MFIs in Uganda

Microfinance Mechanisms and SME Problems in Uganda
A. S. Paul
Structure of the presentation

Typology of Ugandas Financial Sector Definition of Microfinance Role of Microfinance Microfinance institutions in Uganda Clients of Microfinance Institutions in Uganda 6. How Microfinance is delivered 7. Terms and conditions for delivering microfinance in Uganda 8. Issues in Microfinance Industry 1. 2. 3. 4. 5.
Ugandas Financial Sector

Formal: Licensed and Supervised by BOU
Semi formal: Registered as legal organisations but not Licensed and Supervised by BOU Informal not registered as legal bodies
Formal Financial Institutions

Central Bank: Monitory policy formulation & stability of financial sector Money markets: short term financing-banks, credit institutions, MDIs, Devt banks etc Capital markets shares, bonds etc
Semi formal Financial Institutions

SACCOS
Private companies money lenders NGOs
Informal Financial Organisations

Saving clubs Investment clubs Friends and relatives Traders and shopkeepers Informal money lenders Etc
Financial Sector
Financial institutions, products and rules and regulations governing the sector
Development of the Financial Sector in Uganda

No. of financial institutions No. and variety of financial products Legal status of Fis Outreach of Fis Operational efficiency of Fis Effectiveness of FIS
Definition of MF :The BOU Perspective

Microfinance Line of business a principal business of (a) acceptance of deposits ; (b) employing such deposits wholly or partly by lending or extending credit for the account and at the risk of the person accepting those deposits, including the provision of short term loans to small or micro enterprises and low-income households, usually characterized by the use of collateral substitutes, such as group guarantees or compulsory savings; (c) transacting such other activities as may be prescribed by the Central Bank;
Source :MDI Act 2003
Key Issues in the Definition of MF for Ugandas Context

All involve offering financial services(both credit and savings) to the low income people, who face discrimination and difficulty from accessing financial services from formal financial institutions Emphasizes both micro savings and micro credit Two types of Microfinance Institutions:
Regulated (with public deposit mobilization and intermediation and supervised by BOU) Non Regulated (without public deposit mobilization and not supervised by BOU.)
BOU Policy on MFIs

Basic features
Encourages broadening & deepening of the financial system Attempts to provide a linkage between established institutions and small outreach organizations Key concepts: Outreach and sustainability
BOU Policy on MFIs

Tiered framework
Tier 1: Commercial Banks (Min Capital -Shs.4bn) Tier 2: Credit institutions (Min Capital -Shs.1bn) Tier 3: Micro deposit-taking institutions (MDIs) (Min Capital Shs.500m) Tier 4: Microfinance institutions (MFIs) that do not take deposits (No BOU Set K-requirement) 1US $ is approximately Shs.1800 Capital is invested in assets approved by Bank of Uganda
Why not regulate Tier 4 institutions (MFIs)

Tier 4 institutions form a legitimate and well appreciated segment of the MF sector in Uganda Tier 4 are crucial to further outreach of the MF industry in Uganda Tier 4 provides a good learning process of managing finances and developing a savings culture
Why not regulate Tier 4 institutions (MFIs)

Tiered approach designed to give tier 4 institutions an incentive to grow and become sustainable before they upgrade to tier 3 institutions Regulating tier 4 institutions could stifle the innovation, growth and outreach of MF in Uganda
MDI Act 2003

MDIs can: Accept deposits from the public On-lend these deposits MDIs cannot: Engage in foreign exchange transactions Operate current accounts Use the term Bank in their name Onlend compulsory savings
MDI Act 2003

To qualify for an MDI license:
Company limited by shares Proven track record in microfinance Minimum paid-up capital of 25,000 currency points (currently one point is Ush20,000 or US$10) Capital adequacy ratio of 15% of risk-weighted assets No single owner with more than 30% shareholding Any person holding more than 10% shares must be approved by BOU Senior management and board members must be vetted and approved by BOU
Benefits of Regulation
For institution Diversify sources of funding Decreased reliance on donor funds/ whims Increase services to clients/Professional image Become more efficient and financially sound Gain competitive advantage over non-regulated MFIs For clients Savings services Potential reduction in costs For industry Increased outreach to rural areas
Role of Microfinance
Microfinance is a financial service for low income entities or people: Key roles include:
o Production process and exchange o Increasing productivity o Growing the economy o Affording people exploit opportunities o Acquiring basic needs o Reducing vulnerability and creating confidence
Who are the clients of MFIs
Delivery Mechanisms in Microfinance

