THE STATE OF MICROFINANCE IN UGANDA the microfinance sector in Uganda, the GIZ financial sector...

2014/15

THE STATE OF MICROFINANCE

IN UGANDA

(c) AMFIU, 2015For comments or enquiries please contact:

AMFIUAMFIU House, Plot 679, Wamala Rd, Najjanankumbi (off Entebbe Rd)P. O. Box 26056, Kampala-UgandaTel. 0414 259176 / 0393265540Email: [email protected]: www.amfiu.org.ug

2014 / 2015

THE STATE OF MICROFINANCE IN UGANDA

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THE STATE OF MICROFINANCE IN UGANDA 2014/2015

ForewordOn behalf of AMFIU, I am delighted to present the second edition of the state of microfinance in Uganda. The report is based on the financial data from 50 institutions that consistently submitted their PMT reports to AMFIU in the period 2013-2014. These reports were then aggregated and analyzed using the Performance monitoring system – a central database housed at AMFIU. We are happy that the performance monitoring system has been fully developed and AMFIU is able to analyze financial data from institutions against relevant performance standards and peer groups. The feedback and recommendations we give to institutions helps them to further improve on their performance in the various financial aspects.

As a national network we appreciate the role of Gesellschaft für Internationale Zusammenarbeit (GIZ) and other stakeholders who have continued to play a key role in promoting transparency in the microfinance sector and supporting AMFIU in developing the PMS through which this report was produced.

The main reason for generating this report is to inform the MFIs and other stakeholders about the performance of the Microfinance industry in Uganda, identify the gaps and propose recommendations. The results from the available data indicate a higher positive growth in number of savers especially in regulated financial institutions in 2012 – 2014 compared to the number of borrowers. Interestingly, it was clear that more than 40% of the loan portfolio is to the female clients. This is an indication of the capability of women to combine both productive and reproductive roles in microfinance activities and society thus producing a greater impact on the quality of their lives. While the report analyses the performance of MFIs at the general level, it also presents the key sector emerging issues.

David T. Baguma

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The findings in this report clearly indicate that there is still a big untapped market of un- or underserved clients. The operation of the PMT/PMS is a big opportunity for MFIs and SACCOs to monitor their performance and therefore facilitate decision making which will lead to increased outreach and ensure sustainability of institutions.Usage of the PMT has spread well across Rwanda, Kenya, Tanzania and South Sudan.

It is our hope that the information in this report will contribute developing interventions that can lead to accelerated growth and improved financial inclusion in the microfinance sector in Uganda.

David T. BagumaExecutive Director AMFIU

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AcknowledgementsAMFIU wishes to acknowledge the contribution of editors and funders towards the completion of this report.

Sincere appreciation goes to all MDIs, Microfinance Institutions and SACCOs that shared their financial data with AMFIU through the Performance Monitoring Tool (PMT). This a clear sign of their commitment to transparency.

In addition AMFIU would like to thank SEEP network for it’s financial support in the data collection, analysis and publishing of this report.

The Gesellschaft für Internationale Zusammenarbeit (GIZ) for supporting efforts towards setting up a functioning performance monitoring programme within AMFIU and a national database for performance data as well as their great contribution towards the preparation of this report.

The Ministry of Finance, Planning and Economic Development for its support through the Rural Financial Services Programme (RFSP). AMFIU and RFSP jointly supported institutions to improve performance monitoring through the usage of PMT.

For the preparation of this report, AMFIU would like to acknowledge the contribution of Miriam Nanyonga, Jackie Mbabazi, Julia Kirya, Anne-Laure Behaghel, Kagaba J. Solomon, and Robert Ntalaka.

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Table of ContentsForeword iiAcknowledgements ivAcronyms 3Executive Summary 5

Chapter 1: 6Introduction 61.1 Association of Microfinance Institutions of Uganda 61.2 About Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) 61.3 About SEEP 6

Chapter 2: 82.1 Overview of the Economy 82.2 Overview of the Financial Sector 102.3 The Regulated financial institutions 112.4 The Microfinance Sector (Unregulated) 132.4.1 Commercial Banks in Microfinance 142.4.2 The Regulated Microfinance institutions (MDIs) 142.4.3 Non-Deposit Taking Microfinance Institutions 142.4.4 Savings and Credit Cooperatives (SACCOs) 152.4.5 Informal financial service Providers 152.4.6 Mobile Money Sector 152.4.7 The Wholesale Market 17

Chapter 3: 183.1 Government initiatives 183.2 Financial Inclusion 183.3 Agricultural Finance 203.4 Microfinance and HIV & AIDS 213.5 Social Performance Management 213.6 Credit Reference Bureau Services 27

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Chapter 4: 29Financial Performance Analysis 294.1 Introduction 294.2 Outreach 304.3 Portfolio Quality - Regulated Institutions, MFIs and SACCOs 354.4 Profitability: Regulated Institution, MFIs and SACCOs 374.5 Efficiency and Productivity: Regulated Institutions, MFIs and SACCOs 39

Chapter 5: 435.1 Assessment of Sector Risks and Challenges 435.2 Key Achievements and Opportunities 455.3 Recommendations 465.4 Conclusion 47

Participating Institutions 48

References 51

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AcronymsAMFIU Association of Microfinance Institutions of Uganda ASCAs Accumulated Savings and Credit AssociationsATM Automated Teller MachineBn/b BillionBoU Bank of UgandaCGAP Consultative Group to Assist the PoorCI Credit institution CMF Community Managed MicrofinanceCRB Credit Reference BureauDCO District Commercial OfficersDE Debt to Equity DFCU Development Finance Company of UgandaDFID Department for International DevelopmentEFC Entrepreneurs Financial CentreFI Financial Institution FIA Financial Institutions Act 2004FINCA Foundation for International Community AssistanceFTB Finance Trust BankFSD Financial System DevelopmentFVSLA Farmers Village Savings & Loans associationGDP Gross Domestic Product GIZ Gesellschaft für Internationale Zusammenarbeit GmbHGNI Gross National IndicatorGoU Government of UgandaICT Information and communication technologyIIE Informal Information ExchangeIFAD International Fund For Agricultural DevelopmentMDI Microfinance Deposit-taking Institution MFF Microfinance Forum

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MFI Microfinance Institution MoFPED Ministry of Finance, Planning and Economic Development MSCL Microfinance Support Centre Limited MSMEs Micro,small and medium enterprisesMNO Mobile Network OperatorsMTIC Ministry of Trade, Industry and Cooperatives NBFI Non-Bank Financial InstitutionOER Operating Expenses RatioOSS Operational Self-SufficiencyPAR Portfolio at RiskPMS Performance Monitoring SystemPMT Performance Monitoring ToolPRIDE Promotion of Rural Initiatives and Development EnterprisePROFIRA Project for financial inclusion in rural areasPPI Progress Out of poverty indexRFSP Rural Financial Services ProgramROA Return on AssetsRIs Regulated InstitutionsROSCAs Rotating Savings and Credit AssociationsSACCA Savings and Credit Co-operatives of AfricaSACCO Savings and Credit Co-operativeSEEP Small Enterprise Education and Promotion NetworkSPM Social Performance ManagementUBOS Uganda Bureau of Statistics UCA Uganda Cooperative AllianceUCCFS Uganda Central Cooperative Financial ServicesUCSCU Uganda Cooperative Savings and Credit UnionUGAFODE Uganda Agency for Development UGX Uganda ShillingsUS$ United States DollarVSLAs Village Savings and Loan Associations

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Executive SummaryThis report presents the performance of MFI’s in Uganda and as the previous report, it aims at informing the MFIs and stakeholders about the performance trends of individual institutions and peer groups. The objective of the report is to clearly present the performance of the Microfinance industry in Uganda, identify the gaps and propose the way forward.

