THE IMPACT OF RURAL MICROFINANCE: MEASURING ECONOMIC,

SOCIAL AND SPIRITUAL DEVELOPMENT IN KABALE, UGANDA

A Thesis Submitted to the Graduate School of Arts & Sciences

at Georgetown University in partial fulfillment of the requirements for the degree of

Master of Public Policy in the Georgetown Public Policy Institute

By:

Grey Maggiano. B.A.

Washington, DC April 11th, 2006

ii

THE IMPACT OF RURAL MICROFINANCE: MEASURING ECONOMIC, SOCIAL AND SPIRITUAL DEVELOPMENT IN KABALE, UGANDA

By: Grey Maggiano, B.A.

Thesis Advisor: Charles Vehorn, PhD Abstract

Microfinance is the practice of giving loans in small denominations to the

poorest of the poor in developing countries. These loans range between $50 and $1000

dollars and are typically used to support and improve established businesses.1 Much of

the research on microfinance has focused on program sustainability. The theory is if a

program is sustainable and there are obvious signs that peoples� lives are improving,

then the program is providing a valuable service to the community. What has not been

studied is the actual impact of these loans on development within the community

(Hulme, 2000).

This paper takes a recently completed survey of microfinance clients in Kabale,

Uganda from the Five Talents, International program and attempts to discern whether

the program has had measurable impact on the clients� social, spiritual and economic

lives. Models for measuring social and economic development are available. Hulme

(2000), Barnes (2001), Onyx and Bullen (2000) and Makina and Malobola (2004) have

done work on social and economic impact assessments at the individual level. This

study begins to establish measurable indicators for spiritual development by examining

current definitions, and using this information to create a measurable index of spiritual 1 For an in depth discussion of what Microfinance is, see: Zeller, Manfred and Meyer, Richard L. �Improving the Performance of Microfinance: Financial Sustainability, Outreach and Impact.� In The Triangle of Microfinance: Financial Sustainability, Outreach and Impact. Ed. Manfred Zeller and Richard L. Meyer. Johns Hopkins University Press: Baltimore, Md. 2002.

iii

indicators. This data is then measured against comparable survey data from a

Microfinance Institution (MFI) in Zimbabwe.

In the final analysis, increased participation in the microfinance program has a

significant impact on a client�s social and spiritual development. However, clients�

economic development does not appear to be affected by the program. These results

are somewhat surprising as the goal of microfinance programs is to improve the

economic lives of their clients. The results of this study are statistically significant and

have a number of plausible explanations including: 1) the program in question is

located in a rural area with very low levels of infrastructure, 2) certain mitigating

factors, including disease and bad crop years, are endemic to the area and can depress

the overall levels of economic development and 3) indicators do not currently exist to

measure certain forms of economic improvement including more reliable access to

food, increased savings and financial stability. The findings of this study suggest that

the primary impact of microfinance in the short term is an improved social standing for

the client which can lead to increased self confidence, better access to other financial

services, and larger acceptance within the local business community.

At the institutional level, it is important for MFI�s to take into account these

impacts. In order to explain why economic development is slower than previously

expected, it would be worthwhile to conduct a further study to see how loan funds are

spent and whether or not mis-direction of funds is partly responsible for the lack of

economic development among MFI client�s. Anecdotal evidence from loan officers

iv

and clients suggest that some clients use loan funds for non-productive uses like home

repair or to pay off existing debts.

Despite the limited scope of this study, microfinance practitioners who work in

rural areas need to take the results of this investigation into account, particularly if they

have economic development as a short term goal. Social and spiritual development are

strongly correlated to program participation, but new innovations in rural microfinance

must be developed in order to create and sustain the kind of economic development

associated with urban microfinance programs.

v

This Thesis is dedicated to Roggers Aheebwa, Jonathan Byamugisha, Prim Kyomuhangi, Richard Sentongo and all of the staff of Five Talents, Kabale.

Special thanks go to Charles Vehorn, Jean Mitchell, Suzanne Schultz, Craig Cole, Stanley Kriz, Jeanne Anne Feneis, Javier and Kathleen Castillo, Pam Candelore,

Audrey and Andy Bergner, Monica Castillo and James Habyarimana for their academic and emotional support.

Mom and Dad, Thanks for Everything.

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Table of Contents

Introduction 1

Chapter One: Literature Review 3

Uganda: The Colonial Legacy and the Post Colonial Period 4

Uganda: Economic Development: 1986 to the Present 8

Microfinance: Part of a Larger Puzzle 10

Wider Impacts of Microfinance 12

Rural Microfinance: Is it different? 15

Studies of Microfinance: Social and Economic Impacts 16

Case Study: Peru 17

Case Study: Zimbabwe 19

Social Capital: A New Measure 20

Spiritual Development: Why? 22 Chapter 2: Theoretical Model 27

Hypothesis and Analytical Model 29

Research Design 30

Chapter 3: Variables of Interest 36

Chapter 4: Analysis 39

Unexpected Results 46

Chapter 5: Policy Recommendations 52

Chapter 6: Conclusion and Next Steps 53

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Appendices

Appendix A 59

Figures

Figure 1 14

Tables

Table 1.1 Five Talents, Uganda Summary of Statistics 38

Table 1.2 Zambuko Trust, Zimbabwe Summary of Statistics 38

Table 2.1 Zimbabwe Survey Simple Regression 39

Table 2.2 Uganda Survey Simple Regression 39

Table 3.1 Uganda Survey Complete Regression 41

Table 3.2 Zimbabwe Survey Complete Regression 42

Table 4 Uganda Survey Education Break Out Analysis 51

Table 5 Economic Development Indicators Appendix A: 3

Table 6 Social Development Indicators Appendix A: 4

Table 7 Spiritual Development Indicators Appendix A: 5

Table 8 Dependent Index Variables of Interest Appendix A: 7

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Introduction

Microfinance is the practice of giving loans in small denominations to the

poorest of the poor in developing countries. These loans typical range between $50

and $1000 dollars and are used to begin new businesses or support and improve

already established businesses. Much of the research on Microfinance has focused on

program sustainability. If a program is sustainable and there are obvious signs that

peoples� lives are improving then the program must be providing a valuable service to

the community. What has not been studied as in-depth is the actual impact of these

loans on development within the community.

During the summer of 2005, the author was asked by the Executive Director of

Five Talents, International to undertake an impact survey of their loan program in The

Kigezi Diocese of Uganda. Five Talents is an independent non-profit 501(c)3 entity

that is supported principally by the Anglican Communion and its member churches.

Five Talents has four over-arching goals: 1) to equip the poor with small business

training and small loan programs, 2) to equip the church with the tools to help the poor

in small business 3) to show Christ's love and mercy in thought, word and deed and 4)

to affirm human dignity. With those goals in mind, a survey design was selected that

would measure the impact on the cultural, economic and spiritual development of the

loan holders. The ultimate goal of the survey was to create a smaller survey that could

be implemented within all of the Five Talents programs to ensure that the head office

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could not only measure the financial stability of the program itself, but also the social,

spiritual and economic health of the loan holders.

This paper poses the question, can a small scale, microfinance program in a

rural area have a statistically significant impact on a persons, social, spiritual and

economic life? Holding all other factors constant, does the provision of small amounts

of credit really have a statistically significant impact? This question can be answered

by examining varying levels of economic, social and spiritual development among loan

holders, and comparing this information to the number of loans that the loan holders

have received. This study builds on significant prior research on the impacts of

microfinance program and strategies for measurement of social, economic and spiritual

development.

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Chapter 1. Literature Review

Uganda is a mid-sized, densely populated country in Eastern Africa that is land-

locked, though it has a number of significant lakes and rivers, including a long border

along Lake Victoria. Uganda is also one of the sources of the River Nile, which flows

out of Lake Victoria in the province of Jinja. The current population is approximately

27.2 million people. More than half of Uganda�s population is less than 14 years old

(50.1%) a number influenced heavily by deaths related to AIDS and Malaria, which are

endemic in the entire country.2 Uganda is about the size of Oregon, and has about 7

times the population (Oregon�s Pop: 3.4 million).3 Most of Ugandan�s population is

ethnically African, however it is divided into no less than 18 different tribal groups

which was the impetus behind two coup d�etats and a brutal 7 year military

dictatorship led by Idi Amin that was marked by large scale civil violence and

substantial declines in imports, exports and output. From 1986 to the present day

Uganda has experienced substantial economic and social development, but continues to

be hindered by the limitations caused by its experience with extraction based

colonialism and an extended period of internal civil strife. The following section will

discuss both the macroeconomic development of Uganda in the last nineteen years as

well as the continuing impacts of colonialism and violence in Uganda.

2 CIA World Factbook: Uganda. http://www.cia.gov/cia/publications/factbook/geos/ug.html 3 www.50states.com

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Colonial Legacy and the Post Colonial Period

Colonialism has a broad range of effects on a society. The most obvious

impacts are economic. Authors usually focus on mono-crop or mono-export systems

that develop under colonialism, where economic benefits are shared among a relatively

small group of foreigners and extractive economies that leave little hope of

development over the long term. All three of these conditions existed in Uganda. At

independence, Uganda had a prosperous, though narrow agricultural sector principally

growing cotton and coffee. Asians from other British Colonies were brought in during

the colonial period to manage businesses and hold governmental positions.

Agricultural rights were distributed and controlled by state-run marketing boards. This

excluded most Africans from holding property and left most of the wealth in the hands

of Asians brought in by the British. Both coffee and cotton are extremely harsh on the

soil; they contributed to heavy amounts of soil erosion and deterioration. Additionally,

foreign control over agriculture products forced most of the population to continue

relying on subsistence agriculture for their own livelihood (DiJohn and Putzel, 2005).

Most economic interventions in Uganda focused on correcting these deficiencies in the

economy. Unfortunately, there were a number of social and societal impacts also

caused by colonialism that were largely ignored by economists involved in the post

colonial intervention strategy, which continued to hamper the country.

Nicolas Van de Walle discusses these limitations in his book, The Politics of

Permanent Crisis: �these debates have remained remarkably economistic, failing to

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take into account either political or managerial issues. Structuralists critics�have

consistently exaggerated both the capacity of African governments to undertake an

alternative package of policies and the political motivation to do so�Often repeated

references to the applicability of East Asian experiences of State-led development

assume against all the available evidence that African state structures possess a similar

level of implementation capacity and political discipline.� (Van de Walle 2001, p. 13-

14) The lack of political capacity and political will are two important pieces of the

African puzzle that need to be included in any discussion of post-colonial

development. In the Ugandan context, two factors influenced these problems: ethnic

cleavages among ethnic Africans and the position of Asian settlers within the

economic system.

