to thank International Development Department for the bursary whilst I was studying at Birmingham University. I am especially grateful to Prof. Richard Batley and Nick Devas for the extra money received from IDD, after I was burgled in Uganda. Thank you to Dr. Philip Amis for his excellent comments, words of advice and sticking with me throughout, even when you may have thought the end was never in sight. Thank you to Dr. Tony O Connor, my undergraduate supervisor at University College London who inspired me to carry out research in Africa. Whilst in Uganda there were several people who assisted me: Ephraim Gensi and his family for welcoming me into their family and introducing me to Alex Kakuru, Head of UGAFODE, who opened many doors within the MFI community. Thank you to the aid agencies, MFIs and Government within Kampala for allowing me access to your clients and staff, including CMF, FAULU, FINCA, MED-NET, UGAFODE, Bank of Uganda, Ministry of Finance and Plan International. Thank you to the Uganda Institute of Bankers, Micro-Finance Competence Centre for allowing me to present my preliminary findings whilst in Uganda. Thank you to Kampala City Council and ActionAid s Bwaise Urban Development Project for their useful insight into Bwaise and access to the local community. To my three research assistants, Noella, Lydia and Beatrice who worked tirelessly with me for nearly nine months. I thank all of my respondents in Bwaise for devoting their time to answer my research questions. The fieldwork was only possible because of their willingness to share their knowledge with me. Finally to all the friends I made in Uganda, who made my trip memorable, especially Jude, Doreen, Nicolas and Michelle. To friends, work colleagues and family for your words of support along the years. You will all be pleased to know that my epic PHD journey is finally over and my life resumes again. Throughout the duration of the research a number of friends and relatives were of great value to me: my Nan, who was a source a inspiration to me and sadly is not here to see the final result; at Birmingham University Karen Moore and Linda Mapp and personally Joly Tremelling, Nicole Kirby and Sangita Dandona. Special thanks must go to Dr. Jude Murison, who was a great friend and helped me to keep sane (or we were both mad) whilst in Uganda and back in the UK. We both finally got there. Writing up whilst carrying out a full time job was difficult and a hard slog. Thank you to supportive work colleagues, especially Sue Bailey for her endless supply of tea and wine. I also wish to thank the Financial Services Authority for allowing me to have extra leave, which helped me tremendously in completing the write up. A massive thanks must go to Vicky Idiens, I am so grateful for your extensive comments and words of support. I really appreciate all the time you spend helping me. I am eternally grateful to my parents, Cath and David Gifford, who have unconditionally supported me during my whole life. Thank you for having faith in me. Finally, a big thank you to my partner, Simon Gregory, who also has supported me unconditionally. I really appreciate your love and support over the last five years, especially when my life became my PHD. To my parents, for their unconditional love and support TABLE OF CONTENTS CHAPTER ONE INTRODUCTION 1.1 INTRODUCTION African Urban Poverty, Livelihoods And Informal Financial Services Kampala and Uganda STUDY OBJECTIVES Scope Of The Study METHODS Livelihoods Approach: Framework for Analysis Data Collection Approaches STRUCTURE OF THE THESIS 13 CHAPTER TWO AFRICAN URBAN POVERTY, SURVIVAL STRATEGIES, LIVELIHOODS AND FINANCIAL SERVICES: AN ANALYSIS OF CONCEPTS AND LITERATURE 2.1 INTRODUCTION CONCEPTS OF URBAN POVERTY IN AFRICA Introduction Scale and Characteristics of Urban Poverty Defining Poverty Entitlements and Capabilities Conclusion HOUSEHOLD SURVIVAL STRATEGIES LIVELIHOODS FRAMEWORK Introduction Assets Vulnerability and Risk Conclusion FINANCIAL SERVICES FOR THE POOR Introduction Development Finance Institutions Micro-Enterprise Finance Informal Financial Services Conclusion LIVELIHOODS, RISK AND FINANCIAL SERVICES: CONCEPTUAL 94 APPROACH Introduction The Function of Financial Services: Risk and Money Management