mfis in uganda

7/31/2019 MFIs in Uganda

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Structure of the presentation

1. Typology of Ugandas Financial Sector

2. Definition of Microfinance

3. Role of Microfinance

4. Microfinance institutions in Uganda

5. Clients of Microfinance Institutions in

Uganda

6. How Microfinance is delivered7. Terms and conditions for delivering

microfinance in Uganda

8. Issues in Microfinance Industry


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Ugandas Financial Sector

Formal: Licensed and Supervised by BOU

Semiformal: Registered as legalorganisations but not Licensed and

Supervised by BOU

Informalnot registered as legal bodies


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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 marketsshares, bonds etc


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Semiformal Financial Institutions

SACCOS

Private companiesmoney lenders

NGOs


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Informal Financial Organisations

Saving clubs

Investment clubs

Friends and relatives

Traders and shopkeepers

Informal money lenders

Etc


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Financial Sector

Financial institutions, products and rules

and regulations governing the sector


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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


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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 orextending 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


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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 facediscrimination and difficulty from accessingfinancial services from formal financialinstitutions

Emphasizes both micro savings and microcredit

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.)


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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


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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


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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 ofmanaging finances and developing asavings culture


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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 totier 3 institutions

Regulating tier 4 institutions could stifle the

innovation, growth and outreach of MF inUganda


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MDI Act 2003

MDIs can:

Accept deposits from the public

On-lend these depositsMDIs cannot:

Engage in foreign exchange transactions

Operate current accounts

Use the term Bank in their name Onlend compulsory savings


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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 beapproved by BOU

Senior management and board members must be vettedand approved by BOU


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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


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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

oGrowing the economy

oAffording people exploit opportunities

oAcquiring basic needs

o Reducing vulnerability and creating confidence


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Who are the clients of MFIs


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Delivery Mechanisms in

Microfinance

Highly dynamic and institution specific!

Delivery mechanisms are practiced include:1. MFIIndividual

2. MFIIndividuals in Groups

3. MFIGroups4. Bank - MFIIndividuals, Individuals in

Groups or Groups

Ch i f D li M h i


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Choice of Delivery Mechanisms

Depends on a number of factors:

Birth place of MFIs ideas of providing microfinanceEnvironmental 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


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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


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State of Microfinance in UgandaPreliminary Findings of Census of MFI in Uganda 2006

In phase I, a total of 3,360 Tier 4 MFI Outlets inUganda 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 tobe eligible

MFIs and MFI Outlets under this study.


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State of Microfinance in Uganda


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S f i fi i d


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Emerging Issues from study

Several MFIs exist in records of Governmentinstitutions, 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 recordkeeping observed in several MFIs.

Poor infrastructure, making it difficult to access

some MFIs


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Emerging Issues from study

Compilation of financial reports especially bySACCOs 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


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Challenges of Uganda Financialsystem

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



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The formal financial system largely excludes thepoor particularly in rural areas.

Poor people are mainly served by semiformal andinformal institutions which are weak and not

regulated, hence posing a risk to poor peoples

savings, which threatens the financial system.



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Limited financial instruments (treasury bills)

Low return on savings due to high liquidity in

banks and donor funded wholesale funds for on-lending

Weak capital markets which further constrainsdomestic resource mobilisation.


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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.


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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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