This Report gives an overview of 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 performance status of the microfinance industry.

The report shows the improvements in the microfinance sector, its regulation and the current status. The main objective of the report is to clearly present the performance of the Microfinance industry in Uganda which is reviewed in chapter 4, and additionally the risks, challenges and opportunities which are summarised in chapter 5.

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Chapter 1: IntroductionChapter 1 of this report presents a description of the key institutions that have made a contribution in the production of this report. It highlights the role of AMFIU in the microfinance sector in Uganda, the GIZ financial sector programmes and SEEP Network, the international network that supports AMFIU through the responsible finance through local leadership programme.

1.1 Association of Microfinance Institutions of Uganda

The Association of Microfinance Institutions of Uganda (AMFIU) is an umbrella body for microfinance institutions in Uganda and was founded in 1996 to promote professionalism in the microfinance sector in Uganda. AMFIU has steadily grown to become a true voice of the industry. By the end of 2014, AMFIU had 140 members.

1.2 About Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ)

GIZ is the Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH. One of the focal areas of technical cooperation between Germany and Uganda is Agricultural and Rural Finance. On behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ), GIZ has been supporting the financial sector in Uganda since 1998. One of the partners of the GIZ AGRUFIN programme is AMFIU. The partnership with GIZ and AMFIU aims at increasing the transparency of the microfinance sector.

1.3 About SEEP

The SEEP Network is a global network of international practitioner organizations dedicated to combating poverty through promoting inclusive markets and financial systems. SEEP represents the largest and most diverse network of its kind, comprised of international development organizations and global, regional, and country-level

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practitioner networks that promote market development and financial inclusion. Members are active in 170 countries and reach nearly 90 million households.

The partnership with SEEP and AMFIU seeks to promote more transparent business environments built on principles of responsible finance.

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Chapter 2:Overview of the financial sector in Uganda2.1 Overview of the Economy

According to the population and housing census 2014, Uganda is now home to 34.9 million people. The greater percentage (77%) is estimated to be living in the rural areas and mainly engaged in agriculture for its livelihood. Over the years, Uganda’s GDP has been growing steadily and by end of 2014, it was USD26.31 billion as seen in table 2.

Table 1: Uganda’s GPD Growth

The country has seen a consistent economic growth based on continued investment in infrastructure, improved incentives for production and exports, lower inflation and better security of both persons and property.

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Although agriculture dominates the economy in terms of employment, its potential is largely untapped and its direct contribution to GDP, estimated at 23%, is lower than that of the industry and service sectors. However, the relevance of agriculture to these two major sectors as a source of raw materials and end user cannot be over emphasised and hence remains very key to Uganda’s economic growth. Agricultural inputs and product markets were liberalized in an attempt to improve the efficiency of service delivery. According to the population and housing census 2014, over 80% of Uganda’s population in rural and urban areas derive their livelihood directly from agriculture. Considering this, agriculrural performance has direct implications for real GDP growth rate, per capita income, rural employment incomes, and poverty reduction.

Table 2: Economic and Development Indicators For Uganda11

Indicator 2003 2006 2009 2012 2015Population, total 25.3m 27.2 30.7m 34.1m 34.9mGNI per capita, PPP (current international $) 790 890 1010 1120 1752GDP (current US$) 6,34m 9,98m 15,80m 19.88m 27bnGDP growth (annual %) 6.47 10.78 7.24 3.43 6.3Life expectancy at birth, total (years) 48 54 56 58 54.5Agriculture, value added (% of GDP) 26.14 25.59 24.68 - 23.1

The service sector, comprising the micro, small and medium enterprises (MSMEs), is relatively large and contributes almost 50% of the country’s GDP and employing approximately 2.5 million people which is equivalent to 90% of total non-farm private sector workers. Uganda’s MSMEs are largely concentrated in urban areas and engaged in hospitality and entertainment, education, wholesale and retail trade, manufacturing, finance and insurance, health, social work, furniture, agriculture, professional services, and Information and Communication Technology (ICT).

Uganda’s MSMEs are predominantly informal with young enterprises, majority of which are aged between 1 and 5 years with less than 10% of the enterprises having operated for more than 20 years. Most of the MSMEs are sole proprietorships which constitute 43% and private limited liability companies that comprise 33%. Others include partnerships (18%), associations (2%), cooperatives (3%) and NGOs (1%).

1 http://data.worldbank.org/country/uganda

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2.2 Overview of the Financial Sector

The financial sector in Uganda comprises of regulated and un-regulated financial institutions, Development Banks, Forex Bureaus, Insurance Companies, Pension Funds, mobile money service providers and Capital Markets. There is also the wholesale finance market which plays an important role in capitalising and building the capacity of financial institutions.

It is structured in a four tier system and includes regulated and non-regulated financial institutions. • Tier 1 includes Commercial Banks which are 25 in number and the capital

requirement is UGX. 25BN. • Tier 2 consists of credit only financial institutions and these are 4 in number and

the capital requirement is UGX.1BN. The first 2 Tiers are regulated under the Financial Institutions Act of 2004 and

supervised by the Central Bank. • Tier 3 includes Micro finance Deposit Taking Institutions (MDI’s) and they are 5

in number and their capital requirement for establishment is UGX.500 Million. These are also regulated and supervised by the Central Bank and operate under the MDI Act of 2003.

• Tier 4 includes different financial institutions (semi-formal and informal) and these are not regulated.

