Informal sector all over the world plays a significant role in national development due to the massive employment it provides to the citizens of the country where it exists regardless of their education and experience. Informal sector simply refers to those economic activities that are not formally registered by the relevant authorities and sometimes are neither taxed nor monitored (Khavul, Bruton, and Wood, 2009). These informal business activities can include but not limited to; food vending, selling of second hand clothes and other goods, electrical equipment repairs, mechanical works and metal fabrication, grocery and carpentry. Despite the significance attached to this informal business sector, getting access to financial assistance from formal financial institutions sometimes is not easy. This is attributed to factors like lack of collateral security and sometimes lack of permanent address that deprive lenders’ interest in them due to anticipated consequences that would arise thereafter (Obamuyi, 2009). For instance, failure to recover their loans back. Hence, a small number of informal business entrepreneurs rely on formal financial institutions (banks) for financial support to enhance their business performance and expansion.
Uganda’s financial system is characterized by the co-existence of formal and informal financial institutions. The formal financial institutions mainly exist in urban areas and offer a narrow range of financial services. They concentrate on providing working capital mainly to medium and large scale enterprises. The formal financial institutions are inflexible in their operations in respect to the needs of small scale enterprises and to the poor in rural areas who may not have enough collateral or well written feasibility studies to solicit for loans (Porter, 1998). Provision of microfinance services to the informal businesses is expected to contribute to the improvement of the businesses in terms of increased working capital, stock accumulations and increase in levels of income (Dhakal, 2016). There are several microfinance institutions all over the country that are issuing loans and deposit facilities to low income segments of communities and small scale businesses. These include Pride Microfinance, Finca, Brac, Faulu (now Opportunity Uganda) among others.