Ethnic cleavages in Africa are often the result of policies set by Colonial

regimes in order to subdue and control native populations. The most famous example

is the favoring of Tutsi tribal leaders in Rwanda and Burundi over Hutus, who made up

the majority in both nations. In the Ugandan context, the strongest tribal kingdom was

the Baganda which was given preferential treatment by the colonialists in return for

rights to lands and control over large portions of territory. This preferential treatment

resulted in two important discords in the post colonial era: �the division between the

Baganda and the non-Baganda, and the division between the Muslim and poorer North,

and the predominantly Christian, more commercialized south.� (DiJohn and Putzel

2005, 2)

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The cleavage between Asians and Africans is most visible in Idi-Amin�s forced

deportation of all non-Africans in 1972. Shortly after taking power, Amin gave all

residents of Indian descent 90 days to leave the country leaving behind all their land

and property. At the time, about 80,000 Indians were living in Uganda (Lule, 2003).

Not all the Indians left and actual estimates are difficult to find, but those who stayed

in the country were economically inactive and forced into hiding until President

Museveni�s assumption of power in 1986.

The three cleavages mentioned above are important barriers to development in

Uganda. The Lord�s Revolution Army (LRA) continues to represent division between

the North and the South, recent struggles over whether or not to accept a Federal

system of Government and party politics have at their core deep seeded suspicions of

the Baganda kingdom and its desire to exclude other powers and control Kampala.

The current president Yoweri Museveni, from the Ankoli tribe, is consistently accused

of favoring members of his tribe for political appointees and passing laws that favor

the cattle ranchers in the southern part of the country to the detriment of neighboring

tribes who are more agriculturally oriented. Only about half of the appropriated

factories and businesses taken after the exile of Ugandan Indians have been returned,

and ownership of a number of important businesses is still in dispute.

Post Colonialism, there was little political incentive to encourage development

in any region of Uganda, except for the home regions of tribe or people in power.

During the reigns of both Milton Obote and Yoweri Museveni, their tribes, the Lango

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and Ankoli respectively, enjoyed a substantial amount of political and economic

benefits. Idi Amin came to power through a coup, in part to end this kind of corruption.

Though born into a northern tribe Amin was brought up Baganda and had a lot of

support from this formerly powerful kingdom that had lost considerable power in the

post colonial period. It is not insignificant that these three tribes, the Baganda, Ankoli

and Lango are three of the largest tribes and also neighbor each other. They were

always painfully aware not only of the benefits accruing to the tribe in power, but also

to the amount of power they were losing.

In addition to the obvious problems of capacity caused by years of violence, the

banishment of Indians in the early 70�s also dramatically affected the political and

economic capacity of the country. During the Colonial regime, Indians were active

members of the colonial political machine and important members of the local

infrastructure, including police chiefs, mayors, and those in charge of local utilities and

agricultural pricing boards. Their exile and replacement by uneducated and

inexperienced ethnic Africans limited the ability of the infrastructure to adapt to

important political and social changes.

Van de Walle suggests: �political institutions hold the explanatory key to the

African crisis and that there will not be successful economic reform without a prior

reform of the region�s politics.� (Van de Walle 14) The Colonial regime in Uganda left

behind a mono-crop economy structured around very few industries, with little

political capacity and even less political will. This situation led not only to economic

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problems in the post colonial period, but also to considerable amounts of political

violence and civil strife. By 1986 Uganda was a poor, divided State made up of a few

small powerful tribes and a large disenfranchised population. The economic reforms in

the following 19 years did much to improve the economy, but inequality and

disenfranchisement still exist. It is in solving these problems that microfinance is most

effective.

Economic Development: 1986 to the Present

The rapid economic development of Uganda since 1986 can be attributed to

three factors: liberalization of trade, the establishment and protection of property rights

and consistent inflows of foreign aid. Over this period GDP has grown at an average

rate of 6.4%, with significant increases in the industrial and service sector (though both

of these sectors still remain fairly small). In addition, inflation has dropped from an

average rate of 90.6% between 1971-86 to 4.1% between 1996 and 2003. Savings and

investment have both also increased substantially over the period. As a comparison,

GDP growth over the same period for all of Sub-Saharan Africa was only 2.5%

(DiJohn and Putzel).

Trade liberalization was an important part of improving economic performance.

Museveni gradually lowered non-tariff barriers to trade on all imports to encourage

competition within the country and introduce new industries and foreign investment.

By gradually reducing import barriers, Museveni protected national industries that

needed time to rebuild after years of violence, while still allowing for important

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influxes of foreign capital and goods. Tariffs were maintained, but Uganda switched

from export tariffs to import tariffs. This accomplished two things for Uganda that

helped to stabilize the economy: it made Ugandan exports more competitive, and it

established a secure form of income for the fledgling government. One of the

problems that plague all developing governments is establishing a secure and constant

flow of tax revenue. By taxing imports, the government was able to apply a de-facto

sales tax on all products sold in Uganda without having to establish a tax collection

system. In 1996, trade taxes still accounted for over 50% of total revenue (DiJohn and

Putzel).

Property rights are an important incentive for investors and potential

entrepreneurs. One of Museveni�s first actions upon returning to power was to return

appropriated property back to the Indians that Amin exiled in 1971. In addition to

enticing experienced business people back into Uganda, this also established Museveni

and the young Ugandan government as supportive of property rights. This was

difficult to do in a political climate that encouraged returning property to Africans, but

it �was crucial in improving the economic growth as the Uganda economy benefited

from re-incorporating entrepreneurs with proven ability and business skills.� (DiJohn

and Putzel, 8)

Finally, it is impossible to discuss economic development in Uganda without

discussing foreign aid. Between 1987 and 2003, foreign aid made up 65.4% of total

government expenditures, and was 13.7% of total national income. From 1987-1995,

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104.2% of total capital formation came from foreign aid (DiJohn and Putzel). The

impact of this large amount of aid is not all positive. Capital investments have

increased in Uganda, local infrastructure has improved and further economic and civil

strife has been avoided. However, Uganda has acquired a large amount of foreign debt

(most aid comes in the form of debt) and the government, as demonstrated above, has

become dependent on consistent inflows of capital. Because much of this aid comes

without expected guidelines, Uganda and other African nations have not always used it

in the most productive manner. Large amounts of aid have not improved the lot in life

for most Africans, �the press and the public often blame [foreign aid] for all negative

trends in economic conditions� (Van de Walle, 231) Van de Walle suggests that

economic stagnation, the rise of poverty, the breakdown of public services, and the

declining power of civil service salaries are at least partially explained by high levels

of foreign aid. While these accusations are not entirely true, it is clear that foreign aid

has not reached down to the poorest of the poor. Out of this, governments and non-

governmental organizations began looking elsewhere for ways to encourage local

economic development.

Microfinance: Part of a Larger Puzzle

Microfinance was popularized by Dr. Yunus through his work with urban

women in Bangladesh. Dr. Yunus began a microfinance program among women in

Bangladesh in 1976 through the University of Chittagong. However, the concept is

relatively simple and enjoys a long tradition in many developing countries. The basic

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idea of microfinance is to provide credit to the working poor who otherwise would not

have access to credit services. This service has been provided in a variety of different

countries by money lenders in poor communities for a long time. The difference in the

model popularized by Dr. Yunus was the focus on equitable credit for the purposes of

improving economic activity in poor communities.

Microfinance products look different in different regions; however there are

some unifying characteristics that allow a program to be considered a microfinance

program. 1) Lack of substantial amounts of collateral. Most programs use social

collateral to recover loans. Pressure from within the group that has received the loan as

well as the larger community to pay back the loan encourages repayment in the

absence of physical collateral. Often this social collateral is reinforced with token

amounts of compulsory savings and insurance. 2) Group lending. Most microfinance

organizations have a group-lending component. Instead of a loan being distributed to

an individual, a block of funds is distributed to a group of entrepreneurs who distribute

the money and then the whole group pays the money back. In most cases each member

is explicitly responsible for a certain amount of money, however in the case of non-

payment the whole group is responsible for re-payment. 3) Small amounts of Capital

paid back within a short time frame. Microfinance organizations specialize in small

loans that are paid back quickly and turned over. There is no fixed loan amount, but in

Uganda loans tend to be about 1/10 of GDP per capita. The loan term is usually

between 3 months and 1 year. 4) Higher, but fair interest rates. Microfinance

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organizations are required to charge slightly higher interest rates than one might

receive on a larger loan; in order to remain financially stable, they must continue to

charge higher rates. Higher rates are required for two reasons: loan officers have to

spend more time per client and less interest is earned off the smaller amounts of

money, and because financial literacy is low, it takes more effort per client in order to

get the loans distributed and paid back. If a program meets all of these criteria, it can

be assumed to qualify as a Microfinance Institution (MFI) (Zeller and Meyer, 2002).

As microfinance has become popularized, many authors have recognized that it

has impacts outside of improving business. Most impact evaluations conducted at the

institutional level have had as their primary focus economic impacts at the individual

or household level. Examples of these indicators include housing condition, income,

and ability to cope with economic and social shocks (Zohir and Matin 2004).

Wider Impacts of Microfinance

Sajjad Zohir and Imran Matin studied the potential wider impacts of a microfinance

program. They suggest two cases were wider impacts from participation in an MFI

would be observable (Zohir and Matin, 2004). Case 1 deals with the wider impact of

MFI�s as new institutions. Because MFI�s are actually part of a natural progression

from informal money lenders to formalized financial institutions, it is natural that this

formalization would have wider community impacts for participants and staff. The

authors suggest a number of potential outcomes including additional agricultural

production and value added to products sold in local markets, increase in wage

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employment, especially among the poor, and the emergence of a new interest group in

the local political scene. Case 2 deals specifically with the wider impacts of group

participation. This model suggests that the cultural implications of group participation

have important effects, especially for women. Group participation encourages cultural

development, which separately engenders social and economic development. These

two factors in turn impact political participation and activism in poor communities (see

figure 1). By measuring the social and economic impact of an MFI, it may be possible

to in turn isolate these wider impacts. These wider impacts do not constitute an added

bonus to the work of microfinance. On the contrary, they are fast becoming the

principal reason to encourage microfinance in the developing world.

