An anti-poverty initiative in southwest Uganda, utilizing the Graduation Approach, has identified that approximately half of its allocated block grant funds remain unborrowed by participating groups. The program, which provides financial support and coaching for establishing small businesses, attributed this trend to factors including market conditions, logistical challenges, and participant risk aversion. In response, program administrators have implemented modifications aimed at improving fund accessibility and encouraging greater utilization.
Program Overview and Design
The Sustainable Market Inclusive Livelihood Pathways to Self-Reliance (SMILES) program operates in southwest Uganda, providing support to 14,000 households, encompassing both refugees and local Ugandans. Managed by the AVSI Foundation, with monitoring by Innovation for Poverty Action, the program is funded by a $28 million donation from the IKEA Foundation and is scheduled to conclude in 2027.
The SMILES program employs the Graduation Approach, a strategy designed to assist individuals in exiting extreme poverty through financial support and business coaching. Economist Dean Karlan, founder of Innovation for Poverty Action and former chief economist for the United States Agency for International Development (USAID), introduced an innovation to the Uganda program's design. Instead of individual grants, block grants of approximately $4,000 are provided to groups of about 20 individuals for joint management. This structure was intended to enable larger borrowing sums, with loan interest subsequently distributed among group members. Each group is responsible for establishing its own borrowing limits, interest rates, and repayment deadlines.
Observation of Loan Utilization
During a two-year review, Karlan observed that approximately 50% of the grant money allocated to these groups remained unborrowed. This finding prompted an investigation into the underlying reasons for the underutilization of available funds within the program.
Identified Barriers and Participant Perspectives
Participants and program coaches cited multiple factors contributing to the observed reluctance to fully utilize the block grants:
- Market Conditions: Jacquerin Kabanyana, a 23-year-old refugee from the Democratic Republic of Congo and a program participant, reported increasing his weekly income from approximately $5 to $13 over two years after receiving an initial $74 loan for livestock farming. He later planned to reduce a subsequent loan request, citing diminished market activity.
- Aid Cutbacks: Several group members linked the decline in market activity to reductions in World Food Programme (WFP) aid, which had previously provided monthly cash to refugees. This aid is scheduled to be phased out by spring 2025.
- Logistical Barriers: Participants noted the significant travel distance and time required to reach a physical bank for loan transactions, sometimes consuming an entire day.
- Trust and Risk Aversion: Some participants expressed a general distrust of banking institutions. Antoinetta Justine, a participant, conveyed concern about depleting the group's pooled funds, emphasizing their critical role in family sustenance. Rita Larok, AVSI's director of programs, encouraged increased borrowing among participants to maximize collective interest earnings for the group.
Dean Karlan suggested that the reluctance to borrow stemmed from a perceived fear of risk. He stated that households in extreme poverty often prioritize preserving existing resources due to the severe consequences associated with financial setbacks. The block grant model was designed with the intention of providing a faster pathway for households to establish larger, more stable income sources and to reward high-performing members through interest distribution.
Broader Context of Foreign Aid Policy
Karlan indicated that USAID had historically been a significant funder of the Graduation Approach, with financial support increasing by nearly $500 million before recent policy changes. Development assistance and poverty solutions have not been included in the current U.S. foreign aid strategy. An NPR report noted that a USAID-funded graduation program in Uganda by the AVSI Foundation was terminated before its launch. Karlan expressed that block grants could offer a more efficient use of available funds within this evolving foreign aid environment.
Program Adjustments Implemented
Following discussions with participants and coaches, Karlan and the AVSI team implemented modifications to the program:
- Mobile Money Access: Participants will now be able to access funds from the block grant via mobile money, an electronic wallet system widely used in many lower-income countries, to mitigate logistical barriers.
- Enhanced Coaching: Coaches will continue to encourage participants and work to build confidence in financial risk-taking.
During one meeting, a group leader, Tumurhiwe Justine, requested assistance in acquiring a tractor for farming. Karlan suggested that the group's existing, unutilized block grant funds could be used to finance such a purchase.