Microfinance, financial literacy, and rural welfare: A structural pathway analysis among smallholder farmers in Southwestern Uganda
DOI:
https://doi.org/10.51867/ajernet.7.4.38Keywords:
Agricultural Productivity, Financial Management, Financial Literacy, Microfinance Services, Mediation Analysis, Smallholder Farmers, Socio-Economic Wellbeing, UgandaAbstract
This study investigated the influence of microfinance services on the socio-economic wellbeing of smallholder farmers in Uganda, with a particular focus on the mediating role of financial literacy. The purpose of the study was to examine how financial knowledge, skills, and attitudes affect farmers’ ability to utilize microfinance products effectively and enhance their agricultural productivity, financial management, and overall social wellbeing. The study was guided by two key objectives: (1) to identify the key components of microfinance services offered to smallholder farmers and, (4) to evaluate the mediating role of financial literacy in this relationship. The study was anchored in Financial Liberalization Theory. A mixed-methods approach was employed, integrating both quantitative and qualitative data. Quantitative data were collected from 380 smallholder farmers using structured questionnaires and analyzed using exploratory factor analysis, descriptive statistics, multiple regression, and bootstrapped PROCESS-style mediation analysis. Qualitative data from interviews provided contextual understanding of the microfinance landscape and farmers’ experiences with financial products. Factor analysis identified five key microfinance service components training, payments, savings, credit, and advisory support and three dimensions of financial literacy knowledge, skills, and attitude. Mediation analysis revealed that financial literacy significantly mediates the relationship between microfinance services and socio-economic wellbeing, emphasizing the importance of integrating financial education into microfinance interventions. The findings demonstrate that tailored financial literacy programs, mobile financial services, and behavior-oriented interventions can enhance farmers’ financial management, resilience, and productivity. Policy recommendations include designing integrated financial literacy training, promoting seasonally aligned agricultural loans, leveraging digital platforms for financial transactions, and implementing behavioral nudges to improve financial attitudes. These measures collectively offer a strategic framework for MFIs and policymakers to strengthen the capacity of smallholder farmers, ultimately promoting sustainable economic development and social wellbeing in Uganda.
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Copyright (c) 2026 Peter Kalinda, Nixon Kamukama, Isaac Nkote Nabeta, Tonny Muzaale, James Muluya
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