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CulturalSocial

Economic

Political

Can get together outside their homestead

Can interact with outside males

May have their own savings account

May participate in trainings

Changes in perceptions about women�s work and mobility

Mobility of Female Labor

Increased female employment in non-traditional activity

Exchange of market information and ideas through women

Property relation and realization of inheritance

Interactions among socio-economic groups eases

Gender relation changes-Role of males in household activity; perception at community level

Knowledge diffusion around women�s health and motherhood

Violence against women

Resolution of inter and intra-household conflict

Knowledge diffusion on basic civil rights and their protection

Participation in voting

Participation in local government

Mobilization on local issues

Figure 1 (Zohir and Matin, 2004)

CulturalSocial

Economic

Political

Can get together outside their homestead

Can interact with outside males

May have their own savings account

May participate in trainings

Changes in perceptions about women�s work and mobility

Mobility of Female Labor

Increased female employment in non-traditional activity

Exchange of market information and ideas through women

Property relation and realization of inheritance

Interactions among socio-economic groups eases

Gender relation changes-Role of males in household activity; perception at community level

Knowledge diffusion around women�s health and motherhood

Violence against women

Resolution of inter and intra-household conflict

Knowledge diffusion on basic civil rights and their protection

Participation in voting

Participation in local government

Mobilization on local issues

Figure 1 (Zohir and Matin, 2004)

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Rural Microfinance: Is it different?

Microfinance in rural areas is heavily discouraged in the literature, mostly

based on the history of microfinance. Microfinance originated as a way to make

government sponsored rural agriculture lending programs profitable in countries like

Bangladesh and Indonesia. Governments began the programs in order to encourage

development in the agricultural sector and stabilize economic activity in rural areas.

Very quickly governments realized that no one was paying back the loans, and because

the money came directly from the government, it was politically difficult to collect on

defaulted loans from large numbers of rural farmers. This difficulty was exacerbated

by the relatively tenuous state of democracy in these countries. Because the political

elites were concerned with stable elections and staying in power, it would have been

quite difficult to economically destabilize large segments of the rural population.

In order for a microfinance program to be successful in a rural area, it is

necessary to encourage entrepreneurs to engage in alternative economic activities.

Agriculture is often too seasonal and uncertain to benefit from short-term loans.

However, it is possible to encourage farmers to begin food processing, trading, and

manufacturing endeavors in addition to their agricultural activities. By making the

rural urban, MFI staff have been able to succeed in rural areas, although higher interest

rates and more personal client attention is required.

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Besides the problems associated with mainly agricultural economies, rural

MFI�s suffer from 5 other weaknesses: distance, education levels, literacy, language

and large numbers of dependents. Clients tend to be farther apart and live farther away

from the MFI office in rural areas, so transport for both clients and staff can be

expensive. Education levels are substantially lower in rural areas, so financial literacy

is a bigger concern. Literacy, because of the lack education is also an issue. As a

corollary, language is also an issue. In Uganda, the official language is English, but the

country is also home to more than eighteen local languages. Without a high level of

education, Ugandans usually demonstrate low levels of literacy in English. MFI are

limited in the staff they can hire because they must be fluent in the local language to

communicate with clients and English to interact with national staff and donors.

Finally, rural families tend to be much larger and with a history of incorporating

orphans into families clients are responsible for more dependents. This leads to

increasing economic pressures, not just for food, but also to pay for schooling, which is

a tempting use of loan funds.

Studies of Microfinance: Social and Economic Impacts

As background, this study presents two separate studies of microfinance

organizations and their impacts. One study was conducted in Zimbabwe and the other

in Peru. These studies attempt to measure the impact on businesses, households and

individuals involved with microfinance organizations. They focus predominantly on

financial impacts, but do include social development as well, particularly self-esteem,

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future planning, business formalization and enrollment of children in education and

higher education. The data from Zimbabwe will also be used later in this study as a

comparison tool against the data collected in Uganda.

Peru

The Impact of Microcredit: A Case Study from Peru (Dunn and Arbuckle,

2001) is based on cross-sectional data collected in two parts, once in 1997 and again in

1999. This data differs from the data collected in Uganda in that all of the clients live

in Lima, a large urban center, and 63% of the clients in the survey were involved in

commercial activities (retail shops, stores, etc.). Between 1997 and 1999, there was an

economic downturn in Peru that affected the entire economy. This was related mainly

to financial crises in Mexico and Asia as well as the effect of the El Niño phenomenon.

Given these conditions, microfinance appears to have had a substantial positive

effect on enterprise revenue, capital, and employment. In addition microfinance has

allowed improvements in two important transaction areas for entrepreneurs: property

ownership and cheaper inputs. The study did not find any significant impact related to

formalization of businesses or business services, an important social development for

micro enterprises.

Within the household, the Peru study demonstrates a positive impact on

household income and income diversification over the control group. Social impacts in

the household were inconclusive, with marginal positive and negative changes,

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respectively, for spending on food and spending on education within household

receiving microcredit loans.

Among individuals, the study from Peru presents some interesting and

confusing results. It recognizes a positive impact on individual�s views on the future

and his/her potential, but negative impacts on overall self esteem. According to the

authors, the negative impact on self esteem is minimal and appears to reflect some

issues related to increased stress to pay back loans. This immeasurable bias will be

important to consider when choosing impact variables for social impacts. There was

also small but important evidence regarding a woman�s role in controlling assets. In

both the treatment and control groups, women became more involved over the two-

year period in the day-to-day finances both of the household and the business. Because

all of the clients measured were involved in some kind of economic activity, this could

be related to participation by women in a business generally, rather than in a business

supported by an MFI specifically. In the Uganda example, these impacts can be

controlled for by controlling for the age of the business, the number of years receiving

loans and the number of loans received.

Overall the study from Peru presents some interesting results and also some

valuable lessons regarding impact measurement. Of particular concern for the Uganda

analysis are any macro-economic changes over the time period in question that could

affect measurement, differentiation between impact of business ownership by itself

compared to ownership of an MFI supported business, as well as potential omitted

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variable bias among some of the social and spiritual proxy variables being used in this

study.

Zimbabwe

The study conducted in Zimbabwe, Microfinance Program Clients and Impact:

An Assessment of Zambuko Trust Zimbabwe (Barnes 2001), uses time series data from

clients of the Zambuko Trust microfinance organization. It covers the same time

period as the Peru report (1997-1999), but interviewed the same clients in both

surveys, which should give slightly more accurate measurements. Like the Peru report,

all of the clients interviewed in this survey live in metropolitan areas. In the Zimbabwe

case it was Harare, Mutare and Bulawayo, which are the three most populous urban

centers in the country.4

The Zambuko trust program looks most like the Five Talents Program in

operation in Uganda. Zambuko offers co-guaranteed group loans repaid on a monthly

basis, they require attendance of a short business training session in advance of

receiving the loan, and an entrepreneur must have an active business for at least six

months before he/she is eligible for a loan. The biggest discrepancies are the lack of

compulsory savings in Zimbabwe as well as the urban/rural distinction.

The Zambuko study observed improvements in economic welfare in line with

the results observed in Peru, with increases in revenue and assets in both the business

4 This is significant because it is widely believed that microfinance is much more difficult to implement in rural areas. This may lessen or improve the impacts of the program in a rural setting.

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and the household.5 The research does not, however, suggest an increase in

employment within the businesses as was seen in Peru.

Unlike the Peru study, The Zambuko study did observe more significant social

impacts. They found a positive relationship between program participation and

increases in self-esteem and planning for the future. They also established positive

impacts on children�s enrollment in school, willingness to help neighbors and

consumption of nutritious foods with participation in the microfinance program. The

researchers believe that these changes are �associated with clients� increased ability to

manage their enterprise, meet the financial demands of the household, and acquire

assets.� (Barnes, 7) The Zambuko paper re-enforces the importance of empowerment

among the measurable impacts of MFI�s and encourages a closer look into what these

impacts look like.

Social Capital: A New Measure

In his popular book, Bowling Alone, Robert Putnam outlines Social Capital as a

new way to measure the effectiveness of societies:

The quality of public life and the performance of social institutions are indeed powerfully influenced by norms and networks of civic engagement. Researchers in such fields as education, urban poverty, unemployment, the control of crime and drug abuse, and even health have discovered that successful outcomes are more likely in civically engaged communities. Social scientists in several fields have recently suggested a common framework for understanding these phenomena, a framework that rests on the concept of social capital. By analogy with notions of physical capital and human capital--tools

5 In Peru, they did observed increased household income, but no corresponding increase in asset accumulation.

- 21 -

and training that enhance individual productivity--"social capital" refers to features of social organization such as networks, norms, and social trust that facilitate coordination and cooperation for mutual benefit (Putnam, 1995).

Because most microfinance institutions are based on group lending methodology,

Social Capital plays an integral part in both the process and the outcomes of

microfinance: process, because the established group norms and trust between group

members is what acts as collateral in the group loan model. Without those social

pressures, there would be little incentive to pay back debts. Outcomes are also

important because as these groups become stronger the social capital grows. Groups

began to establish their own social networks which increases the number of clients and

elevates the social status of group members. The difficulty of course, is measuring

social capital. You can tally someone�s bank account or count his/her years of

schooling to define physical and human capital, but social capital is more difficult to

define. It is not just the number of friends have or the number of people who know

their name. Social capital incorporates civic engagement, standing in society,

involvement in spiritual and social activities; all of the things that enhance

coordination and cooperation for mutual benefit (Putnam, 1995).

Fortunately a few intrepid researchers have attempted to measure the

development of social capital. Jenny Onyx and Paul Bullen developed an empirically

grounded explanation of social capital defined by eight key factors:

1. Participation in the local community

2. Social agency

- 22 -

3. Feelings of trust or safety

4. Neighborhood connections

5. Family and friend connections

6. Tolerance of diversity

7. Value of life

8. Work connections

The researchers then designed a survey to measure these eight factors. The

survey consisted of 68 questions they felt related to the eight factors. They found that

36 of the 68 questions resulted in statistically relevant data. Moreover, Onyx and

Bullen also established that of the eight factors, participation in the local community,

social agency and feelings of trust and security account are the three most important

factors, as they account for about 30% of the total variance in the data. Building on the

work of Putnam, Onyx and Bullen have developed a framework of analysis for social

capital development that can be implemented in this study.

Spiritual Development: Why?

In addition to the economic and social impacts of microfinance, this study is

also interested in the spiritual impacts of microfinance programs. Traditionally,

spiritual development has been left in the hands of Bishops, Priests and Deacons who

are content to measure spiritual development in number of baptisms, church attendance

and amount tithed. As religious organizations become more involved in economic

development, they are starting to ask if their work is improving the spiritual

- 23 -

development of the local community. In the context of this study, Five Talents Uganda

is a subsidiary of Five Talents, International (FTI) a Christian Microenterprise

Organization founded under the auspices of the Anglican Communion. While they do

not require that members attend their church or any church, they do incorporate

rhetoric about spiritual development into their literature. As donors have become more

involved with FTI, they have started to ask questions about the spiritual development

component of FTI�s literature.

