uganda microfinance industry assessment · uganda microfinance industry assessment august 2008...

August 2008

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AMFIU House Plot 679, Wamala Rd, Najjanankumbi, Off Entebbe Rd

P. O. Box 26056 Kampala - UgandaTel: +256 (0) 414 259176, Fax: +256 (0) 414 254420

Email: [email protected]: www.amfiu.org.ug

ASSOCIATION OF MICROFINANCEINSTITUTIONS OF UGANDA

AMFIU JIREH GROUP

Tel: +256 312 273126, : +256 712 965 315

E-mail: [email protected]

UGANDA MICROFINANCE INDUSTRY ASSESSMENTUGANDA MICROFINANCE INDUSTRY ASSESSMENT

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UGANDA MICROFINANCE INDUSTRY ASSESSMENT

AUGUST 2008

UGANDA MICROFINANCE INDUSTRY ASSESSMENT UGANDA MICROFINANCE INDUSTRY ASSESSMENT

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FOREWARD

Microfinance in Uganda has taken big strides since 1996 when stakeholders formally came together and since then it has been recognized internationally for its contribution to the economic and social development of the economically active poor in Uganda. However, due to the nascent level of the industry, there is limited and scattered information on what is taking place in the microfinance industry in Uganda.

This Microfinance Industry Assessment study tries to compile information on various issues on the microfinance industry and gives an over-view of the general financial sector in Uganda, development and trends in the microfinance industry and issues on regulation of the sector. It provides a wealth of information and knowledge on what microfinance in Uganda is all about, how it fits into the overall financial sector and the role of various stakeholders in the industry.

As a national Network for Ugandan microfinance practitioners and stakeholders, the Association of Microfinance Institutions of Uganda (AMFIU), has been involved in all the different stages of development of the MF industry. Currently, the network has over 100 members that positively impact on the lives of the poor people in Uganda.

Last but not least, I would like to acknowledge the efforts of the AMFIU secretariat team, particularly the Research and Advocacy Officer Jacqueline Mbabazi Arinanye, and the Operations Manager, Solomon Kagaba for working tirelessly to put together this book. Special thanks go to Friends Consults, who were contracted to conduct the study and Kristen Cortiglia from the SEEP Network, whose input enriched the findings of this study.

Hope you enjoy your reading,

David T. Baguma EXECUTIVE DIRECTOR,

UGANDA MICROFINANCE INDUSTRY ASSESSMENTUGANDA MICROFINANCE INDUSTRY ASSESSMENTUGANDA MICROFINANCE INDUSTRY ASSESSMENT

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LIST OF ACRONYMS

ADC Austrian Development CooperationADF African Development FundAFCAP Africa Capacity Building Program AfDB African Development BankAMFIA Association of Microfinance Institutions of AnkoleAMFIU Association of Microfinance Institutions in UgandaASPS Agricultural Sector Program SupportATM Automated Teller MachineBB Bonna Bagagawale (Local Phrase for “Prosperity for All”)BCF Business Culture FundBoU Bank of UgandaCBU Capacity Building UnitCFIs Community based Financial InstitutionsCGAP Consultative Group to help the PoorCIs Credit InstitutionsCMA Capital Markets Authority CMF Commercial Microfinance LtdCRS Catholic Relief ServicesDANIDA Danish International Development AgencyDCA Development Credit AuthorityDFCU Development Finance Company of UgandaDFID Department for International DevelopmentEU European UnionFIA Financial Institutions ActFINCA Foundation for International Community AssistanceFIS Financial Institutions StatuteFSD Financial Sector Development FSDU Financial Sector Deepening Project UgandaFSS Financial Self SufficiencyGDP Gross Domestic ProductGoU Government of UgandaGTZ German Technical CooperationIFAD International Fund for Agricultural DevelopmentMCAP Matching Grant Facility for Capacity BuildingMCC Microfinance Competence CentreMDI Micro Deposit taking InstitutionMED Net Micro Enterprise Development NetworkMF MicrofinanceMFF Microfinance ForumMFI Microfinance InstitutionMoFPED Ministry of Finance, Planning and Economic DevelopmentMOP Microfinance Outreach PlanMSCL Microfinance Support Centre LtdMTCS Medium Term Competitiveness Strategy


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MTTI Ministry of Tourism, Trade and IndustryNGO Non Governmental OrganizationNORAD Norwegian Agency for Development Cooperation NSSF National Social Security FundPAP Poverty Alleviation ProgramPEAP Poverty Eradication Action PlanPMA Plan for Modernization of AgriculturePMT Performance Monitoring ToolPMS Performance Monitoring SystemPRESTO Private Enterprise Support Training and Organizational DevelopmentPRESTO/CMF PRESTO Centre for MicrofinancePRIDE Promotion of Rural Initiatives for Development EnterprisePSDG Private Sector Donor GroupRFS Rural Financial ServicesRMSP Rural Microfinance Support CentreROSCAs Rotating Savings and Credit AssociationsRural SPEED Rural Savings Promotion and Enhancement of Enterprise DevelopmentSACCO Savings and Credit CooperativeSEEP Network Small Enterprise Education and Promotion NetworkSIDAs Sub-County Development AssociationsSMEs Small and Medium EnterprisesSPEED Support for Private Enterprise Expansion and DevelopmentSUFFICE Support to Feasible Financial Institutions and Capacity building EffortsTA Technical AssistanceTERUDET Teso Rural Development Trust LtdTSC Transformation Steering CommitteeUA Unit of AccountUBOS Uganda Bureau of StatisticsUCA Uganda Cooperative AllianceUCB Uganda Commercial BankUCPA Uganda Consumer Protection UnitUCSCU Uganda Cooperative Savings and Credit UnionUFT Uganda Finance TrustUGAFODE Uganda Agency for Development LtdUML Uganda Microfinance LimitedUNDP United Nations Development ProgramUSAID United States Agency for International DevelopmentUSE Uganda Stock ExchangeUSh Ugandan ShillingYES Youth Enterprise Scheme


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TABLE OF CONTENTS

FOREWORD .........................................................................................2 LIST OF ACRONYMS .........................................................................3 EXECUTIVE SUMMARY....................................................................61.0 INTRODUCTION .................................................................................81.1 General Background ..................................................................................................... 81.2 Rationale for the Report ................................................................................................ 81.3 Work Methodology and Tasks Accomplished .............................................................. 8

2.0 COUNTRY OVERVIEW ......................................................................92.1 General Economic Policy Framework .......................................................................... 92.2 Population and Demographics .................................................................................... 102.3 Macroeconomic Situation ........................................................................................... 12

3.0 THE FINANCIAL SECTOR ..............................................................143.1 Overview ..................................................................................................................... 143.2 History and Development ........................................................................................... 153.3 Principal Categories of Suppliers of Financial Services ............................................. 183.4 Access to Financial Services ....................................................................................... 223.5 Barriers to Access for the Poor and Low Income Segments of the Population .......... 253.6 Recent Developments ................................................................................................. 253.7 The Role of Government ............................................................................................ 263.8 The role of Bank of Uganda (BOU) ........................................................................... 273.9 The Role of Donors ..................................................................................................... 27

4.0 MICROFINANCE INDUSTRY DEVELOPMENT .........................304.1 Historical Context and Development of the MF Industry .......................................... 304.2 Brief History and Industry Growth Triggers ............................................................... 344.3 Emergence and Growth of MFIs................................................................................. 344.4 Commercialization and Integration ............................................................................ 374.5 The Start and Role of the Microfinance Forum .......................................................... 384.6 Evolution of Government’s Role ................................................................................ 394.7 The Birth and Growth of AMFIU ............................................................................... 424.8 The Role of Other Meso Level Organizations ............................................................ 444.9 Retail Level Suppliers of Microfinance Services ....................................................... 46

5.0 REGULATION OF FINANCIAL SERVICES ..................................475.1 Financial Institutions Act 2004 ................................................................................... 475.2 The MDI Act 2003 ...................................................................................................... 485.4 The Proposed Regulatory Framework for Tier 4 ........................................................ 515.5 The Impact and Effect of Regulation .......................................................................... 53

6.0 FUNDING SOURCES .........................................................................556.1 Funding Sources for the Period (1995-2000) ............................................................. 566.2 Funding Sources Between (2000-2003) ..................................................................... 576.3 Funding Sources (2004 and Beyond) .......................................................................... 59

7.0 IMPACT AND SOCIAL PERFORMANCE OF MICROFINANCE ACTIVITIES .......................................................668.0 OPPORTUNITIES AND CHALLENGES ........................................679.0 CONCLUSION ....................................................................................70 APPENDICES ......................................................................................71


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EXECUTIVE SUMMARY

An overview of the overall national economic performance, financial sector dynamics and the regulatory environment provide a vital context for understanding the state and performance of the microfinance industry. That is why this report, intended to present the history and current status of microfinance in Uganda, starts by examining the key aspects of the national economy before looking at the financial sector and then focusing on the microfinance industry in more detail.

Under the PEAP, which has defined Uganda’s economic planning and management framework since 1997, the country has registered significant improvements on the economic and social fronts in the past 20 years. Among these have been average annual real GDP growth of 6%, containment of single digit annual inflation (save for the recent two years when it has gone to 10 % and 12% respectively due to global increases in food and oil prices), a reduction of HIV/ AIDS prevalence from 18% to 6%, a reduction of absolute income poverty from 64% to 31% of the population and an increase in literacy rates from about 50% to 70%. Agriculture, which provides employment and livelihood to 57% of Uganda’s 28.2 million people, is still the mainstay for many although its relative importance is declining as the manufacturing and service sectors continue to grow.

The financial sector, like many others, has recovered from the economic decadence that resulted from a 15-year turmoil (1971 to 1986). By the end of 2007, the BoU regulated financial institutions consisted of 16 commercial banks, 4 credit institutions, 4 MDIs, 2 leasing firms, 19 insurance companies 84 forex bureaus and the NSSF. The sector is expanding as is typified by the increase in commercial bank branches from 133 in 2004 to 290 in 2007. The combined number of outlets of commercial banks, credit institutions and MDIs was 417 by December 2007. All this not withstanding, rural outreach still remains a challenge. Finscope, a detailed side study carried out in 2007, concluded that only 38% of Ugandans have access to financial services: 21% accessing formal and 17% informal financial services. Barriers mainly relate to difficulty in accessing service points, illiteracy, extreme poverty (causing self exclusion), high costs, unsuitability of some product features and lack of financial awareness.

Within about 20 years, Uganda’s microfinance industry has grown from an insignificant sideline to a key sub sector in the economy. Clientele has during this time increased from below 300,000 to over 3.5 million. Adaptation of international sound practices and stakeholder cohesion have mutually reinforced each other to accelerate industry growth. This has been championed by AMFIU and other industry stakeholders. Microfinance retailers in Uganda currently range from commercial banks

However, due to the dynamic nature of the microfinance industry in Uganda and the general financial sector, changes occurred between August 2008 (the study period) and December 2008. The changes include;

Commercial Banks increased from 17 to 20 banks as new players entered the sectors and others graduated through the tiers. Eco bank entered the sector as a new player while Uganda Microfinance Ltd (UML) was taken over by Equity Bank and therefore moved from tier 3 (MDI) to tier 1 as a Commercial Bank. Commercial Microfinance, which was a Credit Institution in tier 2 also joined tier 1 as it was also taken over by Global Trust bank.The number of MDIs reduced from four to three as UML graduated to tier 1FAULU (U) Ltd, which was a tier 4 microfinance institution graduated to tier 2 as a Credit Institution.


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to Tier 2 credit institutions, MDIs, SACCOs, NGOs and private companies. While the challenge of modest outreach, limited product variety and high pricing/ costs remain, the microfinance industry continues to facilitate access to financial services for the low income people in a significant way.

The MDI Act, the first law enacted specifically for microfinance, is now facing a critical test as MDIs aspire to upgrade to commercial banks and the mature Tier 4 institutions display profound reluctance to apply for an MDI license – mainly due to the perception that while MDIs are not much riskier but MDIs are over regulated and unduly restricted from some gainful businesses streams. The outcomes of these aspects will in a few years inform microfinance regulation internationally.

Government, recognizing microfinance as a suitable engine of growth through provision of financial services to the poor, has in the past come up with different initiatives which have had varying degrees of failure. Government’s most supportive involvement in the industry was perhaps between 2002 and 2005 when government declared its withdrawal from direct provision of microfinance, committed itself to creating an enabling environment for private-sector delivered microfinance to grow, and continued championing the Microfinance Forum. The success of the latest Government MF initiative, the redesigned RFSP (based on one government aided SACCO per sub county), still remains to be seen as the program is only just rolling out. Which ever way this will turn out, it may to some extent negatively affect MFI operations but the industry is sufficiently mature and dynamic to withstand any undesirable side effects.

Funding for microfinance capacity building and loan capital has been vital in industry growth. In a very notable sense, microfinance successes and industry growth can be ascribed to donors just as it can to AMFIU and other stakeholders. Well focused donor programs like USAID-PRESTO, Microsave, EU-SUFFICE, USAID-SPEED, GTZ-Sida FSD Program, USAID- Rural SPEED, FSDU-DFID and others have all contributed to industry growth through training, entrenchment of sound practices, provision of wholesale loans, systems development and institutional technical assistance. Both capacity building and loan capital funds were initially provided by donors and as the industry grew and the MFIs matured, less of the grants for loans funds was available. Presently, hardly any donor provides loan funds for MFIs although a number of them still support capacity building. MFIs now largely get their loan capital from the money market.

Among the positive impacts of microfinance have been positive influence of government policy, improvements in household income, family access to better healthcare and insurance, promotion of social cohesion in the communities, contribution to improved literacy, access to financial services for the economically active poor and promotion of gender equity through women empowerment. Among the challenges are low rural outreach, high product costing, low financial literacy among the poor, limited product range, modest management information systems, inadequate supply of technical skills, imprudent behaviour by non-regulated Tier 4 institutions and Government’s recent moves towards directed credit delivery through SACCOs in sub counties.

In conclusion the Ugandan microfinance industry, which is now well integrated into the financial sector, has gone through all stages of maturity and is now robust and resilient. Any investments in the sector would be best productive if they are aimed at offering technical assistance and other capacity building in the mentioned areas1 where there are challenges.

1 Of this report


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INTRODUCTION1.0

General Background1.1

This Industry Assessment Report presents the status and dynamics of Uganda’s microfinance industry. Starting with the broader demographic and macroeconomic context, the report proceeds to present the relevant issues in the wider financial sector before narrowing down to the situation and status of the microfinance industry. It is structured so as to be useful for persons encountering Uganda’s microfinance industry for the first time, those who would like to compare it with others as well as those who just want to update their information on the industry. Topical issues like the historical perspective of industry development, regulation, government initiatives, funding and how it has evolved over time, microfinance impact, and opportunities and challenges are covered.

Rationale for the Report1.2

The study was requested by Association of Microfinance Institutions in Uganda (AMFIU) to provide useful information on the outlook of Uganda’s micro finance industry. The study looked at Uganda’s microfinance sector in the context of the broader financial sector and national economy, and from both the historical perspective and current situation. This report should be of use to AMFIU, its members, partners as well as other persons interested in working with or studying the country’s microfinance sector.2

Work Methodology and Tasks Accomplished1.3

This assignment was meant to mainly compile secondary information from various sources, complement them with any necessary interviews, analyze them and produce an industry assessment report. Consultants accordingly assembled the relevant documents, papers and reports, reviewed and collated them, analyzed all the information and produced this report.

Among the main tasks accomplished are:

Review of various papers, reports and documents on the state and trends of Uganda’s economy and demography. This mainly focused on the key social, macro-economic and demographic indicators3

Review the facts and figures relating to the wider financial sector emphasising key issues that are relevant to the development of an inclusive financial sector. Review and analysis of the current and proposed regulations, focusing on their impact on the availability of financial services, safety of public deposits and overall stability of the financial sector Panoramic review and analysis of the microfinance (MF) sector development in

2 As an example, AMFIU has entered a funding arrangement with two development partners –Citi Foundation and Small Enterprise and Education Promotion (SEEP), and this report could be of use to this institutional relationship. 3 Mainly for the past five years, though in some case dating back to the 1980s


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Uganda including its history, development trends, retail and meso-level actors and the evolution of financial and non financial products/services.A quick inventory of the currently available funding sources in the industry

Review of prior industry assessments relating to the impact of microfinance activities in the countryFrom analysis of all the above and the consultant’s deep and wide knowledge of the industry, identification of opportunities for and challenges in the MF industry were made.

It was not necessary to carry out interviews specifically for this report since the consultants had recently carried out two studies on different aspects of industry development and asked all the questions that would have been necessary for this report. Furthermore, a lot of other data, information and reports were available with AMFIU, Bank of Uganda and FRIENDS Consult that was relevant for the assignment and needed analysis in the light of it. Accordingly, the consultants concentrated more on studying existing data, information, reviewing relevant reports and other documents to broaden and enrich the report.

COUNTRY OVERVIEW2.0

General Economic Policy Framework2.1

Uganda has registered remarkable economic growth in the last 20 years, having emerged from many years of civil wars and strife that had destroyed the country’s economic, social and physical infrastructure. Uganda’s economy (measured by Gross Domestic Product-GDP) grew by an annual average by 6.5% between 1990 and 2006. This has followed a combination of a fairly successful economic recovery programme, growth focused economic planning/ management, review of laws and regulations to attract more investments, liberalization of the economy, Government’s attempts at providing an enabling environment for enhanced economic / business activities and, in the last ten years, a national economic planning framework focused on poverty reduction. The current national planning framework is the Poverty Eradication Action Plan (PEAP). Since its formulation in 1997 and subsequent revisions in 2001 and 2003, the PEAP has guided and influenced formulation of all government policy. As the overall framework, PEAP is built on five pillars:

Sound economic management1.

Enhancing production, competitiveness and incomes2.

Security, conflict-resolution and disaster management3.

Good Governance4.

Human development5.


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PEAP has two grand implementation strategies to realize the first two of the above five pillars:

Plan for Modernization of Agriculture (PMA), developed as a holistic action strategy to facilitate the expansion of the rural economy through increased agricultural productivity, value addition and market access.

Medium Term Competitiveness Strategy for the Private Sector (MTCS) developed to target the areas of business environment and facilitation needed for the private sector to become increasingly competitive and function as an ‘engine of growth’

PEAP together with and the above two implementation strategies drive the national economic agenda.

Population and Demographics 2.2

National population and its growth rateWith a population of over 28.2 million people in 20074 and a population growth rate of 3.3% per annum5, Uganda has one of the fastest population growth rates in the world, and second highest in Sub-Saharan Africa. The literacy level was recorded at 70% and average life expectancy at 49.7 years in 2006. Life expectancy has since slightly improved to just above 50.

HIV/ AIDS prevalenceDemography of many African countries is today closely linked to the prevalence or rate of HIV/ AIDS infection. Uganda’s HIV/AIDS prevalence rate is presently about 6% having declined from 6.4% in 20056 and from 18% between 1990 and 2002. Uganda is regarded as a leader in the fight against HIV/AIDS. However, the prevalence rate in the past five years has stagnated around 6% and the epidemic remains a leading cause of death within the most productive age (15-49)7.

Poverty incidenceDuring the 1990s, income poverty (percentage of people living on below one US$ per day) fell dramatically from over 60% in the 1980s to below 34% in 2000. Between 2000 and 2003, however, income poverty rose, with the proportion of people below the poverty line rising from 34% in 2000 to 38.4% in 2003. This then fell to an all time low of 31.3% as by the end of 20068, at which level it still stands. Uganda remains one of the poorest countries in the world despite the impressive decline in poverty indicators and attaining a per capita income of around $335 per annum (just above the international poverty line break-even) during

4 MoFPED, Back ground to the Budget (2007/08), Uganda Bureau of Statistics5 2005/06 Uganda Population and Housing Census Report Mid-Term Report6 MoFPED, Uganda Poverty status report, 20057 MoFPED, “PEAP Revision 2004”8 MoFPED, Back ground to the Budget 2007/2008


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2005/2006 fiscal year9 which improved to $353 and $400 in the subsequent two years. Most of the population has crossed the international poverty line but still lives quite close to it. The reduction of absolute poverty, however, is significant for the microfinance industry in that it expands the MF market as more people get out of absolute poverty into the category of economically active poor.

