kai chen micro finance presentation
TRANSCRIPT
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Microfinance and SACCOs (Savingand Credit Cooperatives) in Uganda
Kai Chen - CFA, CPA
B.B.A. - Accounting, Economics and Finance Baylor University, 2002Master of Accountancy Baylor University, 2003
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Uganda Overview Population and Demographic
2
89.0% 88.0% 87.0%87.0%
11.0% 12.0% 13.0% 13.0%
16.7
24.4
27.328.2
5.0
10.0
15.0
20.0
25.0
30.0
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
1991 2002 2006 2007
% of Population living in Rural areas % of Population living in Urban areas Total Population (in Million)
CAGR: 2.8%
CAGR: 3.3%
CAGR: 3.5%
CAGR: Compounded Annual Growth Rate
Source: Uganda Microfinance Industry Assessment, 2008, The Association of Microfinance Institutions inUganda
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Uganda Overview GDP and Economic Sectors
3
44.3% 45.8% 47.1%
52.8%
35.1% 33.3% 31.9%
22.6%
20.0% 20.9% 21.0%24.6%
$335
$353
$400
$490
$300
$350
$400
$450
$500
$550
$600
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
04/05 05/06 06/07 07/08
ectorC
ontributiontoGDP(%)
Year
Services Agriculture Industry GDP Per Capita (US $)
Source: Uganda Microfinance Industry Assessment, 2008, The Association of Microfinance Institutions inUganda
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Population and Employment: Rural vs. Urban
4
As illustrated by previous slides, Ugandas population
continues to grow at a rapid rate with majority (87%) of peoplestill living in the rural areas
About 86% population and 77% of active labor force in ruralareas are employed or self-employed in agriculture sector
Despite large rural population and labor force, agricultureproductivity and share of GDP continue to decline
Rural population has not benefited from overall economicgrowth. In fact, over 96% of Ugandans who live belowabsolute poverty line (US $1) live in the rural areas
Source: Poverty Eradication Action Plan (PEAP) (2004/05-2007/8)
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State of Financial Service Industry in Uganda
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As of December 2007, there are 16 commercial banks, 4
credit institutions, 4 Micro-Deposit taking Institutions (MDIs)that constitute the formal financial service sector under thesupervision of Bank of Uganda
Source: Uganda Microfinance Industry Assessment, 2008, The Association of Microfinance Institutions inUganda
Tier I (Commercial Banks) Tier II (Credit Institutions) Tier III (MDIs)
Tier IV (All financial
Institutions notregulated by Bank of
Uganda)
Examples Barclays, Stanbic Banks,
Bank of Baroda, Equity Bank
Post Bank, Faulu Uganda,
CMF
Pride Microfinance,
Finance Trust, FINCA
SACCOs, NGOs, ASCAs,
VSLAs, ROSCAs
Services Provided Savings, Term Deposits, Short
and 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
Regulatory LawsMDI Act 2003
Co-operative Societies
Statute 1991Financial Institutions Act 2004
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State of Financial Service Industry in Uganda
6Source: Uganda Microfinance Industry Assessment, 2008, The Association of Microfinance Institutions inUganda
Tier I (Commercial Banks) Tier II (Credit Institutions) Tier III (MDIs)
Tier IV (All financial
Institutions not
regulated by Bank of
Uganda)
Services for Low
Income Market
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
Number 16 4 4 >1000
Number of Towns
Served55 18
44 towns (11 with no Tier 1
or 2)
33 towns (9 with no Tier 1,2
and 3)
Number of Branches 290 39 88 926
% of rual branches 35% 43% 63% 70%
As indicated by the table above, most established financial
institutions (Tier I and II) focus on urban markets and Ugandanssaving deposit base is disproportionately concentrated in Tier Ibanks (60%)
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Financially
Unserved, 62%
Informal
Financial
Groups, 17%
Formal Banks,
16%
MDIs, 2%
SACCOs, 2%MFIs, 1%
Access to Financial Services
7Source: Uganda Microfinance Industry Assessment, 2008, The Association of Microfinance Institutions inUganda
62.0%
52.0%
65.0%
38.0%
48.0%
35.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
Overall Urban Rural
Access to Financial Services
With Access to Financial Services No Access to Financial Services
Access to Financial Services by
Ugandans
Rural markets are severely underserved by financial institutions
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Major Barriers to access Financial Services for Low-Income and Rural Ugandans
8Source: Uganda Microfinance Industry Assessment, 2008, The Association of Microfinance Institutions inUganda
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 ruralcommunities, which makes services expensive for clients and lessattractive to financial institutions
Sustainability considerations for the institutions in rural and remoteareas where there is no critical mass to sustain delivery of services
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 low-income, less educated people) about
perceived complexity of financial services and banks and inability tospeak their language