Gradually, spiritual development or transformation has come to have a number

of definitions. World Vision, International, a leading Christian Aid organization

defines spiritual development in this manner: �Changed people and just and peaceful

relationships are the twin goals of transformation�Changed people are those who

have discovered their true identity as children of God and who have recovered their

true vocation as faithful and productive stewards of gifts from God for the well-being

of all.�(Opportunity International, 7) Opportunity International (OI) provides a similar

definition: �A deeply rooted change in people�s economic, social, political, spiritual

and behavioral conditions resulting in their enjoyment of wholeness of life under

God�s ordinances.� (Opportunity International, 8) These two definitions share some

common features, notably that transformation requires economic and social

transformations as well, and that God (but not Jesus, Allah or Y-WEH) plays a central

role in the definition. It is also important to note the causal relationships involved.

World Vision sees growth as children of God and growth as economically and socially

- 24 -

involved beings as separate but parallel paths, while Opportunity International

establishes social and economic development as part of a series of steps leading up to a

more faithful spiritual life.

This causal relationship is important, because it moves beyond the traditional

wealth gospels employed by early missionaries. The wealth gospel suggests that by

believing in God you will become wealthy. While this was an effective tool to recruit

new converts it does not stand up to scientific scrutiny. Within the new definition of

transformation there are opportunities for measurement. The World Vision model

allows for increases in spirituality along with increases in development, while the OI

model appears to be the inverse of the traditional wealth gospels; that those who

become wealthier and more socially active also have a better opportunity to become

spiritually involved.6

Unfortunately, very few established spiritual transformation indicators exist.

This study uses a number of indicators recommended in Spiritual Transformation

Through Microenterprise Development. However, this resource acknowledges the

limitations of the available literature, because �they typically face three common

limitations in assessing client transformation: a) lack of well-developed social and

spiritual impact indicators, b) emphasis on quantitative methods over qualitative

participatory ones, and c) failure to produce results that are integrated into management

decision making.� (Opportunity International, 128) The first two are of particular 6 This paper will not attempt to decide which of these definitions is more correct. It merely assumes that both are valid working definitions and allow researchers to measure the spiritual development or spiritual impact associated with any given transformational program.

- 25 -

importance to this paper. Additionally, two more limitations specific to the

measurement of spiritual development should be noted: 1) the difficulty of measuring a

relationship with God and 2) honesty.

Most of the contemporary literature suggests measurement indicators such as

�Has prayer and relationship with God deepened since the beginning of the loan

cycles?� and �Has quality of Church Activities improved since the beginning of loan

cycles?�7 These questions are very difficult to answer. Educated men and women all

over the world would find these questions very difficult to answer, never mind the

typical microfinance client in a third world country. As a corollary to this, honesty is

an important problem. These questions suggest a right and a wrong answer,

particularly when being administered by a Christian MFI or Aid Organization in a

context of measuring how well the program is doing.

Clients often feel that they are receiving a good from these organizations; it is

in their best interest to protect that relationship and give �correct� answers to the

questions on the survey. Additional questions such as have your donations to the

church increased? Or how often do you attend Church?, suffer a similar problem.

Respondents may distort the numbers to look better and make sure they protect their

access to cheap credit.8 Additionally, church attendance and giving to the church could

7 Questions from ASODENIC Impact Survey Tool, Appendix 6.1, Spiritual Transformation through Microenterprise Development. 8 Microfinance Interest rates are almost always higher than available interest rates from larger, nationwide banks. However, these more formal credit lines require a good deal of collateral in the form of money or property, which makes these kinds of loans unavailable to most MFI clients. The only

- 26 -

be more correlated with free time and extra income than they are with spirituality or

transformation as defined earlier in this paper.

To overcome these limitations, the author suggests two tactics for measuring

spiritual development: 1) proxy variables based on the Christian behavior and 2)

burying indicators among other questions. Proxy variables that ask about taking care

of the sick, helping children, taking in orphans, lending or giving money to those in

need, and other activities can serve as a measurement for spirituality or spiritual

development. Additionally, burying otherwise problematic indicators about prayer,

church attendance, and reading the bible among more common place questions like

how many times do you go to the market, go to the clinic, or share a meal with friends

should increase the legitimacy of these indicators. Respondents will no longer feel that

they are being quizzed on their spiritual activities, but rather giving a simple summary

of their weekly activities.

credit alternative for MFI clients are money lenders who often have interest rates in the 10-50% a month; much higher than the average MFI.

- 27 -

Chapter 2. Theoretical Model

This study attempts to build on the conceptual model outlined by the Assessing

the Impact of Microenterprise Services project of USAID. Research Strategy for the

AIMS Core Impact Assessments (Dunn, 2002), outlines a conceptual model that she

refers to as the Household Economic Portfolio. This model places Microfinance in its

proper location as one of a number of physical and social capital creating activities

within the household. The model divides the house into three entities active in capital

transactions: 1) physical capital held within the household 2) production, consumption

and investment within the household and 3) the circular transactions that are constantly

taking place between these two entities (Dunn). The model focuses on physical or

economic capital in attempting to measure impact.

The notion of capital as a revolving entity within the household is important as

it allows one to consider that it can both be increased and depleted by any action,

including participation in a microfinance program. It is significant to keep in mind,

that through participation in the Five Talents program, surveyed clients could have lost

economic or social capital by investing in a new product line, or expanding their

business to offer more services.

This study will add social capital and spiritual development to the model Dunn

describes. This is possible, because like physical capital, Social Capital is finite in the

short term, it can be accumulated, and like the economic capital described in Dunn�s

Model, social capital is fluid. It can exist as stock, a fixed investment, or as a fluid

- 28 -

asset to be used for productive means. This model of social capital is outlined by

Anirudh Krishna in �Creating and Harnessing Social Capital� (Krishna, 2000). Krishna

describes social capital as the outcome of development of �relation capital� and

�institutional capital�. (Krishna, 79). Relational capital is social capital within

individuals, and institutional capital is social capital between individuals and

institutions. If there is both high relation and institutional capital, than there is high

social capital. Interestingly enough, the example cited by Krishna in explaining this is

the development of a microfinance organization: �People who need credit and

assurance join together in groups, especially when�credit and insurance are not

openly available to all individuals. Having joined together to obtain private goods,

however, members must devise membership criteria and monitoring and sanctioning

procedures.� (Krishna, 84) These individuals are expending relational capital (trust) to

bring their friends together to establish an institution, thereby creating institutional

capital. Over time, institutional capital accumulates, new members can be brought in,

new relationships developed, and institutional capital can be spent to create new

relational capital.

Krishna�s model of social capital development coupled with Dunn�s conceptual

framework for the Household economic portfolio establishes a strong background for

the comparative usage of economic and social development indicators. As discussed in

the literature review, the existing literature on spiritual development is scarce and

varies widely. It does appear, from the previously mentioned analysis of World Vision

- 29 -

and Opportunity International, that spirituality, like the other measurements, can be

accumulated and is not a yes or no quality. This study will create and then attempt to

measure changes in an individuals economic, social and spiritual development.

Hypothesis and Analytical Model

This study hypothesizes that social and spiritual development will be impacted by the

introduction of a microfinance program in rural Uganda. Economic development will

be less affected than it has been in more urban settings and it is possible that

microfinance in a rural area will have no impact on economic development at all.

In order to test this hypothesis, this study will incorporate three separate

dependent variables representing social, spiritual and economic development. All

three dependent variables are indexes representing a range of variables serving as

proxies for social, spiritual and economic development. This builds on survey data

conducted in Zimbabwe, Ethiopia, Peru and parts of the developed world which have

relied on eight to ten dependent variables serving as proxies for Household Economic

Development, Household Social Development, and Access to Food or Development of

Social Capital.

What follows is a step-by-step outline of the model used in this study. First, an

examination of the use of indexes at the macro and micro levels;9 second, a description

of the analytical models used in this study; third, a breakdown of the three indexes and

9 For a full description of the indexes used in this study, please see appendix A.

- 30 -

their grounding in the literature, and fourth, a description of the conceptual models that

form the basis for the three analytical models used in this study.

The use of indexes as proxy variables does enjoy considerable support in the

literature at both the macro and micro levels. At the macro level, the most famous

example is the World Bank�s Human Development Index which attempts to re-rank

countries based on other development factors in addition to GDP.

At the micro level, a number of studies have used this strategy to highlight

social and economic programmatic impacts; including the two studies, �Measuring

Social Capital in Five Communities� (Bullen and Onyx, 2000) and �Microfinance

Program Clients and Impact: An Assessment of Zambuko Trust, Zimbabwe� (Barnes,

2001). The former focuses on social development indicators, while the latter looks

directly at economic development. The Zambuko study also incorporates some social

development into its indexes.

Research Design

This study is based on data sets from impact studies from two separate

microfinance programs in Africa. The first data set (sample size: 111) is from clients

in the Five Talents Uganda program in Kabale, Uganda. Kabale is a rural area in the

southern part of the country close to the Rwandan and Congolese border. The Second

data set (sample size: 577) involves clients and prospective clients from the Zambuko

Trust program in Zimbabwe. The Zambuko client data was collected in three separate

- 31 -

urban areas: in and around Harare, Bulawayo and Mutare. �These cities have the

largest concentrations of urban populations and approximately 60% of all of Zambuko

clients lived in these areas in May of 1997� (Barnes, 2). The data of interest is the

smaller sample from rural Uganda. In order to establish the legitimacy of the data set

and ensure that both the measurement techniques used in this paper and the data

themselves are consistent, all of the information will be compared with the data from

Zimbabwe. In addition, this will also provide breadth to the indexes and allow for a

comparison between the index data generated here and previous work done without

indexes in the Zambuko context.

The key independent variable in this study will be the number of loans

(numloans), which will serve as a proxy for participation in the program. In addition a

number of variables will be included to control for wealth, gender, urban/rural clients,

family size, involuntary orphan adoption, age, and age of the business. Generically the

model will look like this:

Socdev =β0 + β1 numloans+ βj wealth indicators+ βk demographics+ βl Business

characteristics+ u

Econdev= β0 + β1 numloans+ βj wealth indicators+ βk demographics+ βl Business

characteristics+ u

- 32 -

Spirdev = β0 + β1 numloans+ βj wealth indicators+ βk demographics+ βl Business

characteristics+ u

The most important piece of this model is the creation of the indexes. Bullen and

Onyx suggest eight factors that lead to Social Capital creation (see above) which will

serve as a model for the social development index. In the Ugandan context, most of

these apply, with the exception of tolerance for diversity. Ethnic Africans make up

99% of the population10 with only 1% representing other races in Uganda. This does

not mean diversity is unimportant, but especially in the context of Kabale, where

almost the entire population is Bakiga, diversity is less of an issue. For this reason, it

does not appear that the lack of an indicator for diversity will greatly affect the results.

