The microfinance sector in Uganda reached a critical point in the late 1990s. A transformation was needed to ensure its sustainability. Since no donor could go it alone, the transformation became a collaborative effort.
The microfinance sector in Uganda reached a critical point in the late 1990s. Various donors had supported the expansion of the sector by providing grants for capacity building, technical assistance and loan capital amounting to more than US$ 40 million. By 2003 there were about 1500 microfinance institutions in Uganda.
As grants for loan capital dried up, it became clear that in order to improve and extend services, microfinance institutions would have to restructure and commercialise their operations to attract private capital. Drawing on the lessons learned in other countries, particularly in South America and Asia, the donors worked together to transform the larger unregulated microfinance institutions into regulated financial institutions so as to integrate them into the mainstream financial system. Regulation by the Bank of Uganda would enable these institutions to mobilise voluntary savings from the public and use the funds to make loans to their clients.
Preparations for reforming the microfinance sector began in 1998/9, although the need for transformation became urgent in mid-2003, when the Ugandan parliament passed an Act establishing a new type of institution, called a microfinance deposit-taking institution (MDI). The Act also set a time frame for prohibiting intermediation of compulsory savings (minimum savings required from clients before accessing a loan), which had previously been the major source of loan capital for most microfinance institutions. The MDI Act 2003 also disallowed non-licensed institutions from making loans using compulsory savings.
Effective coordination
It was clear that transforming the microfinance sector in Uganda would require massive capacity building at regulatory, board, management and operational levels. It was also necessary to upgrade the infrastructure, establish systems and controls, and prepare a regulatory framework, as well as to identify new sources of loan capital. In view of the magnitude of the task, effective coordination among donors was essential. By working towards a common objective, they indeed succeeded and the first MDI, FINCA Uganda, was licensed on 25 October 2004.
Although there had been some informal coordination of microfinance transformation, led by USAID’s Urban Support for Private Enterprise Expansion and Development (SPEED) programme, the Transformation Steering Committee (TSC) was formalised only in November 2004. The roles and responsibilities of the new partners, including the government’s Microfinance Outreach Plan and major development partners – the UK Department for International Development (DFID/FSDU), GTZ/Sida (Financial System Development programme, FSD) and USAID (rural SPEED) – and the criteria for selecting funding and non-funding members, were stipulated in a formal letter of mutual understanding.
Challenges
Over time, other members have joined the committee, including the Bank of Uganda, and EU and World Bank projects in the sector. The members meet quarterly to review progress and to address new challenges as they arise. The TSC set out to manage over US$ 2.5 million committed by its funding members, to be used for technical assistance, upgrading management information systems, acquiring communications equipment, and upgrading branch infrastructures.
The new face of microfinance in Uganda.
The TSC has so far assisted two institutions – the Uganda Finance Trust, which became a licensed MDI in October 2005, and Faulu Uganda, which is now finalising its licence application. Effective coordination requires a secretariat with skilled staff and resources. It also demands transparency among the members through sharing project documents, work plans and results.
The TSC has faced several challenges, including the underutilisation of grant funding for post-transformation activities due mainly to procurement guidelines, which the grantees deemed were too stringent and the process too slow. There have also been shifts in government policy away from a microfinance sector led by the private sector, to a member-based, public good approach. Today, the committee’s most urgent challenge is to formulate a way forward in view of the impending expiry in 2007 of several funding members’ projects, including DFID’s FSDU, USAID’s rural SPEED, and the EU’s SUFFICE programme.
All of these challenges, however, have provided invaluable lessons in adapting public sector/donor procurement procedures to the practices used in the private sector, in particular to ensure accountability in the use of grants, and empowering grantees to take charge of the procurement process.
Links
Association of Microfinance Institutions of Uganda (AMFIU)
Consultative Group to Assist the Poor (CGAP)
DFID Financial Sector Deepening Project Uganda (FSDU)
GTZ/Sida Financial System Development (FSD) programme
Ugandan Ministry of Finance, Microfinance Outreach Plan
USAID Rural Savings Promotion and Enhancement of Enterprise Development (SPEED) programme
Further reading
R. Goodwin-Groen et al. (2004) Uganda Microfinance Sector Effectiveness Review. Consultative Group to Assist the Poor.
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