CONCLUSION 99 CHAPTER THREE UGANDA AND KAMPALA: POVERTY, POLICIES AND FINANCIAL SYSTEMS IN INTRODUCTION UGANDA S POVERTY STATUS IN Poverty Status 105 3.2.2 Micro-Enterprise Sector Poverty Profile POLICIES FOR POVERTY REDUCTION and MICRO-ENTERPRISE 111 DEVELOPMENT Poverty Eradication Action Plan Medium Term Competitive Strategy Micro and Small Enterprise Policy Unit Private Sector Development FINANCIAL SECTOR IN UGANDA Introduction Formal Financial System Microfinance in Uganda CONCLUSION 134 CHAPTER FOUR LIVELIHOODS IN BWAISE 4.1 INTRODUCTION KAMPALA Introduction Historical Origin Urban Growth and Poverty Status BWAISE CONTEXT Physical Structure and Services Markets City Council NGOs in Bwaise Conclusion LIVELIHOOD ASSETS IN BWAISE Introduction Labour and Enterprise: Income Generating Activities Housing and Physical Capital Human Capital Household Structure and Intra-household Relations Social and Political Capital Social axes of difference LIVELIHOOD CONSTRAINTS AND VULNERABILITIES Perceptions of Poverty Shocks and Trends Experienced Livelihood Constraints and Risks CONCLUSION 221 CHAPTER FIVE THE FINANCIAL SYSTEM IN BWAISE 5.1 INTRODUCTION FORMAL BANKS Co-Operative Bank Commercial Microfinance Ltd 5.3 MICROFINANCE INSTITUTIONS FINCA FAULU MED-NET PLAN INTERNATIONAL UGAFODE Conclusion SAVINGS AND CREDIT SCHEMES YOFA Bwaise Poverty Reduction Limited Uganda Microfinance Scheme for Development TRADE ASSOCIATIONS Bwaise Vendors Association (BVA) Munakukaama Metal Work Association CMF clients Merewoma Tailoring Institute-CMF clients Bwaise New Park Boda Boda Association Bwaise Veterans Transport Association Ddembe Motorcycle and Bicycle Association Special Hire Association Kawaala Motor Vehicle Boda Boda Association Uganda United Hawkers Association CASH ROUNDS MANAGERS OF INFORMAL FINANCE MUNNO MUKABI CREDITORS PROVIDERS OF INFORMAL FINANCE Moneylenders and Pawnbrokers Suppliers Shopkeepers and Landlords FRIENDS, FAMILY AND NEIGHBOURS RECIPROCAL LENDING SAVINGS AT HOME CONCLUSION 251 CHAPTER SIX UTILISING LIVELIHOOD ASSETS: HOW ARE FINANCIAL SERVICES ACCESSED AND BY WHOM? 6.1 INTRODUCTION WHO ACCESSES FINANCIAL SERVICES? Social Axes of Difference Wealth HOW THE URBAN POOR ACCESS FINANCIAL SERVICES Introduction Labour and Enterprise Capital Housing and Physical Capital Human Capital Household structure and Intra-household Relations Social Capital Financial Capital CONCLUSION: THE IMPORTANCE OF LIVELIHOOD ASSETS FOR 276 ACCESSING FINANCIAL SERVICES CHAPTER SEVEN ENHANCING AND PROTECTING LIVELIHOOD ASSETS: THE USE OF FINANCIAL SERVICES TO SECURE LIVELIHOODS 7.1 INTRODUCTION EXPENDITURE AND FINANCIAL SERVICES Main Types of Expenditure FINANCIAL SERVICES AND LIVELIHOOD ASSETS Microfinance Institutions Savings and Credit Schemes Trade Associations Munno Mukabi Cash Rounds Creditors: Suppliers Creditors: Shopkeepers and Landlords Creditors: Moneylenders and Pawnbrokers Reciprocal Lending: Neighbours, Friends and Family Loans Savings at Home Bank Accounts Conclusion ENHANCING LIVELIHOOD ASSETS Introduction Labour/Enterprise Capital Housing/Physical Human Capital Household Structure and Intra-Household Relations Social Capital Financial Capital Conclusion PROTECTING LIVELIHOOD ASSETS: RESPONDING TO RISK Introduction Protective Strategies In Times of Reduced Income Low Sales Theft Ill Health and Death CONCLUSION: THE POSITIVE ROLE OF FINANCIAL SERVICES 326 CHAPTER EIGHT THE LIMITATIONS AND DRAWBACKS OF FINANCIAL SERVICES FOR SECURING AND DEVELOPING LIVELIHOODS 8.1 INTRODUCTION DRAWBACKS OF FINANCIAL SERVICES FOR LIVELIHOOD 329 ASSETS Introduction Enterprise/Labour Capital 8.2.3 Housing/Physical Capital Human Capital Household Structure and Intra-Household Relations Social Capital Financial Capital Conclusion THE LIMITATIONS OF FINANCIAL SERVICES IN BWAISE Introduction Microfinance Institutions Savings and Credit Schemes Trade Associations Cash Rounds Munno Mukabi Creditors: Suppliers, Shopkeepers, and Landlords Creditors: Moneylenders and Pawnbrokers Reciprocal Lending: Friends, Family and Neighbours Loans Savings at Home Bank accounts Conclusion CONCLUSION: THE NEGATIVE ROLE OF FINANCIAL SERVICES 358 CHAPTER NINE CONCLUSION: THE ROLE OF FINANCIAL SERVICES IN MANAGING POOR URBAN LIVELIHOODS 9.1 SUMMARY KEY THEMES