The table below shows a summary of the Uganda financial sector;

Table 3: Categories of Institutions

Tier Type of institution Applicable law Regulator Number Capital Requirements

Tier 1 Commercial Banks Financial Institutions Act 2004

Bank of Uganda

25 UGX 25 Billion

Tier 2 Credit Institutions Financial Institutions Act 2004

Bank of Uganda

4 UGX 1 Billion

Tier 3 Micro-deposit taking institutions (MDIs)

MDI Act 2003 Bank of Uganda

5 UGX 500 Million

Tier 4 Other MFIs and SACCOs

Companies Act, NGO Act, Cooperative Societies Act, Money Lenders Act

None Over 2,000

Not specified

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These financial institutions are also categorized as formal, semi-formal and informal financial institutions. The formal institutions are those that are regulated by the central bank and include the commercial banks, credit institutions and the MDIs. The semi-formal institutions include Savings and Credit Cooperative Associations (SACCOs) and other non-deposit taking financial institutions. These are entities incorporated under the general business laws in Uganda but their operations are not regulated under the financial sector laws. The informal financial institutions comprise all those that are not independent legal entities but with operations which are recognised and in favour of community development. These include various types of associations and community based organisations such as Village Savings and Loans Associations (VSLAs), Rotating, Savings and Credit Associations (ROSCAs), investment and savings clubs.

Since 2009, there has been a tremendous evolution in mobile money services that has changed Uganda’s financial landscape to include a large proportion of the population that was formerly excluded from the financial services sector.

There seems to be an increasing preference for formal non-bank financial institutions, in both rural and urban areas, which, looking at the figure below, can be explained by the increasing usage of mobile money services.

CHART 1: Financial Services inclusion with mobile money (2013)

Source: Finscope 2013

2.3 The Regulated financial institutions:

2.3.1 Commercial BanksThis includes commercial banks which are authorized to hold checking, savings and time deposit accounts for individuals and institutions in local as well as international currencies. They are also authorized to buy and sell foreign exchange, issue letters of credit and advance loans to customers.

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According to the Bank of Uganda Report on “Status of Financial Inclusion in Uganda”, the overall physical network of Uganda’s banking systems’ continued to experience sustained expansion with the total number of bank branches increasing from 167 in 2004 to 658 in 2013. There was also a substantial increase in the number of ATMs from 152 in 2004 to 813 in 2013 as shown in the diagram below:

CHART 2: Number of Bank Branches and Atms

Source: BOU

The commercial banks that have a bigger portion of their portfolio in microfinance include Centenary Bank and Finance Trust.

2.3.2 Credit Institutions: This category includes credit and finance companies and they are not authorized to establish checking accounts or trade in foreign currency. They are authorized to take in customer deposits, establish savings accounts, and issue collateralized as well as non-collateralized loans to customers. Post Bank and Opportunity Bank Uganda are the main Credit Institutions offering microfinance services.

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2.3.3 Micro-Deposit Taking Institutions (MDIs):These include microfinance institutions that are allowed to take deposits from their customers in form of savings accounts. However, they are also not authorized to offer checking accounts or trade in foreign currency.

The regulation and supervision of these institutions is vested in the Bank of Uganda. It conducts on-site supervision of these financial institutions using a risk-based supervision methodology and off-site surveillance through periodic reporting.

2.4 The Microfinance Sector (Unregulated)

As part of the financial sector, the microfinance market plays a big role in enabling the low income section of the population access financial services. It emerged as a market in the early 90’s during which it was dominated by a few institutions, mainly NGOs, government credit programmes and specialized financial institutions including one commercial bank and about five MFIs serving about 120,000 clients. Overtime, the market has registered a sizeable growth in terms of number of institutions and clients. By early 2000, and with clients increasing to over 1,000,000, the sector had started attracting competition from commercial banks that had recognized the business potential in delivering microfinance services.

There is evidence of increased private sector investment in microfinance as more MFIs prepare for regulation in order to access savings as a more reliable and cheaper source of funding. There are also increased business partnerships between Banks and MFIs – an attempt at linkage banking and in some cases, takeovers as banks try to downscale into the microfinance. Wholesale lending has also been stepped up as MFIs seek commercial or near commercial loans and four wholesale financial institutions operate in Uganda i.e Stromme Microfinance East Africa, Oikocredit, Microfinance Support Centre ltd and Uganda Central Cooperative Financial Services. Some MFIs access funds in the form of wholesale loans and overdraft facilities from commercial banks.

To accelerate professional growth in the sector, attention has been turned to putting in place mechanisms for regulation, performance monitoring as well as promoting sound practices. To demonstrate its resolve to support the growth of the microfinance sector, the Government of Uganda created the microfinance department in the Ministry of Finance Planning and Economic Development (MFPED) which has now been upgraded to a Financial Services department.

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The Government with support from the Microfinance Forum has stepped up efforts to regulate the entire sector and important strides have been taken in drafting the Microfinance Bill which includes the establishment of the Microfinance Regulatory Authority. The sector is now moving along the lines of financial inclusion characterized by the promotion of Social Performance Management and Client Protection Principles as well as integration and support to community financial services. This is a big step from the previous definition of sound practices where emphasis was on financial performance.

Categories of Microfinance Institutions

2.4.1 Commercial Banks in MicrofinanceWith 25 commercial Banks and a total of 512 branches by end of 2014, the banking sub-sector commands the biggest market in the financial service delivery. However, their participation in microfinance has been limited with only two key participants: Centenary Bank and Finance Trust Bank (FTB) and these are currently members of AMFIU. Only FTB has provided data for the analysis in this report, which will be done with the other regulated microfinance institutions.

2.4.2 The Regulated Microfinance institutions (MDIs)Apart from the commercial banks, other regulated financial institutions include Credit Institutions and MDIs. Only two credit institutions; Post bank (U) Limited and Opportunity Bank (U) Limited offer microfinance, as well as five MDIs; Pride Microfinance Limited (U), UGAFODE, FINCA (U), EFC (U), and YAKO Microfinance Limited with a total of 130 branches countrywide.

2.4.3 Non-Deposit Taking Microfinance InstitutionsThe non-deposit taking Microfinance Institutions are part of the Tier 4 institutions incorporated under the general business laws in Uganda. They are registered as Companies or NGOs, but their operations are not regulated under any specific financial sector laws. There are many such institutions but because of the lack of a regulatory framework, the non-deposit taking MFIs operating in the country can only be identified by level of association with the national apex as paid up members or applied for membership. AMFIU provides the only form of self -regulation in the industry through a Code of Conduct (CoC) for its members. This is important because self-regulation ensures that institutions protect their existence through compliance to the CoC which AMFIU enforces.

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2.4.4 Savings and Credit Cooperatives (SACCOs)Since the government introduced a policy to promote SACCOs as a strategy for increasing financial outreach in rural areas, the number of SACCOs has grown with the cooperative department putting the current figures at 2,176 SACCOs registered to-date. Despite their potential to enhance financial access for the low income population especially the small scale farmers, the competitiveness of SACCOs has been greatly affected by poor management. There are several apexes of SACCO’s supporting several capacity building initiatives. To boost these efforts, the government of Uganda through the Project for Financial Inclusion in Rural Areas (PROFIRA) and Uganda Cooperative Alliance (UCA) have developed strategies to enhance the management of SACCOs. PROFIRA has a component of SACCO strengthening where private sector service providers will be engaged to work with SACCOs in strengthening their capacity while UCA in collaboration with its members have established a training for cooperatives to deal with issues of capacity building.