For the economic index, this paper will focus on the Barnes work on the

Zambuko Microfinance program in Zimbabwe. Barnes study does not specifically

establish an index for use as a dependent variable. She does however group variables

together under three headings: improvements in household economic welfare,

enterprise growth and empowerment of clients. She then tested each of the variables

for significance among clients and non-clients and drew conclusions regarding

development under each of the three headings (Barnes). By specifically focusing on the

variables that have been highlighted to measure household economic welfare and

enterprise growth a strong index to measure economic development can be established.

10 CIA World Fact Book. http://www.cia.gov/cia/publications/factbook/geos/ug.html.

- 33 -

Measuring spiritual development is the least explored of these three indexes.

The construction of this index has relied on the kind of analysis used in the previous

two examples, while taking care to account for some of the peculiarities of spiritual

development: specifically that spiritual development should be based on faith and

works. In order to construct a valid index, both must be included, without favoring one

over the other. In addition, certain actions that were commonplace before may take on

new meaning or be extended to impact new individuals due to spiritual development.

A good example of this is caring for the ill and lending money to those in need. In the

African context, these are commonplace among family members, but much less

common among neighbors and acquaintances. For this reason, caring for the sick and

lending money have only been included when it involves those outside of the family in

order to separate cultural norms from spiritual development.

More standard spiritual measures such as church attendance, prayer and study

of scripture have also been included. These indicators however, were buried inside a

larger questionnaire about more repetitive daily activities to ensure that respondents

gave valid answers and not �right�11 answers.

The existing literature on microfinance is gradually moving from evaluations

based on institutional sustainability to impact assessments at the client level. This is

largely in response to donor requests about the effect of loan programs on the clients.

The shift in evaluation techniques has required researchers to begin testing new

11 Refer to Survey Design: we were very concerned about respondents attempting to guess the right answers to questions, particularly those referring to spirituality.

- 34 -

variables that can effectively measure the impact of a given microfinance program. So

far these efforts have focused almost exclusively on the economic impacts.

Despite this, anecdotal evidence from the literature suggests that microfinance

also has significant social impacts on communities. Therefore there is a strong basis for

the measurement of the social impact of microfinance, and a number of studies have

taken cautious steps towards incorporating some of the wider impacts of microfinance

into their work. Of particular interest is the creation of social capital through

participation in microfinance. Microfinance is based on a group lending model and

does consider community empowerment as a stated goal so it is natural to assume that,

as researchers like Krishna suggest, in such a situation social capital would naturally

accumulate.

The first index used in this study measures economic development. In her

Zambuko study, Carolyn Barnes used established instruments to measure household

economic welfare and enterprise growth. These included an increase in assets, an

increase in income, increase in enterprise asset accumulation, an increase in

employment created by the enterprise and an increase in the number of transaction

relationships (Barnes, 2001).

A second index was developed to measure social development. Using the eight

factor model for measuring social capital developed by Bullen and Onyx, it is possible

to create an index to measure the level of social capital development among

microfinance clients. This study will create a similar index based on established

- 35 -

economic development models and test whether participation in the microfinance

program increases a client�s performance on these development indexes.

A third index, spiritual development, has also been included in this study. A

growing number of development organizations with a religious foundation are

incorporating spiritual development into their mission statements but are having a

difficult time measuring change. Existing literature on measuring spiritual

development is scarce and highly open to critique. This study will create an index for

spiritual development based on existing definitions for spirituality given by leading

development organizations. The indicators that will be incorporated into this index

were collected in a manner consistent with current literature on obtaining honest

answers for potentially difficult questions like church attendance, prayer and giving to

the church.

Each of these indexes were then compared against the number of loans received

by the client in order to establish whether participation in a microfinance program

would have any tangible impact on the economic, social and spiritual development of

the clients in question. Because the Zambuko survey did not deal explicitly with

spiritual issues, the spiritual development indicator was left out of this sample.

- 36 -

Chapter 3. Variables of Interest

The main independent variables of interest for this project are the number of

loans the client has had and the average size of the loan. In addition there is a number

of interesting control variables that are included in the tables below for two reasons: 1)

to test whether or not the two data sets are statistically similar and 2) to ensure that

there is no other variation of the indexes across any other variables. These include

controls for type of business, gender, age, education and a number of variables meant

to measure wealth.

A cursory analysis of the two data tables (tables 1.1 and 1.2) brings to light a

number of important discrepancies, most notably the differences in gender, access to

electricity and loan size In the Five Talents Sample, 42% of the clients are male

compared to 17% in the Zambuko program. The gender discrepancy is consistent with

the general makeup of the two programs. The Zambuko trust program has as a goal the

integration of women into the local economy in Zimbabwe. In Five Talents the

empowerment of women is a goal, but they strive to maintain equality and lend

irrespective of gender. For this reason FTI still has a higher percentage of female

clients than males, but they do not have nearly the gender imbalance found in the

Zambuko program. Discrepancies in measurement of the access to electricity, 46%

(Five Talents) versus 73% (Zambuko), are almost entirely related to the distinctions

between urban and rural programs. Most of Five Talents clients live outside of the

town of Kabale where there is very little access to electricity. Because the Zambuko

- 37 -

program is based in urban areas, access to electricity is usually limited due to monetary

constraints, but Five Talents clients face additional physical constraints to obtaining

access.

The differences in loan size are important and serve as the main underpinning

for the hypothesis of this paper. Using exchange rates contemporary to the times of the

different studies (1999 and 2005, respectively), the average (mean) loan size for the

Five Talents program was $177.95 (USD) and the average loan size for the Zambuko

program was $57.04. Despite the large difference in the size of loans, almost a factor

of four, the average revenue from the businesses is actually higher in the Zambuko

sample, $799 (USD) to $344. It appears to take a substantially larger amount of capital

to motivate the similar amounts of growth in rural areas over urban areas. Comparing

these two studies, even with average loans that are four times larger, businesses in the

Five Talents program were only able to create half of the revenue of their counterparts

in Zimbabwe. For this reason, this paper seeks to test whether microfinance has less of

an economic impact in a rural setting.

It also is important to discuss what is missing from this table. There are no

clear variables in the Zimbabwe dataset for kind of enterprise, so more work is

necessary in order to establish types of enterprises or to distinguish the different

enterprises in the Zambuko study by size, capital or other measurements. More

discussion on further work necessary with the data will follow in the next section of

this paper.

- 38 -

Table 1.1: Five Talents, Uganda Summary of Statistics

Variable mean modestandard deviation min max 25% median 75%

avgloan (in Schil) 324947.000 300000 154926.000 100000 1140000 200000 300000 400000hheduc 7.250 7 4.632 0 17 4.5 7 11hhmale 0.427 0 0.497 0 1 0 0 1hhage 38.363 32 10.204 22 72 30 38 43agric 0.148 0 0.356 0 1 0 0 0service 0.175 0 0.382 0 1 0 0 0transport 0.027 0 0.165 0 1 0 0 0trade 0.537 1 0.500 0 1 0 1 1textile 0.064 0 0.247 0 1 0 0 0manuf 0.046 0 0.211 0 1 0 0 0tinroof 0.973 1 0.164 0 1 1 1 1elec 0.455 0 0.500 0 1 0 0 1conc 0.573 1 0.497 0 1 0 1 1cell 0.427 0 0.497 0 1 0 0 1rural 0.407 0 0.494 0 1 0 0 1econdev 5.859 6.5 1.659 1 9.5 4.5 6 7socdev 4.973 3.0 1.982 0.5 10.0 3 5 6.5spiritdev 5.286 6.0 1.572 0 10.0 4 5 6numloans 2.490 1 1.353 1 6 1 2 4Revenue (in Schil.) 628522.000 300000 967328.000 0 6000000 120000 300000 800000Exchange Rate: 1.00 USD United States Dollars = 1,826.00 UGX (Dec. 2005) Table 1.2: Zambuko Trust, Zimbabwe Summary of Statistics

mean modestandard deviation min max 25% median 75%

Avgloan (in Z $)* 2173.481 0 19806 0 461250 0 0 1500hheduc 7.785 7 3.218 0 15 6 8 11hhmale 0.174 0 0.375 0 1 0 0 1hhage 40.35 40 11.24 14 88 32 40 47hhmarried 0.701 1 0.458 0 1 0 1 0bicy 0.173 0 0.378 0 1 0 0 0elec 0.725 1 0.446 0 1 0 1 1fridge 0.452 0 0.498 0 1 0 0 1cell 0.069 0 0.2544 0 1 0 0 0Economic Development 3.970 3 1.848 0 9 3 4 5Social Development 4.136 4.5 1.455 0 8 3 4.5 5numloans 1.127 1 0.791 0 5 1 1 1Revenue (Z$/month) 30469.29 42000 35580 200 150000 8500 19000 420001.00 USD United States Dollars = 38.10 ZWD (September 1999)

- 39 -

Chapter 4. Analysis

In this study, data collected from a rural MFI in Uganda was used to create an

economic, social and spiritual index (from 0-10) for each client. Because data were

only available from one time period, the number of loans received by the client was

used as a proxy for the amount of experience a client has had with the MFI.

Table 2.1 Zimbabwe Survey Data

Simple Regression

Dependent Variable: Economic Development Social Development

Independent Variables Estimate/t-value Estimate/t-value

Intercept 3.608 3.437 20.740 25.650 Numloans 0.289 0.528 2.510 5.940 F Value 6.300 35.250 Pr>F 0.012 0.000 R-squared 0.010 0.059

Table 2.2 Uganda Survey Data Simple Regression

n=108

Dependent Variable: Economic Development

Social Development

Spiritual Development

Independent Variables Estimate/t-value Estimate/t-value Estimate/t-value Intercept 5.591 4.034 4.563 16.87 10.510 14.960 Number of loans 0.1101 0.385 0.297 0.92 2.780 2.700 F Value 0.850 7.73 7.27 Pr>F 0.3587 0.0064 0.0081 R-squared 0.0078 0.0668 0.0631

- 40 -

The main hypothesis of this paper is as a client has more experience with the

program, he/she will receive a higher score on the economic, social and spiritual index.

As a first step, the number of loans was regressed on each of the indexes to test

whether there was a correlation. In the Uganda sample, the number of loans did have a

statistically significant effect on social and spiritual development, but no impact on

economic development. (table 3.2.)

