Financial vulnerability : an empirical study of Ugandan NGOs

Abstract

Nongovernmental organisations (NGOs) pursue wide ranging and very diverse projects and they have become more vital for developing countries than ever. They draw public awareness for human rights, promote the development of democratic institutions and seek to improve the well-being of communities by being increasingly engaged in different aspects of socio-economic development, such as health and education. However, NGOs are dependent upon their external environment, especially the financial resource environment. The financial situation of most organisations is negatively affected by constraints to credit, their inability to raise own capital and to engage in profit-making activities, which renders them financially vulnerable. The more financially vulnerable an NGO is, the more difficult it is to pursue long and medium term organisational commitments and goals. This may even result in decreased, interrupted or terminated programmes. This study adapts the methodologies that have previously been used for developed countries to predict financial vulnerability in developing countries. It contributes to the body of empirical literature on development finance, by identifying alternative proxies to assess the financial vulnerability of the NGO sector, including donor conditions, endowments (investments funds or equity) and savings. It takes an empirical approach and examines a selection of studies on the financial vulnerability of NGOs, using data from 295 NGOs in Uganda to explore the possible relationship between organisational characteristics and financial vulnerability. The study confirms the results of previous studies. Revenue concentration and surplus margin are significant predictors of financial vulnerability. The existence of equity is another variable which can help to manage financial vulnerability. The study also found that larger and community funded NGOs are less likely to be financial vulnerable.