Poverty is mainly prevalent in the rural areas and much more so in the northern part of the country. It is estimated that the number of people living below the international poverty line in northern Uganda increased from 3.3 million in 2002 (61% of the Northern Uganda population) to 3.9 million in 2004 (71% of the population in Northern Uganda). This has been attributed to prolonged drought, cattle rustling and the civil war that has ravaged this part of the country for over 20years10. The income poverty has again reduced to 61% as at 2005/0611.

9 MoFPED, Back ground to the Budget 2007/200810 MoFPED, Uganda Poverty status report, 200511 Background to the Budget


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TABLE 1: KEY POPULATION AND DEMOGRAPHIC INDICATORS

Indicator Period1991 2002 2006 2007

Total population (figure in millions) 16.7 24.4 27.3 28.2Population growth rates (%) 2.5 3.3 3.3 n/a1

% of population living in rural areas 89 88 87 87% of population living in Urban areas 11 12 13 13Literacy rates (%) 54 68 70 n/a

Income poverty (%)21999/ 2000 02/ 03 2004/05 2006/0733.8 38.4 31.3

Sources: 2002 Uganda Population and Housing Census – Main Report, Uganda Bureau of Statistics, BoU, MoFPED, Background to the Budget 2007/08, UNDP (2006), Uganda Poverty status report, 2005.

FIGURE 1: UGANDA POVERTY TRENDS (1992 – 2006)12

55.751.2 50.2 49.1

44.4

33.638.4

31.3

0

10

20

30

40

50

60

1992

1993

/4

1994

/519

96

1997

/8

1999

/2000

2002

/03

2005

/06

Period

Shar

e of

Pop

ulat

ion

(%)

Sources: 2002 Uganda Population and Housing Census – Main Report, Uganda Bureau of Statistics, BoU, MoFPED, Background to the Budget 2007/08, UNDP (2006), Uganda Poverty status report, 2005

Macroeconomic Situation2.3

Agriculture still forms the main source of livelihood and provide more than 57% of total employment to the labor force in 2006. Self-employment within this sector remains the most common source of income, while non-agricultural enterprises employed in micro and small businesses provide about 15% of incomes. The agricultural sector’s contribution to GDP in 2006/07 was 31.9%, declining from 33.3% in the previous fiscal year, and lagging behind dropping further to 22.6% in 2007/08; lagging behind the services sector (52.8%). It is noteworthy that the proportional contribution of agriculture to both employment and GDP is steadily declining, while that of industry is rising modestly and for services, is rising

12 Source: Background to the budget and PEAP 2004


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quite vividly. The relative decline in the importance of agriculture is not due to its reduced productivity (overall, agricultural production is growing in absolute terms). It is because of the relatively higher growth in the industrial and services sectors. The service sector which is the fastest growing in the economy since 2003/04 (averaging over 8% per year), consists of telecommunications, power, construction, transport, financial services, insurance, education, hospitality (hotels, restaurants, tourism) international and intra-national trade and professional services.

The country’s annual underlying inflation in 2007/ 2008 was recorded at 11.8.% compared to 7.7% for the fiscal year (2006/07). The monthly headline inflation for June 2008 was 12%, the highest in over a decade. The reasons for the rise mainly relate to high international oil and food prices, which affect the domestic economy directly. The foreign exchange rate was USh 1,860 per US dollar in June 2006. By March 2007, the shilling had appreciated by 5.9% to UShs. 1,751 per US dollar, attributed to inflows from the export sector, NGOs and donor inflows. Overall, the exchange now stabilized at between USh 1,640 and 1,720 from Dec 2007 to April 2008, but it has now appreciated further to USh 1,620 per US$. Overall, both the intrinsic and parity value (compared to other currencies) of the Uganda Shilling has been fairly stable. Stable inflation has been good for the growth of the financial sector, including microfinance.

TABLE 2: KEY MACROECONOMIC INDICATORS

Indicator Period04/05 05/06 06/07 07/08

Per Capita GDP (US $) 335 353 400 490

GDP growth per annum (%) 6.2 5.1 6.5 8.9

Sector contribution to GDP (%)AgricultureIndustryServices

35.120.044.3

33.320.945.8

31.921.047.1

22.624.652.8

Underlying annual inflation rates (%) 4.7 5.4 7.7 11.8

Exchange rates (USh per US$) 1,738 1,825 1,7513 1,684

Weighted Interest rates (%) per annum on; Savings Deposits- Demand Deposits- Time Deposits- Lending-

1.921.187.8519.37

2.021.149.1218.19

2.231.1610.4418.83

Not Available

Employment (%):Formal- Government employment - Self employment in agriculture- Self employed outside agriculture- Private employment - Not working -

5.170.812.07.14.9

4.857.725.26.75.6

Not available

Not available

Source: Uganda Population and Housing Census – Main Report, Uganda Bureau of Statistics, BoU, MoFPED, Background to the Budget 2007/08, UNDP (2006), Uganda Poverty status report, 2005.


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Growth and developments in the other sectors of the economy have affected microfinance: Growth in the manufacturing sector, for example, means more people take to retailing locally manufactured goods,, more people are involved in the cultivation of raw materials and other inputs, more people join the low income working group, all of who are suitable clients of MFIs. Growth in the services sectors like communication, construction and education have a similar effect of expanding the market for microfinance, as does the growth of the SME sector.

THE FINANCIAL SECTOR3.0

Overview3.1

Snapshot of the key players3.1.1

TABLE 3: KEY PLAYERS IN THE FINANCIAL SECTOR

Player Role

Ministry of Finance, Planning and Economic Development (MoFPED)4

Management of Government’s Treasury, policy level oversight of the financial sector, promotion of inclusive provision of financial services

Bank of Uganda (BoU) Regulation of the financial sector to ensure orderly and safe growth as well as stability of the financial system

Commercial Banks Normal banking services

Credit institutions Loans and in some cases savings accountsDevelopment Banks Large loans and other types of start-up capital, mainly for

corporate business concerns

MDIs Deposit and loan facilities, mainly for low income people

Tier 4 MFIs and SACCOs Loans for low income people (in the case of SACCOs, savings facilities as well)

MF Wholesale lenders Lending to MFIs

Forex Bureaus Buying and selling foreign currencies

Insurance companies Normal insurance services to the population

National Social Security Fund

Management of social security contributions by workers and their employers

Uganda Securities Exchange (USE)

IPOs, trading in shares, bonds and other securities

Capital Markets Authority (CMA)

Regulation of the Uganda Securities Exchange and overall capital markets within the country

Money lenders Individuals and firms that lend money, usually at very high interest rates

Source: Consultants’ own analysis of the financial sector


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Overview of the Banking and Microfinance Sector3.1.2

The banking and microfinance sections of the financial sector are composed of commercial banks, credit institutions, micro-deposit taking institutions (MDIs), and more than 1,200 Tier 4 MFIs including savings and credit cooperatives (SACCOs) which offer a variety of financial products and services in both the rural and urban areas. The analysis in this section focuses on these sets of institutions because they are the principal suppliers of financial products and services that impact directly on the microfinance industry in Uganda.

The principal players here can be grouped into three broad categories:

Formal financial institutions: Banks, Credit Institutions, and Microfinance Deposit-i) taking Institutions (MDIs). These are supervised by Bank of Uganda under the Financial Institutions Act 200413 and the MDI Act 2003. Semi- formal financial institutions with some form of legal status but are not supervised ii) by BoU. These include SACCOs registered under the Cooperative Societies Statute 1991, MFIs registered under the Companies Act and microfinance NGOs registered under the non-governmental organizations (NGO) Statute.Informal setups: All other member-based associations, including village savings and iii) loans associations (VSLAs), accumulated savings and credit associations (ASCA) and rotating savings and credit associations (ROSCAs).

This categorization is necessary in assessing the extent of access to formal financial services by the poor and low-income segments of the population in Uganda, and in evaluating how the regulatory and operating environment under the different grouping impact on the building of an inclusive financial sector.

History and Development 3.2

The history and development of the financial sector in Uganda has, in many ways, been shaped by the political history of the country. Different governments since independence have implemented political decisions, macroeconomic policies and strategies that have either strengthened or weakened the financial sector in some way.

The years 1962 to 1986The years immediately after independence were years of relative economic stability and the financial sector grew fairly fast. Government started the first indigenous bank -Uganda Commercial Bank (UCB) to widen access to financial services to Ugandans. At the time, the cooperative movement was strong and many SACCOs provided financial services in rural areas. Later on, Cooperative Bank (which eventually collapsed due to poor management in 1998).was also formed. The years between 1971 and 1986 were times of unrest and turmoil, during which the financial sector and the economy as a whole did not develop to any significant extent

13 Which replaced the Financial Institutions Statute 1991


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The years 1986 to 2000The period between 1986 and 2000 was one of recovery and reconstruction in all sectors of the economy. The country was recovering from the effects of several wars that ousted the previous regimes. The period saw fair growth of the private sector, including the opening of a number of locally-owned commercial banks, credit institutions, and building societies. At this time, only 4 major international banks (Barclays Bank of Uganda Ltd, Standard Chartered Bank Uganda Ltd, Grindlays/ Stanbic Bank Uganda Ltd and Bank of Baroda (U) Ltd) held more than 70% of the total assets of the banking sector among them.

Although Bank of Uganda had the mandate to regulate and supervise the banking sector, the banking law set relatively low entry requirements for indigenous institutions with respect to capitalization, reporting, management of liquid assets, and governance competences, thus making it easy for new entrants. This led to a sudden upsurge in the number of banking and credit institutions, which resulted into some institutional failures, chief among them four banks.14

UCB’s losses in nearly all the rural branches, which caused them to be closed down, were a demonstration of how difficult it was (and still is) to offer commercially viable financial services to rural areas. Private institutions that are committed to offering financial services to the rural areas have argued that differences ought to be considered by regulators when setting infrastructure licensing requirements for the rural areas in order to encourage institutions to set up branches in the rural areas. The loss making UCB was eventually bought by Stanbic Bank Uganda Ltd in 2002, reorganized and Stanbic Bank Uganda Ltd is today the market leader among banks in all aspects.

Following the 1998 banks failures, BoU placed a moratorium on licensing new banks for about three years, based on the argument that the economy was over-banked, and new entrants could further weaken the small banks unless they provide new products. The closure of Co-op Bank had a devastating impact on the sector because of the size of its depth of outreach at that time. Many clients lost their money and with that, confidence in the banking sector. One of the lessons learnt from the Co-op Bank failure is that prudent management of depositors’ funds is important for the stability of both the institutions handling deposits and the formal financial sector in general. Safety of depositors’ funds and financial sector stability therefore became a crucial aspect of subsequent laws and regulations for the financial sector. Accordingly, BoU introduced risk-based regulation and supervision, which it now uses.

The years 2001 to 2008The financial sector in Uganda underwent major changes since 2000. Among the measures undertaken to strengthen the financial sector were:

In 2002, BoU ordered the restructuring of Post Bank including the reduction from 90

to 20 service points, due to its capital inadequacy, modest systems endowment and other resources in relation to the level of operation.

14 Greenland Bank, International Credit Bank, Cooperative Bank and Trust Bank


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The Financial Institutions Act 2004 was enacted in 2004, replacing the Banking Act

and focusing on safety and soundness of all banks/ credit institutions as well as the systemic soundness of the whole financial sector. The new Act has stronger prudential aspects such as: increased core capital requirement, stricter liquidity and solvency ratios, higher capital adequacy ratio, a requirement for the directors and top managers of banks and credit institutions to pass a tightly-defined “fit and proper” evaluation, elimination of ownership concentration, imposition of tighter limits on insider lending, imposing limits on credit level and concentration, limits on investment portfolios, and increased reporting frequency/ details.

The enactment of the Microfinance Deposit-taking Institutions Act 2003, as a measure

to bring under BoU supervision all non-member-based microfinance institutions which wanted to legally collect and intermediate savings. Four (4) MDIs were subsequently licensed between 2004 and 2006. This means that microfinance, which was originally largely informal and unregulated, became integrated in the formal, regulated financial system.

3.3 Current / More Recent Situation

By end of December 2007, institutions registered and supervised by Bank of Uganda included: 16 commercial banks, 4 credit Institutions, 4 micro deposit-taking institutions (MDIs), 84 forex bureaus, 2 leasing firms, 19 insurance companies and the National Social Security Fund. As at December 2007, there were 290 branches of commercial banks in Uganda. In 2004, by comparison, there were only 133.The fairly rapid expansion in commercial bank outreach reflects both the competitive forces within the financial sector and new opportunities arising from growth of the economy. The table below gives a complete picture (as at Dec 2007) of the branch network of regulated financial institutions that offer credit and deposit services to Ugandans:

TABLE 4: BRANCHES/ OUTLETS OF REGULATED FINANCIAL INSTITUTIONS

INSTITUTIONAL TYPE NO. OF INSTITUTIONS

NO. OF BRANCHES

Commercial banks 16 290

Credit institutions 4 39

MDIs 4 88

TOTAL 24 417Source: Bank of Uganda website


18


From all the foregoing, it can be inferred that access to quality financial services is improving in Uganda. The challenge, however, is that regulated institutions rarely cover remote rural areas.

According to the Report of Census of Financial Institutions in Uganda of 2006,15 there were 1,271 institutional outlets (headquarters and branches) from 813 financial institutions of all types covering most districts of Uganda. Of these, 13% were by banks, 3% were by Credit Institutions, 8% were by MDIs, and 67% were by other financial institutions and associations not supervised by BoU, including SACCOs, private company MFIs, NGOs and Sub-County Development Associations (SIDAs).

According to the FinScope Uganda Study Report of 2007, 62% of Uganda’s population has no access to financial services. The balance of 38% that have access, 20% is by the non-BoU regulated institutions, whose branch network is to a great extent in rural areas. The non-BoU regulated institutions, therefore, make up the backbone of the rural financial sector, which means that the rural financial sector is largely undeveloped, fragmented and not integrated into the formal financial sector, but with comparative advantages to provide financial inter-mediation in rural areas. The big question is whether they can be effectively monitored and supervised under a regulatory framework that preserves those unique characteristics that give them advantages in the rural areas. This question is still the subject of debate among stakeholders of the microfinance industry.

Principal Categories of Suppliers of Financial Services 3.3 TABLE 5: FINANCIAL INSTITUTIONS OUTREACH AS AT 31 DEC 2007

Type Tier I Tier II (Credit

Institutions)

Tier III (MDIs)

Tier IV MFIs

Regulatory instrument

Financial Institutions Act 2004 MDI Act 2003 Co-operative Societies Statute

1991 for SACCOs

Number 16 4 4 >1,000

Number of Towns served

55 18 44 towns (11 with no Tier 1

or 2)

33 towns (9 with no Tier 1,2 and 3)

Number of Branches5

290 39 88 926

15 Census of Tier 4 Financial institutions in Uganda – MoFPED and FSDU, 2006


19

Type Tier I Tier II (Credit

Institutions)

Tier III (MDIs)

Tier IV MFIs

% of rural branches

35% 43% 63% 70%

Products Savings, Term Deposits, short to long term loans, credit and overdrafts, leasing, forex transactions

Savings, Term Deposits, short and medium term loans, mortgages, money transfer agents,

Savings facilities, short term loans, Money transfers, micro insurance

Savings and short term credit,

Extent of serving low income markets

Mainly target corporate and high-end retail markets. Beginning to move toward middle income customers. Only Centenary Bank has microfinance portfolio, targeting mainly active low income

Two institutions (CMF and PostBank) have microfinance portfolios. CMF mainly target urban economically low income. PostBank targets active poor as well.

Targets low income and economically active poor in urban, peri-urban and rural areas. Beginning to look up markets to middle income segments

Targets economically active poor in peri-urban and rural areas

Source: A Private Sector Donor Group Brief 2005 and various other documents; Background to the budget 2008/09, MDI PMTs

There is a concentration of formal financial institutions (regulated) in a few towns as the above Table indicates. Tier 1 (commercial banks) serve approximately 60% (2/3) of all formal sector depositors in Uganda and hold twice the volume of deposits held by all tier 2- 4 institutions combined. 16 With the acquisition of Nile Bank, Barclays became the second largest commercial bank after Stanbic Bank Uganda Ltd. For the microfinance industry, this means more competition coming. Nile Bank had mastered effectiveness in serving SMEs,, most of which MFIs also target. Barlcays with its greater capitalization and global resource endowment is likely to come in a superior competition in this regard.

Financial institutions in different tiers are influencing the integration of the financial sector and thus inclusiveness in the following ways:

16 CGAP Uganda Country-level Savings Assessment by Reni Deslipande and Mark Rickens (2006)


20


Tier 1 (Commercial banks):Wholesale lending to MDIs and other MFIs

Downscaling into the traditionally microfinance clientele zone

One Bank, Centenary Bank, has over 80% 17 of its business (clients) in the microfinance portfolioOpening more upcountry branches, thus being able to serve more low income people both directly and by offering loan and deposit facilities for the local MFIs/ SACCOs that serve themTwo banks, Stanbic and Centenary Bank, have strategies aimed to penetrate low- income and rural markets; approximately 93% of deposit accounts in these two banks have average balances of Shs 1 million or below, indicating that they now probably reaching a greater number of clients from the lower economic profile. For Centenary Bank, the motivation for this strategy comes from its social mission derived from its affiliation to the Catholic Church. For Stanbic Bank Uganda Ltd, the extensive country-wide branch network attracts good accounts from government, aid agencies, international organizations and corporate businesses. Linkage banking relationships with SACCOs and other Tier 4 institutions

Although the experiences of Centenary Bank and Stanbic Bank Uganda Ltd (kinds of incentives) cannot be replicated, they may offer valuable lessons for purposes of expanding rural outreach.18

Tier 2 (Credit institutions)Some do wholesale lending to MDIs(examples are DFCU Ltd that lent to UML, UFT and FINCA), to MFIs and to SACCOsOne, Commercial Microfinance Ltd, has microfinance as its sole business

Post Bank, offers savings facilities to middle and low income people and now also lends to micro and small enterprises, salary earners, and wholesales loans to MFIs and SACCOsAll MDIs and some other MFIs cooperate with banks (as agents of banks) and Tier 2 institutions in money transfer services through Western Union and Moneygram, as agents.Linkage banking relationships with SACCOs and other Tier 4 institutions

Tier 3 (MDIs) Loans and deposit facilities to SACCOs and other community based MFIs. According to a 2007 Regulatory Impact Assessment of the MDI Act, low income people have benefited tremendously on the savings facilities offered by MDIs although on the loans side, MDIs have sought more of the less poor borrowers to balance their portfolio

17 Centenary bank annual report 200718 CGAP Uganda Country-level Savings Assessment by Reni Deslipande and Mark Rickens (2006)


21

Now opening more branches; since licensing, for instance, Uganda Microfinance Limited (UML), one of the MDIs, has opened 8 branches and it plans to open 5 more shortly. This way, the MDIs serve both more rural Tier 4 MFIs and more rural/ poor peopleOne MDI, UML, being taken over by the largest retail bank in Kenya, Equity Bank, whose main business is micro, small and medium enterprises (SME) financial services MDIs continue to collaborate with the rest of the industry in promoting sound practices, lobbying and advocacy

Tier 4 (All financial institutions and associations not regulated by BoU) The larger and more progressive Tier 4 institutions have put up effective and engaging competition with MDIs and even commercial bank branchesMoving upscale to diversify the income notches of their clients

Improving their operations and service points to attract more clients

Opening up more remote rural branches to service people who were previously unserved The Tier 4 institutions, especially the SACCOs, are often very suitable in rural areas because of their simple organizational structures that are cost effective, and their ability to respond to clients’ needs because of their being member-based and member-governed.A negative contribution of this tier has been the frequent failure of institutions, leaving their clients/ members with no suitable financial services. The census of tier 4 MFIs in 2005 by MoFPED and FSDU had identified only 628 active SACCOs compared to a total of 1,274 registered with the Department of Cooperatives under the Ministry of Trade, Tourism and Industry (MTTI). The study on the unaccounted for SACCOs and MFIs19 to find out the story behind the 646 variance, established that a good number of the “missing” institutions were registered but never operated, or were once operational but had collapsed, without being deleted from MTTI registry.

The MoFPED has issued a draft regulatory framework for SACCOs in Uganda intended to regulate SACCOs. The new law will recognize the member-based orientation of SACCOs, and also create further opportunity for integration of rural finance into the formal financial system, thus enabling members of SACCOs to get access to formal financial sector institutions and services. It remains to be seen what effect this will have on promoting inclusive financial sector and deepening/ widening outreach.