In the comparison sample from Zimbabwe (Table 3.1.), the results were slightly

different. In this context, the number of loans had statistically significant impacts on

both economic and social development.12 This is not surprising because the urban areas

where microfinance has been applied lend themselves more easily to economic

development than rural Uganda.

While these results are interesting, the equations as they stand have little explanatory

power. Across the five equations, the highest r-square is .067. A set of independent

variables was created to account for any variation in the dependent variables due to

age, gender, marital status, education level and other variables that can be controlled

for with the data available.

12 Spiritual impact was not measured in Zimbabwe because adequate variables are not available in the data set.

- 41 -

Table 3.1 Uganda Survey n = 108 Complete Regression

0.19940.35460.424R-squared

0.0190.00010.001Pr>F

2.224.065.950F Value

NA-1.950-0.360

NA-0.763-0.112Illness in the family

-0.6501.0801.510income

-0.3610.6630.748Other household

NA1.5002.260changed?

NA0.2550.304Have your grp. Membrs

1.7203.2804.780

0.6011.3341.325Cellphone

-0.820-0.180NA

-0.637-0.163NATinroof

1.290-1.280NA

0.541-0.620NAElectricity

0.3101.900NA

0.1230.855NAConcrete Floor

NA-0.030-0.380orphans?

NA-0.015-0.139Have you taken in

0.420-0.007-2.290

0.031-0.006-0.163# of Children

1.080NA-2.440completed

0.034NA-0.071High. Level of Ed.

1.280-1.290-0.230

0.436-0.526-0.073Married

-1.2901.8900.9

-0.4370.7220.27735Male

-0.300-0.290-0.77

-0.005-0.006-0.01229Age

2.4602.2300.85

0.2870.3080.09315# of Loans

4.6300.0048.48

4.4603.4065.45375Intercept

Estimate/t-valueEstimate/t-valueEstimate/t-valueIndependent Variables

Spiritual Development

Social Development

Economic DevelopmentDependent Variable:

0.19940.35460.424R-squared

0.0190.00010.001Pr>F

2.224.065.950F Value

NA-1.950-0.360

NA-0.763-0.112Illness in the family

-0.6501.0801.510income

-0.3610.6630.748Other household

NA1.5002.260changed?

NA0.2550.304Have your grp. Membrs

1.7203.2804.780

0.6011.3341.325Cellphone

-0.820-0.180NA

-0.637-0.163NATinroof

1.290-1.280NA

0.541-0.620NAElectricity

0.3101.900NA

0.1230.855NAConcrete Floor

NA-0.030-0.380orphans?

NA-0.015-0.139Have you taken in

0.420-0.007-2.290

0.031-0.006-0.163# of Children

1.080NA-2.440completed

0.034NA-0.071High. Level of Ed.

1.280-1.290-0.230

0.436-0.526-0.073Married

-1.2901.8900.9

-0.4370.7220.27735Male

-0.300-0.290-0.77

-0.005-0.006-0.01229Age

2.4602.2300.85

0.2870.3080.09315# of Loans

4.6300.0048.48

4.4603.4065.45375Intercept

Estimate/t-valueEstimate/t-valueEstimate/t-valueIndependent Variables

Spiritual Development

Social Development

Economic DevelopmentDependent Variable:

- 42 -

Table 3.2 Zimbabwe Survey n =562 Complete Regression

Dependent Variable: Economic Development Social Development

Independent Variables Estimate/t-value Estimate/t-value

Intercept 1.319 3.435

2.668 12.120 numloans 0.204 0.490 1.710 5.870 age 0.018 -0.029 2.360 -5.690 male -0.500 0.085 -2.500 0.570 married 0.515 0.378 3.030 2.950 electricity? NA 0.621 NA 3.570 Bicycle? NA 0.232 NA 1.610 Fridge? NA 0.474 NA 3.960 educ 0.091 NA 3.400 NA new household members 0.419 NA 2.830 NA training 0.056 NA 0.270 NA loans used for school -0.429 -0.940 -0.720 -2.120 loans used for medicine -0.662 -0.390 -0.610 -0.510 illness? 0.016 0.297 0.060 1.510 cell? 1.098 0.370 3.770 1.680 # of Children 0.146 0.037 3.480 1.190 F Value 7.420 14.210 Pr>F <.0001 <.0001 R-squared 0.1396 0.237

- 43 -

The second set of regression is much more interesting. In Uganda, the variable

of interest, number of loans received, remains significant in the regression on spiritual

and social development, and remains insignificant when regressed on economic

development. Because Kabale is a rural town with very low levels of infrastructure

and liquid capital, it is very difficult for a small enterprise to experience any

meaningful economic development. The majority of rural microfinance loans either

replaces or increases stock or seed, or they act as insurance or a buffer against

economic shocks. There is little reason to expect that a loan used in this manner will

have a meaningful impact on the economic development of a client.

Social and spiritual developments are positively impacted by participation in

the microfinance program. For each loan received, a client can expect to improve their

social and spiritual index by about .30. Social development should be intimately tied

to microfinance participation because most microfinance programs are group-based

programs where participation in a loan group is required to receive a loan. These

groups not only come together to receive loans, they also socialize together and often

quickly become leaders within their own communities. Loan groups will often pool

their profits and establish a collective savings account to cover the group if one person

is unable to pay, or they will loan out their savings as a group to other entrepreneurs

who cannot yet qualify for a microfinance loan and receive interest on their savings.13

13 Many people are surprised when they here that clients don�t qualify for MFI loans. In fact, most MFI�s, in addition to being part of a group, require that a prospective borrower be involved in an active income earning activity and save 10-30% of the total loan up front, as an insurance against non-payment on the first loan.

- 44 -

Spiritual development also increases with program participation in the Ugandan

context. These results are most likely related to the importance that Five Talents,

Uganda places on spirituality. While they do not require that participants be of any

particular faith, they do desire that clients will become more spiritually active in their

church and their community. They encourage groups to pray together and for clients to

pray on their own and with their families. It is also interesting to note that in the

spiritual development model, no one other variable has a statistically significant impact

on spiritual development, except for the number of loans received.

The explanatory power, or R-squared, of the equations also tells a story worth

noting. The model as designed explains 34% of the variation in economic

development, 35% in social development and only 20% in spiritual development. The

factors used to measure economic development tend to be very concrete, easily

identifiable characteristics. Most people can tell when their neighbor is better off than

they are. With social development, it is less clear. A person may have many friends,

but no one he/she can count on in an emergency. Or they may have fewer friends, but

many people they can count on. A person could be very popular, but not be very well

thought of by the community as whole. Conversely a person could be less well known,

but like what people know about him/her. Because social development is harder to

quantify, it is understandable that the equation would have less explanatory power.

Finally, spiritual development is even more difficult to quantify. How do you judge

whether someone is spiritual? Because spirituality is best understood by the believer

- 45 -

and their god, it is somewhat futile to try and measure whether or not someone has

developed spiritually. For many organizations, however, this is a stated goal and one

they work hard to complete, so it is important to try and measure any change in

spirituality.

The comparison data set from Zimbabwe is very similar. The impact of

program participation remains significant on social development, and is now just

barely insignificant on economic development (7% significance level). The most

obvious difference between the two data sets is the direction of the coefficients on

gender and marital status for the regression on economic development. In the Uganda

sample, the coefficient on male is positive while the coefficient on married is negative.

In Zimbabwe it is the opposite. This suggests that there is something different about

the makeup of the two data sets and possibly the two cultures.

The Zambuko Trust (Zimbabwe) has as a goal to empower female

entrepreneurs and has more female clients than male (17% male clients). In Uganda,

Five Talents has not established any gender quotas., However, they still have more

female clients than male, but the margin is much smaller (43% male). The focus in

Zimbabwe on female clients could by itself make that program a more positive

experience for women and therefore a better business environment. It is also possible

that they are more likely to receive secondary business development services (BDS)

from the MFI than their male counterparts. In a sample that is mostly female, it can be

a great benefit to be married because this may give you another source of income and

- 46 -

potential access to a less expensive labor pool if your children have time to work in the

business.

Five Talents provides BDS to all of its clients, and does not discriminate based

on gender. However, many women who enter the program only do so after their

husbands have passed away. The death of a husband leaves many women in Uganda

in a difficult economic situation. They often have little formal training but are suddenly

called upon to provide financially for the household, parents and often the parents of

the deceased as well. These women will naturally score lower on any score of

economic development because they are faced with so many competing pressures.

These discrepancies between the programs may help to explain the differences across

these two variables.

Unexpected results

One of the most curious discrepancies between the two analyses is the

difference in R-squared. The Uganda regressions for economic and social

development have R-squares between .34 and .35, but the Zimbabwe regressions have

R-squares between .13 and .23, despite having a larger sample size (n=562 vs. n=108).

Paradoxically, the Zimbabwe sample also has more significant variables, and yet still

has a lower r-squared overall. This is most likely because of the differences in the

samples themselves. The Zimbabwe sample is a composite of a number of MFI

programs in two urban areas in Zimbabwe. Urban areas tend to contain a more

ethnically and socially heterogeneous population. In contrast the rural population of

- 47 -

Kabale, Uganda tends to be ethnically similar and on the whole more homogenous.

Because the Uganda sample tends to have less variation in unexplained characteristics,

it makes sense that the Uganda regressions would have more explanatory power.

In this study two variables have consistently demonstrated surprising results.

Cell phones have been statistically significant across both samples for all of the

indexes (the lowest p-value is .08 for cell phones and spiritual development). The

second variable is education, which in the Uganda sample has a negative coefficient on

economic development. Both of these occurrences are interesting and deserve more

attention.

Cell phones are statistically significant for social and economic development in

the Uganda and Zimbabwe samples. A few factors appear to be at work here. The first

is that cell phones are expensive and may serve as a proxy for wealth. This is most

likely more true for the Zimbabwe sample because the study was conducted in 1999,

when cell phones were relatively rare in Africa. Wealth alone can not explain the

phenomenon, because Africa has experienced tremendous growth in cell phone

adoption. Cell phone users have increased from 2 million in 1998 to 82 million by

2004. From 2003 to 2004, usage almost doubled from 51 million to 81 million. With

close to half of the population (43.6%) living on less than a dollar a day, this kind of

growth is very impressive, and demonstrates that it is not just the wealthy who are

acquiring cell phones.