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Private Sectors Initiatives to assist Low-Income andRural Communities
9Source: Uganda Microfinance Industry Assessment, 2008, The Association of Microfinance Institutions inUganda
To bridge the gaps, local and international NGOs have been active
in mobilizing rural communities and establishing informal financialservice providers at grassroots levels There are now more than 1,000 Village Savings and Loan Cooperatives
(VSLAs), Accumulated Savings and Credit Associations (ASCAs), RotatingSavings and Credit Associations (ROSCAs) in Uganda
Local communities have also formed their own Saving and CreditCooperatives (SACCOs) to facilitate savings and loans among themembers Formed, owned and operated by cooperative members within the communities,
SACCOs are highly suitable and effective for reaching out rural areas due totheir simple and cost effective structure, and their flexibility to meet members
needs
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Saving and Cooperatives (SACCOs) in Uganda
10Source: Uganda Cooperative Savings and Credit Union
Currently, SACCOs in Uganda are governed by Cooperative
Societies Statute of 1991 and Cooperative Societies Regulations of1992
Requirements for forming a SACCO: Minimum of 30 members
Register with Department of Cooperatives under Ministry of Trade
Form a Management Committee of SACCO Draft cooperative bylaws or constitution
How does a SACCO function: Each member must purchase a minimum number of shares as determined by
SACCO bylaw and constitution to partake SACCOs ownership and participate in
future profit sharing
As determined by bylaw and constitution, each member also saves monthly andsavings are usually split between voluntary and compulsory saving accounts
Once a member has sizeable savings and establishes his or her credit worthiness, amember can apply for a loan based on the shares/savings to loan ratio mandated bythe SACCO
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SACCOs Emerging Importance in Uganda
11Source: State of Microfinance in Uganda: 2008: Analyzing AMFIU Members; Uganda Microfinance IndustryAssessment, 2008, The Association of Microfinance Institutions in Uganda
2,656,671
1,071,582736,910
423,333 311,538 243,271
Banks - Tier I Credit institutions -
Tier II
Non-Deposit Taking
Financial Institutions
(NDFIs) - Tier IV
MDIs - Tier III NGOs - Tier IV SACCOs - Tier IV
Average Size of 1st Loan Given to Clients byInstitutions (Figures in Ugandan Shillings)
SACCOs are becoming increasingly important as they focus on serving
low-income clients and have potential to reach millions of people in ruralareas
However, lack of regulation and government supervision also contributes tofrequent failures of SACCOs. In 2005, there were 1,274 SACCOsregistered with the Department of Cooperatives. As of Dec, 2007, only 628
remaining active
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Rural Financial Services Program (RFSP) UgandaGovernments SACCO Initiative
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SACCOs potential has attracted Uganda governments attention. In
2006, the government initiated a new Rural Financial ServicesProgram, also known as Prosperity for All, or Bonna Bagaggawale
in local language
Rural Financial Services Program plans to use a SACCO per sub-county strategy to channel both agricultural and commercial loans
at below market rates to borrowers in every sub-county, in both ruraland urban areas
Under the plan, government-sponsored SACCOs will accessfunding from the government for commercial and agricultural loans
at 9% and 13%, and extend commercial and agricultural loans at13% and 17% respectively
Ugandan Parliament is also drafting a new SACCO law whichspecifically governs the formations and operations of SACCOS
Source: State of Microfinance in Uganda: 2008: Analyzing AMFIU Members; Uganda Microfinance IndustryAssessment, 2008, The Association of Microfinance Institutions in Uganda
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Rural Financial Services Program (RFSP) UgandaGovernments SACCO Initiative
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However, government's initiative has raised serious concerns
among the microfinance industry practitioners The initiative is politically motivated rather than market oriented:
By setting an interest rate ceiling that can be charged by SACCOs (and inevitably forother types of microfinance institutions and practitioners), the government indirectlyimpacts the profitability and sustainability of many existing MFIs
The government has yet to specify the targeted beneficiaries of the program, which
means not only the most vulnerable and marginalized economic groups (i.e. ruralwomen) will qualify for the program, but other people who already have access tofinancial services as well
Governments intervention creates potential moral hazard:
Government-backed SACCO members may access the loans under the assumptionthat governments fund doesnt need to be repaid and loan repayment rate will likely
suffer
SACCO members may no longer save for future investments, bur rather as means toqualify for a government loan.