19 by FRIENDS Consult, commissioned by FSDU


22


Access to Financial Services3.4

The most comprehensive and elaborate study so far on access to financial services in Uganda was the Finscope Study20,completed in 2007. Using the “mutually exclusive principle”21, the report among other aspects indicates that:

Only 38% 22 of Uganda’s population access financial services of any sort: 18% access formal financial services, 3% access financial services from semiformal institutions, 17% from informal sources while 62% are un-served by any form of financial services23. The breakdown is as follows;

16% are served by formal banks- 2% are served by MDIs- 2% by SACCOs- 1% by MFIs- 17% by informal financial groups- 62% are financially unserved-

More rural people (65%) than urban people (58%) are un-served

71% of Ugandans save, a majority of them not in cash (buying livestock, land or other valuables)Of those who borrow, most (54%) do so from friends, relatives, greater than the number that borrows from informal, semi-formal and formal institutions all combined. In urban areas, the ratio of the financially served to the un-served is close (48:52) while in rural areas, it is skewed in favour of the un-served (35:65)

FIGURE 2: ACCESS TO FINANCIAL SERVICES BY UGANDANS

Source: FinScope Study 2007

20 Initiated and coordinated by the Financial Sector Deepening Project Uganda (FSDU)-a program of the Department for International Development (DFID) 21 According to the FinScope study: “Mutual exclusivity” = if an individual uses more than one type of financial institution, that individual is graded in the more formal institution in the access strand. For example, if an individual uses both a bank and a SACCO, then that individual is a bank user and not counted in the SACCO strand. 22 FINSCOPE Uganda 2007 23 FINSCOPE Uganda 2007

VSLA1%

ASCAs5%

ROSCA/Welfare funds,savings club

11%

MDIs2%

SACCOs2%

MFIs1%

Commercial Banks16%

Financially unserved

62%


23

In terms of rural/urban distribution, people living in rural areas are more likely to be without financial services than those in urban areas (65% and 52% respectively)24.There are significant regional variations in the populations’ access to financial services.

TABLE 6: FINANCIAL ACCESS BY LOCATION AND REGION

Rural UrbanCentra l Kampala

Central Other Eastern Northern Western

Financially Served (%) 35 48 49 28 33 34 50

Un-served (%) 65 52 51 72 67 66 50

Source: FinScope Uganda Study, 2007

There is notable usage of financial institutions (FIs) and groups by those who access them. A significant proportion of those using formal FIs also use semi-formal and informal financial groups.Ugandans accessing formal financial institutions are most likely to be educated to secondary school level or above (74%), over 25 years of age (85%) and in business (43%).

Non usage of formal and semi-formal FIs is mainly attributed by the respondents to not having enough money to save or open/ maintain an account.

Access to financial services in Uganda is still tilted in favour of men (gender) and urban areas (location).

The Table below highlights how the 38% of the population that is financially served is distributed between urban and rural areas, and between male and female.

TABLE 7: FINANCIAL ACCESS STRAND BY LOCATION AND GENDER

Total all respondents Total Rural Urban Male Female

% % % % %Unserved 62 65 52 58 66Banks 16 12 28 21 11Informal groups –minus ASCAs 11 12 6 11 10ASCAs 5 5 6 4 6MDIs 2 2 3 1 2SACCOs 2 2 2 3 2MFIs 1 1 1 1 1VSLAs 1 1 1 1 1Credit Institutions 0 0 1 0 0

Source: FinScope Uganda Study 2007

24 FinScope Study 2007


24


The table indicates that formal banks mainly serve male clients compared to female, while other categories of institutions are fairly balanced on the gender access strand.

Considering that the bulk of the population is in the rural areas, strategies by financial institutions to increase financial access should focus on developing appropriate products for the rural population. Development of agricultural financial products is one area that has received little attention and yet has unmet demand. Slowly, some MDIs and SMEs focused banks are starting to develop suitable agricultural/ agribusiness focused financial products.

It is important to note from these findings that the majority of Ugandans who access financial services use informal institutions, re-emphasizing the need to put in place a law for regulating informal and semi informal financial institutions as soon as possible. Another important finding is that at least 22% of Ugandans that borrow from formal financial institutions borrow from more than one institution (multiple borrowing). This underscores the growing need to have a national credit reference system to reduce on the risks associated with multiple borrowing. This is more critical for and 4 institutions which will not be served by the recently established Credit Reference Bureau.

The highest proportion of “unserved” comes from Eastern and Northern Regions. These two areas have in the last 20 years suffered from insurgency and dry periods that have affected economic activities and progress. In addition the state of infrastructure in terms of communication, roads and utilities is relatively less developed compared to other regions. These are basic requirements for institutions to set up financial outlets. Their absence or relative scarcity in many ways explains the lower levels of business activity and access to financial services in these areas. The special efforts by Government to increase financial access in such areas (such as promoting a SACCO at each sub-county) are quite justified, provided business principles are followed, and regulation is streamlined. With time, formal institutions that are unable to set up branches in such remote places could explore linkage relationships with Tier 4/ member-based institutions that are or will be established there.

To improve access to financial services, government and its development partners in the industry now need to focus their support on initiatives that promote outreach to remote and rural people. Such initiatives could include:

Development of products that are more suitable to small scale rural agriculture, most prevalent in rural areas

Development and refinement of product/ service delivery methodologies that would enable MFIs to serve rural clients sustainably at affordable service costs

Incentives like initial year loss compensation, partial coverage of initial year overheads and funding of branch establishment in rural areas.

Establishment of pro-poor wholesale lending to MFIs (Government is already implementing this with SACCOs)


25

Barriers to Access for the Poor and Low Income Segments of the Population3.5

The major barriers to access to financial services for the poor Ugandans include the following:25

Limited branch network by the formal and regulated institutions

Unsuitable products for the segment (the poor/ low income people, especially in rural areas where farming/ agriculture is predominant)

Inaccessibility and lack of basic infrastructure in some rural and remote rural areas of the country

The high cost of delivering financial services to the poor/ low income rural people, which makes services expensive for clients and less attractive to financial institutions

Sustainability considerations for the institutions in rural and remote rural areas where there is no critical mass to sustain delivery of services limits options for branch networks by formal institutions

Lack of regular income (on the part of the poor rural populations) to save in order to open and maintain a bank account

Discomfort (on the part of poor, modestly literate people) about perceived sophistication of banks and inability to speak ‘their language’

High transaction costs to users – transport to bank, service fees, time it takes to draw money from the formal institution.

In addition to direct interventions like those that reduce the cost of microfinance to clients, addressing the problem of access will also need continued and intensified sensitization/ education on basic business/ entrepreneurial skills and financial literacy (AMFIU is making efforts at addressing the latter).

Recent Developments3.6

Uganda’s financial sector has developed more dynamically and speedily in the last decade than in the previous years. Among the developments are:

The acquisition of Uganda Commercial Bank by Stanbic Bank Uganda Ltd and turn-i. around of the business, which took retail banking in Uganda to a higher levelPurchase of Nile Bank, a leading local bank, by Barclays Bank of Uganda Ltd, ii. making Barclays, which had previously been a high street bank, the third largest in branch network and second largest bank in asset endowmentLicensing and regulation of four leading MFIs into MDIs and their prudential iii. regulation by the central bankDevelopment and adaptation of new products, especially asset leasing and mortgage iv. loan finance, by nearly all the banks

25 Put together from different document reviews, including the FinScope Uganda Study, 2007


26


Increasing competition as new banks from other countries enter the market, MDIs get v. more into head-on competition with commercial banks and mature Tier 4 institutions compete with both categoriesReplacement of the history/ forensic based supervision with the more dynamic and vi. preventive risk-based supervision by the central bankIncreasing competition and cooperation between/ among different tiers of financial vii. institutionsSpeedy branching out of banks, MDIs and mature tier 4 MFIsviii. Promotion and strengthening of rural based financial institutions by donor programs, ix. with support of the governmentFailures of several SACCOs and other Tier 4 MFIs that were not commercially viable x. or sustainability focused, and notable growth of the progressive onesEnlightenment of low income/ rural people on their rights and responsibilities as xi. consumers of financial services through consumer education.

Despite many positive developments in the industry, in some remote rural areas where commercially-oriented institutions are not keen to establish, socially- oriented initiatives such as ROSCAs are for sometime likely to remain the main providers of financial services.26 There needs to be a mechanism for identifying such informal set ups and helping them to work better.

The acquisitions, while making the institutions larger and in some cases more competitive, will most likely move a number of MDIs and other mature MFIs further away from offering microfinance to the very poor. Both UML and CMF, for example, have been acquired by banks and will soon become commercial banks. While they will no doubt want to maintain their focus on low income clients, the acquiring banks have to balance between poverty focus and profitability, perhaps more in favour of the latter.

Competition is driving banks to establish branches in most of the districts and MDIs and other MFIs to move deeper into less urban locations. This all shows that competition can drive geographical outreach, although this happens at a pace slower that politicians and other leader would in most cases like to see. A vital role for Government and donors is to help MFIs branch out faster into more rural areas that they would have done on their own.

The Role of Government3.7

Government remains committed to supporting the growth and outreach of inclusive financial services, although this has meant a de-emphasis of the purely market based outreach. Among governments roles in this regard are:

Provision of regulatory framework in which the private sector providers of micro-a) financial services can thrive, in which the industry as a whole can develop and which ensures appropriate protection of public deposits

26 The Microfinance Banker – vol. 6 Issue No.4 2006 (pages 7-15)


27

Active promotion of a “rural financial infrastructure” through Government of b) selected SACCOs at the sub county level

In the past, supporting role of overall institutional capacity building in the c) microfinance industry.

Government has put up different initiatives at different times, all of which have had different degrees of failure (or success). These are elaborated in section 4.6 of this report.

The role of Bank of Uganda (BoU)3.8

BoU has had to embrace the role of regulating and supervising MDIs in addition to its traditional role of supervising commercial banks and credit institutions. In both regulatory roles, BoU uses the risk based, preventive approach which is rigorous, very engaging to the regulated institutions and ensures greater safety of the institutions and their customers’ deposits.

After the negative impact of the 1990s bank failures, the Regulation Guidelines issued by BoU as a basis of supervision of MDIs and banks/ credit institutions are now risk based and preventive. While the new regulatory regime has had excellent success in safeguarding public deposits and ensuring the safety and soundness of the financial system, it has as a side effect tended to limit expansion and outreach by the regulated institutions.

While mobilizing of savings from the public by unlicensed, non-SACCO MFIs is prohibited, BoU does not have the capacity to closely supervise this segment of the sector. BoU’s vigilance has, however, remarkably reduced incidences of deposit taking by non-licensed institutions. Never-the-less, isolated incidences of such still happen and when they do and things go wrong, public confidence in the microfinance sector suffers.

The BoU has the responsibility to maintain a sound financial sector, but it is obvious that some of the necessary measures to achieve this may not necessarily lead to development of increased outreach and depth in the financial sector.

The Role of Donors3.9

During the early and growth/ consolidation years of microfinance industry in Uganda (1995 – 2000), the donors played an important role in the area of capacity building for MFIs, with the USAID funded PRESTO Project at the fore front in the area of developing and training MFIs in basic “best practices” and business approaches, while GTZ was assisting BoU to build capacity in financial systems development including regulatory matters. In the years immediately prior to the passing of the MDI Act (2000 – 2003), the donors supported transformation activities by paying for technical assistance and training, improvement/ overhaul of MIS, branch infrastructure improvements, and by extending grants and subsidized loans, as well as guaranteeing bank loans for funding loan capital of the MFIs. Non-transforming MFIs continued to receive subsidized training and technical assistance (TA) but to a lesser extent than the transformation candidates.


28


Donors were instrumental in the setting up of a Microfinance Outreach Plan Coordination Unit (MOP)27 at the government level, and have supported the development and strengthening of AMFIU to carry out its functions. The MF donors as a group also developed their own coordination and principles for funding MF initiatives. This has helped them to be more focused on the industry’s areas of need and to avoid duplication. A number of donors like FSDU and Rural SPEED have funded initiatives in consumer education, either jointly with or to complement AMFIU’s efforts in this regard.

In summary, cooperation among microfinance stakeholders, in which donors were active participants, led to the creation of several highly effective mechanisms for collaboration. Some of the positive developments from this collaboration are listed in the CGAP 2004 Review:

The Private Sector Donors’ Group (PSDG) for donors was formed to coordinate donor support to the industry,

The microfinance forum (MFF) for all stakeholders including high-level government representatives, and its subcommittees for technical consultations on key issues, such as capacity building, financing of MFIs, consumer affairs, regulations, and lobbying,

The industry association AMFIU.

The development and adoption of “Donor Principles for Support to Uganda’s Microfinance Sector” in 2001,

The passage of the MDI Act in 2003, and the development and adoption of a common donor reporting tool (PMT) for Ugandan MFIs in 2003.

Development of the “Donor Code of Best Practices” for microfinance, which happened in part because of the level of organization and interaction in the industry. Although the code was meant to guide only the donors active in the Uganda MF industry, it has now been adopted in many parts of the world as guiding principles for MF donors.

Although the donors were not the only or lead players in the above, they played key roles like financing and providing technical expertise to aid them. Donors have continued, albeit on a reduced scale, to support building capacity for the BoU to supervise and regulate the sector and to retail institutions to enable MDIs and MFIs to sustainably deliver more affordable and appropriate products for the poor. Overall, donor programs have impacted significantly, both negatively and positively, on microfinance in Uganda. Positive results have mainly been registered in areas of human resource/ skill development, adaptation of sound practices, streamlining institutional sustainability of systems/ procedures while negative results (in few of the cases) were registered where donors had conditions that forced MFIs to take less market or operational decisions that were not commercially sound.

27 Now changed to the RFSP Implementation Unit


29

There is still a role for donors to support the industry, particularly in the following areas:

Further development of linkage banking initiatives between MDIs and other MFIs i) and SACCOs in order to join the advantages of local ownership and governance, with the advantages of centralized professional management.28

Establishment of a national identification system that would in turn support a credit ii) reference system, to help reduce the risks being created by multiple borrowings by clients (especially for Tier 4 financial institutions).

Market surveys, especially in the areas of product development and adaptability for iii) middle and low- income segments

Stepping up of consumer education programmes in order to improve the effectiveness iv) of financial markets29.

Promotion of further rural outreach and financial v)

More capacity building for the MFIs, especially in the areas of systems and staff vi) development.

These are areas that can particularly lead to an increase in client- responsive financial services and thereby create increased demand for financial services. Increasing access to financial services to the poor and the poorest probably also requires the substantial growth of financial services for middle-income Ugandans, to achieve a “critical mass” of financially-viable institutions of efficient scale, before outreach can be extended to the poor and poorest in the rural areas.30

28 FSDU 2005: Linkage Banking, DFID FSD Project Uganda 29 Uganda Microfinance Sector Effectiveness Review – CGAP 200430 The Microfinance Banker – vol. 6 Issue No.4 2006 (pages 7-15)


30


MICROFINANCE INDUSTRY DEVELOPMENT 4.0

Historical Context and Development of the MF Industry4.1

TABLE 7: SNAPSHOT OF THE VITAL MILESTONES AND KEY-PLAYERS

Period Event(s) Key Players/ Movers

1984 Start of Uganda Women’s Finance and Credit Trust (UWFCT)7 by a group of progressive women, to offer microfinance to low income poor women [Now Uganda Finance Trust-MDI].

A group of influential Ugandan women led by;

Mrs. Ida Wanendeya, 1. Mrs. Mary Maitum(RIP),2. Mrs. Mary Mulumba 3. Mrs. Mary Okwakol4. Mrs. Treza Mbiire5.

1987-1992 Start and implementation of the Rural Farmers’ Scheme by the then Uganda Commercial Bank (UCB)8. The scheme failed because whereas it financed increased productivity, market access was a severe challenge for the farmers.

1. Government of Uganda2. Uganda Commercial Bank

1991-1992 Planning for and start of PRIDE Africa, a microfinance retailing project financed by the Norwegian government (and managed by PRIDE Africa Management Services) as development aid to the government of Uganda. This was institutionalized and is now PRIDE Microfinance (MDI), one of the leading MFIs in the country.

1. Government of Uganda2. Government of Norway) through NORAD)3. PRIDE Africa Management Services Ltd.

1992 Start of FINCA as an NGO, promoted by FINCA International, to offer small loans to low income women entrepreneurs. It grew over the years and FINCA Uganda (MDI) became the first MDI to be licensed by Bank of Uganda in 2004.

FINCA International

Early & 1990s

Emergence of small microfinance programs and institutions, mainly promoted by large international NGOs with a socio-welfare agenda.

International welfare NGOs like World Vision, Feed The Children, Food for the Hungry and Freedom From Hunger.

1994 to 1997

Planning for and implementation of the failed Entandikwa (start-up capital) scheme, retailed through local government structures

Government of Uganda


31


1996-2000 Start and operationalization of the Poverty Alleviation Project (for MF capacity building and loan wholesaling.

1. Government of Uganda2. African Development Bank

Start and implementation of the USAID-PRESTO9 Project which has to date made the most important mark in MF capacity building, entrenching of MF Sound Practices, paradigm shifting from viewing MF as a social/ welfare activity to viewing and practicing it as a business with a focus on sustainability, MF loan capitalization and sound-practice based technical assistance.

1. USAID Uganda (designer and funder)2. Price WaterhouseCoopers (Project manager of PRESTO’s Center for Microfinance)3. Anne Ritchie (Director of the Center for Microfinance, PRESTO)

Start and operationalization of MicroSave Africa, very focused that promoted savings product research/ improvement, market oriented product development and delivery and vital research into key industry issues.

1. DFID (Financier)2. UNDP (Financier)3. Graham Wright (then the Director, MicroSave)

Start of the Microfinance Forum, an informal but well attended and very influential monthly meeting of all MF stakeholders

1. PRESTO2. MicroSave Africa3. PAP4. MoFPED10

5. MFIs – all categories6. Donors7.Bank of Uganda8. Other MF stakeholders

Drafting of the financial sector policy by BoU and approval by Cabinet

Bank of Uganda

Drafting of the MF Regulation Bill by BoU Bank of Uganda

On the basis of the draft bill, several debates, disagreements, lobby events, cross-transfer of information between the industry and BoU, cross-fertilization of learning between government, BoU and the industry. This resulted in drastic, positive changes in the Bill into what eventually became the MDI Act.

1. Bank of Uganda2. PRESTO3.PAP4.MFIs5. Anne Ritchie (PRESTO)6. Henry Bagazonzya (PAP)7. Andrew Obara (PRESTO)8.Anthony Opio, BoU9. Keith Muhankanizi (MOFPED)10. David Baguma (FTC-CBP)11) Eva Mukasa (then CEO-UWFT)12 Suleiman Namara(ED, AMFIU)


32



2001-2004 Design of USAID-SPEED Project, to help mature MFIs graduate and transform

USAID Uganda

Harnessing and leading MF industry stakeholders in the shaping of the MDI Bill; other lobby, advocacy and information dissemination activities during the period

AMFIU

Operationalization of SPEED’s Microfinance Component, choice of institutions, appraisal and rationalization of focused, targeted technical assistance

1. Joanna Ledgerwood (MF Advisor, SPEED)2. Andrew Obara (Senior MF Specialist, SPEED)3. Olive Kabatalya (MF Specialist, SPEED)

Design of the Microfinance Outreach Plan11 (Government strategy for market responsive outreach with microfinance)

1. Henry Bagazonzya2. Lance Kashugyera 3. Lene Hansen4. Andrew Obara5. Anthony Way6. John Beijuka(all the above were a select subcommittee of the Microfinance Forum tasked with this).

Set up and start of the Financial Sector Deepening Uganda project (which concentrated on vital areas that all other programs were not addressing, like industry wide research on financial access, consumer protection initiatives and financial education).

1. DFID (funder)2. Ebony Consulting Africa (managing contractor)3. Paul Rippey (Project Manager)4. Chris Musoke ( Deputy Manager)

Design and operationalization of the Matching Grant facility for Capacity Building (MCAP) – conceived and designed as a basket of funds by Government and all willing donors for MF capacity building in the areas of institutional strengthening, product development and rural outreach.