- 48 -

The second factor is that a cell phone is most likely an indicator of other

immeasurable factors like entrepreneurial spirit, connectedness to the outside world

and motivation to succeed. It makes sense that clients with a cell phone are more

socially active, because it is easier for them to communicate. It also makes sense that

they are more economically active, because it is easier for them conduct business using

their cell phone. They also have more reliable access to accurate information and prices

so they are les likely to be swindled in the marketplace. The significance of cell phones

in this study does not suggest that all clients should be given cell phones. It does,

however, imply that there is something particular about clients who choose to purchase

cell phones that make them better business owners. In part because of the

immeasurable characteristics associated with cell phone adoption, the Grameen Bank

in Bangladesh has recently begun offering loan products to clients specifically for the

purchase of cell phones. While cell phones have dropped significantly in cost, for the

poorest of the poor it is still difficult to accumulate all of the cash necessary to

purchase a cellular handset. Grameen�s strategy is to assist clients who would like to

obtain a cell phone in order to improve their business, which in turn will strengthen the

social and economic development of their client base.

Returning to the Uganda sample, there is a surprising effect of education on

economic development. The coefficient on education is highly significant but

negative. This is surprising because a high premium is placed on education in Uganda

and in any context one would be hard pressed to think of a scenario where a business-

- 49 -

person would prefer to be less educated or uneducated. A third regression was run in

an attempt to explain this peculiar variation, breaking down education into four

categories: no education, primary education, secondary education and college level

education. The results are found in table 5.

By dividing education into four subcategories it is possible to get a clearer

picture of the differentiated impacts of education on economic development. In this

model, having zero education is the default. If a person has a primary education, this

has a negative impact of -.571 A secondary education also has a negative correlation,

with an impact of -.14. Surprisingly, a college level education has a very high negative

impact of -.936.

Why does education have negative impacts across the board? Upon closer

inspection, the t-value for secondary education is very low (-.34) and not statistically

significant. The t-value for primary education is -1.59, which represents an 11%

significance level. The only variation that is somewhat statistically significant is the

negative impact related to college education. In the Uganda context 12% of the clients

demonstrate a college level education. This does appear high, but it also includes post-

secondary vocational and training programs such as teachers colleges, technical

schools and nursing programs. Many clients have begun businesses after having a

career in education or healthcare because the wages simply are not high enough to

support a family. These clients may be leaving another job to start their business,

which would explain the negative impact. Additionally, college educated clients who

- 50 -

begin businesses in rural areas, where agriculture is the main form of enterprise may

actually have lower job skills than their less educated counterparts who may have

learned agricultural and business skills from family members instead of going to

school.

- 51 -

0.22780.35460.3529R-squared

0.0160.00010.0001Pr>F

2.184.064.030F Value

NA-1.950-0.710

NA-0.763-0.233illness?

-0.4401.0801.460

-0.2460.6630.774Other Income

NA1.5001.340

NA0.2550.190Group Mem. Change

1.1903.2804.410

0.4291.3341.317Cellphone

-0.680-0.180NA

-0.521-0.163NATinroof

1.540-1.280NA

0.654-0.620NAElectricity

0.4601.900NA

0.1840.855NAConcrete Floor

NA-0.030-0.520

NA-0.015-0.204Orphans

0.680-0.007-2.040

0.051-0.006-0.155# of Children

1.580NA-1.810

0.661NA-0.936college

-0.620NA-0.340

-0.368NA-0.140secondary

-0.060NA-1.590

-0.023NA-0.571primary

1.300-1.290-0.840

0.441-0.526-0.283married

-1.5001.8901.13

-0.5050.7220.3688male

-0.440-0.290-0.42

-0.008-0.006-0.0072age

2.7502.2301.24

0.3300.3080.14627numloans

4.4900.0048.11

4.3543.4065.71138Intercept

Estimate/T-value

Estimate/T-value

Estimate/T-valueIndependent Variables

Spiritual Development

Social Development

Economic DevelopmentDependent Variable:

0.22780.35460.3529R-squared

0.0160.00010.0001Pr>F

2.184.064.030F Value

NA-1.950-0.710

NA-0.763-0.233illness?

-0.4401.0801.460

-0.2460.6630.774Other Income

NA1.5001.340

NA0.2550.190Group Mem. Change

1.1903.2804.410

0.4291.3341.317Cellphone

-0.680-0.180NA

-0.521-0.163NATinroof

1.540-1.280NA

0.654-0.620NAElectricity

0.4601.900NA

0.1840.855NAConcrete Floor

NA-0.030-0.520

NA-0.015-0.204Orphans

0.680-0.007-2.040

0.051-0.006-0.155# of Children

1.580NA-1.810

0.661NA-0.936college

-0.620NA-0.340

-0.368NA-0.140secondary

-0.060NA-1.590

-0.023NA-0.571primary

1.300-1.290-0.840

0.441-0.526-0.283married

-1.5001.8901.13

-0.5050.7220.3688male

-0.440-0.290-0.42

-0.008-0.006-0.0072age

2.7502.2301.24

0.3300.3080.14627numloans

4.4900.0048.11

4.3543.4065.71138Intercept

Estimate/T-value

Estimate/T-value

Estimate/T-valueIndependent Variables

Spiritual Development

Social Development

Economic DevelopmentDependent Variable:

Table 4 Uganda Survey Data N=108 Education Break Out Analysis

- 52 -

Chapter 5. Policy Recommendations If a microfinance organization is truly concerned with having an immediate

impact on economic development in rural areas, it will be important for it to consider

the results of this study and think critically about how to better improve economic

development. Possible suggestions include providing training in financial education,

loan management and asset accumulation.

Conversely, because significant impacts do exist on social and spiritual

development, particularly when programs make these a priority, it is important that

organizations learn to advertise these gains to prospective donors. This would include

regular evaluation of clients to track development and reporting of both anecdotal and

statistical evidence to prospective donors in order to make a convincing argument that

these developments are real and valuable.

From an institutional policy perspective it is also important to note that this

study took place in a rural area with limited infrastructure and liquid capital in the

marketplace. It appears clear that program implementation in a rural area requires a

different kind of preparation if it seeks to improve the economic capacity of its clients.

- 53 -

Chapter 6. Conclusion and Next Steps

Microfinance is a new solution to ending poverty in the developing world.

However, recent data suggests that in order to make substantial economic impacts on

microfinance clients in the short term, MFI�s need to do better job of structuring their

programs with this goal in mind. Simply giving out loans and ensuring they get paid

back is not enough.

Microfinance organizations like Five Talents (FTI) have done a good job of

structuring their programs to encourage social development, and in the case of FTI,

spiritual development. For this reason, these programs demonstrate the clear gains are

in terms of social and spiritual development. This did not happen by accident. In order

to replicate this progress with economic development, organizations must devise new

strategies for increasing economic development as part of the loan program.

Overall, the Five Talents Uganda program has been successful in encouraging

social and spiritual development among its clients. Regular group meetings, the

creation of Rotating Savings and Credit Associations (ROSCA�s), and the increased

self esteem associated with microfinance participation are all a part of this increase in

social development. Spiritual development is most likely impacted by regular prayer

meetings, the encouragement to find a spiritual connection to the business, the

dominance of the Anglican Church in Uganda, and the cultural association of increased

wealth with the intervention of a higher power. The data from Zimbabwe supports

these conclusions and provides a strong benchmark to what would otherwise be a very

- 54 -

small, limited piece of research. While there are a number of discrepancies, the overall

conclusion that social impacts are felt and economic impacts are not is true across both

studies and merits further consideration.

Despite these conclusions, many issues remain unaddressed. This research is

based on a relatively small sample in an isolated rural area, which does raise issues of

external validity. A strong argument can be made that the research is valid in similar

rural contexts with homogenous populations. In addition, because the final conclusions

are similar to the results from Zimbabwe, it is also possible to argue that there is

limited external validity within the African microfinance sector.

It is important to stress that these are changes measured in the short term. It is

possible, and likely, that some of the economic benefits of microfinance will not be felt

for many years or even until the next generation as families begin to see the benefits of

increased social investment. A more comprehensive study to look at the long term

benefits of microfinance is recommended.

There may be a stronger connection between economic development and loan

usage in the short term than this study was able to measure given the data available. A

more in depth, time-series study that could track the economic behaviors and asset

accumulation patterns of clients over a long period of time may provide more fruitful

data. Nevertheless, economic development is far from significant and is most likely

related to program design and issues with loan usage.

- 55 -

As mentioned earlier, the lack of economic impacts related to program

participation suggest that work needs to be done to track what loan funds are used for

and where the capital comes from to repay the loan. A number of theories exist,

including that loans are used as an insurance policy (i.e. held under the mattress), a

second loan is taken to pay off the first, or that loans are used for consumption (school

fees, investment in the home) as opposed to productive activities.14

In the short term, rural microfinance programs demonstrate a high degree of

correlation between program participation and social and spiritual development. There

is not, however, any correlation between participation and economic development.

This study recommends that rural MFI�s create innovations in order to encourage short

term economic development in a rural setting.

14 As previously mentioned, education is an investment in human capital but it is not a productive investment for a business-only loan of the type studied in this program. Currently, microfinance practitioners are working to design new products to meet needs for loans to cover school fees, medical expenses and other expected and unexpected costs.

- 56 -

Sources: Barnes, Carolyn. Microfinance Program Clients and Impact: An Assessment of Zambuko Trust, Zimbabwe. 2001. found at: http://www.usaidmicro.org/pubs/aims/ Bullen, Paul and Onyx, Jenny. Measuring Social Capital in Five Communities. The Journal of Applied Behavioral Science. Vol 36: 1. March 2000. Chen, Martha Alter. A Guide for Assessing the Impact of Microenterprise Services at the Individual Level. 1997. found at: http://www.usaidmicro.org/pubs/aims/ Di John, Jonathan and Putzel, James. Institutional Change for Growth and Poverty Reduction in Low Income Countries: The Case of Uganda. London School of Economics. Paper presented for Conference on Institutional Change for Growth and Poverty Reduction in Low Income Countries, IMF, Washington DC. 6-7 July, 2005. Dunn, Elizabeth. Research Strategy for the AIMS Core Impact Assessments. March 2002. available online at: http://www.usaidmicro.org/pubs/aims/ Dunn, Elizabeth and Arbuckle, Joseph J. The Impact of Microcredit: A Case Study from Peru. Management Systems International. September 2001. Available at: http://www.usaidmicro.org/pubs/aims/ Hulme, David. Impact Assessment Methodologies for Microfinance: Theory, Experience and Better Practice. Institute for Development Policy and Management: University of Manchester. 2000. Jennefer Sebstad, Catherine Neill, Carolyn Barnes, and Gregory Chen. Assessing the Impacts of Microenterprise Interventions: A Framework for Analysis. 1995. found at: http://www.usaidmicro.org/pubs/aims/ Krishna, Anirundh. �Creating and Harnessing Social Capital�. Social Capital: A Multifaceted Perspective. Ed. Partha Dasgupta, Ismail Serageldin. Washington, DC: The World Bank. 2000. Lule, Kennedy. �End of a Bad Chapter, say Ugandan Indians.� The Monitor. August 17th, 2003. http://www.monitor.co.ug/specialincludes/ugprsd/amin/articles/news6.php Makina, Daniel and Malobola, Louisa A. �Impact assessment of microfinance programmes, including lessons from Khula enterprise microfinance.� Development Southern Africa. Volume 21. Number 5. Carfax Publishing: London, England. December 2004. 799.

