Determinants of participation in informal and formal financial institutions in Uganda

Abstract

This study aimed at identifying the determinants of participation in informal and formal financial institutions in Uganda. The objectives were to: establish the relationship between demographic factors and participation in informal and formal financial institutions; examine the relationship between socio-economic factors and participation in informal and formal financial institutions; assess the relationship between financial factors and participation in informal and formal financial institutions; and establish the relationship between demographic, socio-economic, and financial factors and the simultaneous participation in both informal and formal financial institutions. The study utilized nationally representative data from the Uganda National Household Survey (UNHS) 2019/20 and employed a multivariate probit model to estimate the key factors shaping financial institution participation choices. The empirical findings indicated that participation choices varied significantly across gender, education, marital status, residence, occupation, and income levels. Females, rural residents, older individuals, and low-income earners were more likely to use Informal Financial Institutions, while males, urban dwellers, professionals, and educated individuals tended to use Formal Financial Institutions. Borrowing behaviour and financial decision-making also had a notable influence, with joint decision-making linked to reduced reliance on Informal Financial Institutions. Simultaneous use of both Financial Institutions was more common among older, educated, and higher-income individuals, and less likely among the never-married and low-skilled workers. The study concludes that both structural and behavioural factors influence financial participation patterns in Uganda. To enhance sustainable and inclusive financial inclusion, the study recommends leveraging Informal Financial Institutions as gateways to formal inclusion, promoting joint household financial decision-making, simplifying access to formal credit, addressing gender-based disparities, expanding financial literacy, and scaling up formal financial infrastructure particularly in underserved regions. These policy recommendations provide actionable insights that align with Uganda’s National Financial Inclusion Strategy (2023–2028), which aims to expand access to quality and affordable formal financial services and promote poverty reduction through inclusive economic growth.

Subject Key words: Informal financial institutions; formal financial institutions; Uganda