1. Government of Uganda2. DANIDA (funder of design and interim operations)3. FRIENDS Consult Ltd (design and interim management)4. PriceWaterhouse Coopers (LT management)5. Andrew Obara (lead design consultant6. Eva Mukasa (design consultant)

Institutionalisation and funding of AMFIU Secretariat

1. MFIs2. Meso level institutions3. GTZ/Sida (FSD)4. EU_SUFFICE


33


Design and start of EU-SUFFICE (for MF capacity building and loan wholesaling)

1. Government of Uganda2. EU

Passing of the MDI Act Parliament

Transformation of PAP to Rural Microfinance Support Project (RMSP), with some improvements in the project features

1. Government of Uganda2. African Development Bank3. Henry Baganzonzya (TA to the project)

Preparation of 4 MDI candidates for transformation (through TA, infrastructure improvement, strategic plans, attracting investors)

1. Management of MFIs aiming to transformUSAID-SPEED (funding and direct TA)2. Accion International3. Joanna Ledgerwood4. Andrew Obara5. Clare Wavamunno6. Victoria White7. Elizabeth Rhyne

2002-2006 Development and improvement of the PMT Joanna Ledgerwood (SPEED)Samuel Mutebi (SPEED)Lene Hansen(EU-SUFFICE)AMFIU

After 2004 Steering institutions towards licensing and managing the transformation as well as the complex post-transformation institutions

1. Fabian Kasi – MD, FINCA Uganda2. Peter Okaulo – formerly MD, UFT3. Paul Mayanja – MD – PRIDE Microfinance4. Charles Nalyaali – CEO, UML5. Rodney Schuster – formerly ED - UML

Design completion and management of the Business Culture Fund, a MOP component that aimed to enhance the aptitude of rural Ugandans to manage business and consume financial services.

1. FRIENDS Consult Ltd (management contractor)2. Andrew Obara3. William Mugerwa4. Martin Oiko

Abolition of MOP/ MCAP/ BCF arrangement and refocusing the program, Rural Financial Services Program to creating and sustaining SACCOs to intermediate wholesale loans from government

1. Government of Uganda


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Brief History and Industry Growth Triggers 4.2

The microfinance industry in Uganda was a natural offshoot of the general dynamics of the country’s economy, which left rural and other low income people lacking financial services in the last three decades. The economic breakdown of the 1970s and 1980s caused many banks to close upcountry branches, and community based financial institutions like SACCOs, also closed down. Attempts to reverse this through massive branch opening by the then UCB in the 1980s was not successful as many of the branches made perpetual losses and were closed down. This was exacerbated by the massive failures of four banks in 1998, including the Cooperative Bank which then had the second largest branch network and agency arrangements for its microfinance sub-branches.

The issues highlighted above left rural and other poor people in Uganda without formal financial services. Microfinance was and is still seen as a vehicle to alleviate poverty. For this, government’s economic policy framework and development strategy all deliberately identify microfinance as a vital tool in addressing one key development challenge: prevalent absence of suitable financial services in rural areas. Government’s development agenda recognises the necessity for rural financial infrastructure, including savings facilities, as a critical component to the development of the financial sector.

Emergence and Growth of MFIs4.3

In their bid to alleviate poverty through a social agenda, a number of NGOs and other aid organisations started developing some form of micro credit as departments or functional areas in the 1980s and early 1990s. Owing to the real need for financial services by low income people, these microfinance programmes and institutions31, grew fairly fast in number and size, helping to fill the void left behind by the economic turmoil and bank failures of earlier years.

At about the same time, a few specialized MFIs also started operations, mainly delivering micro credit backed by compulsory savings used as collateral substitutes. Since then the microfinance industry has experienced a continuous growth. Compared to a total client estimation of about 100,000 in 1996, for instance, the industry today serves over three million people.

Although accurate figures are not available for all the institutions, the following table shows indicative growth of some of them 32

31 (Examples: UWFT, CRS HOFOKAM, FAULU, FINCA, FOCCAS, Feed The Children, MEDNet, PRIDE, TERUDET,UMU and SACCOs) 32 The table does not contain data on the whole industry


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TABLE 8: GROWTH OF MF OUTREACH IN THE RECENT YEARS

Institutional Type/ growth attributes

Period 2004 2005 2006 2007

MDIsTotal savers 171,237 197,597 250,255 418,725Total savings (U Shs. billion) 24.99 30.73 39.16 54.35Total borrowers 160,853 141,581 143,817 142,957Tier 2 (CMF)Total savers 39,964 53,216 82,392 122,786Total savings(U Shs. billion) 4.85 7.18 10.78 19.85Total borrowers 7,485 6,826 11,241 12,308Tier 1 (Centenary Bank)12

Total savers 362,442 439,392 503,245 567,189Total savings (U Shs. billion) 121.20 158.90 193.60 238.10Total borrowers 47,414 52,092 59,502 73,002Tier 4 (SACCOs, NGOs, companies) Not available Not available Not available

Not available

Source: MiXMarket Website; Annual Reports of MFIs; FinSope Study 2007; RIA Study 2007; PMT Reports 2007

In the late 1980s and early 1990s, some of the NGO microfinance functions were spun off into fully fledged MFIs or stand-alone microfinance programmes. Examples are MED-Net (from World Vision), Feed The Children Community Banking Programme (from Feed The Children Uganda) and Success Microfinance (from UWESO Savings & Credit Services). The paradigm of microfinance was, during this time, largely limited to microcredit. The mid and late 1990s was also a time of increased interest and education in microfinance internationally. Through a combination of donor programmes (PRESTO, MicroSave Africa,), Government support and keen interest to learn on the part of the MFIs, a lot of fully sponsored training and technical assistance based on “Microfinance Best Practices” was provided in 1997 through to early 2000s. The process began with several donors and MFIs working with a few key government officials on international good practice.

This period was characterized by the move towards commercializing and mainstreaming of microfinance, increasing competition, and later by donor preference to fund capacity building rather than loan capital. The adoption of sustainability and profitability alongside the social missions of MFIs (which came to be referred to as the dual mission or double bottom-line) meant that sponsors and management of MFIs moved from seeing microfinance purely as a social service to running the institutions with a focus on profitability and long term commercial viability. The dual mission drove the MFIs to seek greater outreach and the MFIs grew the numbers of their clients significantly as highlighted in the graph below:


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FIGURE 3: ESTIMATED CLIENT GROWTH

Source: Finscope Report 2007, MIX Market Report, Annual Institutional Reports and RIA Report 2007

Stakeholders of the microfinance industry (MFIs, Government, donors, other development partners and other people with interest in the industry) through the MFF, an informal but very effective information sharing mechanism started discussions on how to mainstream microfinance into the formal financial sector and create conducive conditions for MFIs to become sustainable, thrive and grow.

During this time the government, as a champion of and an active participant in the MFF, continued to agree to its role of creating an enabling environment for the sustainable growth of the microfinance industry. This commitment was shown by:

Government’s withdrawal from direct delivery of MF and transfer of credit schemes into credit lines of institutions.

A ministerial statement that government would no longer offer directly retailed microfinance to people

Promotion of national co-ordination and linkages through the microfinance forum

Commitment to the provision of incentive grants to MFIs willing and able to reach out into underserved areas.

Establishment of the Microfinance Outreach Plan (MOP) –a grand strategy for supporting market responsive outreach of MF, with its components of:

Capacity building unit -

Growth of Clients Served by Microfinance

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

EmergingStage(as at 31st

Dec 2000)

Growth Stage (asat 31st Dec 2003)

FinancialIntegration Stage(as at 31st Dec

2007)Period

Num

ber o

f clie

nts


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Matching Grant Facility for Capacity Building- Performance monitoring system for tier 4 MFIs- District Microfinance Committees - Microfinance data collection and update of the MFI outreach map- Winding up of the government administered credit schemes- Rural Business Culture -

Since 2006, Government’s role and focus in promoting microfinance has since changed as explained under section 4.6 of this report.

Commercialization and Integration4.4

The chronicle of Uganda’s microfinance industry can be broadly summarized as follows: FIGURE 4: CHRONICLE OF UGANDA’S MICROFINANCE INDUSTRY

The first three of the above stages were the time microfinance emerged from incognito into a recognizable sector. After adapting internationally proven sound practices, the MFIs went on to improve their systems, management, governance, product offering, delivery mechanisms and other aspects. This professionalization was accompanied by increasing commercialization of microfinance, arising in part from the sustainability orientation. While all this was happening, outreach increased faster and BoU as the financial sector regulator saw microfinance as part of the financial sector that could not be ignored.

The highlights of integration include:

Enactment of the MDI Act 2003, under which large MFIs wishing to take public deposits and intermediate them would be licensed and regulated by BoU.

Licensing of four MDIs: FINCA Uganda, PRIDE Microfinance, Uganda Microfinance Ltd and Uganda Finance Trust.

Granting of a tier 2 license to Commercial Microfinance Ltd and regulating it under the Financial Institutions Act 2004[Formerly Financial Institutions Statute 1991]

Commer-cializationBeginnings

Adaptation ofSound

Practices

Profession-alization

Integration into the format financialsector


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Upgrading of branch outlook, infrastructure and signage by MDIs to such an extent that they look and operate just like banks, save for the products that MDIs are not allowed to offer

Business linkages established between MDIs and commercial banks, MDIs and lower level MFIs and between commercial banks and tier 4 MFIs.

Effective competition among financial institutions of all tiers – an aspect that has led to down scaling to the lower tier clientele by commercial banks and up scaling to the upper tier clientele by MFIs – effectively creating high competition to serve SMEs.

Government withdrawal of its support from the more formalized microfinance institutions since they have become part of the profit-motivated mainstream financial sector.

Withdrawal of a number of donors who previously supported microfinance capacity building into more narrowly defined rural financial services, or to other welfare initiatives: again reflecting their realization that microfinance here has become of age and integrated into the wider business oriented financial sector.

Government seeking improved regulation of SACCOs to serve the poorer people who might be ‘left out’ by microfinance institutions which are integrated into the formal financial sector.

The Start and Role of the Microfinance Forum4.5

In 1998, all the stakeholders were in involved in the founding and formation of MFF, an informal but highly organized and focused microfinance discussion forum. The MFF was the process through which the national microfinance workshop (in 1998) was organized. The workshop paved way for a baseline agreement on principles of good practice for the microfinance industry that started with leaders from Bank of Uganda, the Ministry of Finance, local MFIs and donor agencies, by attending training workshops and starting frequent informal meetings to discuss industry developments and growth direction. This and later initiatives that developed through this cooperation resulted into:

The MFIs and other stakeholders broadening their understanding of microfinance from microcredit to other financial services

Appreciation by most stakeholders that microfinance should be delivered in a sustainable and businesslike way

Many MFIs and microfinance programmes developing long and short term plans with a focus on operational and financial sustainability, which when implemented enabled them to attract increasing numbers of clients while adopting a more business oriented focus.

Government reviewing its role in the microfinance sector, and publicly declaring its withdrawal from direct provision of microfinance (concentrating its role on creating a conducive and enabling environment for market responsive microfinance to thrive)

All stakeholders coming to a common understanding, based on the desirability of sustainable microfinance provision as a means of economic empowerment of low income people


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Incoming donors and development partners fitting their programs and interventions to the clear national philosophy and framework already in place.

Evolution of Government’s Role4.6

Summary of the InitiativesPast and present Government schemes to support microfinance are elaborated further on in this sub section. The following table summarizes the main ones.

TABLE 9: GOVERNMENT INITIATIVES

Programs Focus/ StatusRural Farmers’ Scheme

A special credit scheme for rural farmers to increase production and thereby improve their household economies. Started in the mid 1980s; Failed in the early 1990s

Entandikwa Directly administered/ retailed government credit. Started early 1990s; failed mid 100s

YES A special government funded loan scheme for youths to start and sustain enterprises. Started and failed in the early 2000s.

NAADS An executive arm of PMA tasked with helping farmers to develop their farm productivity and incomes

PEAP, PMA and MTCS

Economic growth, development and planning framework of the country with its main implementation strategies, all aimed and enhancing economic growth and reducing the incidence of poverty

PAP and RMSP Government wholesale funding and capacity building. Heavy defaults and institutional failures checked progress and had to be redesigned

MSC Ltd Government’s MF wholesaling and capacity building company. Uses sound practices in lending though it is still unsustainable (funded by AfDB)

SUFFICE EU funded microfinance wholesale funding and capacity building project. Had some success from 2000 to 2004 and then institutional challenges deteriorated its performance. Now closed.

MOP Formerly the Government’s systematic plan to assist outreach with market responsive microfinance services to rural and remote rural areas. Turned into RFSP, with a narrower focus on SACCOs, in 2007

MCAP A component of MOP that was meant to provide matching grants for microfinance capacity building, focused on product development. Started June 2004; ended in October 2007.


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Programs Focus/ StatusBCF A component of MOP that was meant to provide training and technical

assistance to rural enterprise groups to improve their aptitude and productivity in business. Stared May 2006; ended October 2007

RFSP Creation and support of one SACCO per sub county, to ensure extensive “rural financial infrastructure” This was started in 2007 and its success and impact are yet to show. Ongoing

Overall, Government’s efforts at helping poor people to access financial services has always been either right from the outset or later on, influenced by political considerations that tend to promote them for short term visibility. Thus even where they are very well meant (as they often are in Uganda) the schemes soon fail because of the short term nature of their focus.

Evolution of Government’s roleDuring the mid-1980s and early 1990s, government tried to intervene by funding schemes like the Rural Farmers’ Scheme, a micro/ SME loan scheme to increase production by rural framers. This was not successful due to a combination of factors: lack of market access by the framers, poor loan features, informal and sometimes partially executed collateral security, inappropriate loan allocations to city/ town businessmen(who later defaulted) instead of intended borrowers, and in some cases corruption and misappropriation. In the mid 1990s, government tried direct delivery of retail loans through the already mentioned Entandikwa, which also failed because of politicization (and people taking the loans as a “gift” from government), poor delivery structures (through local officials at the grassroots level) and misappropriation. This was almost immediately followed by the Poverty Alleviation Project (PAP), a government credit facility, financed by Government of Uganda and AfDB, to wholesale funds to MFIs who retailed it to their clients. This too, largely failed but to a lesser degree than the former two (over half of PAP loans were recovered). PAP was replaced by RMSP and eventually by Microfinance Support Centre Ltd (MSC Ltd) which exists up to the present and does mainly market responsive, sound-practice based lending to SACCOs. These successive projects reflected attempts by government getting the right intersection of sustainability, sound practices and massive outreach of MF to the poor.

Government’s role as an enabler rather than a provider of direct microfinance was strengthened in 1999 in a BoU policy statement on regulation. In the policy statement, BoU supported the view of microfinance as a line of business and foresaw the initiation and creation of a four tier financial structure as follows:

Tier 1- Commercial banksTier 2- Credit institutionsTier 3- Micro - deposit taking institutionsTier 4- SACCOs, NGO-MFIs and other non-regulated MFIs.


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Government’s decision to take the role of an enabler followed both BoU’s recommendations and key lessons learned33 from the collapse of the government’s Entandikwa program; chiefly that government credit programs inevitably get politicized and suffers low repayment. In 2001, Government issued a statement that it had pulled out of direct delivery of financial services, and would concentrate on improving the environment for private sector institutions to do the business.

Government, however, still remained very concerned about what they saw as lack of rural/ poverty outreach and ‘exorbitant interest rates’ charged on loans by MFI. Whereas most of the technocrats (civil servants working in the area of finance, including microfinance) believed that gradual, market led outreach of microfinance was the right way to go, the politicians wanted to see speedy, sudden outreach to all areas with low-cost loans. This caused Government’s confidence in the effectiveness of market based outreach of microfinance to wane off rapidly, culminating in a radical review of its role during the second half of 2006. In the reviewed role, government decided to pull out from supporting all types of microfinance institutions except SACCOs.

Government also decided to shift its concept of microfinance from that of financial services business with the poor to that of creating infrastructure for poverty alleviation. Accordingly, government decided to support one SACCO in every sub county, through which low interest government wholesale loans, with an interest cap, would be channeled. Effectively, therefore, government has ceased to be the strong partner it once was in promoting a market responsive, sustainability focused microfinance industry.

Emerging results and issues around Government’s new direction

The immediate result of the Government’s new direction has been that Government’s promotion of microfinance has ceased to be focused on market led channels to more closely administered methods. The MFF, which Government used to chair, no longer meets regularly. Because the MFF was vital in bringing stakeholders to discuss and decide on key industry issues regularly, it is now very much missed by stakeholders. Government’s interaction with the industry now mainly takes the form of consultative dialogue on what Government has decided to do (the SACCO per sub county support and channeling of government money through these SACCOs). The oveall implication here is that the rest of the industry (non-SACCOs) has to go on and develop with less of government support. Other challenges resulting from the Government’s new direction are:

In the remote rural areas, the well intentioned scheme is already causing some - confusion in people’s minds. People who originally focused on accessing financial services for their businesses are now largely waiting for “Government money to come”. This is likely to negatively affect clientele and business in the SACCOs not chosen for Government support and other MFIs

A shift in motivation of saving, from considering it as a means for future investment - to doing it only in order to qualify for a “government loan”

33 Mainly that government loans, directly delivered to borrowers, fail – and thus that government’s role should not be delivery by support.


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Long term sustainability of the participating SACCOs is likely to suffer because the - interest rates (and thus margins34) they charge on loans are restricted

Whereas Government has tried to use market channels for delivering its loans, - the message is still clear that the chosen SACCOs at the sub counties are retailing government loans and thus repayments are likely to suffer somewhat.

- The Birth and Growth of AMFIU4.7

In the mid and late 1990s, microfinance stakeholders saw the need for industry coordination. In 1996, several stakeholders (mainly donor programs and larger MFIs) started exploring the idea of establishing an association to coordinate common industry issues. The then MFI (like FINCA, UWFT and the Cooperative bank micro-finance agencies) spear-headed this, expecting that the association would coordinate them and promote best-practices. This view was keenly shared by donors who had experiences with the more mature micro-finance industries of Latin America and South East Asia. To move industry coordination and cooperation forward, the then head of the Cooperative Bank Agencies in 1998 worked with Government to develop a concept paper and on the national strategy for micro-finance. The rest of the industry picked up from the concept paper the idea of an institutionalized network with a coordination secretariat. In a series of informal meetings, the Association of Microfinance Institutions in Uganda (AMFIU) was formed with key issues being coordination, lobby/ advocacy, information dissemination delivery, promotion of sound practices and outreach promotion. In 1997, AMFIU (then as a registered institution but without its own physical address) was launched. AMFIU from then on consolidated its position as the MF network organization in Uganda.

In 2000, AMFIU board members secured grants for AMFIU to rent premises, pay two staff and meet basic administrative and operational costs. Mr. Suleiman Namara, formerly a senior officer in the Prime Minister’s Office, became the first substantive Executive Director of AMFIU –with Mrs. Clare Wavamunno - earlier elected Board Chair/ President, in charge of governance. This put AMFIU in a sound footing to add tremendous value, establish its role in the industry and to become popular and attract scores of members because of the vivid benefits of being a member. The Executive Director’s role was in Sep 2004 taken over by Mr. David T. Baguma, formerly Operations Director of the Feed-The Children Community Banking Program who had also served on the AMFIU Board for six years. Under Mr. Baguma, AMFIU has further improved its validity and sustainability by implementing fee earning initiatives and concentrating AMFIU’s activity where it adds most value. AMFIU is today reputed to be the most developed and mature MF national network organization in sub-Saharan Africa.

AMFIU’s role as the apex in professionalizing the industry has become very important. AMFIU spearheaded the first ever comprehensive documentation of Microfinance Sound Practices, builds the capacity of its members in some areas, runs a member performance monitoring system (PMS), promotes research and information dissemination, supports MF consumer education/ protection, leads active lobby and advocacy, works to strengthen the secretariat for more impactful service delivery and uses the member Code of Conduct and Consumer Code of Practice ensure its members adhere to minimum standards of ethics, integrity and professionalism in doing their business.

34 SACCOs intermediating Government money are restricted to a margin of 4%


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Member capacity building: AMFIU, through ongoing member strength assessments, often comes up with practical areas of critical need, undertakes or sponsors a detailed industry diagnostic on it and works with the members to address the identified gaps or weaknesses. AMFIU coordinates member capacity building by:

Working with development partners to buy appropriate training and/ or technical assistance that addresses deficiencies in member MFIs.