2.4.5 Informal financial service ProvidersAs the industry focus shifts to financial inclusion, informal service providers are increasingly becoming part of the microfinance sector. Currently, there are efforts to promote Village Savings and Loan Associations and other Community savings interventions as viable models for community financing. Although evidence is scanty, these informal groups are proving to be viable alternatives to the formal financial sector and promoting them is a critical agenda of all stakeholders. Currently there are several efforts to promote different community financing models in the country, the main one being the CARE VSLA model. GIZ and UCA have adapted the VSLA to focus specifically on farmers (FVSLA) and are promoting linkages with the formal financial Institutions. Stromme and West Nile Private sector are also promoting a community managed microfinance (CMMF) model in the region.

2.4.6 Mobile Money SectorAccording to the Bank of Uganda, “Mobile Money” is e-money available to a user to conduct transactions through a mobile phone. Currently, mobile money services are offered by the Mobile Network Operators (MNOs), as well as other mobile money service providers, who operate mobile money services using the MNOs’ networks – in partnership with licensed institutions to offer the mobile money services. The rapid growth of the mobile money service demonstrates the financial inclusion potential of the service.

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Mobile Money Agents- Distribution

Source: Brand Fusion Ltd & Gates Foundation

The Bank of Uganda Mobile Money Guidelines came into force on

October1, 2013.

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2.4.7 The Wholesale MarketThe wholesale microfinance market is growing alongside the retail microfinance both in terms of portfolio and products. There are a number of local and off-shore lenders operating in Uganda, The market leaders have not increased and remain Oikocredit, Stromme Microfinance East Africa, Microfinance Support Centre and Uganda Central Cooperative Financial Services. The other off-shore lenders operating in Uganda include: Triple Jump, Microvest, Symbiotics, etc. Most of the wholesale lenders provide capacity building and technical assistance to the MFIs in addition to the loan funding.

Table 4: The Wholesale Microfinance Market

Institution Products Major clientsOikocredit Credit lines for commercial and

agriculturalBanks, MDIs, MFIs, SACCOs, SMEs

Stromme MF EA

Asset Finance, agriculture and commercial wholesale credit

Banks, MDIs, MFIs, SACCOs

MSC ltd Agriculture, commercial wholesale credit

MDIs, MFIs, SACCOs, SMEs

UCCFS Agriculture and commercial wholesale credit

SACCOs

Commercial Bank

wholesale creditOverdraft Facilities

MDIs, MFIs, SACCOs, SMEs

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Chapter 3:Current and Emerging Issues3.1 Government initiatives

The Government of Uganda has continued to support the development of the microfinance sector through restructuring the Department of Microfinance by renaming it the Financial Services Department in a bid to accommodate insurance, pension schemes and other services.

In order to provide a conducive environment that can facilitate the microfinance sector to grow sustainably and with increased confidence, the Government, through the Ministry of Finance has put a lot of effort in ensuring that the Tier 4 Bill is concluded and enacted into law. It is hoped that implementation of this law will enhance professionalism in the microfinance sector and thus help to build stronger and sustainable institutions. However, this is still work in progress.

Through PROFIRA, the Government is supporting the strengthening of SACCOs and Community Groups especially in areas where the SACCO strategy has not been effective. The project is also supporting the establishment of a Tier 4 regulatory framework.

3.2 Financial Inclusion

According to the Global Findex 2014 report, access to financial services in Uganda has improved significantly over the last decade, which has been attributed to rapid expan-sion of mobile-money services. According to the same report, the share of individuals operating a bank account has remained stable, at around 20% in recent years. In addi-tion, rural areas continue to suffer from low coverage of formal financial-services out-lets, despite Government’s efforts to promote the establishment of informal financial institutions, such as SACCOs.

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However, interest in and deliberate efforts to promoting financial inclusion in Uganda has grown dramatically in recent years. More financial services, especially credit and savings, are now provided to individuals and enterprises. However, according to the 2013 Uganda FINSCOPE study, this has mainly been enhanced by the development of the informal financial sector resulting into a significant percentage of the population gaining access to financial services through the informal and semi-formal financial sector as shown in the figures below;

CHART 3: Informal Sector Growth

Source: Finscope 2013

New technologies such as Mobile Money; Mobile Banking, ATMs; POS Machines, and e-banking have also helped broaden access to financial services, including savings, money transfers and payment products and services/utilities. In general, the proportion of financially excluded population has steadily reduced over the years although economies still grapple with the challenge of quality and usage of financial products and services. According to the 2014 FINSCOPE study, 56% of adults were using mobile money services although only 34%were formally registered with the service providers. Many financial Institutions are leveraging on this success by partnering with mobile phone network operators as a channel to broaden accessibility and outreach to their target unbanked customers.

However, low and volatile income levels, inflationary environments, high illiteracy rates, inadequate infrastructure, governance challenges, and the limited competition within the banking industry as well as high cost of banking are some of the factors

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impacting on the development of the formal financial sector and thereby limiting its outreach.

Although the lack of cheaper funding from banks to micro and small enterprises has been partly compensated by the growing number of microfinance institutions, the latter still do not typically finance long term growth, as they mainly offer short term finance. In addition, the MFIs are themselves constrained by their limited funds, and the high cost of refinancing through the formal banking sector, which makes their funds more expensive.

The Government of Uganda has proposed several amendments to the current laws governing the financial sector, which would allow financial institutions to make use of agents to reach out to a greater number of customers. However, the appearance of many fraudulent MFIs, as well as a continued sense of a lack of transparency and competition in the banking sector, has eroded public confidence in many financial products offered by formal and informal institutions alike. These developments prompted several stakeholders, including government, the BoU and AMFIU to embark on a confidence-building exercise which aimed at improving financial literacy and consumer protection around the country. If successfully implemented, these efforts have the potential to clarify rules on consumer protection and empower consumers to make more prudent choices regarding their personal finances. This, together with a microfinance regulatory framework is able to balance prudent regulation with innovation and increased competition and this has the potential to transform Uganda’s financial sector and put the country at the forefront of financial inclusion in Sub-Saharan Africa.2

3.3 Agricultural Finance

Over the years, there has been increasing importance of developing agricultural finance as a viable approach to sustain income generation of rural livelihoods and thus alleviate poverty. With large parts of Uganda’s population being employed in agriculture, fostering sector growth is crucial to sustain economic development. Agricultural finance goes beyond the scope of regular micro and small entrepreneurial financing, as it requires a high degree of specialisation and adaptability to the needs of each respective value chain and the different stages thereof.

2 Global Microscope 2014

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By providing information on the different options with which agricultural financing can support rural households to generate higher incomes, AMFIU aims at contributing to the transition of Uganda’s agricultural sector from subsistence to commercial farming. The support offered by AMFIU in the form of raising awareness, providing information and recommendations to reach this goal is critical.