- 57 -

McGregor, J. A. �Government Failures and NGO Successes? Credit, Banking and the Poor in Rural Bangladesh 1970-1990.� Chapter in Lloyd, T. and Morrissey, O. (eds) Poverty and Rural Development: Case Studies in Economic Development .Volume 3. Macmillan, London. 1994. Opportunity International. �A Conceptual Framework for Transformational Development.� Spiritual Transformation Through Microenterprise Development: A Compendium of Tools for Christian Practitioners. Presented at the 2nd Christian Microenterprise Conference. Compiled by World Relief�s Microenterprise Consulting Services and the Opportunity International Network. 1999.

Pischke, J.D. �Microfinance in Developing Countries.� Replicating Microfinance in the United States. Ed. Carr, James and Tong, Zhong Ti. Woodrow Wilson Center Press: Washington D.C. 2002.

Program evaluation: alternative approaches and practical guidelines. Editors, BR Worthen, JR Sanders, JL Fitzpatrick, BR Worthen. Longman: New York. 1997. Putnam, Robert. Bowling Alone: America�s Declining Social Capital. Journal of Democracy 6:1, Jan 1995. Putnam, D. Robert. Bowling Alone: The Collapse and Revival of American Community. Simon and Schuster: New York, NY. 2000. Putnam, D. Robert. Making Democracy Work. Princeton University Press: Princeton, NJ. 1993. Shadish, William R; Leviton, Laura C; Cook, Thomas. Foundations of Program Evaluation: Theories of Practice. Sage Publications: London, UK. 1991. Social Capital: A Multifaceted Perspective. Ed. Partha Dasgupta, Ismail Serageldin. Washington, DC: The World Bank. 2000. Van de Walle, Nicolas. African Economies and the Politics of Permanent Crisis. Cambridge University Press: Cambridge, UK. 2001. Zohir, Sajjad and Matin, Imran. Wider Impacts of Microfinance Institutions: Issues and Concepts. Journal of International Development. Volume 16. 2004. pages 301-330. available online at www.interscience.wiley.com.

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Zeller, Manfred and Meyer, Richard L. �Improving the Performance of Microfinance: Financial Sustainability, Outreach and Impact.� The Triangle of Microfinance: Financial Sustainability, Outreach and Impact. Ed. Manfred Zeller and Richard L. Meyer. Johns Hopkins University Press: Baltimore, Md. 2002.

- 59 -

Appendix A: In order to conduct the analysis in this study, it was necessary to construct three

separate indexes to measure economic, social and spiritual development. All three

indexes run from 0 to 10. All three also increase incrementally by .5 (0, .5, 1.0,

1.5�etc.). In order to ensure that this study was replicable, the indexes were based on

material already available in the literature.

Each index includes a series of variables used to measure the desired factor.

For example, in the case of economic development in Uganda twelve variables were

selected and each was given a weight of 1 or .5 to total 10. All of the indexes were

created in this manner with the exception of spiritual development.

The spiritual development index contains 16 indicator variables. Because the

spiritual development indicators were new it was difficult to discern what the

significance of these variables would be. Particularly problematic were the �sickness�

variables, where respondents indicated how they treated someone who was sick. All

respondents gave at least one of the six responses, and all six responses were given. No

individual gave more than four of the responses so it was necessary to include all six

and give them roughly equal weights of .5. The total index was then normalized to ten

after all the variables were added to ensure that no respondent was given a score higher

than 10 or lower than 0. For a detailed description of the variables included in spiritual

development see table 8 below.

- 60 -

The economic development index is based on the factors described in

�Microfinance Program Clients and Impact: An Assessment of Zambuko Trust�

(Barnes, 2001). Barnes� study groups variables together under three headings:

Improvements in household economic welfare, Enterprise growth and Empowerment

of clients. By specifically focusing on the variables that have been highlighted to

measure household economic welfare and enterprise growth a strong index to measure

economic development can be established.

All three of the indexes contain variables called Business Change,

Personal Change, Household Change and Group Change. Each respondent was asked

what has been the biggest change in his/her household, group, business and family.

Post survey, these responses were coded as being economically oriented, spiritually

oriented or socially oriented. For example, all forms of asset accumulation and

business activity, whether working longer hours or spending more time at market, were

classified as economic. Any response mentioning prayer or other spiritual activity was

classified as spiritual. Any response mentioning interactions with others, groups

working together, or a feeling of empowerment within the community were classified

as social. This was an attractive way to allow clients to speak and tell the evaluators in

their own words how they think their lives have changed due to involvement in the

program.

- 61 -

The following table lists the factors considered important to measuring

economic development in column 1, the included variables from Uganda in column 2

and the included variables from Zimbabwe in column 3:

Table 5: Economic Development Indicators

Uganda Variables Zimbabwe Variables Household Economic Welfare Increase Income Loan Payment < Profits Consumption of Meat Biggest Household Change? Do you have a servant? Electricity Asset Accumulation Concrete Floor Bicycle Electricity Refrigerator Tin Roof Household Improvements Enterprise Growth Asset Accumulation New Equipment Land Ownership Business Improvement Have you purchased land? Did you pay the land in full? Employment Employees? Transaction Relationships Biggest Business Change? Do you have any savings? Biggest Group Change? Biggest Personal Change?

The social development index is based on �Measuring Social Capital in Five

Communities� (Bullen and Onyx, 2000). Previously tested indicator variables were

selected based on their ability to measure one of the eight factors relevant to social

capital outlined by Bullen and Onyx(see table 7)

- 62 -

The following table lists the factors considered important to measuring social

development in column 1, the included variables from Uganda in column 2 and the

included variables from Zimbabwe in column 3:

Table 6: Social Development Indicators

The third index for spiritual development is new, so there is no benchmark

against which to measure the selected variables. Nevertheless, table 8 lists the variables

included in the spiritual development index. These variables are combination of short

and long term behavioral changes commonly associated with spirituality. To the

outside observer, drinking beer seems like an odd indicator to include. However,

religious organizations in Uganda preach heavily in favor of temperance and encourage

most of their members to not drink alcohol at all. In fact, when you talk to church

Social Development Uganda Variables Zimbabwe Variables Participation in the Community

Do people come to you for advice?

Do you rent rooms to others?

Personal Change? Funeral assistance to community members?

Pro-active Attended Trainings Attended Trainings Education Level Education Level Feelings of Trust Help someone pay their loan? Financial assistance to friends and

family? Neighborhood Connections

Visit a neighboring town? Financial Assistance to Neighbors?

Group Change? Family and Friend Connections

Share a meal? Do you feel adult members of the household respect you?

Household Change Care for Orphans? Value of Life Practice English Take care of sick Read a book Prepared for the future? Work Connections Employees? Business Change?

- 63 -

members about how their life is different, they will frequently cite not drinking beer or

waragi anymore as one of the biggest changes.

It is important to note that Obushera, a local fermented beverage made from

sorghum flour and honey is not considered an alcoholic beverage, despite the fact that

after fermenting for three days to a week it clearly contains alcohol. This has been

explained a number of ways, but the most compelling is that a) the alcohol content is

low and b) it is a traditional cultural beverage that locals have been drinking for

hundreds of years. Religious organizations do not wish to intrude on cultural traditions.

Obushera also is not considered as dangerous as stronger forms of alcohol available

which are more likely to lead to, alcoholism, household conflicts and job loss.

Table 7: Spiritual Development Indicators

Spiritual Development (Uganda Only) Read your bible? Attend a prayer group? Help a child with homework? Spend time with friends? Attend Church? Drink alcohol? How have you helped someone who is sick? Help to pay their loan? Prepare food? Look after family members? Provide healthcare? Pray? Raise Money? Business Change? Personal Change? Group Change? Household Change?

- 64 -

All five indexes demonstrate a good range of values and demonstrate similar

means, medians and modes (See table 9). The standard errors are between 1.4 and 2,

and no index appears to contain any significant outliers. The lowest mean is 3.9 and

the highest mean is 5.8 Overall the values for the indexes are higher in the Uganda

sample than in the Zimbabwe sample; two points higher for economic development

and one point higher for social development. This is most likely because the Uganda

survey was created specifically to match the research model and the Zimbabwe survey

was not.

Any process involving selection of variables will immediately create questions

about which variables were selected. In this study there are several limiting factors

that prevent perfect and parallel selection of variables. First, the variables need to be

available, and both of these studies lacked adequate variables to measure everything.

Second, the variables must show a robust enough change across the sample to be

worthwhile. Some variables originally designed with certain impacts in mind did not

vary at all across the sample, particularly in Uganda. Third, comparable variables must

be available in the other samples. As you can see, in certain cases in this study, that

was not possible.

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Table 8: Dependent Index Variables of Interest

Despite the limitations of variable selection all of the indexes are robust and

well defined. This is the most novel aspect of this study and is open to criticism. The

process of index design and variable selection for this kind of study should be an

iterative process and future researchers who would like to undertake similar studies are

encouraged to improve on this first attempt. An ideal survey would incorporate a

number of variables for each desired factor to protect against unusable variables. It

would also have a large enough sample size to prevent the need for comparative data.

Finally, the survey would be lean enough to cover only the relevant points outlined in

the research proposal. This would guard against interviewer and subject fatigue, which

is always an issue with longer survey data. Finally, panel data that allows the

researcher to measure the change in development indicators over time among the same

respondents would be preferable because it would be easier to partial out impacts.

Mean 25% Median 75% Mode Standard Deviation Range

Zimbabwe Economic Development 3.970 3.0 4.0 5.0 3.0 1.848 9.0

Social Development 4.136 3.0 4.5 5.0 4.5 1.455 8.0

Uganda Economic Development 5.859 4.5 6.0 7.0 6.5 1.659 8.5

Social Development 4.973 3.0 5.0 6.5 3.0 1.982 9.5

Spiritual Development 5.286 4.0 5.0 6.0 6.0 1.572 10.0