Maintaining a database of the demand and supply of capacity building services among its members, and often coordinates the two sides to the benefit of its members.

In highly technical but necessary areas, AMFIU takes proactive steps to get its members receive practical training that imparts on them the peculiar skills. A recent case was the training of trainers on the use of the Performance Monitoring Tool. This ToT has availed more PMT trainers thus averting the previous crisis of lack of trainers.

Organizing technical presentations by various industry professionals in a workshop running into each of its Annual General Meetings (AGM). This affords the members vital learning and experience sharing among them.

The Performance Monitoring System (PMS): AMFIU is completing the mega database, the Performance Monitoring System (PMS) with support from GTZ. Data from the PMT reports submitted quarterly by member institutions will be input and stored in the PMS database. This will enable AMFIU to process and disseminate industry performance reports, without revealing competitive information, enabling peer comparison and benchmarking.

Research, information collection and dissemination: AMFIU collects and disseminates international and national industry information through various channels:

Jointly with the Micro-finance Competency Centre, a Unit of the Uganda Institute of Bankers, AMFIU publishes a quarterly magazine- The Micro-finance Banker with well researched, deeply relevant articles and cutting edge information on the developments in micro/ pro-poor finance. There are always insightful articles and information from AMFIU management, staff or board members in each such publication.AMFIU organizes regular (quarterly) information exchange events to sensitize stakeholders on contemporary topics and developments worldwide that affect the industry.AMFIU uses its quarterly e-newsletter, print media, brochures, flyers and other publications to disseminate information on key issues in micro-finance. AMFIU has a large mailing list of just about every Ugandan stakeholder or interested party in micro-finance, to which it routinely sends information it receives on a myriad of issues from all over the world.To afford researchers, practitioners, consultant and development partners easy access to relevant information, AMFIU has expanded and now continually revamps its micro-finance library.In developing and continually updating the AMFIU website www.amfiu.org.ug they provide unlimited access to a priceless resource of information.AMFIU speaks, learns from and shares information in regional and international meetings and workshops.


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AMFIU carries out research on topical issues in the industry and disseminates the results thereof.

Consumer education and protection: AMFIU, in conjunction with FSDU and the Uganda Consumer Protection Association (UCPA) officially launched the micro-finance Consumer Education Pilot Project in 2005. In this pilot project MFIs were supported to develop and implement a consumer protection code of practice and to track and report on consumer complaints. The three institutions also joined hands to engage MFIs in good customer care practices like full display of price and product characteristics information, and to conduct consumer awareness campaigns

Active lobby and advocacy: AMFIU led a successful three year lobby leading to substantial positive changes in the Bill and enactment of the Micro-Deposit Taking Institutions Act. The Act was passed in a form that addressed both prudential operations and the needed industry growth. Currently, AMFIU is leading the industry in engaging government to ensure Government’s new direction of involvement in microfinance does not reverse the gains registered by the industry in the past 15 years. AMFIU is also spearheading the drafting of Tier 4 Regulation for non-SACCO institutions as well as engaging Government to involve stakeholders in the formulation of the SACCO law, and to take on board their views. On special interest/ disadvantaged groups, AMFIU is involved in promoting provision of microfinance for people with disabilities.

AMFIU’s membership is wide and covers the whole spectrum of microfinance practitioners in tiers 3 and 4 as ordinary members and tiers 1 and 2 as associate members. As at March 2007, AMFIU had a membership of 73 MFIs.35 AMFIU has helped to instill a sense of good governance and ethical conduct among its members.

The Role of Other Meso Level Organizations4.8

Different sections of this report explain the roles of meso level and other types of organizations in the growth and development of Uganda’s microfinance industry. The following table summarizes the roles of the key meso level institutions.

TABLE 10: ROLE OF MESO LEVEL ORGANIZATIONS

Institution/ Active Years Role PlayedPoverty Alleviation Project (PAP) funded by Government and AfDB– 1994 to 2000

Wholesale of funds and funding capacity building to MFIs – was not a big success

Rural Microfinance Support Project (RMSP)13 2001 to 2002

As above, also funded by AfDB. Was more successful than PAP

Microfinance Support Centre Ltd – 2003 to date

Wholesaling funds to and funding capacity building of SACCOs. Operates in a more market responsive way than its predecessors

35 AMFIU Microfinance Directory, Volume 3, 2007


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Institution/ Active Years Role PlayedSupport to Feasible Financial Institutions and Capacity Enhancement (SUFFICE) –funded by Government and EU – 2000 to 2006

Wholesale loans and capacity building support to community based financial institutions. Did a fair job especially in overall national level industry dialogue and in supporting AMFIU, though the project ended somewhat problematically

Private Enterprise Support, Training and Organizational development (PRESTO) – funded by USAID – 1997 to 2001

Introduction and entrenching of “Best Practices”, sustainability focused MFI training, technical assistance and other MF capacity building

Support to Private Enterprise Expansion and Development (SPEED) - funded by USAID – 2001 to 2004

Capacity building for mature MFIs to increase their financial sustainability and eventually transform into regulated financial institutions

Microfinance Competency Centre (MCC), a component of the Uganda Institute of Bankers - 2001 to date

Formal and refresher training in all areas of microfinance

AMFIU Already explained

Uganda Cooperative Savings and Credit Union (UCSCU), member-based – the 1960s to date

Apex for SACCOs in the country; seen by many as being quite weak. Has been chosen as the implementation agency for RFSP and is being assisted to build its capacity to more effectively undertake this role

Uganda Cooperative Alliance (UCA), the national apex of the country’s cooperative movement – the 1980s to date

Training, nurturing and TA to SACCOs. Has been very vital and useful in reviving and supporting business oriented rural SACCOs and helping them with systems and TA

Association of Microfinance Institutions of Ankole (AMFIA) – 2005 to 2006

A short lived regional version of AMFIU in the mid-western area of the country. Closed because it did not have a vital role for which MFIs would pay.

Private Sector Development Programme (PSDP) – funded by the UNDP: 1997 to 2000

Helping communities to start and nurture modal SACCOs, giving them seed capital for initial operating costs and basic assets and training them

Rural Savings Promotion and Enhancement of Enterprise Development (Rural SPEED) funded by USAID – 2004 to 2007

Rural financial institutions strengthening, product development, savings promotion, consumer education on the need for savings, refinement of delivery methodologies for rural finance, SACCO strengthening.

Agricultural Sector Program Support (ASPS), funded by DANIDA

Promotion of agricultural finance and rural financial services for the agribusiness value chain: including product development, a micro leasing wholesale fund, a guarantee fund for MFIs

STROMME Foundation – 1997 ongoing

Wholesaling funds and capacity building in the East African region


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Institution/ Active Years Role PlayedSTROMME Microfinance EA Ltd – 2004 ongoing

As above, but as a de-linked program/ company

Oiko Credit – 2005 ongoing Wholesale loans to MFIs

BoU Regulation of MDIs, and, at one point, capacity building support to some rural MFIs

Micro Save – funded by UNDP and DFID – 1998 to date

TA and training of MFIs and MF consultants in market research and market focused product development and delivery

Microfinance Outreach Plan (MOP) – 2003 to 2007

Coordination of government’s microfinance capacity building and outreach components

Matching Grant Facility for Capacity Building (MCAP) – 2004 to 2007

Component of MOP funding capacity building to MFIs, particularly SACCOs

Business Culture Fund (BCF) – 2006 to 2007

Component of MOP

Retail Level Suppliers of Microfinance Services4.9

Retail level suppliers of microfinance services include a range of institutions from all the four tiers of the financial system as well as savings clubs, accumulated savings and credit associations (ASCAs), rotating savings and credit associations (ROSCAs) and village savings and loan associations (VSLAs).

TABLE 11: SUPPLIERS OF MICROFINANCE

Tier/ Category

Type of Institution

Typical Products/ services

Depth of outreach

I Banks Normal banking products including current accounts, savings, fixed deposits, local and international transfers, custody of valuables, bill discounting. One bank, Centenary Bank, has most of its clientele in microfinance

Mainly the major towns and trading centers

II Credit Institutions

Various loan products and savings (ordinary and fixed savings accounts)

Mainly in Kampala and very few regional towns


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Tier/ Category

Type of Institution

Typical Products/ services

Depth of outreach

III MDIs Group and individual loans, group and individual savings, money transfer,

Kampala City, rural towns and trading centers

IV MFIs Loans (individual and group based)

City, towns and rural trading centers

SACCOs Loans (individual business loans, salary loans, school fees loans, group loans), savings (ordinary and fixed deposit )

Towns and rural areas, including very remote rural villages

ASCAs Savings and loans Mainly rural areas, including where no formal institutions serve

ROSCAs Savings and loans Same as above

VSLAs Savings and loans Same as above

REGULATION OF FINANCIAL SERVICES5.0

Financial Institutions Act 20045.1

The prime objective for prudential regulation and supervision by BoU are:

Enhancing orderly growth of the financial sector

Building public confidence in the financial system and in the institutions by boosting the safety of their deposits with financial institutions

Maintaining and improving stability of the financial sector.

BoU as the regulator achieves these objectives by setting high management and performance standards as well as strict governance and reporting requirements that are essential for a sound financial institution. It is an accepted fact that only stable and sound institutions that are able to provide financial services on a sustainable basis, and can afford to undertake regular product innovations and diversifications, thus ensuring that clients can have access to a variety of financial products. It can be rationally concluded that in general, effective regulation has had a positive impact on the level of financial sector soundness and stability. Even if financial access may not have been stated as a specific objective for regulation, it looks increasingly likely that the long term impact of effective regulation on increased financial access will be positive too.


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The effects of the FIA 2004 on the financial sector have not been systematically researched or documented yet. This assessment has had to rely on performance reports by the regulator and references in studies that are primarily focusing on Tier 3 and Tier 4 regulation impact.There has been considerable growth in commercial banking sub-sector after the enactment of FIA 2004. Details of this are explained in section 3.3 of this report

The MDI Act 20035.2

Provisions in the MDI Act 2003 and the Regulations cover the crucial areas of Ownership, Governance and Management, Operations and Policies, Financial prudence, and Audited Accounts. These are strictly enforced by BoU in supervising MDIs. The effect has been an improvement in the quality and prudence of Management, more competent/ effective boards and clear ownership structures; improved portfolio quality, regular and accurate reporting on operational and financial performance, and increased financial discipline. On the whole these provisions are suitable for the good running and growth of the MDIs. This has made MDIs more trustworthy and respected institutions and has increased institutional stability.

The FSDU funded Regulatory Impact Assessment of 200736 comprehensively documented the effects of regulation on the microfinance industry in Uganda. It has established, among other findings, that since licensing/ transformed MDIs have become more business oriented and innovative. The integration of MDIs in the formal fiancial sector has meant that more people have access to formal financial services.

In some cases, regulations have led MDIs to halt plans for opening new branches. In order to ensure that strong MDIs emerge, BoU imposed “stringent” requirements for opening new branches, security and physical infrastructure at rural branches, and rigorous reporting on a weekly basis. MDIs had to upgrade all existing branches to standards required by BoU, and in some cases, savings mobilization at some existing branches had to be suspended while this upgrading was going on. As an example, one year after being licensed as an MDI, PRIDE reported that only 18 out of 29 branches had been upgraded and savings mobilization halted in all others37. As can be expected, the urban branches were given priority in terms of upgrading, and the rural branches are attended to last, since the expected revenue from most rural locations often does not justify the costs involved in setting up expensive premises. Sustainability considerations often work against rural areas, thus reducing access in these areas.Furthermore, the new ownership requirements meant that MDIs had to get “deep pocketed” investors who needed a justifiable return on their money. This put pressure on MDIs to make profits by seeking more viable avenues of business including diversifying their loan clientele into the not-so-poor38. There are also aspects of the Act and its regulations which have been criticised by stakeholders as unnecessarily hindering their development or being an obstacle for further growth. These are summarized in the table below.

36 Study of the Effects of the MDI Act 2003 on the Microfinance Sector in Uganda 200737 Reni Deslipande and Mark Rickens –CGAP; Uganda Country-level Savings Assessment 200638 Study of the Effects of the MDI Act 2003 on the Microfinance Sector in Uganda 2007. The full report can be downloaded from FRIENDS Consult website: www.friendsconsults.co.ug


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TABLE 12: CONTROVERSIAL SECTIONS IN THE MDI LAW AND REGULATIONS

Issue Reference Criticism

Prohibition to intermediate loan insurance fund

MDI Act, sec. 19 (h)

LIF cannot be used for lending, and yet are included among the liabilities for capital adequacy and core capital requirements.

Prohibition to take deposits and lend in foreign exchange and to offer current accounts

MDI Act, sec. 19 (a) and (g)

There is demand for these products, and they are suitable especially if MDIs want to boost their deposits

Provisioning stricter than for banks/credit institutions

MDI Act, sec. 89 (3)(a) and Asset Quality Regulations

MDIs are competing with banks, but are not on a level playing fields with them

Maturity of loans restricted to two years

MDI Act, sec. 2 “short term loan

The limit of two years makes it difficult to offer longer term loans for example for housing and agriculture.

Source: Regulatory Impact Assessment FRIENDS Consult/ FSDU Study, 2007

The issue of loan maturity restriction is the most constraining of them all. It limits product diversification by MDIs to meet the needs of the middle- income segments.

The RIA study, done in 200739 (two years after the first MDI was licensed) established, among other findings, that since transformation and licensing:

MDIs have become more business oriented and innovative

MDIs have overall seen a reduction of the number of borrowers and a significant increase in the loan portfolios

The numbers of savers have increased sharply, while the total Shilling value of savings has risen only modestly

Loan pricing has not come down – there has been a slight rise in the portfolio yield of MDIs

Financial and operational performance of the MDIs experienced a temporary setback just after licensing, and are now being corrected

MDIs have realised that their status is unfavourable in relation to banks, and mature Tier 4 MFIs are less eager to become MDIs

BoU and MDIs’ expectations have largely been met, while Government’s expectations have not.

The FinScope study found that the percentage of MDI clients being served by rural branches has remained quite stable after licensing (72% in 2006 vs. 75% in 2004).

39 Study of the Effects of the MDI Act 2003 on the Microfinance Sector in Uganda 2007


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The Cooperative Statute 19915.3

Co-operative societies are registered and are subject to certain regulatory requirements of the Co-operative Societies Statute 1991 administered by the Dept of Co-operatives in MTTI. The general view is that in practice, oversight has been weak due to limited capacity of the department. The statute provides for the registration, management, governance, membership and running of all cooperative organizations.

The Statute has a number of shortcomings, and some of the relevant ones for this study are briefly discussed below.

Registration procedures and requirements1) do not pose any regulatory mechanism for controlling and censuring entry in the sector. Apart from the requirement that the society must have at least 30 members, there are practically no other conditions to ensure minimum adherence to prudential standards before registration. There are no prescribed capital or shareholding levels, and there is minimal fee on registration. Entry is therefore very easy.

The provisions on supervision are weak and inadequate2) . Under Section1 (1)-(4), the Statute designates the Commissioner for Co-operatives Development as the sole Registrar for co-operative societies. The Registrar, a public officer, is responsible for “providing and administering the services required by the societies for their information, organization, registration, operation advancement and carrying out the provisions of the Statute”. This responsibility can hardly be translated into a supervisory role; it is more of a facilitation role than a supervisory one. For example, the Statute does not have any of the prudential provisions that empower the Commissioner to look into administrative and operational areas that normally impact on institutional strength and soundness, such as the capabilities of managers, the lending policies, the administrative and financial management policies.

Apex bodies –UCA, UCSCU and AMFIU – have played a limited self regulatory role through the collection of performance-related data and facilitating capacity building services. These have had a more notable impact on instilling sound practices on their members.

3) The statute is outdated. There must have been fewer co-operative societies in 1991 when it was passed than there are now. Probably the number of officers specified in the Statute was by then sufficient to carry out the required functions. Currently, the registered societies are over 1,200 and these pose a big challenge for the department. The statute also leans more towards production marketing cooperatives rather than SACCOs

The weaknesses and lack of supervisory capacity by the Co-operative Department were validated by the findings of the financial institutions census in 2006 by MoFPED and FSDU. The census identified only 628 institutions compared to a total of 1,274 registered with the Department of Co-operatives Development in the MTTI. The department could not explain what had happened to the “missing SACCOs” The study on the unaccounted for SACCOs and MFIs by FRIENDS’ Consult Ltd, commissioned by AMFIU and FSDU


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in February 2007 established that a good number of the “missing” institutions were registered but never operated, or were once operational but had collapsed and were not deregistered, while some were operating without a fixed location, and so were not counted by the census. In a number of cases, the census looked at institutions that were operating but without an authentic registration certificate from the Department of Cooperatives. These findings are a clear evidence of lack of capacity to monitor the sector by the department.

4) The core business of co-operative societies has substantially changed from the original

focus of the co-operative movement. The Co-operative Societies Statute 1991 provides mainly for governance of traditional co-operative societies, whose core business was cooperation by members in agricultural, consumer, commercial and industrial activities by the members. With the advent of microfinance as a profitable business, most of the SACCOs are concentrating on mobilizing savings and intermediating them. This has made the current statute largely inappropriate for regulating and supervising SACCOs.

The Proposed Regulatory Framework for Tier 45.4 a) SACCOs

With the evolution of microfinance as a profitable business sector, most of the SACCOs now are concentrating on mobilizing savings and advancing loans to their members on a commercial basis. This has further made the Cooperative Statute (1991) very inadequate for regulating and supervising the SACCOs. The MoFPED has issued a draft regulatory framework intended to regulate SACCOs as financial institutions. The Ministry’s intention is that the new law will recognize the member-based orientation of SACCOs, and create further opportunity for integration of rural finance into the formal financial system. This, it is hoped, will enable members of SACCOs to somehow get access to the formal financial sector. The Ministry advocates for a separate law on three main accounts:

SACCOs’ specialization in financial service makes them very close to banking 1. institutions and therefore different in many significant respects from other co-operative societies. While the current Co-operative Societies Statute emphasizes the general good principles of co-operation and sharing of revenues and assets, the proposed law focuses on sound and prudent management and governance of SACCOs as financial institutions that intermediate members deposits and ensure safety of savings mobilized. This is particularly necessary because as part of the GoU Rural Financial Services Strategy (RFS), which is focusing on creating and/ or supporting one SACCO in every sub-county. Under the scheme, over 1,000 SACCOs may be created/ supported. If unregulated these SACCOs will pose a potential threat to the financial sector.

Both the FIA 2004 and the MDI Act 2003 do not cover the member-based financial 2. institutions like SACCOs or other Tier 4 MFIs. While the institutions under FIA 2004 and the MDI Act 2003 are private companies where management and owners have


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separate roles, in member-based institutions the two categories tend to be the same. Having a specific regulatory framework for SACCOs will ensure that this key cooperative principle can be advanced under sound business management principles.

The legislation of CFIs/ SACCOs will create further opportunity for integration of rural 3. finance into the formal financial system, thus enabling members of CFIs/ SACCOs to get access to formal financial sector institutions and services.

The proposed regulatory framework for CFIs/ SACCOs has a few principles similar to those articulated in the MDI Act 2003. Examples are:

Adherence to prescribed liquidity levels, to ensure smooth operations and reassure the i) members/ depositorsRestriction of placement avenues of savings deposits to liquid investments. Investment ii) of savers’ deposits in non-liquid investment such as buildings and equipment, shares, non-financial subsidiaries and other long-term securities will be strictly controlled and limited as means of risk minimization.Prescribed core capital adequacy levels for all SACCOs, to ensure strong financial iii) soundness.Establishment of a Stabilization Fund and /or Deposit Insurance System to reduce risk iv) of loss of members’ deposits in case of SACCO failure.

There are two major differences between the proposed regulatory framework for CFIs/SACCOs on the one hand and FIA 2004 and the MDI Act 2003 on the other:

While BoU, the regulator of institutions under the FIA and MDI Acts, is a corporate i) body and is independent of the Ministry of Finance, it is proposed that the CFIs/SACCOs will be licensed, regulated and supervised by a regulatory agency on behalf of the Minister of Finance. The agency may not be very independent if it is merely an agent who must adhere to the wishes of the principal. On the other hand, given the fact that the task of regulating over 1,000 societies is likely to be enormous, it is not likely that a self-sustaining corporate body can emerge now to carry out this responsibility. As a starting point and in the short run, an agency of the Ministry of Finance may be the most feasible way forward, until that body can gain financial independence, just as was the case with BoU.