Source: State of Microfinance in Uganda: 2008: Analyzing AMFIU Members; Uganda Microfinance IndustryAssessment, 2008, The Association of Microfinance Institutions in Uganda
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Lessons Learnt from Previous Ugandan GovernmentIntervention in Microfinance Industry
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Previous governments intervention only resulted in failures and market
disruptions: In mid-1980s and early 1990s, government intervened by introducing aSME (Small Medium Enterprise) loan program to rural farmers, whichultimately failed due to 1). Lack of market access by the farmers 2). Poorloan features 3). Inappropriate loan allocations to city/ town businessmen(who later defaulted) instead of the intended borrowers 4). Corruption and
misappropriation Other two interventions by the government in mid and late 1990s also failed
due to poor loan repayments (people take money as gift from the
government), poor implementation by local officials and corruption andmisappropriation
Since late 1990s, governments role has been as an enabler and promoter
of microfinance service, rather than a direct provider
In 2001, government completely pulled out of direct delivery of financialservices
Source: Uganda Microfinance Industry Assessment, 2008, The Association of Microfinance Institutions inUganda
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Uganda Microfinance Industry Growth with minimal GovernmentIntervention: 2000 2007
15Source: Uganda Microfinance Industry Assessment, 2008, The Association of Microfinance Institutions inUganda
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Opportunities and Challenges for Uganda Microfinance andSACCOs
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Although the impact of governments RFSP remains to be seen, the
microfinance industry faces significant challenges and opportunities: Challenges:
Radical change in focus and direction by the government, making it a directprovider of microloans to the people rather than a promoter of marketoriented microfinance
Concentration of MFIs in the urban and peri-urban areas and clientssometimes take out multiple loans from different MFIs, which increasesMFIs credit risk exposures
Inadequate rural outreach with limited financial products for agriculture
Insufficient human resource and weak organizational capacity as theindustry grows at a much faster rate than the actual development pace of
personnel and skills required
Lack of technology and tools such as computer and software for someinstitutions and insufficient knowledge and skills within some MFIs to fullyutilize their MIS and performance monitoring technology
Source: Uganda Microfinance Industry Assessment, 2008, The Association of Microfinance Institutions inUganda
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Opportunities and Challenges for Uganda Microfinance andSACCOs
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Opportunities:
Building upon the current and future laws governing the financialinstitutions, develop an integrated and comprehensive industry-wide self-regulatory system to promote transparency and accountability
Develop financial products suitable and sustainable for rural areas. MostMFI products and delivery mechanisms still do not suit or exist in ruralareas. There could be tremendous business opportunities as majority of
Ugandans remain unserved by financial institutions Effective resources sharing and performance benchmarking within financial
institutions across all Tiers to improve service delivery to the clients
Ugandas economy continues its impressive growth and more of the
countrys population move out of absolute poverty. Favorable
macroeconomic environment creates more demand for formal or informalfinancial services
Source: Uganda Microfinance Industry Assessment, 2008, The Association of Microfinance Institutions inUganda
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Outlook for Microfinance in Uganda
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Microfinance Industry in Uganda is currently at integration and
consolidation stage: In June 2008, Equity Bank, a Kenyan bank acquired Uganda Microfinance
Limited, the leading MDI of Uganda
Industry consolidation and integration continue as MDIs likely to move up toTier I or II institutions and stronger Tier IV institutions seek to transformdirectly into Tier I and II to avoid governments regulatory constraints on
Tier III MDIs
As industry matures and competition intensifies, many NGO sponsoredMFIs will fail or become increasingly insignificant if they dont achieve
profitability and self-sustainability in the next 5 to 10 years
The industry will also need to overcome the negative impacts of
governments direct intervention which has only failed and disrupted themarket in the past
If an appropriate regulation for Tier IV institutions can be implemented withstronger consumer education and financial literacy for the mass population,the industry will likely experience significant growth
Source: Uganda Microfinance Industry Assessment, 2008, The Association of Microfinance Institutions inUganda