3.4 Microfinance and HIV & AIDS

In Uganda, the shift of HIV infection from younger to those in their most productive age especially those aged 24 - 49 years has become a concern for the private sector including the microfinance industry.

Poor families, the priority target group for Microfinance Institutions are particularly vulnerable to the effects of the HIV&AIDS epidemic given the limited options to cope with the economic impacts of the disease. In addition, the affected families who are typically clients of MFIs have had a diminished ability to pay back the loans on time. This has negatively impacted on the productivity of Microfinance Institutions and gradually undermined both their operational and financial sustainability. HIV/ AIDS has continued to affect people in their most economically productive years, most of whom are clients of Microfinance Institutions. It was therefore prudent for the sector to be an active player in addressing the challenges paused by HIV and AIDS.

With Support from HIVOS and Stop AIDS Now (SAN!), AMFIU in partnership with the Agency for Cooperation and Research in Development (ACORD), and NAFOPHANU, the umbrella body of all organizations, networks and groups of People living with HIV and AIDS (PLHIV) in Uganda are implementing a financial inclusion programme aimed at enhancing the capacity of Microfinance Institutions in Uganda to reduce the impact of HIV and AIDS on their clients and the microfinance industry.

3.5 Social Performance Management

As social businesses, MFIs apply commercial means to achieve social ends. Effective performance management in microfinance requires both a social and financial perspective. The practical steps MFIs need to develop their strategy, set objectives and align all their systems to achieve their dual goals are the essence of Social Performance Management (SPM). Some MFIs focus on the poor but others serve different groups of vulnerable clients like women, Youth, conflict affected areas, the urban poor, people with disabilities etc. These Institutions must demonstrate that they are achieving

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their social goals as stated in their mission. MFIs that recklessly pursue growth and profitability can miss out on serving the different client needs and different segments. Responding to target client needs and preferences is necessary in order to build and retain a strong client base, achieve sustainability, grow and be competitive in the long run.

The increased awareness on social performance management among AMFIU members and generally in the sector has led to a big rise in the demand for social performance support services. With SPM, which encompasses the principles of client protection, MFIs/SACCOs understand better the methodology to satisfy their clients’ needs, monitor progress (improvement) of their clients and at the same time remain sustainable through increased client loyalty and retention. Many stakeholders, both nationally and globally have embraced the importance of SPM and according to the AMFIU member satisfaction survey, it was one of the top priority training areas that were identified.

An assessment conducted among AMFIU members who are in the process of integrating SPM to establish implementation and compliance levels with the universal standards showed that much as most institutions had clearly stated social goals and objectives, the majority did not collect data and report on the same as shown below;

Client Complaints Handling

Although most institutions said they informed their clients about their rights to complain, most of them had not institutionalized this and had not established clear complaints handling systems. It was majorly treated as a customer care issue without institutional policies guiding them as shown in the figure below;

CHART 4: Define and Monitor Social Goal

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Notes3e.1 The institution has an effective mechanism to handle client complaints 3e.2 The institution has a policy that client complaints must be taken seriously, fully

investigated, and resolved in a timely manner without bias.3e.3 The institution informs clients of their right to complain and know how to

submit a complaint to the appropriate person3e.4 Employees are trained to inform customers of the opportunity to make a

complaint as well as how to handle complaints and refer them to the appropriate person for investigation and resolution.

Poverty Measurement

All microfinance institutions have an inherent goal of reducing poverty among their clients embedded in their mission statements. Much as it’s a goal that cuts across most MFIs, the majority do not measure if they are achieving this goal according to results of an assessment conducted among AMFIU members that had started the process of institutionalizing SPM as shown below;

CHART 5: Complaints Handling System

CHART 6: Poverty Measurement

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However, some institutions had started on the process of capturing client poverty data and measuring the progress thereafter, with most of them using the Progress out of Poverty Index tool (PPI). Below are extracts from PPI reports of some institutions:

CHART 7: Average Client Poverty Rates

CHART 8: Poverty Rates Vs. Business/Enterprise

CHART 9: Average Poverty Rates Vs. Gender

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Client Protection Principles

Client protection has emerged as a key aspect of the microfinance industry in Uganda and globally. This has come in the wake of the microfinance sector to renew their focus on the client and ensure that client needs are at the core of the microfinance business. Even the commercialized MFIs strive to implement the principles of client protection to ensure that they do not harm their clients and therefore increase client retention rates and promote a good sector image. Globally, microfinance has gone through a series of criticisms, ruining the image of the business as one that is only profit oriented and not concerned about the needs of the clients they serve. Uganda has not been spared in this negative publicity and that’s why AMFIU, as the national association of MFIs joined the campaign to put the client first in all the decisions made by the financial institutions in order to ensure that they are not harmed.

Implementing the principles of client protection ensures that the clients of MFIs are not ‘harmed’ as they access financial services – that they will leave the institution better than they were when they first joined it. The financial sector in Uganda has adopted these principles and the Bank of Uganda issued consumer protection guidelines that all regulated financial institutions are required to abide by. According to a study conducted among AMFIU members’ majority of them were aware about these principles and are making an effort to implement them. A country level client protection diagnostic study carried out by AMFIU to establish levels of commitment and implementation of the principles of client protection in terms

CHART 10: Poverty Rates Vs. Branch

26


of laws, regulations, policies and actual implementation of the principles showed that while implementation of certain principles was meeting the basic conditions, there was still a gap in establishment of laws, regulations and policies that ensure that these principles are enforced as shown in the diagram below;

Client Protection Market Diagnostic ToolSummary Table

Consumer Protection AreasSystems & Legal

FrameworkIndustry Practices

Country's Client Protection Legal Framework

N/A

TransparencyCredit Products

Deposits & Other Products

Fair TreatmentProtection of Clients

Borrowers

Depositors

Recourse Mechanisms

Data Protection

Markets with Credit Products Only

Consumer Protection AreasSystems & Legal

FrameworkIndustry Practices Clients' Experience

Country's Client Protection Legal Framework

N/A

TransparencyCredit Products

Fair TreatmentProtection of ClientsBorrowers

Recourse Mechanisms

Data Protection

Meets basic conditionsWork in progress, but needs improvementInadequate

Legend

Meets basic conditionsWork in progress, but needs improvementInadequate

Legend

Table 5: Client Protection Market Diagnostic Tool

Table 6: Markets with Credit Products Only

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Therefore, achieving the social mission of microfinance goes beyond merely providing more services to more clients. Experience shows that the way services are provided is just as important: they need to respond to the real needs of clients and be appropriate to their capacities. SPM does not negate the importance of financial performance but argues that MFIs have a double-bottom line goal to achieve (social goals and financial sustainability) and tracking the progress on both is critical for any MFI as they reinforce each other.