Affiliation to UCSCU as an Apex will be mandatory by all SACCOs. It is proposed ii) that UCSCU as the apex will be strengthened to provide appropriate educational, promotional, legal, financial, advocacy, insurance and commercial services tailored to the needs of these institutions.

The proposed framework is aimed to ensure strengthened SACCOs with increased protection of savers’ deposits. The overall impact of this on the financial access to poor people will be monitored by Government.A number of shortcomings and challenges in the proposed framework have been pointed out by different microfinance stakeholders. For the purposes of this assessment, two relevant ones are considered.


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Capital adequacy has been one of the key pillars of building a financially strong i) institution, more so a financial institution, as has been the case for the banking sector and the MDI sector. The proposed framework considers capitalization of the SACCO in terms of capital reserves and retained earnings. These may not be sufficient to build a strong financial institution. As pointed out earlier on, it is a financially strong and sustainable institution that can provide a variety of financial services to a wider clientele on a sustainable basis. AMFIU and BoU can play a vital role in this case by advocating for adequate capital requirements for regulated SACCOs.

The number of SACCOs to be supervised may be over 1,000, unless the relevant ii) authorities limit formal regulation and supervision to only big or strong SACCOs. Depending on the threshold set, many (possibly the majority) of the SACCOs may still be outside the new law, thus solving only part of the original problem.

Non-SACCOsb)

In the current financial sector categorization, there are other institutional types in addition to the SACCOs in tier 4. There are a number of fairly big MFIs, mostly registered as shareholding or guarantee companies but not licensed. They therefore cannot legally engage in savings mobilization, and yet they have a big potential to do so. Many of them have branches in different rural and peri-urban locations of the country, and most are operating profitably. They are potential vehicles for increasing the provision of a full range of financial services (as opposed to credit only) to the poor / low income people especially in rural areas. This can only happen if they graduate to tier 1, 2 or 3. AMFIU has played a critical role in self-regulation of tier 4 institutions through the collection of performance-related data, enforcing a Code of Conduct on its members and championing consumer education and awareness. Although AMFIU is not a regulator, its mandate comes from the industry and it is highly respected. AMFIU is currently spearheading the drafting of a law to regulate non-SACCO Tier 4 institutions.

The Impact and Effect of Regulation5.5 The different financial sector laws mentioned here have affected or influenced different stakeholders in a number of ways. The FIA has mainly strengthened supervision, oversight and regulation of commercial banks by BoU. This has restored and boosted public confidence in the financial sector to such an extent that new banks have come up and international/ regional banks have opened subsidiaries in Uganda. Physical and balance sheet safety of the assets have also been enhanced. These aspects have increased competition, reduced interest rates charged by banks, helped banks to instill and sustain very good customer care practices and, generally, to become more customer responsive.

Section 5.2 of this report summarizes the findings of the Regulatory Impact Assessment recently done by FCL for DFID Uganda. It indicates that since licensing, MDIs have become more business focused, improved their portfolio quality, enhanced their branch infrastructure, greatly increased the number of their savers, developed more products to


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improve client responsiveness, slightly reduced the number of their borrowers, increased the portfolio volumes significantly and become real competitors to banks. The impact of regulation on the operating environment in Uganda has been more pronounced with the passing of the MDI Act. Before the MDIs were licensed in 2003, commercial banks and credit institutions were the only formal regulated institutions in the financial sector that were licensed to take and intermediate savings deposits from the public, and they had very little competition to contend with, except among themselves, especially where corporate and high-income clients were concerned. They had little or no interest in middle- income clients; even the salaried employees were clients, not so much by choice but because of employers’ requirements for them to use certain or specified banks. Banks could afford to discriminate against certain clients through prohibitive fees and charges on transactions or for opening and maintaining certain accounts, especially checking accounts. Microfinance clients who were required to open accounts with commercial banks in order to save before and during loan periods were often termed a “nuisance” by some banks.

After the MDIs were licensed and 4 MDIs joined the formal financial sector, competition became more dynamic for banks as well as MDIs. Banks and credit institutions are now competing with MDIs for savings deposits and for salary accounts as well as well-to-do clients. The MDIs have had to undertake more serious product development and diversification and aggressive marketing through advertisements of new products, both loan and savings products, for the not-so-poor, well-to-do clients and even corporate bodies in a bid to become more competitive and improve profitability. The MDIs began paying particular attention to customer care and product pricing, especially access conditions for loans, charges and interest on savings deposits, to the advantage of all types of clients.

With increased competition in the sector, there has been increased transparency regarding charges and interest payable on deposits and loans, and, coupled with increased advertisement by the institutions as to what services and products are on offer, customers are now more informed of the products provided by the different institutions. The overall development has meant that the sector is no longer a supplier’ market, as was the case when microfinance institutions had just started and commercial banks were few. For AMFIU members the operating environment is now market-driven; gender preferences have been abandoned, customer is now “king”, and the market demands efficiency of operations and convenience of services, including ability to access savings from any branch of the institution.

The effects/ impact of the weak cooperative law (from the financial sector standpoint) has been springing up and failure of many SACCOs, in several cases making poor people lose their savings. Non-regulation of Tier 4 institutions has had one positive result: small NGOs and other Tier 4 organizations have provided financial services in remote rural areas and other poor people fairly free of any regulatory burden. The negative impact, which seems to far outweigh the positive one, is that many dishonest people have started microfinance schemes to lure poor people into depositing money with them. Some of the promoters of these institutions misappropriated the deposit money so much that institutions collapsed and the clients lost their money. In some cases, promoters of Tier 4 MFIs were genuine but inept in managing a financial institution. Some institutions under this category have also collapsed and people have lost their money. Such incidents highlight the need for effective Tier 4 regulation (or at least effective preventive oversight under an amendment of any of the existing laws)..


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FUNDING SOURCES6.0

According to the 2006 CGAP Regional Funder Survey for Sub Saharan Africa, Uganda is among the 10 top most donor funded countries in Sub-Saharan Africa. Top most among the microfinance donors/ funders here have been USAID, DFID, AfDB, DANIDA, the European Union, NORAD and GTZ/Sida(through the Financial Systems Deepening Project). Other funders, who each mainly worked with a single institution were FINCA International, Food For the Hungry International, Freedom From Hunger, Feed The Children International. These organizations and other like them have financed loan portfolios, institutional development, operational subsidies and capacity building for MFIs in Uganda.

It is estimated that between 1999 and 2003, a total of US $40 million was invested in the sector by the top four donors (DFID, USAID, EU and GTZ/KfW)40 and that a further US $20 million was committed to the direct support of MFIs by other development partners/ donors.

With the maturity of the microfinance industry in Uganda; has come the realization that MFIs cannot be babied for ever. Softer and more liberal forms of funding have given way to business oriented commercial financing and, to a lesser extent, sustainability focused grant funding for technical assistance. Donor funding, especially by way of grants, has progressively reduced with the growth of the industry. The emerging prevalence of MF financing is from:

Commercial banks and other commercial sources of wholesale funds (loans for MFI portfolio growth)

A semi-autonomous government agency that lends at near-market rates ( Microfinance Support Centre Lt d)

Other institutional wholesale lenders, both local and international (examples are Oiko Credit, Shore Bank, DFCU Ltd, KFW, Cordaid, STROMME Microfinance EA Ltd)

Equity investors, both local and international

Client saving(especially for SACCOs and MDIs)

Retained earnings for the larger MDIs and other MFIs that are making profits

40 Uganda Microfinance Sector Effectiveness Review 2004


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Funding Sources for the Period (1995-2000)6.1

TABLE 13: FUNDING SOURCES FOR THE PERIOD (1995- 2000) Funding institution/ category Main areas funded

African Development Bank Capacity building grants to all types of MFIs1.

Wholesale loans to all types of MFIs2.

NORAD Grants for capacity –building of PRIDE 1. Africa, then a microfinance retailing project under the Ministry of Finance and Planning

Grants for loan capital for PRIDE Africa 2.

USAID14 Grants for MFI capacity training, TA and 1. other capacity building

Grants for loan capital to progressive, sound-2. practice MFIs

Government of Uganda The Entandikwa (seed capital) micro-credit scheme, retailed directly through local government systems15

MFI parent institutions (FINCA Int. Feed The Children Int. Food for the Hungry, Freedom from Hunger etc)

Capacity building grants, loan capital and operating subsidies for their (single) MFIs in Uganda

Canadian Swedish and other cooperative apexes

Capacity building of the cooperatives, including SACCOs

Internationally, this was a time when microfinance as a socio-welfare intervention for sustainable development was popular. Microfinance as a sector was a favorite among donors. In Uganda, microfinance funding during this period was mainly in form of grants for both loan capital and capacity building. Although some funders already existed in Uganda’s microfinance industry, the African Development Fund (ADF) and USAID emerged as the main sources of funding between 1995 and 2000.

AfDB financed Uganda’s Poverty Alleviation Project (PAP) to support income generating activities of the poor that was to phase out in 1998 but lingered on till 2000. PAP, though well funded, was poorly structured in that the wholesale loans were made by a Government project directly under the Prime Minister’s Office. A substantial portion of the loans given out was lost due to failure of the intermediary institutions or massive defaults by their borrowers.

USAID implemented its PRESTO Project of which the largest component was the Centre for Microfinance (CMF). Through a combination of capacity building grants, direct and outsourced training/ technical assistance and later on grants for loan capital, CMF made a permanent mark in influencing the industry to adopt sound practices and focus on sustainable provision of financial services to the poor. With the operationalization of PRESTO in 1997, USAID was the first donor to provide substantial support for the development of microfinance in Uganda in a holistic way. Having funded MFIs in the early 1990s, USAID designed this project in 1996 to focus on real needs of the MF industry development in Uganda at the time.


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NORAD, through a bilateral donor agreement between the governments of Uganda and Norway, financed PRIDE Africa, then a microfinance retailing project. The funding was successful and PRIDE later changed into a guarantee company, and finally to a shareholding company, PRIDE Microfinance Ltd. PRIDE is today one of the largest/ leading MFIs in Uganda and it is licensed/ regulated by the central bank under the MDI Act.

Funding Sources Between (2000-2003)6.2

TABLE 14: SUMMARY OF FUNDING SOURCES (2000- 2003)

Funding institution/ category

Main areas funded

USAID16 Capacity building grants for the more mature, sound 1. practice MFIs to attain FSS and/ or transform into regulated financial institutions

Assets and deposit-taking infrastructure development 2. in preparation for transformation

Guarantee fund for mature MFIs to access wholesale 3. loans from the banking system

EU17 Capacity building grants for community based MFIs1.

Wholesale loans for all types of MFIs2.

Guarantee fund for MFIs to access wholesale loans 3. from the banking system

Some initiatives of AMFIU, the industry network4.

DANIDA18 Establishment of the secretariat for the microfinance 5. Outreach Plan; then the Government’s grand strategy for rural outreach with MFCapacity building for SME agricultural finance6.

NORAD Grants for business expansion and transformation 1. preparation of PRIDE

Grants for loan capital for PRIDE 2.

African Development Bank (through RMSP)19

Capacity building grants to of all types of MFIs1.

Wholesale loans to all types of MFIs2.

Government of Uganda Co-funding of RMSP and its activities mentioned above

Unidirectional parent institutions

Capacity building grants, loan capital and operating subsidies for their (single) MFIs in Uganda


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Funding institution/ category

Main areas funded

Canadian Swedish and other cooperative apexes (through UCA)

Capacity building of the cooperatives, including SACCOs

Commercial banks and other conventional lenders

Wholesale loan, mainly to the more mature MFIs

DFID and UNDP MicroSave Africa, a project that researched on value addition to MF, trained MFIs on how to adopt market responsive product development and delivery

GTZ/ Sida Financial Systems Development TA to BoU1.

Establishment of the Microfinance Competency 2. Centre at the Uganda Institute of Bankers

Programs/ operational grants to AMFIU, the industry 3. network

SNV20 Support to AMFIU’s institutional capacity through funding technical assistance

DED Technical assistance to AMFIU and support to Kabarole Research and Development Center (which has MF as one of its focus areas)

Locally, this period has been often referred to as the “commercialization period”. Effort by PRESTO and other programs had helped the industry to substantially grow and adopt sound practices. Funding sources, as can be inferred from the snapshot table above, ranged from bilateral and multilateral donors to government, private wholesale institutions and commercial banks. The government to a good extent kept to its decision not to provide wholesale funding through directly at the retail level, although it did channel wholesale funds through RMSP. An important trend that started towards the end of this period was that donors started becoming less interested in funding MFI loan portfolios and more interested in funding capacity building. Both RMSP and the SUFFICE programme lent to MFIs at near market rates, and neither seemed to have adequate wholesale loans to meet the high and rising demand. MFIs started or increased their borrowing from commercial banks, in some cases using partial guarantees from SPEED and SUFFICE. By the end of 2003, all of the top-tier MFIs had loans or credit lines from banks.

The USAID’s Support to Private Enterprise Expansion and Development (SPEED) was a successor to PRESTO project. SPEED, a three year project started in 2001. Its focus was to fund capacity building and transformation preparation of mature MFIs with a focus on eventually transforming into regulated financial institutions. It worked with four transformation candidates and 10 other mature MFIs.


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DANIDA (ASPS), alongside EU, supported microfinance activities through the Microfinance Outreach Plan (MOP) during this period. MOP’s objective was to massively increase the outreach of sustainable microfinance in Uganda, and especially in rural areas. MOP also aimed to improve the enabling environment for microfinance, supporting capacity building, setting up a tier 4 performance monitoring system and tracking outreach through a regularly updated Microfinance Outreach Map. In 2002, DANIDA in partnership with other donors (notably GTZ), assisted the Uganda Institute of Bankers (UIB) to broaden and modernize its operations and training programmes. This was in particular to reach the microfinance sector through the establishment of a dedicated department known as the Micro Finance Competence Centre (MCC).

The EU continued funding SUFFICE to do what it did during the prior period, and also part funded the set up and operations of MOP.

The AfDB funded government project changed from PAP to Rural Microfinance Support Project (RMSP) during this period. Operations became more focused and choice of loan intermediary MFIs a bit more sustainability based. RMSP nurtured MFIs through funding their capacity building and set up minimum performance benchmarks for MFIs to qualify for loans. It continued working with MFIs from all tiers.

MicroSave Africa, the DFID and UNDP funded MF research and MF capacity building project, did a lot of work that complemented those of other programs during this period. An addition to direct technical assistance in the area of savings and loan product development, it also funded training and TA in key areas of MFI product development and delivery.

Commercial banks and other conventional lenders came to MFIs to seek business opportunities rather than to “fund” them. Since then, the wider, conventional money market has become the largest source of financing for progressive MFIs in Uganda.

Funding Sources (2004 and Beyond) 6.3

TABLE 15: SUMMARY OF FUNDING SOURCES (2004 AND BEYOND)

Funding institution/

category

Main areas funded

USAID21 1. Capacity building grants for strengthening rural SACCOs

2. Capacity building grants for rural outreach by other MFIs

3. Rural focused MFI product development

4. Savings awareness creation/ sensitization in rural Uganda

5. Rural focused remote transaction technology to deepen outreach

EU22 Capacity building grants for community based MFIs1.


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DANIDA23 Grant funding to build MFI capacities for Ag finance1.

Product development for agriculture/ rural finance2.

Wholesale micro-leasing fund for use by one MDI and one tier II 3. institution in agribusiness related finance leases

NORAD Final grant funding, for PRIDE to release client’s “forced savings” from financing the loan portfolio

African Development Bank (through MSCL)24

Capacity building grants to community based MFIs1.

Wholesale loans to community based MFIs3.

DFID (FSDU Project)

Support to financial sector linkages (MFIs and more formal 1. institutions)

Support for training and TA to rural MFIs2.

Consumer education and protection3.

Financial education of rural people4.

Key industry-wide studies on very useful topics5.

Commercial banks and other conventional lenders

Wholesale loans, mainly to the more mature MFIs

GTZ/ Sida Financial Systems Development TA to BoU1.

Establishment of the Microfinance Competency Centre at the 2. Uganda Institute of Bankers

Programs/ operational grants to AMFIU, the industry network3.

IFAD Rural Financial Services Program, implementing the 1. Government’s SACCO scheme

District Livelihood Support Programme in 13 (which has a 2. Community Savings sub component)

Citi Foundation 1. AMFIU and industry capacity building, including SMME development promotion through the Microenterprise Award

DED 1. AMFIU activities and technical assistance Source: Consultants’ own analysis

The period leading to and following the enactment of the MDI Act in 2003, the funding structure of Ugandan MFIs, and especially the MDIs, changed dramatically. The transformation process provided MFIs an opportunity to proactively seek and attract new funding sources that would support their future vision41.

41 Joanna Ledgerwood – Transforming MFIs (2006)


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These included equity funding, socially sympathetic (subsidized) loans, commercial loans, convertible loans, quasi-equity (preference shares) and clients’ savings/ deposits.

Donor fundingDonors during this period moved almost completely away from loan funding (save for the two wholesale funds) and concentrated on capacity building, transformation, supporting meso level organizations/ activities, providing guarantees for loan capital and supporting new innovations in the industry. Two examples of the new tastes in donor funding are:

In 2005, for instance, USAID/Uganda renewed implementation of the Development i) Credit Authority (DCA) guarantee scheme. Under this scheme, DCA signed agreements with partnering banks and agreed to partially guarantee individual MFIs’ borrowings from the banks, following strict eligibility guidelines.

In 2006, the Uganda Rating Fund (a multiple donor funded project: SUFFICE, FSDU, ii) Rural SPEED and GTZ/Sida) was set up. This was intended to enable Ugandan tier 4 institutions to access rating services at subsidized costs. The fund subsidized up to 85% of the rating costs with a maximum of US $ 3,500 and the balance was met by the MFI. The Rating Fund was resident and managed by SUFFICE which has since closed.

The major donor programs that supported microfinance in Uganda during this period (FSDU-DFID, EU-SIFFICE and Rural SPEED –USAID) came to their close during the last quarter of 2007. These were not designed to be extended and have had no successor programs. The one key reason has been the re-entry of Government into the microfinance funding arena with the SACCO-per-sub county arrangement. The other reason is that microfinance, in Uganda at least, has matured and to some extent lost some of its flavor to donors.

The main donors who still support microfinance capacity building include:

African Development Bank (through the Microfinance Support Center)i)

IFAD (Loan to the Government that supports Rural Financial Services Program or ii) the SACCO-per-sub county scheme), DANIDA-ASPS (funding capacity building mainly to agribusiness related financial outreach) and GTZ/Sida providing technical support to Bank of Uganda including the area of rural finance.

Donor funding for microfinance capacity building is no longer very available, while for their loan capital MFIs mainly borrow from the banking system and some (who are authorized) take public deposits.

Government funding Currently, government has narrowed down its support to what has become known as the Rural Financial Services Program (RFSP), which is in turn a part of the Prosperity for All (PFA) or Bona Bagagawale program. Under this programme, GoU has committed funds for the creation of SACCOs in every sub- county in the country. Government then plans to pass on wholesale loans for retailing through the selected sub county SACCOs, through MSCL.


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Even before the scheme has fully taken off, it was politicized at the local levels and it will be difficult for any of the participating SACCOs to survive uninterrupted.

Commercial loansCommercial banks are currently the main source of wholesale loans to MFIs42 lending at 16% to 20% per annum43, the very range that specialized MF wholesale lenders, including the government owned MSC Lts, lend MFIs. Unlike savings that require infrastructure for marketing and sales among others, commercial funds are easily available and negotiable. This type of funding is available in form of term loans and lines of credit. In Uganda’s microfinance industry, commercial debt is highest among the financially sustainable institutions (84%) and strong MFIs backed by guarantees from third parties.

Specialized MF Wholesale fundingWholesale funding from specialized MF fund wholesalers are another source of funding available. The institutions include MSCL, Oiko Credit, and Stromme Microfinance (EA) Ltd. These lend mainly in Uganda Shillings at rates near the market prime rates charged by commercial banks.

Equity financingEquity financing is relatively new to microfinance in Uganda. The main thrust came with transformation, when MDIs needed shareholders to get the MDI license. Equity investors mainly invest in profitable future of MFIs and expect a share of the returns. Equity funding is most common with MDIs and SACCOs. While MDIs attracted both local and foreign investors, SACCOs have local shareholders, mainly from around their locations.

