The Impact of Access to Finance on Household Welfare: Revisiting the Evidence from Uganda

Abstract

Our paper highlights the role played by semiformal financial institutions in the livelihoods of Ugandan households that are not served by the commercial banks and microfinance institutions. Data from Living Standards Measurement Survey 2018 Uganda are used. We employ Propensity Score Matching and complement this with the two-step IV Treatment Effects method. We compare the effect of access to services from banks, Village Savings and Loans Associations, Rotating Savings and Credit Associations, and Savings and Credit Cooperatives on household welfare. We find a positive and statistically significant impact of access to both bank and semiformal financial services on household dietary diversity score; school enrollment rates; and clothing expenditure. The improvement in household welfare due to VSLAs, ROSCAs and SACCOs is comparable to that conferred by banks upon their customers. The results are robust to the method of estimation and we show that confounding factors are not a serious problem in our average treatment of the treated estimations. We also examine only those households that: (i) experienced drought; (ii) experienced drought, pests and heavy rains; (iii) were rural; (iv) had farming as main occupation; (v) were male-headed; (vi) had an education level below sample average. We find that in all cases bank, VSLA, ROSCA and SACCO member households have higher household dietary diversity score, school enrollment rates and clothing expenditure than control households. The policy implication from this study is that the improvement in welfare due to VSLAs, ROSCAs and SACCOs is relatively comparable to that obtained by commercial bank customers. Thus there is need to increase the geographic spread and depth of financial outreach of these semiformal institutions to increase the scale of financial inclusion in Uganda.