Title: The Debt Trap Cycle: How Quick Loans Undermine the Viability of Micro-Enterprises in Uganda
Authors: Arinaitwe Julius, Musiimenta Nancy
Volume: 10
Issue: 3
Pages: 109-115
Publication Date: 2026/03/28
Abstract:
This study examined the debt trap cycle and its effects on the viability of micro-enterprises in Uganda, with particular attention to the role of quick loans from informal and semi-formal financial institutions. Uganda's micro-enterprise sector remains a cornerstone of the country's economy, accounting for a significant proportion of employment and household income, yet it continues to face persistent challenges related to access to affordable credit. Using a cross-sectional survey design, data were collected from 320 micro-enterprise owners across Kampala, Wakiso, and Mbarara districts. Structured questionnaires, key informant interviews, and business financial records formed the basis of data collection. Univariate, bivariate, and structural equation modelling (SEM) techniques were employed to analyse the data. Descriptive results revealed that the average monthly interest rate on quick loans was 18.4%, the mean debt trap index score was 64.2 out of 100, and the average repayment-to-revenue ratio stood at 0.61, indicating that over half of monthly revenue was consumed by loan repayments. Bivariate analysis established significant negative correlations between loan interest rates and business revenue (r = ?0.612, p < 0.001) and between loan frequency and business viability (r = ?0.574, p < 0.001). SEM results confirmed that quick loan uptake significantly predicted the debt trap index (? = 0.584, p < 0.001), which in turn significantly undermined business viability (? = ?0.631, p < 0.001). Financial literacy emerged as a significant protective factor against debt trap exposure (? = ?0.348, p < 0.001). The study concluded that quick loans, while providing short-term liquidity, structurally entrapped micro-enterprises in cycles of debt that eroded profitability, reduced employment, and threatened business survival. The study recommends regulatory reforms on interest rate ceilings, integration of financial literacy into enterprise support programmes, and strengthening of credit guarantee schemes for micro-enterprises in Uganda.