TABLE 16: PAID UP SHARE CAPITAL OF THE FIVE REGULATED MFIS AS AT DECEMBER 2007.

Institution No Of Equity Investors Paid Up Share capital (Ush Millions)25

UML 8 9,301UFT 5 7,400PRIDE 1 5,344FINCA 1 4,617CMF 7 2,248

Total 22 28,910 Source: 2007 Annual reports of the Institutions, MIX market

At their maturity, the microfinance institutions attracted a variety of equity investors. The follows table gives an indication of such variety.

42 MoFPED Report of Census of Financial Institutions in Uganda 200643 BoU


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TABLE 17: LIST OF SHARE HOLDERS OF MICROFINANCE INSTITUTIONS; (4MDIS, CMF AND CENTENARY BANK)

UMLAureos East Africa Fund Norfund Nalyaali CharlesRodney SchusterOgule Willy (RIP)Kasibante JRMJames MugambiUMU-NGOFINCA UgandaFINCA InternationalPRIDEGovernment of Uganda (aimed at ownership divestiture to the private sector)UFTUWFTSun Mutual Founder MembersInvestment and PartnerOiko Credit Commercial Microfinance Patrick BitatureNilson PeramunkCavellPatrick WakoWilliam PikeShore BankCentenary Bank The Catholic DioceseUganda Catholic Secretariat STICHING HIVOS – TRIODOS FONDSSIDI (French Investment Bank)3 of individual share holders)

Source: Centenary Bank. Annual Report (2006); MIX Market; MDI Websites

Savings

With transformation, MDIs have become keen on attracting deposits to finance their loan portfolios. As a recent trend (for non- member based MFIs) and one of the motivations for transformation to become MDIs, savings mobilization has been seen as a relatively


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stable and inexpensive source of funds denominated in local currency. Savings are generally mobilized as either demand deposits (ordinary savings) or time deposits (fixed deposits). In savings mobilization, MDIs face the challenge of high pertinent costs like marketing, security; cash transfer expenses and carrying costs accounts. The following table summarizes savings portfolios of the five regulated MFIs. Before transformation, the MDIs were prohibited from taking voluntary savings although two of them did so.

TABLE 18: GROWTH IN VOLUNTARY SAVINGS DEPOSITS OF SELECTED REGULATED MFIS IN UGANDA. (FIGURES IN BILLIONS OF USH)

Institution: 2002 2003 2004 2005 2006 2007UML 2.51 2.15 2.23 4.46 6.07 8.70

PRIDE 0 0 0.45 1.43 5.32 6.95 UFT 2.50 2.90 4.19 5.06 6.64 7.07

FINCA 0 0 2.22 4.61 5.87 6.77

CMF 4.61 5.48 4.85 7.18 10.43 19.86TOTAL 9.62 10.53 13.94 22.74 34.33 49.35

Source: Study of the effects of the MDI Regulation (2007; MixMarket and PMT Reports

In all aspects, the table above shows that savings deposits continue to grow in importance as a source of funding for regulated MFIs. For the four MDIs, the savings volume almost tripled between 2004 (before licensing) and 2007. With full commercialization of microfinance, the services are now largely provided as a business in Uganda. Donors have stopped giving grants for loan funds and many MFIs now borrow from either commercial banks, wholesale lenders or from the wider money market. With the dwindling donor funds that would not sustain the growth and development of the microfinance industry, practitioners had to look else where to fund their capital needs as shown in the table below. TABLE 19: LOANS AND GRANT FUNDING SOURCES OF MF ACTIVITIES (FIGURES IN BILLIONS OF USH)

Institutional Types

Source of Funding

ConcessionaryLoan

Commercial loans

Grants Other

SACCOs 2.23 1.20 0.94 0.81Companies 1.35 31.04 3.58 0.07NGOs 4.53 2.84 1.43 0.97SIDAs 4.11 1.69 0.05 0.11Total 12.22 36.77 6.00 1.96Percentage 21% 65% 11% 3%

Source: MoFPED, Financial Sector Census 2006


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The table indicates that commercial debt (65%), is currently the major source of funding to MFIs. This is followed by concessionary fund (21%) and grants (11%), while other sources is 3% respectively44.

To MDIs overall, commercial/ money market sources of finance like customers’ deposits, money market borrowing, subordinated, convertible debt and equity finance have increased in relative importance compared to grants and “soft” loans. The table below shows growth in the different types of financing over the last three years

TABLE 20: CONSOLIDATED BALANCE SHEETS OF MICRO DEPOSIT TAKING INSTITUTIONS (USH BILLIONS)

June -06 Dec - 06 June -07 Dec -07 Mar -08

TOTAL ASSETS 107.6 128.6 107.6 162.4 172.9

Notes and Coins 2.6 3.6 2.6 5.0 4.7

Balance with Financial Institutions in Uganda

12.2 14.6 12.2 20.1 19.6

Investments in Government securities 13.8 16.2 13.8 21.3 25.0

Loans (Net) 62.9 76.9 62.9 104.8 109.3Inter branch/Due from own Offices 0.3 0.1 0.3 0.2 0.0

Net Fixed Assets 9.3 9.6 9.3 10.3 10.2

Long Term Investments 0.6 1.1 0.6 1.8 2.4

Other Assets 5.9 6.6 5.9 8.3 10.6

Total Deposit liabilities 17.7 23.2 17.7 39.1 43.1

Loan Insurance Funds/Compulsory Savings

14.9 15.3 14.9 16.0 16.3

Borrowings 29.5 41.3 29.5 46.6 49.5Other Liabilities 6.4 6.6 8.3 8.7 10.9Other Long-term Liabilities 0.5 0.5 0.0 0.0 0.0

Total Equity 19.8 22.7 19.8 31.6 32.9

Subordinated Debt 13.7 13.9 13.7 16.5 16.5

Preference Shares 3.8 3.8 3.8 3.8 3.8

TOTAL LIABILITIES AND EQUITY 107.6 128.6 107.6 162.4 172.9

Source: Bank of Uganda, Background to the Budget (2008/09)

44 MoFPED, Financial Institutions Census 200644 Ruth Goodwin- Groen et al. Uganda Microfinance Effectiveness Review. October 2004


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7.0 IMPACT AND SOCIAL PERFORMANCE OF MICROFINANCE ACTIVITIES The impact of microfinance activities in Uganda has been the subject of considerable research and debate. While at the micro level there is evidence of positive and negative impacts of microfinance, the positive contributions clearly outweigh the negative ones.

Previous microfinance impact studies in Uganda (Barness, Morris and Gaile 1998; Mutesasira et al 1999; AIMS 2000; Andy Carlton et al 2001; Ruth Goodwin-Groen et al 2004; MoFPED, FinScope 2007, Obara, Mukasa and Staschen 2007) and many others record that microfinance impact goes beyond just business loans and savings.

Among the positive impacts identified by the different studies are:

Impact on Government policy: microfinance is an important part of the growth strategy in Uganda. The Uganda microfinance effectiveness review45 sights the inclusion of microfinance in the poverty eradication plan as an indication of how serious Government of Uganda treats the program (microfinance).

Improvement of clients’ household income through growth of their micro and SME businesses

Enabling clients to access health care and education

Aiding the clients in managing household or social emergencies

Promotion of social cohesion through the group based methodologies

Improved financial literacy of members/ clients of MFIs

Improved gender empowerment and relations, especially because the majority of MFI clients are women

Empowerment of poor people to participate in both their financial service groups and in their local social and political issues

Household asset/ wealth accumulation

Maintenance and entrenchment of a social mission alongside the business orientation, which drives the MFIs to focus on the poor as their key market

The fairly wide and increasing geographical coverage especially in rural areas, notably to serve more poor people or those who previously could not access institutionalized financial services

Vivid efforts to improve and promote client satisfaction through increasing the range of products and services available, improving their features and delivery mechanisms

Transparency and consumer protection, promoted jointly by AMFIU, development partners, the government and MFIs. This aims to improve both the practical knowledge and the rights/ well-being of clients.


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Involvement, especially of community based, rural MFIs, in promoting community well being.

In many cases, conducive and worker-friendly human resource policies and staff development programs.

OPPORTUNITIES AND CHALLENGES8.0

Potential areas for growth and development8.1

At the meso level, stakeholders are quite well developed and informed. The key potential for growth and development lies with AMFIU, which is now the undisputed lead network organization in the industry. The key areas of potential growth and development for AMFIU are:

Full scale implementation of the performance monitoring system (PMS), and thereby - developing a credible reputation as a referral organization . From the PMS, AMFIU will attract many more members because it will become increasingly realized that whoever is not in AMFIU’s database/ PMS is not an obvious sound-practice organizationDevelopment and entrenchment of a fully recognized industry self-regulatory system - that covers the whole microfinance industryDeveloping a national rating or classification system for MFIs, based on a suitably - adopted version of what international raters use. This could be revised annually and could serve as first point contact from other industry stakeholders who would like to work with the different types of MFIs

At the retail (MFI) level, major opportunities to boost business exist in areas like:Products suitable for rural areas, because this is the most sensible growth area. Most - MFI products and delivery mechanisms still do not suit rural areas, although there could be some good potential business in these areas. Cost effective establishment of branches and service points in more remote areas- Linkages among the different tiers of institutions, for mutual strength and more - complete satisfaction of the clients.More of the country’s population getting out of absolute poverty, to some extent - implying that people are moving out of destitution into the lowest and basic tier of monetized economic activity. As they move this way, they also move away from being non-prospects to prospective clients of MFIs.

Promising innovations and other opportunities 8.2

Some promising innovations and opportunities, which could result into significant benefits to the sector in future, are worth mentioning:

Technology driven access at affordable rates. At least one MDI, UML, is already - using technology driven remote access to serve clients in areas away from its physical presence.


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In the area of linkages, what has been experimented by Post Bank might offer a - significant opportunity for future growth and increased geographical outreach with sound practice microfinance. A higher tier MFI like an MDI and a local SACCO, for instance, stand to mutually benefit if the SACCO gets the right to use the MDI’s streamlined policies and procedures, and the MDI lends the SACCO wholesale while providing for the SACCO safe custody of its deposits.

Challenges facing the industry8.3

The key challenges facing the industry are:

Radical change in focus, philosophy and direction by the Government, making it less - of a participant than promoter of market based outreach of microfinance.

Concentration of microfinance in the urban and peri-urban areas, with the attendant - problem of multiple borrowing by clients.

Inadequate rural outreach.-

Limited financial products for agriculture, which is the economic mainstay of most - rural Ugandans.

The Prosperity For All (PFA) scheme, which has a widely publicized and politicized - component meant to deliver government funded credit at every sub county. This might pollute the market for sound practice organizations before it eventually faces its own fate.

Human resource/ skill inadequacy as the industry grows fairly faster than the - development of appropriate personnel and skills.

Inadequate supply of MIS technology for some institutional types and where packages - are available, inadequate expertise within the MFIs to fully utilize.

The challenge of Tier 4 regulation which to some extent is being addressed but not - wholly.

In addition, the following general barriers46 to access by the very poor people also still apply to the Ugandan situation to some extent:

Physical barriers like poor infrastructure and remote locations

Economic barriers like transaction costs (including opportunity costs of attending meetings and travelling to service points)

Self exclusion by the rural poor with low self esteem

Sector risks (rural poor living at subsistence level and mainly involved in small scale agriculture – making them very vulnerable)

The impact of chronic poverty, disease, ignorance and other vices, making microfinance not the immediate appropriate solution for the extremely poor

46 Published by the Poverty Outreach Working Group of the SEEP Network [Authors: Jan Maes and L:aura Foose] www.microfinancesummit.org/papers/workshops/6_MaesFoose.pdf


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The paper presents some empirical evidence of how poverty responsive microfinance has been delivered elsewhere through targeting the poor in geographical selection, developing the right products and delivery methodologies for the rural poor, complementing microfinance with other poverty focused initiatives like business skills training, access to basic health, empowerment and sensitization, food assistance, functional adult literacy and ongoing business/ enterprise support. While past attempts by several MFIs in Uganda to deliver microfinance alongside safety net programs hampered sustainability, a future innovation could be that the MFIs collaborate with and complement welfare programs to deliver more comprehensive poverty solutions. The industry also needs to undertake a detailed product profiling exercise, accompanied by a representative sample of clients, to identify product gaps for complete customer responsiveness.

Future out look of microfinance in the country8.4

As already mentioned, microfinance in Uganda is at the integration stage. Already, one MDI (UML) has announced that it is about to be acquired by Equity Bank of Kenya. This is likely to impact significantly on the microfinance and banking sector in the country. Equity Bank has a very ambitious expansion program and a history of success in doing it. This could have a demonstration effect to other banks that if they want to significantly downscale, they could just buy/ acquire an MDI or other MFI. It could also trigger the desire for current MDIs to seek Tier 1 (commercial banking ) license in order to effectively compete. If this happens, then to some extent the MDIs are set to move further away from the poor clients (without leaving them out totally).

In all likelihood, most of the NGO type MFIs that do not scale up and transform to regulated institutions will fail or become increasingly insignificant and weak in the next five to ten years. MDIs are likely to graduate to tier 1 or 2 and the more mature Tier 4 institutions are likely to seek transformation into Tier 2 or 1 rather than into MDIs. The reason for the distaste for MDI status, as elaborated in the Regulatory Impact Assessment study of 2007, hinges mainly on the perception that MDIs are over-regulated and overly restricted from certain activities, like intermediation of loan insurance funds and forex based business.

If Government succeeds in supporting or setting up a SACCO in every sub county, this might create a lot of genuine excitement initially but unless the sustainability of these SACCOs is promoted, many of them could eventually collapse and this would again adversely affect the SACCO sub sector that was starting to emerge as a viable Tier 4 mechanism for providing financial services to rural and poor people.


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CONCLUSION9.0

It is a known fact that neither microfinance nor any other single intervention can singly eradicate poverty. Poor people need employment, schooling, health care, technical assistance in production, marketing and business. Some of the poorest require immediate income transfers or relief to survive. Access to financial services and most especially microfinance, forms a fundamental basis on which many of the other essential interventions for sustainable poverty reduction depend. Financial services contribute to the reduction of poverty and its effects in multiple, concrete ways and as MFIs approach financial sustainability, they can reach far beyond the limits of scarce donor resources and deliver pro-poor financial services on an ongoing, growing, permanent basis. Microfinance thus offers the potential for a self-propelling cycle of sustainability and massive growth, while providing a powerful impact on the lives of the poor, even the extremely poor. In Uganda, the reduction of poverty incidence already explained in this report has not happened in spite of the growth of microfinance, but partly because of it.

All aspects considered, Uganda’s microfinance industry has reached maturity and is quite resilient. The future of the industry hardly needs to be shaped by more external interventions. It is most likely that sector and institutional evolution will shape the long term future of this industry much more than isolated activities of stakeholders, government included. If the right solutions can be found for Tier 4 regulation, further consumer education and financial literacy of the population, product and delivery methodology innovations to penetrate remote rural areas, containment of the potential negative impacts of government’s new involvement and human resource/ skill enhancement, the industry would be strengthened further to be able to absorb most shocks it might face.

UGANDA MICROFINANCE INDUSTRY ASSESSMENTUGANDA MICROFINANCE INDUSTRY ASSESSMENT

APPENDICES1.0

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1.0 APPENDICES


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APPENDIX I: LIST OF DOCUMENTS REVIEWED

Uganda Population and Housing Census (Government of Uganda - 2002)a)

National Household Survey (MoFPED - 2005/2006) b)

The Poverty Assessment Report MoFPED -(2005)c)

The Revised Poverty Eradication Action Plan (PEAP, Government of Uganda 2004)d)

Investment Assessment Reports,e)

AMFIU Directories and other relevant documents f)

FSDU studies on the microfinance industryg)

Financial Institutions Act (2004)h)

MDI Act 2003i)

The Cooperative Statue (1991)j)

The Draft SACCO Regulation Bill (MoFPED – 2007)k)

Bank of Uganda policy documents and summary statistics on commercial bank operations l) (various dates)

Microfinance Outreach Plan, Strategy and Map (MoFPED 2004, 2006)m)

Background to the Budgets (Various dates)n)

Report of Financial Institution Census (MoFPED - 2006) o)

The Missing SACCOs Report (FRIENDS Consult, FSDU – 2007)p)

The Uganda Microfinance Sector Effectiveness Review(2004)q)

The Study of the Effects of the Regulation MDI Act on the Microfinance Sector in r) Uganda (FRIENDS Consult, FSDU - 2007)

Relevant MicroSave publications (Various dates)s)

FinScope Uganda Market Supply and Demand Report (FSDU - 2007)t)

Microfinance Services for the Very Poor: Promising Approaches from the Field – Poverty u) Outreach Working Group, SEEP Network

Linking Microfinance, Poverty and HIV/ AIDS: A Theoretical and Empirical Review – v) James Atta Peprah Department of Economics, University of Cape Coast, Ghana


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APPENDIX II: MORE INFORMATION ON MICROFINANCE PROGRAMS AND IMPACT

RMSP AND MSCLBased on government’s commitment to microfinance with funding from IFAD, In 2000, ADF extended UA 14.94 million47 to the GoU to support the Rural Microfinance Support Project (RMSP). As a five-year project designed to increase the rural poor’s access to microfinance services and to provide appropriate capacity building and technical assistance, the GoU contributed additional UA 4.6 million48 to RMSP. This was used to fund the three RMSP projects that include;

Extension of micro-credit and savings mobilization services via partner organizations in Uganda

Provision of capacity building for microfinance clients and project implementation staff and

Creation of Microfinance Support Centre Limited (MSCL) for wholesale lending to MFIs.

The European Union in collaboration with government of Uganda started in 1984 by implementing its Micro projects Program. This was later restructured in 1999 to form SUFFICE due to the poor performance of the program as a result of politicization. SUFFICE followed a financial system approach that supported the development of an inter-linked chain of sustainable and fairly efficient MFIs. SUFFICE was part of and benefited from the formation of a strong collaborative effort among donors, government, the central bank, microfinance practitioners, and capacity building providers (Microfinance Forum), chaired by the Ministry of Finance, Planning and Economic Development. Through its Center for Microfinance (CMF) under PRESTO spearheaded the training and technical assistance function to MFIs with a focus on microfinance best practices, business approach and group Lending.

SPEEDA follow-on of the highly impactful PRESTO project, the USAID-SPEED Project focused on building the capacities of the more mature MFIs to attain full financial sustainability and transform into regulated FIs The key aim was to nurture these MFIs and prepare them for transformation.

Rural SPEEDRural SPEED’s financial objective was to deepen and strengthen Uganda’s financial sector, through its microenterprise programme. This was in response to rural sector demand for financial services to meet the needs of micro, small, and medium enterprises. The programme supported Institutional capacity building, new product development, and services delivery. Through sub partnerships with financial organizations on a cost sharing basis, support ranged from tier I to tier IV organizations. Other specific activities financed included 47 (1UA = 1880.64 U Shs, and 1UA = USD 1.36421)- The Effects of Wholesale Lending to SACCOs In Uganda (2006)48 The effects of wholesale lending to SACCOs in Uganda


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feasibility studies, design and rollout of new loan and savings products, design and rollout of technology-based systems and savings mobilization campaigns. In addition, training, technical assistance, and provision of computers for rural branch startup were provided.

FSDUThe DFID’s FSDU project (2001- 2007), supported microfinance in Uganda with the goal to generate sustainable improvements in the livelihoods of the poor households. Aimed at reducing vulnerability to shocks, increased incomes, and employment creation’s FSDU’s objective was to deepen the capacity of Uganda’s financial sector to meet the financial needs of poor rural and urban households on a sustainable basis. FSDU’s funding focused on;

Improving the supply and demand for financial services,

Achieving better informed and protected consumers,

Improving products and delivery mechanisms that meet a wider range of needs,

Developing a top end financial sector of large regulated institutions serving the needs of poor clients, and

Increasing dissemination of relevant information to policy makers and practitioners.