Well-designed microfinance programmes that deliberately address clients’ needs have great potential to bring a wide range of benefits to the poor and excluded people’s lives, and to do so in a sustainable way. Some MFIs prioritize financial targets and don’t feel the need to prioritize social goals, assuming that they will follow automati-cally. But evidence from the field shows that this is not the case.

Today, successful MFIs describe ‘organisational performance’ in relation to their dou-ble bottom line - they understand that microfinance is about both positive change and sustainability. These MFIs set clearly-defined social and financial goals, and manage deliberately so that they achieve both and maximise synergies between the two. They use different tools and strategies, and manage their overall performance in different ways. But a common thread brings them together - a passionate commitment to their social mission, and an understanding that good intentions are not enough.

3.6 Credit Reference Bureau Services

Credit Reference Services (CRS) started in Uganda in 2005 with licensing of the first credit reference bureau by BOU under an exclusive 3 year contract with Compuscan. Under the laws establishing the CRS, participation was restricted to only regulated financial institutions. However, BOU is currently in the process of putting in place a new policy to guide further operations of the CRS in Uganda. This policy includes expanding the services to other providers to enable more complete reports to be com-piled.

In a study commissioned by AMFIU on the readiness of the institutions to use credit reference bureau services, 86% of Tier 4 MFIs were aware about the existence of a CRB for regulated FIs. However, 83% said they only had very basic information about it and had never received any form of training on how it operates. 11% had made some form of preparation towards joining the CRB like upgrading their MIS, network-ing branches, redesigning loan application forms to include sections on permission

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to share credit history etc. However, majority of the clients of MFIs interviewed ex-pressed a willingness to join the CRB as shown in the diagram below;

Legal reforms should be undertaken to facilitate full-fie data sharing that includes the Tier 4 MFIs. This will address the problem of information asymmetry between lenders and borrowers and facilitate the appraisal processes, prevent client over-indebtedness and improve portfolio quality.

CHART 11: Desire for Clients to Join CRS

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Chapter 4: Financial Performance Analysis4.1 Introduction

Performance Analysis, both at institutional and national levels, plays a key role in the promotion of a vibrant and effective microfinance sector because it provides the information on which the financial institutions, policy makers and development partners can base their decision making processes. In this chapter we have analysed financial performance based on indicators in outreach, profitability, efficiency and portfolio quality. The data used is only from the financial institutions that have been consistently reporting to AMFIU using the Performance Monitoring Tool (PMT) from 2013 - 2014.

BOX 1: The Performance Monitoring Tool

The sole purpose of the PMT is to enable MDIs, MFIs, SACCOs and other financial institutions involved in microfinance to self-monitor report and receive feedback on their progress against relevant performance standards and peer groups in a coherent and transparent way. The aim is to improve risk management and promote adherence to minimum requirements and good practices within the entire industry, thus a big improvement in financial services available to existing as well as prospective clients.

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4.2 Outreach

Financial institutions in Uganda have been aggressive in their efforts to provide finan-cial services to populations who might not otherwise have had access. According to the Finscope study 2014, there was significant improvement in the access to financial services by adult population. Overall, 85 percent of the adult population aged 16 years and above are financially included, an improvement from 70 percent in 2009 and 38 percent in 2006.

In this section, we have analysed the outreach indicators across the different types of financial institutions and their implications to the whole sector. The indicators used include; the numbers of clients, borrowers and depositors. The extent of the outreach has been analysed in three categories and that is the regulated institutions, MFIs and SACCOs.

BOX 2: Borrowers and Savers Defined

The number of Borrowers: The number of individuals who currently have an outstanding loan with the MFI. This number is based on the individual borrowers (individual clients and members of groups) rather than the number of groups.

The number of Savers: The total number of individuals who currently have funds on deposit with the MFI (either compulsory and/or voluntary). This number applies to deposits that are held by the MFI and deposits held in other institutions by the MFI’s clients for the purpose of accessing credit from the MFI.

4.2.1 Outreach in Regulated InstitutionsIn this report, Four (4) regulated institutions have been considered; Finance trust bank, Opportunity Bank Uganda, Pride Microfinance (MDI) and Ugafode MFI (MDI). As regulated financial institutions, their portfolios include both savings and credit. The four regulated institutions currently serve close to 900,000 savers and about 140,000 loan clients. Although Finance Trust Bank (with 35 Branches) transitioned from an MDI into a commercial bank in 2014, its operations are still comparable to the institu-tions in this category and will be treated as such in this analysis.

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4.2.2 Growth in Number of borrowers and savers

The growth in number of savers in regulated financial institutions showed a higher positive trend between 2012 – 2014 compared to the number of borrowers. The sus-tained growth in numbers of savers points to the fact that the market for savings mo-bilisation is not yet saturated and may continue growing in the near future.

On the other hand, the regulated financial institutions registered a very slight growth in number of borrowers during the period which was only significant in the first two quarters of 2012.

4.2.3 Growth in the number of female clientsA high percentage of women are among the poorest of the poor. However, over the years, microfinance activities have given women a means to climb out of poverty. It has been a platform through which women have been offered social recognition and empowerment.

CHART 12: Growth in Borrowers and Savers - Regulated Institutions

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The capability of the women to combine productive and reproductive roles in microfi-nance activities and society has enabled them to produce a great impact.

According to the AMFIU data, it is clear that more than 40% of the loan portfolio is to the female clients. Moving forward, micro finance programmes should provide women with specific adapted products through appropriate methodologies so as to ease their access to financial services which can offer competitiveness to their business but also well being to them and their families.

4.2.4 Average loan and Savings value per client

CHART 13: Percentage of Outstanding Loans and Portfolio to Female Clients - Regulated Institutions

CHART 14: Average Loan and Savings Value per Client Regulated Institutions

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As mentioned in the earlier section, the number of savers increased amongst the regulated institutions. However, it is interesting to note that the average savings per client remained below 200,000 in 2013 through to 2014. This trend shows that most of the savings were mandatory. Thus, there is need to build a strong savings culture amongst the clients.

By the end of 2014, a client of the regulated institutions had on average an outstanding loan of 1.5m an increase of 0.32m from 1.18m in 2012.

4.2.5 Growth in the Loan PortfolioThe loan portfolio is the major income generating asset for financial institutions. As such, it is highly recommended that the loan portfolio constitutes at least 80% of the total assets. This facilitates increase in earning in proportion to total assets.

There was an increase in loan portfolio for the regulated institutions throughout 2013-2014. In terms of growth, the loan portfolio showed a consistently steady rate similar to that in number of borrowers over the two years. This shows that the target of regu-lated institutions in terms of borrowers is not changing and could indicate that the growth is planned. Interestingly, the regulated financial institutions maintained a high growth rate in terms of number of savers, higher than number of borrowers.

4.2.6 Outreach in SACCO’sSavings and Credit Co-operatives are both economic and social in their aims, they are primarily economic institutions and they must, therefore, succeed in business in order to be sustainable. SACCOs are majorly formed to fight poverty by improving the members’ economic and social conditions.