Highly dynamic and institution specific!
Delivery mechanisms are practiced include:
1. 2. 3. 4. MFI Individual MFI Individuals in Groups MFI Groups Bank - MFI Individuals, Individuals in Groups or Groups
Choice of Delivery Mechanisms

Depends on a number of factors:
Birth place of MFIs ideas of providing microfinance Environmental factors Performance of the mechanism Vision and Mission of MFI Economic activities and the community set-up Regulatory framework Size of MFI Experience of clients with access to microfinance services Population density and cultural practices
Terms and Conditions of Product Delivery

Interest rate ad method of calculating it Loan size, maturity and payment terms Collateral Training Joint liability group Being economically active Financing start-up or existing business Providing a business plan
State of Microfinance in Uganda

Preliminary Findings of Census of MFI in Uganda 2006
In phase I, a total of 3,360 Tier 4 MFI Outlets in Uganda was listed. In phase II, a total of 1,248 Tier 4 MFI Outlets was mapped. In phase III and part of phase IV, a total of 741 MFIs and 1064 MFI Outlets have been found to be eligible MFIs and MFI Outlets under this study.
Emerging Issues from study

Several MFIs exist in records of Government institutions, but not operational. Substantial number of MFIs found eligible for this census may not be viable. There is widespread lack of qualified staff in the MFIs. This could be responsible for the poor record keeping observed in several MFIs. Poor infrastructure, making it difficult to access some MFIs
Emerging Issues from study

Compilation of financial reports especially by SACCOs and auditing methods fall short of the generally accepted international standards. Several MFIs exhibit governance and management inadequacies. A number of SACCOs appear to have been established to receive Government resources, which is in conflict with the principle of community resource mobilization for wealth accumulation and creation.
Challenges of Uganda Financial system

Under banked- only 2.3 million accounts!!! Bank dominated financial system. 4 foreign banks account for 70% of total assets. Disconnection between formal and semi formal/ informal financial. Low domestic savings mobilisation-Uganda has the lowest savings to GDP ratio in Sub Saharan Africa

The formal financial system largely excludes the poor particularly in rural areas. Poor people are mainly served by semiformal and informal institutions which are weak and not regulated, hence posing a risk to poor peoples savings, which threatens the financial system.

Limited financial instruments (treasury bills) Low return on savings due to high liquidity in banks and donor funded wholesale funds for onlending Weak capital markets which further constrains domestic resource mobilisation.
Challenges
The financial system in Uganda lacks information and confidence about contracts. Poor savings culture perpetuated by limited access to safe and sound institutions, confidence in the financial system etc.
Challenges of MFIs
Lack of protection of savings of clients Mistaken assumption that MF is a poverty savior Politicizing MFI services during elections Entandikwa Week monitoring and supervision of MFIs Over and Under regulation High operational costs lack of credit information Underdeveloped institutions

MFIs in Uganda

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MFIs in Uganda

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Microfinance Mechanisms and SME Problems in Uganda

Structure of the presentation

Ugandas Financial Sector

Formal Financial Institutions

Semi formal Financial Institutions

Informal Financial Organisations

Development of the Financial Sector in Uganda

Definition of MF :The BOU Perspective

Source :MDI Act 2003

Key Issues in the Definition of MF for Ugandas Context

BOU Policy on MFIs

BOU Policy on MFIs

Why not regulate Tier 4 institutions (MFIs)

Why not regulate Tier 4 institutions (MFIs)

MDI Act 2003

MDI Act 2003

Who are the clients of MFIs

Delivery Mechanisms in Microfinance

Choice of Delivery Mechanisms

Terms and Conditions of Product Delivery

State of Microfinance in Uganda

State of Microfinance in Uganda

State of Microfinance in Uganda

State of Microfinance in Uganda

State of Microfinance in Uganda

Emerging Issues from study

Emerging Issues from study

Challenges of Uganda Financial system

Challenges of Uganda Financial system

Challenges of Uganda Financial system

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