The Microfinance Transformation Donors

Between 2000 and 2003, microfinance donors (EU, NORAD, AfDB, DIFD, and USAID)49, created a universal reporting tool (The Performance Monitoring Tool -PMT), now used by all donors in the country. Initiated by AMFIU and supported by the EU’s SUFFICE program, USAID SPEED project finalized the development of PMT in 2003, showing a commitment to more transparency and reducing the reporting burden on MFIs. During the same period, efforts to develop a regulatory framework for microfinance had started with the initial work supported by the Austrian – financed project in 1996. This was only to be later taken to another level by German Agency GTZ that provided technical assistance to the central bank in the areas of regulation and supervision. With multiple donors (World Bank, IFAD funded Rural Financial Services Programme (RFSP), MOP– MoFPED Project50, USAID’s Rural SPEED Programme and DFID’s FSDU among others,

49 Donor Good Practices (No.7 )– CGAP July 200350 Study of the Effects of the Regulation for Microfinance Deposit Taking Institutions on the Microfinance Sector in Uganda. 2007

Uganda’s Transformation Steering Committee

To help achieve the goal of donors supporting transformation in Uganda – coordination, support to the mature MFIs, technical assistance, and information exchange – the major donors formed a transformation steering committee. These donors included the World Bank, which is supervising Uganda’s Rural Financial Services Project on behalf of IFAD; USAID’ SPEED Project, DFID’s FSDU Project; GTZ/SIDA’s FSD Project; and MoFPED’s MOP. Coordinating all issues related to the transformation of MFI’s by December 2005, the committee members had provided US $ 4.7 million in support of 5 MFIs, four of which received the MDI license from BoU. Source: Joanna Ledgerwood- Transforming MFIs 2006


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with BoU in observer capacity), other stakeholders supporting the process, conferences and dialogues held led to the first policy statement to be issued on microfinance by BoU proposing the four- tier system. The Transformation Steering Committee (TSC) was formed to ensure transparency and as much fairness as possible, and to minimize duplication and arbitrage. By the time the MDI Act was passed, and MFIs transformed, its estimated from the file information of the TSC and Joanna Ledgerwood’s status notes that donors spent between US$ 470,000 and US$ 910,000 per MDI with an average of US$ 736,000 on transformation/ graduation.51

GTZ through its Financial System Development Project (FSD) plays a critical role of technical support to BoU in developing the legal framework for the regulation and supervision of microfinance. Co funded by Sida, GTZ on behalf of the German Development Cooperation since 1998 continues to support the reform process of Uganda’s financial sector and is currently implementing phase III of FSD started in June 2005 and will be running until 200852.

MOP DONORSTo foster effective coordination of microfinance and its sustainable expansion, Government set up the Microfinance Outreach Plan (MOP) in 2003/04 under the sponsorship of the EU, IFAD, DANIDA and Government of Uganda. This has comprised a number of initiatives including a coordinated approach towards funding capacity building initiatives in the country and a coordinated mechanism for providing grants for rural expansion of microfinance operations. Other initiatives include support for expansion of financial operations into rural areas (rural branches start up kit), and providing an infrastructure of private sector led extension workers (financial extension workers) in rural areas that offer;

community sensitization, - education of potential clients or consumers,- business and entrepreneurial training, - and savings and credit operation on how people should form savings and credit - cooperative organizations.

This period was also characterized by commercial funding for the loan portfolio of many strong and promising MFIs. Commercial banks began taking an active interest in the sector as a profitable business opportunity, mostly focusing on retail savings and wholesale lending to MFIs. Rather than develop their own loan products for the poor clients, commercial took on lending to top-tier MFIs. This was strengthened further by donor support to MFIs in form of guarantees to reduce the risks and encourage financial accessibility from the commercial banks.

Conclusions from the Regulatory Impact Assessment of the MDI Act

The enactment of the MDI Act and application of the Regulations have generated some positive results and also some challenges.

51 Study of the Effects of the Regulation for Microfinance Deposit Taking Institutions on the Microfinance Sector in Uganda. 200752 AMFIU, Microfinance Directory 2007


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Positive effects On the positive side, it has brought about the following benefits:

Increased access by low income people to safe saving/ deposit facilities

Created public confidence in the MDIs, putting them at a level of commercial banks in the perception of many of their clients

Increased competition for MDIs from other MDIs and commercial banks. This has caused MDIs to diversify their product range, look for innovation and improve customer care. At the same time, unregulated MFIs have also started improving their customer care to compete with MDIs, again to the benefit of the clients

Owing to regulation, MDIs have become stronger, more sustainable institutions with improving performance, improved efficiency of operations, professionalism and integrity..Clear ownership structures, which support more sustainable/ commercial operations, better quality of corporate governance and management practices

Better access to wholesale loan financing from commercial sources

Exposed the real weaknesses (governance, management and operational) in some institutions which were otherwise considered strong and profitable.

MDIs have provided good ground for development of capacity of local top level managers of financial institutions. CEOs of all MDIs are Ugandans compared to only 1 commercial bank (Orient Bank Ltd) with a Ugandan CEO out of the 15 commercial banks in the country.

Closer donor coordination, through the TSC, which has done a good job with transforming and transformed institutions

ShortcomingsImplementation of the Act and the Regulations has also not lived up to expectations in some areas:

The branch infrastructure requirements are perceived as being too costly limiting the opening of new branches in rural and remote areas, which was one of Government’s reasons for supporting regulation

The overall cost of transformation has been enormous, compared to what the then intending MDIs though it would cost.

Unintended undermining of the reputation of SACCOs and other MFIs, some of which are doing a good job in their communities. Because of the MDI status and improved image, some potential clients see Tier 4 MFIs as risky institution.

Unfavourable provisions prohibiting LIF intermediation and yet including it among the liabilities for calculation of capital adequacy


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Deposit mobilisation has been slower than was anticipated before the MDIs were licensed (although the number of savers grew impressively)

The expectations of the Government – to massively increase access to financial services through secure, regulated institutions – has not been fully met and is unlikely to be met in the near future through the MDI regulatory regime. Whereas Government expected a transformation of a financial market segment (the entire micro-finance industry) to make it more responsive to the financial service needs of low income/ poor people, what we have achieved through the MDI Act is a transformation of institutions. This has not yielded the results that would have been expected of a transformation of the entire microfinance industry.

Expectations of employees (which came later in the process of transformations) to own shares were not met.

Documented Impact of Microfinance Activities Poverty reduction

Microfinance has been seen as a tool for poverty reduction because its interventions are especially aimed at reaching the poor or low income market segments with the objective of improving their livelihood. Nanyonjo and Nsubuga53, records that MFIs in Uganda have since the 1990s gained wide recognition for the role they play in providing financial services to the low-income households, and their contribution to poverty alleviation. Andy Carlton et al54 focusing on the evaluation of microfinance as an instrument of the Austrian Development Cooperation (ADC), documents that clients of MFIs tend to cluster around the poverty line, and evidence from microfinance clients around the world demonstrates that access to financial services enables poor people to increase their household incomes, build assets, and reduce their vulnerability to crises. Ruth Goodwin-Groen et al55 examining the behaviour and actions of all microfinance stakeholders in the country between 1998 and 2003, notes that the core unifying value of the shared vision was a deep-seated conviction that poverty outreach and sustainability are twin pillars that must be achieved together, which helped the stakeholders to work together with the vision to building a retail infrastructure to reach massive numbers of the poor.

Many studies indicate that the major sources of poverty include lack of income, vulnerability to income fluctuations and powerlessness56. However the promotion and protection of incomes and empowerment of the microfinance clients leads to poverty reduction. Microfinance reduces rural families’ dependence on drought prone crops through diversification of their income generating activities, through providing capital for diversification of existing businesses and support to the creation of new ones.

53 Justine Nanyonjo and James Nsubuga; Recognizing the role of Microfinance Institutions in Uganda. Bank of Uganda Working Paper54 Andy Carlton et al microfinance in Uganda (2001)55 Ruth Goodwin- Groen et al. Uganda Microfinance Effectiveness Review. October 200456 Joanna Ledgerwood(2000)


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Promotion of financial access especially among the rural poor Uganda’s financial system is characterized by the co-existence of formal and informal financial markets. According to Mutesasira et al57 the formal financial markets mainly exist in urban areas and offer a narrow range of financial services. He also notes that they concentrate on providing working capital mainly to the medium and large-scale enterprises, inflexible in their operations with respect to the needs of the small-scale enterprises and the poor people in the rural areas who may not have collateral or well-written feasibility studies to solicit loans.

Access to financial services also allows the poor to cope with shocks or economic stress events once these take place. Clients of MFIs use loans to re-stock their businesses and to smooth consumption58. Ruth Goodwin- Groen et al documents that as at the end of 2003, 935,000 small savers and close to 400,000 borrowers in the country were served by microfinance. A study focusing on the impact of Austrian Development Cooperation’s microfinance interventions in Uganda (ADC) reports that 32 Financial Service Associations (FSAs) were established in different locations of the country to serve local, poor people and by mid 2003, a total of 14,000 people were reportedly served by the FSAs in Uganda. It concludes that this creation no doubt helped some previously un-served people to access financial services59. The same study reports that the establishment of Uganda Microfinance Limited (UML) branches in Kisoro and Kisiizi provided financial services to be accessible to all categories of people in the area. In Kisoro, there was no other formal financial institution apart from Stanbic Bank Uganda Ltd which mainly served civil servants, while in Kisiizi there was still none by the time to the study.

The FinScope Uganda study focusing on a nationwide survey of the demand for financial services reports that out of the 38 percent Ugandans served by financial institutions, commercial banks served 16percent while microfinance institutions served 22% of the population60. With a total of 1,271 outlets from 813 financial covering all the districts in Uganda, commercial banks outlets are only (12.9percent), while the rest are for microfinance institutions as indicated in the table below61.

Type of Institution Percent of Outlets (Branches)Commercial banks 12.9Credit Institutions 2.9Companies 9.5MDIs 7.7SACCOs 57.3NGOs 5.4SIDAs 4.3

57 MicroSave(2000)58 L and R Social Research (2001)59 ADC Study of the Impact of its Microfinance programs in Uganda (2007) 60 FinScope study (2007)61 Financial Institutions Census (2007)


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Where as tier1 and 2 hold the biggest portfolio volumes, MFIs have a wider spread in terms of geographical outreach.

Rani Deshpande et al focusing on demand for deposit services and the capacity of financial systems in Uganda, sights Pelrine and Katabalya62 that clients would prefer delivery services at the sub-district to satisfy their needs as savings clients. It also sights that many rural Ugandans find the nearest financial institution to be up to 60kms. The same study documents high demand for savings services but low usage of formal financial institutions which lag behind informal savings mechanism in fulfilling key client preferences63. However, MFIs are designed to serve micro and small scale business people who cannot obtain these services from the formal financial institutions because their business, saving levels and credit needs are all small.

Creation of employment opportunities Job creation in single -person enterprises appears negligible. However, when the total number of enterprises is combined, client households often create work for others. ADC study, reports that the establishment of UML branch in Kisoro created about 25 direct new jobs and a lot many others indirectly through catalyzing small and micro enterprises to come up64. The Census reports that out of a total number of 8,771 people employed by the financial institutions, commercial banks employed 42.7% while 67.3% was employed by microfinance institutions.

Enhancement of financial services awarenessAccess to financial information is important in helping consumers decide what and which financial service to consume. However, in Uganda, such information is scarce65. AMFIU as the information hub for microfinance institutions continues to strife to make this a reality. The introduction of the consumer education program is one of such efforts to promote financial service awareness and protect customers. Other mechanisms in the microfinance industry include;

Employment of the Financial Extension Workers by government under (RFSP) and,

Tier 4 rating services by PlaNet Rating

ADC reports that the creation of FSAs offered training to their members by Financial Services Association International Uganda (FSAIU) which to some extent raised their awareness as consumers of financial services. The basic skills and knowledge in management of Community Based Financial Organizations (CBFOs) were imparted to staff which can be built on by the succeeding SACCOs. Clients of microfinance institutions also testify that participating in these programs has made them acquire information that can enable them make informed decisions on financial services.

62 Rani Deshpande et al (2006). Country Level Savings Assessment – CGAP Savings Initiative 63 CGAP Focus Note No. 37; Safe and Accessible. Bringing Poor Severs into the Formal Financial System 64 ADC Study of the Impact of its Microfinance programs in Uganda (2007)65 Rani Deshpande et al (2006). Country Level Savings Assessment – CGAP Savings Initiative


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Promotion of educationOne of the first things poor people all over the world do with new income from microenterprise is to invest in their children’s education. Studies show that children of microfinance clients are more likely to go and stay in school longer. Incomes from microfinance activities allow poor people to plan for their future and send their children to school. To support this argument, many microfinance programs have developed new credit and savings products specifically tailored to school expenses like back to school loans. The ADC study reports that establishment of UML branches in western Uganda helped parents to take and keep their children at school, while the parents themselves attended further studies by making use of back to school loans66. USAID-AIMS67 focusing on the impact of microenterprise services reports that, client households invest more in education than non-client households. MicroSave study indicates that loans to education and health were repeatedly cited as the most valued results of access to credit by microfinance clients.

Empowering womenMicrofinance programs have generally targeted women as clients because they have often proved to be more financially responsible with better repayment performance than men. It has also shown that women are more likely than men to invest increased income in the household and family well-being. MFI programs through financing women are known to empower them to become more confident, more assertive, more likely to participate in family and community decisions, and better able to confront systemic gender inequities68. Appropriate program design can have a strong, positive effect on women’s empowerment, resulting in women owning more assets, having a more active role in family decisions, and increasing investment in family welfare. Care International Uganda documents that Village Savings and Loans Association (VSLA) has made women clients more confident and assertive and thus better able to confront gender inequities69.They have achieved considerable change as reflected by their control over the money they earned; ability to contribute to household income, their status in the household and community; self-confidence, business activity with decreased risk of de-capitalization and periodic shut-down; and improved household cash-flow management70.

Encouraging the of innovative technologyTechnology holds the potential to reduce the cost of offering services in close proximity to clients by bypassing expensive branch –based expansion models71. Whereas the same study documents that 15 percent of clients in Kampala already use ATM cards and 70 percent would be willing to use one if they were offered, the outstanding challenges is that adequate literacy and comfort with this technology may be difficult to be found among the low-income rural population. Microfinance institutions are however pilot testing innovative products that include the Remote Transaction System (UML and FINCA), where customers can conduct transactions72.

66 ADC Study of the Impact of its Microfinance programs in Uganda (2007)67 USAID- AIMS study, assessing the impact of Microenterpride Services (1998)68 Elizabeth Littlefield, Jonathan Murdoch, and Syed Hashemi January (2003) Is Microfinance an Effective Strat-egy to Reach the Millennium Development Goals? (2006)69 Elizabeth Littlefield, Jonathan Murduch, and Syed Hashemi January (2003) Is Microfinance an Effective Strategy to Reach the Millennium Development Goals?70 Care International in Uganda

71 Rani Deshpande et al (2006). Country Level Savings Assessment – CGAP Savings Initiative

72 Transaction balances include balance inquires, cash deposits and withdrawals, and electronic payment for goods.


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However, there is still room for innovation of more user friendly technology that be used by the rural active poor.

Improving health outcomes Illness is generally the most important crisis for poor families. Deaths in the family, taking time off from work when sick, and health-care related expenses can deplete incomes and savings. They can lead to selling assets and indebtedness. For microfinance clients, illness is often the main reason for failure to repay loans. However, households of microfinance clients appear to have better nutrition, health practices, than comparable non-client households73. Larger and more stable incomes generally lead to better nutrition, living conditions, and preventive health care. Increased earnings and financial management options also allow clients to treat health problems promptly rather than waiting for conditions to deteriorate.

Along with financial services, some microfinance institutions also provide health education, usually in the form of short, simple preventive care messages on immunization, safe drinking water, and pre-natal and post-natal care. Some programs provide credit products for water, sanitation, and housing. ADC study reports that UML clients (Kisoro and Kisiizi) of have received health insurance through UML’s partnership with MicroCare.

Source of government revenueSince commercialization of microfinance, it’s now offered with a more business approach generating profits which is an additional source of revenue to the government coffer. According to the Background to the Budget 2007/08 Fiscal year, the MDIs’ net profit was U Shs. 3.2 billion up from U Shs. 1.1 billion recorded on December 2005.

Influencing government policy The inclusion of microfinance in the PEAP and other national policy documents recognizes microfinance as critical for development. In the same spirit, the MTCS recognizes the role of microfinance in restoring public confidence in the financial sector, while emphasizing the need to work with savings –based institutions in rural areas. The implementation of the Microfinance Outreach Plan was aimed at expanding financial services and especially microfinance to the presently underserved rural areas74. This was as a result of government’s conviction that MF is a vehicle for poverty reduction. Government also supported the MDI bill with the expectation of rural financial outreach and affordable loans by the microfinance institutions. However an FSDU study carried out in 200775 reports that government expectations were not met according to government. Having been disappointed by the inability of market forces to deliver what it desired to see, government has now decided to concentrate its microfinance support to SACCOs under the Rural Financial Strategy Program. Under this new strategy, government will assist one SACCO per Sub County with capacity building and loan capital in order to create an extensive financial infrastructure for inclusive development76.

73 ADC Study of the Impact of its Microfinance programs in Uganda (2007)74 Poverty assessment report (2005)75 FSDU Study on of the effects of the regulation for microfinance deposit taking institutions on the microfinance sector in Uganda. July (2007).76 ADC Study of the Impact of its Microfinance programs in Uganda (2007)


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Accumulation of assets Access to financial services enables clients to build and change their mix of assets. Microcredit can be used for land acquisition, housing construction or improvements, or the purchase of animals and consumer durables. Clients can also use loans to make important investments in human assets, such as health and education.It is for this reason that poor people desperately need places to accumulate long-term lump sums in preparation for these life-cycle events.

However, though upheld as a tool for poverty reduction, microfinance has had far reaching challenges and negative economic implications. The down side of microfinance has been most especially as a result of its endeavor to mobilize resources necessary to reach / serve the rural underserved. According to ADC study, the franchise method used by FSAIU took all the executive powers of the FSAs, which meant potential benefits to the communities were forgone during the project period. The servant-master relationship between the FSAs on the one hand and FSAIU on the other also meant that all the resources, direction and other important aspects of the FSA were controlled by FSAIU. This created the dependency syndrome which has led to the creation of a bad culture of none payments in MFI that started as donor funded projects. Through the 10 percent fee on gross income of the FSAs, their institutional resources were also depleted at a time they needed financial nurturing most.

APPENDIX III: LICENSED FINANCIAL INSTITUTIONS SUPERVISED BY BOU AS AT 31ST DEC 2007

COMMECRIAL BANKS

“Without VSLA regular savings even of five hundred Uganda shillings (Ug Shs. 500/=) is impossible for us poor farmers. And accumulating savings is also impossible; we are encircled with many problems. I have never handled Fifty thousand shillings (Ug Shs. 50,000) in my life, VSLA is a dream.Source: Margaret Byabasaija- one of the VSLA members; as quoted by CARE International Uganda

Bank of Africa1. Bank of Baroda (U) Ltd2. Barclays Bank of Uganda Ltd3. Cairo International Bank4. Centenary Bank5. Citibank Uganda6. Crane Bank Ltd7. Diamond Trust Bank8. DFCU Bank Ltd9. Housing Finance Bank10.

National Bank of Commerce11. Orient Bank Ltd12. Stanbic Bank Uganda Ltd13. Standard Chartered Bank Uganda Ltd14. Tropical Bank Ltd 15. KCB Bank (U) Ltd16. Union Bank of Africa17.


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MDI’sFINCA Uganda 1. PRIDE Microfinance2. Uganda Microfinance Ltd3. Uganda Finance Trust4.

INSURANCE COMPANIESAIG Uganda1. East African Underwriters Ltd2. Goldstar Insurance Company3. First Insurance C. Ltd4. Paramount Insurance company5. Rio Insurance Company6. East African General insurance Co. Ltd7. Statewide Insurance Company8. Excel Insurance Company9. The Jubilee Insurance company of Uganda Ltd10. United Assurance11. Insurance Company of East Africa Ltd12. Microcare Insurance Ltd13. National Insurance Corporation14. Nico Insurance (U) Ltd15. Trans Africa Assurance16. Leads Insurance Co Ltd17. Phoenix Insurance Company of Uganda18. Lions Insurance Cl Ltd19.

CREDIT INSTITUTIONSCapital Finance Corporation1. Commercial Microfinance Ltd2. Mercantile Credit Bank Ltd3. Post Bank 4.

LEASING FIRMSEast African Development Bank1. DFCU Ltd2. .

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