CHART 15: Portfolio Growth - Regulated Institutions

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In general, SACCOs are increasingly providing formal saving opportunities in the rural areas. People in the rural areas often lack financial services providers that lie within range and are regularly accessible. SACCOs are often the only formal financial institutions people in rural areas can access.

According to the AMFIU data, there was significant growth in number of savers within the reporting SACCOs in the first three quarters of 2013 but growth slowed down over 2014. This could be attributed to the fact that there were efforts to increase awareness on savings among the SACCO members from RFSP which reduced dormant accounts and the same time the reporting accuracy in these SACCOs improved over the period 2013.

The percentage of female members remained below 30% of the total membership in 2013 through to 2014. This could be highly because most of the SACCOs are located in the rural areas where cultural norms and practices are not in favor of women doing business. However, efforts are in place to bring on board more women and the current developments of the rural women micro-entrepreneurs cannot be under estimated. By the end of 2014, the average savings amount per member was at shillings 167,027 and the average loan amount was at shillings 1,159,401.

CHART 16: Borrowers and Saves - SACCOs

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As seen in the table below, Although the gross loan portfolio increased over the peri-od, its percentage contribution to the total assets of financial institutions declined. The loan portfolio remained a major component of the assets but the decline could mean that financial institutions are consciously investing in other assets other than loans.

4.3 Portfolio Quality - Regulated Institutions, MFIs and SACCOs

Timely repayment of loans is a crucial indicator of the institutional and industry credit performance. Poor collection of microloans is almost usually traceable to institutional culture (tolerance to default), and an indication of weaknesses in management and systems. The strongest repayment incentive for uncollateralized microloans is probably

CHART 17: Average Loan and Saving Value per Client - SACCOs

CHART 18: Portfolio as a Percentage of Assets

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not peer pressure, but rather the clients’ desire to preserve their future access to a loan service that they and their families find very useful: thus, healthy repayment rates are a strong signal that the loans are of real value to the clients. (Richard Rosenberg, CGAP)

4.3.1 The portfolio at risk (PAR)Portfolio at risk is the outstanding amount of all loans that have one or more installments of principal past due by a certain number of days. The Portfolio at risk (PAR) >30 days was chosen as the most reliable indicator to analyse quality of the loan portfolio since it is the most commonly used by almost all financial institutions.

Information available for this analysis indicates that the regulated financial institutions are doing very well with an aggregate of less than 3.5% which shows the extent to which mature MFIs take concern to avert the resultant loan losses. The regulated institutions have been credited for the implementation of rigorous staff performance management based approaches that are pegged on pre-determined performance levels.

These regulated have also undertaken increased monitoring of loans, lending stops to credit officers with

high portfolio at risk, continued involvement of head office staff in assessment of loans as well as institution of mandatory loan recovery week periods.

Risk Coverage: Shows how much of the portfolio at risk is covered by an MFI’s loan-loss allowance. It is a rough indicator of how prepared an institution is to absorb loan losses in the worst case scenario. MFIs should provision according to the age of their portfolio at risk: the older the delinquent loan, the higher the loan-loss allowance. For example, a ratio for PAR > 180 days may be close to100%, whereas the ratio for PAR > 30 days is likely to be significantly less. Thus, a risk coverage ratio of 100% is not necessarily optimal.

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As reported in the 2012 report, the loan portfolio performance in regulated and unregulated institutions still had notable variation by the end of 2014.

Some of the possible reasons that could be attributed to this situation include:1) Regulated financial institutions are under strict supervision by the Central Bank

and hence pay a lot of attention to their performance including the quality of the portfolio. As a result, product development is prioritised as a way of improving the performance. Equally it is assumed that the Credit Reference Bureau will play a key role by keeping the clients of regulated financial institutions in check. A study that was conducted by AMFIU on the need for extending the CRB to the tier four institutions confirmed the benefits accruing from the CRB to the regulated financial institutions.

2) Most MFIs, and in particular the SACCOs, have inherent problems emanat-ing from poor management. This has been attributed to the lack of appropri-ate business skills and orientation by the managers hence affecting the perfor-mance. The lack of business orientation extends to the Governance (Members and Board) who only see the financial institutions as means to access financial services and not business entities. Performance management is not given prior-ity in these institutions.

Whereas the CRB has been effective in controlling multiple borrowing among the regulated financial institutions, it is known to mask the problem in the tier four in-stitutions in that the clients borrow from as many institutions in order to repay the

regulated financial institutions.

4.4 Profitability: Regulated Institution, MFIs and SACCOs

Profitability is a key aspect of any business. The business of loans has had great impact on the livelihoods of the economically active Ugandans. But whereas it is important for the livelihoods of the people to get better, the financial institutions also need to generate enough profits on the loans such that the institution can sustainably serve the community.

In this section, 3 key profitability indicators have been considered.

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Operational Self Sufficiency

A percentage (%), which indicates whether or not enough revenue has been earned to cover the financial institutions total costs.

Portfolio Yield A percentage (%) which shows the average gross returns as a proportion of the portfolio outstanding. The major income generating asset for any financial institution is the loan portfolio. The interest and fees paid on the loans should be able to cover operating expenses, and financing expenses, inflation, and leave a good return.

Return on assets A percentage (%) which shows the institutions ability to use assets productively to generate returns. The ratio measures a Financial institutions net profit or loss in relation to the MFI’s total assets. If the ratio is positive, then the business is profitable and sustainable because it is covering all its costs and also is able to capitalize itself for growth.

The 2014 figures show stagnation in the profitability since 2012. The average Operating Self Sufficiency (OSS) remained above 100%, meaning that the costs of operation could be covered by income from the business.However, the Return on Assets (RoA) ratio remained very low at an average of 5% and the portfolio yield approximately 30%.

CHART 19: Profitability - 2014

RI’s

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However, these figures of Portfolio Yield and Return on Assets imply that the cost of managing the portfolio is rather high, which could partly be attributed to increased loan loss provision expenses (if compared with the PAR figures above). Overall most institutions experienced an increase in operating costs which could be attributed to the investments to enhance outreach as well as to comply with regulatory requirements for deposit- taking including: system and branch infrastructure upgrades, purchase of motor vehicles and increased marketing costs to raise awareness.

For SACCO’s the figures show a gradual increasing trend of portfolio yield, an indicator of increasing portfolio performance.

In order to enhance the profitability of the institutions, a number of strategies are being deployed to address the portfolio quality issues and these will in turn result into the generation of more revenues that will lead to an improvement in profitability. The CRB will also help to improve the efficiency of MFIs, especially on individual lenders that share information with other lenders.

It is widely known today that providing loans to micro-entrepreneurs has a relatively attractive potential to generate profits and growth. (Lascelles, 2008).

