Abstract: The Association of Microfinance Institutions of Uganda (AMFIU) in collaboration with the Financial Sector Deepening Project Uganda (FSDU) contracted FRIENDS Consult to undertake a study to track and report on the status of missing SACCOs and non- cooperative MFIs in Uganda. This followed a census of Tier 4 micro-finance outlets carried out in 2005/2006 by the Ministry of Finance, Planning and Economic Development with assistance from FSDU. The results of the Tier 4 census revealed a variance between the institutions that were found by the Census team and the ones legally registered (here referred to as the missing SACCOs and MFIs).

Tables of Contents

Introduction 1
Work methodology 3
Summary of responses/findings 8
The fate of missing SACCOs and MFIs 10
Observations and Conclusions 17
Recommendation 18

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Abstract: Regulation of the microfinance sector, especially the lower tier institutions, has always posed a challenge in most countries. Government of Uganda proposes to regulate Tier 4 microfinance institutions under two separate laws – one for SACCOs and the other for non-deposit taking Tier 4 MFs. Government has already drafted the two laws and discussed them with selected stakeholders. As the industry network and custodian of MF sound practices,

AMFIU would like to make technically informed recommendations on Tier 4 regulation. This necessitated a survey of relevant aspects nationally, compilation of lessons learnt elsewhere and compiling a report that would inform AMFIU’s recommendations. AMFIU contracted FRIENDS Consult to undertake the survey, whose findings and recommendations are presented in this report. The current financial sector regulatory framework leaves out Tier 4 MFIs, which are vital in provision of financial services to low income people but whose activities, unless regulated, could also disrupt people’s economic lives. Rationale for Tier 4 regulation lies in the need for continued financial sector stability, safety of people’s deposits, need for inclusiveness of regulation, borrower protection and overall national economic development.

Table of contents:

1 Introduction 5
2 Regulatory framework for the financial sector in Uganda 7
3 Experiences and lessons from other countries 13
4 Suitable regulatory regime for tier 4 institutions 18
5 Probable effects of the regulating tier 4 institutions 26

Abstract: Since the last booklet was produced in 2006, a number of developments have taken place in the microfinance industry in Uganda. The key developments include the trend towards commercialisation, winding up of Foundation for Credit and Community Assistance (FOCCASS), and imminent acquisition of Uganda Microfinance Limited (UML) by Equity Bank of Kenya. On the SACCO front, the industry has witnessed significant changes, with some SACCOs growing laterally by establishing branches. Coupled with this growth has been increased interest in regulating SACCOs. Despite these developments, key challenges have persisted in the area of outreach, and agricultural financing has continued to face service gaps. At the broader level, the government launched the “Prosperity for All Programme” which seeks, among other interventions to address inadequate access to financial services. Commonly known as “Bonna Bagaggawale”, the Rural Financial Services programme is designed to use a SACCO-per sub-county strategy to channel both agricultural and commercial loans at

below market rates to borrowers. The approach to “Bonna Bagaggawale” has raised serious concerns in the industry, particularly its emphasis on SACCOs whose impact is perceived to likely disintegrate the

once highly-coordinated microfinance industry. As a result, a number of donor projects have withheld or withdrawn their support, while the microfinance forum (MFF) that used to bring stakeholders together ceased to function. This booklet has been prepared to provide analytical issues, which may be used to guide

policy among all stakeholders. It is based on the presentations made during the workshop, issues arising, and the consultants’ views on these issues.

Table of contents

1. Microfinance at crossroads 1

2. Unity and coordination 7

3. Regulation and its implication to the poor 12

4. Professionalism and sound practices in microfinance: What has gone wrong in Uganda? 17

5. Challenges of resource mobilization and capacity building for microfinance institutions 23

6. Social performance assessment and management 27

7. Integrating technology and developing systems amidst limited resources into microfinance operations 30

8. Agricultural financing 32

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Abstract: Efforts to develop and expand the outreach to the poor and rural areas of Uganda’s micro-finance institutions (MFIs) have raised a number of important questions: What types of institutions can effectively improve access to financial services, especially in poor, rural areas? Can these MFIs be self-sustaining? Who is responsible for ensuring satisfactory performance of such institutions and the safety of savings by the poor in them? These issues arise from real-life-experience in Uganda with the operation and expansion of MFIs. Practitioners, development partners, and politicians and government agencies share these concerns ? although their perspectives and approaches may differ. This volume analyses microfinance regulatory frameworks in Uganda in such a way as to represent or inform perspectives of various stakeholders that have been involved in the process, including MFI apex organisations,1 relevant Government of Uganda agencies,2 international development partners, and microfinance practitioners themselves. Furthermore, given the stated interest of Parliament in the regulation of “Tier 4” MFIs that are not supervised by BOU, a number of parliamentarians have been included and informed during the consultative process. This volume provides the technical expertise and background needed to establish a regulatory framework for the Tier 4 segment of Uganda’s microfinance industry that will be cost-effective in protecting the savings of the poor and in ensuring that weak MFIs do not undermine the stability of the financial system – the two major justifications for public intervention in regulating financial institutions and activities. This introductory chapter provides an overview of the volume and guidance to its key findings. The next section (1.2) highlights the socio-economic and political background of microfinance in Uganda. Section 1.3 synthesises the key findings and recommendations regarding a future regulatory framework. Section 1.4 discusses the role of national apex institutions within such a framework. Section 1.5 describes the flow of chapters and annexes of this volume. Section 1.6 concludes by listing the recommendations.

Table of content

1. Tier 4 of the Micro finance market in Uganda 1

2. Strengthening and regulating Tier 4 Micro finance 17

3. Issues paper on regulation of Tier 4 Financial Institutions 37

4. References 79

5. Annexes 83

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Abstract: 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.

Table of content

1. Introduction 8
2. Country overview 10
3. The financial sector 15
4. Micorfinance Industry Development 32
5. Regulation of Financial Services 51
6. Funding Sources 59
7. Impact and Social Performance of Microfinance Activities 70
8. Conclusion 75

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