Diversity of Financial Services Livelihoods Diversification Insecurity and Vulnerability Livelihood Management Strategies: Financial Services for Consumption Smoothing Inter-linkage of Livelihood Assets to Manage Livelihoods Personal Networks and Trust Nesting of Financial Intermediation Information Exchange Housing and Physical Proximity Gender and Intra-household Relations Livelihood Development Debt as Vulnerability 9.3 REFLECTIONS OF THE LIVELIHOODS FRAMEWORK AS AN ANALYTICAL TOOL 9.4 CURRENT CONTEXT-MICROFINANCE INDUSTRY APPENDIX ONE RESEARCH METHODS 383 APPENDIX TWO KEY EXTERNAL STAKEHOLDERS INTERVIEWEES 397 APPENDIX THREE MFIs, SCSs, ASSOCIATIONS, BWAISE RESIDENTS 398 INTERVIEWS AND FGDs APPENDIX FOUR FOCUS GROUP DISCUSSIONS CHECKLIST 401 APPENDIX FIVE IN-DEPTH INTERVIEW CHECKLIST 403 APPENDIX SIX INDIVIDUAL SURVEY 406 APPENDIX SEVEN EXAMPLES OF MFI PASSBOOKS & FORMS 426 BIBLIOGRAPHY 430 LIST OF BOXES Box 2.1 Hierarchy of Needs 26 Box 2.2 Grameen Bank Model 67 Box 4.1 Types of IGAs in Bwaise 154 Box 4.2 Constraints in Bwaise Area 206 Box 4.3 Perceptions of Poverty 208 Box 5.1 CMF Characteristics 226 Box 5.2 FINCA Characteristics 230 Box 5.3 FAULU Characteristics 231 Box 5.4 MED-NET Characteristics 233 Box 5.5 Plan International Characteristics 234 Box 5.6 UGAFODE Characteristics 236 Box 5.7 Quotations from cash round members 247 Box 6.1 Livelihood Assets Used for Accessing Financial Services 265 Box 6.2 Setting up FINCA in Bwaise 277 Box 7.1 Role of Financial Services for Livelihood Assets 284 Box 7.2 Reasons for Joining and Benefits of MFI Membership 285 Box 7.3 Key Benefits of MFI Membership 296 Box 7.4 How Financial Services Were Used to Enhance Livelihood Assets 311 Box 7.5 Protective Strategies In Times of Reduced Income 319 Box 7.6 Utilising Financial Services: Protecting Assets 327 Box 8.1 MFI Collateral Required 340 Box 9.1 Summary of Research Findings 363 LIST OF FIGURES Figure 2.1 Six-Level Poverty Pyramid 22 Figure 2.2 DFID s Sustainable Livelihood Framework 38 Figure 2.3 CARE s Livelihood Security Model 38 Figure 2.4 The Impact of Microfinance Services on Reduced Vulnerability 73 Figure 2.5 Virtuous Spirals 76 Figure 2.6 Household Financial Lifecycle Needs 97 Figure 3.1 Percentage Distribution of the poor by age, sex and rural-urban location 108 Figure 4.1 Population Graph of Kampala 136 Figure 4.2 Types of IGAs 156 Figure 4.3 Male IGAs In Bwaise 157 Figure 4.4 Female IGAs in Bwaise 158 Figure 4.5 Male and Female (%) IGAs 159 Figure 4.6 Transport Means (Male) 179 Figure 4.7 Transport Means (Female) 180 Figure 4.8 Use of Boda bodas 181 Figure 4.9 Use of Taxis 181 Figure 4.10 Family Planning Methods 186 Figure 4.11 Male Educational Levels 187 Figure 4.12 Females Educational Levels 188 Figure 4.13 Household Number 192 Figure 4.14 Ethnic Background 202 Figure 4.15 Risk Factors Experienced (% Per Respondent) 210 Figure 4.16 Risks Factors Experienced (% of total responses) 211 Figure 4.17 Livelihood Constraints 214 Figure 6.1 Financial Services Used in Bwaise Figure 6.2 Financial Services Used By Gender Figure 7.1 Typical Daily Expenditure 282 LIST OF PHOTOGRAPHS Photograph 4.1 Concrete Drainage System Photograph 4.2 Residential Housing Photograph 4.3 Rubbish Problem Photograph 4.4 Trading centre Photograph 4.5 Bwaise amenities Photograph 4.6 Ddembe Market Photograph 4.7 Bwaise Market Photograph 4.8 Vegetable Seller Photograph 4.9 Carpenters Photograph 4.10 Shop Photograph 4.11 Metal Workers Photograph 4.12 Tailor Photograph 4.13 Kiosk Photograph 4.14 Cooked Fishseller Photograph 4.15 Rental Units Photograph 4.16 Taxi Stage Photograph 4.17 Urban Agriculture Photograph 4.18 Poor Drainage Photograph 9.1 Spare Motor Parts Photograph 9.2 Brick-Making LIST OF TABLES Table 1.1 Survey Respondents Key Characteristics Table 1.2 Number of FGDs and Interviews Table 3.1 Poverty Headcount and Gini- Co-efficient for Uganda by Region 107 Table 3.2 Human Development Indicators in Table 3.3 Causes of Poverty in 2000 and Table 4.1 Major Sources of Revenue in Kawempe Division Table 4.2 Range of Activities Table 4.3 Frequency of Income (% of male, female and total) Table 4.4 Change in Income in the Last Two Years (% of respondents) Table 4.5 Frequency of Purchasing Supplies Table 4.6 Change in Quantity of Business Stock (last two years) Table 4.7 Educational Levels (Percentage of Respondents) Table 5.1 Level of Formality and Reliance on Group-Based Activity Table 5.2 Credit Risk Categories for Groups and Individuals Table 5.3 Bwaise Poverty Reduction Membership Grades Table 6.1 Financial Services and Social/Wealth Axes Matrix 254 Table 7.1 Types of Expenditure ACRONYMS AND PHRASES AAU Boda boda BoU BPR BSDP BUDP BUDS BVA Cash round CBO CEEWA CMF DFI DFID Dobbi DREPS El Niño Entandikwa EU FACS-U FAULU FGD FINCA FIS GAD GDE GDP Gomesi GoU GTZ HDI HIPC IGAs ILO IMF Jua Kali Kabaka KCC LC Magendo Mailo Marram Matooke MED-NET Action Aid Uganda Motorbikes and bicycles used as taxis Bank of Uganda Bwaise Poverty Reduction Business/Entrepreneurship Skills Development Training Programme Bwaise Urban Development Programme Business Uganda Development Services Bwaise Vendors Association Cash round was the term used in Bwaise for ROSCAs. Community Based Organisation Council for Economic Empowerment for Women In Africa-Uganda Commercial Microfinance Development Finance Institutions Department for International Development Launderer District Resource Endowment Profile Survey A disruption of the ocean-atmosphere system in the tropical Pacific having important consequences for weather around the globe causing flooding and increased water temperatures. Government s loan programme European Union Foundation for African Child Support, Uganda Success or to succeed in Kiswahili Focus Group Discussion Foundation for International Community Assistance Financial Institutions Statute Gender and Development Gross Domestic Expenditure Gross Development Product Traditional female dress Government of Uganda Deutsche Gesellschaft fur Technische Zummenarbeit (German Aid Agency) Human Development Indicators/Index Highly Indebted Poor Countries Income Generating Activities International Labour Organisation International Monetary Fund Kenya Informal Economy literally means Under Hot Sun King Kampala City Council Local Council Informal economy Local land tenure system Dirt track roads Banana plantain Micro Enterprise Development Network MFIs Micro-Finance Institutions MMWA Munakukaama Metal Work Association MSE Micro and Small-scale Enterprises MTCS Medium Term Competitive Strategy Munno Informal group insurance scheme Mukabi Mzungu European white person NGOs Non-Governmental Organisations NRM National Resistance Movement PAP Poverty Alleviation Project PEAP Poverty Eradication Action Plan Posho Cooked maize meal PPA Participatory Poverty Assessments PRELAC Programa Regional del Empleo para America Latina y el Caribe PRESTO Private Enterprise Support Training and Organisational Development ROSCAs Rotating Savings and Credit Associations RoU Republic of Uganda SAPs Structural Adjustment Programmes SCF Save the Children Fund SCSs Savings and Credit Schemes SEWA Self-Employed Women s Association Special Hire Privately run taxis SPEED Savings Promotion and Enhancement of Enterprise Development SSA Sub-Saharan Africa Stage A bus stop/taxi rank so buses, boda bodas and special hire could congregate within an area. SUFFICE Support to Feasible Financial Institutions & Capacity Building Efforts Taxi Minivans used as buses Toninyira Mukange Evening markets that started in the 1970s in urban areas for people to buy raw and cooked foodstuffs UCB Uganda Commercial Bank UGAFODE Uganda Agency for Development UMSFD Uganda Microfinance Scheme for Development UNDP United Nations Development Programme UPE Universal Primary Education UPPAP Uganda Participatory Poverty Assessment Programme USAID United States Agency for International Development /=USh Uganda Shillings 2,500/=USh was equal to 1 in Wayaye Useless loiterer WFP World Food Programme WID Women In Development YOFA Youth Development Foundation Chapter One Introduction CHAPTER ONE INTRODUCTION 1.1 INTRODUCTION African Urban Poverty, Livelihoods and Informal Financial Services The 1990s witnessed phenomenal urban growth, with the worldwide urban population increasing by 36%. By 2007, for the first time in human history, more than half the people in the world will be living in cities, the result of a continuing movement of people that has led to the tre
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