4.5 Efficiency and Productivity: Regulated Institutions, MFIs and SACCOs

Microfinance institutions (MFIs) tend to focus on providing credit to the poor who have no access to commercial banks, in order to reduce poverty and to help the poor with setting up their own income generating businesses.

CHART 20: SACCO Profitability 2012 - 2014

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Considering providing credit to the poor in many cases is a very costly activity, MFIs are often loss making, i.e. they are not financially sustainable. However, a number of institutions have been successful in lending to domestic small companies and poor agents partly through financial support from donors who offer them loans against below-market interest rates; but also through implementing interventions that have enabled them to serve more clients while reducing the costs including: scaling up of group lending methodologies, engagement in linkages with community based insti-tutions and managing each service centre (branch or agency) as both profit and cost centres.

In this section, three key indicators have been considered; the Operating expense ratio, the cost per loan disbursed and the case load. 4.5.1 The operating ExpenseIn general MFIs gain relatively little from economies of scale because microcredit is rather labor intensive: salaries make up the majority of most MFIs’ operating expenses and fixed costs are relatively low compared with variable costs (Rosenberg, et al., 2009). Operating expenses of MFIs include most often personnel and administrative costs and represent a major part of charges to borrowers.

According to the AMFIU data, the personnel costs cover more than 50% of the operating expense in all three categories of institutions. For the Regulated institutions, the ratio increased from 49% in 2012 to 53%, the MFIs and SACCOs increased to 57% and 51% in 2014 from 55% and 41% respectively in 2012. It is interesting to note the SACCOs registered the highest % increase.

CHART 21: Personnel Expenses

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4.5.2 The cost per loan disbursedIt is also noted in the graph below, that the costs per loan disbursed reduced in the regulated institutions by about 5% from 2013 to 2014. Amongst the MFIs and SACCOs the figures show an increase in the costs from 2013 to 2014.

4.5.3 Staff ProductivityOne of the challenges of managing a microfinance institution is trying to do more with less. To serve more people with less subsidies. To achieve greater impact with smaller loans. And, for staff to manage more clients with fewer arrears.

Loan officers play a diverse and significant role in microfinance institutions. They are the front line staff as they spend most of the times with clients, their direct communication

CHART 22: Cost Per Loan Disbursed

CHART 23: Loan Officer Case Load

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allows them to see, hear or even experience the need of the clients. (Gray, B. 2013). The loan officers are mainly in charge of screening potential customers, screening the loan applications, continuous monitoring and follow up of the loan and producing the required reports. (Holtmann and Grammling, 2005; Labie et al., 2009).

According to the AMFIU data, it is clear amongst all the three (3) categories of institutions, the SACCO loan officers have the biggest case load which is one of the causes of the high PAR in the SACCOs. In an effort to spend less and make much, an individual loan officers ends up dealing with several loan clients with very huge amounts. This might seem like efficiency at the start but it eventually leads to loss.

As financial institutions increase efficiency, it is important to set realistic targets for the loan officers and also to ensure that they are well motivated.

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Chapter 5: Key Findings and RecommendationsThis chapter presents an assessment of major sector risks and challenges. It also highlights opportunities and achievements of the sector, and gives both general and specific recommendations for microfinance institutions and policy makers.

5.1 Assessment of Sector Risks and Challenges

Over Indebtedness

Despite efforts that have been undertaken to implement Client Protection Principles of the SMART Campaign, client over-indebtedness still remains a KEY risk to financial inclusion efforts. A number of Microfinance clients still experience business failure due to high levels of indebtedness. A study carried out by AMFIU on establishing a credit reference system for tier 4 financial institutions showed that 29% of the sampled clients from tier 4 MFIs/SACCOs had financial cards. This meant that they were also borrowing from regulated financial institutions. In the same study, clients of MFIs/SACCOs were asked if they were servicing more than one loan at ago and 55% of them answered in affirmative as shown below;

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Therefore, the importance of client appraisal prior to loan disbursements is underscored here to ensure that clients do not remain in a debt trap. Appropriate product design, financial literacy for clients and the establishment of a credit reference bureau that encompasses all categories of financial institutions is vital to deal with this challenge.

Asset Quality of SACCOs

The biggest component of the assets of financial institutions is the loan portfolio and therefore its performance reflects the overall quality of Assets. In the case of SACCOs, the analysis of PAR in this report clearly shows an increasing trend, indicating that the performance of SACCOs was getting worse. This scenario confirms the common fear in the industry that the sustainability of SACCOs in their current state is at stake. For their increasing relevance in outreach to the poor, the SACCOs need attention and focus should be given to improving the asset quality so as to boost the confidence of the members. To improve portfolio performance, and therefore asset quality, SACCOs must deal with the obvious causes of delinquency including inadequate staff skills, weak loan tracking systems, governance issues and general business orientation. The leadership of SACCOs i.e Board members and Managers should create an environment in which financial analysis and portfolio quality issues are paramount. Again, this should be a capacity building concern.

Outreach to Loan Clients

Outreach to loan clients has not shown any signs of growth over the two years, especially in the Tier 4 MFIs. The regulated financial institutions had a slight growth in number of clients but SACCOs have remained almost the same. Although this may not seem to be encouraging given the effort to increase outreach, it is a sign of institutional maturity because in this case, quality overrides quantity. Given the recorded poor portfolio performance in SACCOs, it would be a surprise that the number of clients is growing. It is good that SACCOs prioritise savings over loans as a core principle and therefore put more effort in savings mobilisation among members. On the other hand, the slight growth in number of clients in regulated institution rhymes very well with the growth in loan portfolio.

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Profitability and Efficiency in all institutions

There is a promising trend that all regulated financial institutions registered profits in the period. However, the different indicators also reveal that the cost of managing financial services is quite high and therefore important that institutions involved in financial service delivery need to operate on business principles to survive. Unfortunately, most SACCOs lack this efficiency in business and it affects their profitability and hence sustainability. They have to continuously depend on subsidies and grants especially for cost of capacity building and in their absence they register losses

Enhancing the profitability of financial institutions is critical for future sustainability of the sector and should be given priority in capacity building programmes. The sector is better off with a small number of sustainable institutions than a big number of institutions that are making losses. This equally affects the quality of outreach of these institutions.

5.2 Key Achievements and Opportunities

Financial Inclusion

During this period, the sector as a whole has had a focus on how to foster financial in-clusion so as to increase access and usage of financial services even in the areas which have been excluded. This has been implemented through different strategies that aim at both increasing consumer confidence and use of financial services delivery channels that easily reach rural areas.

Government, through the Ministry of Finance and the Central Bank have spearheaded this move. The integration of financial literacy initiatives in the sector strategies by Bank of Uganda has helped in creating client confidence. Over the last 3 years, Bank of Uganda has implemented financial literacy initiatives under the financial literacy platform and also the promotion of financial consumer protection guidelines within the regulated financial institutions.

AMFIU has also continued to provide financial literacy trainings, client protection and social performance management training and awareness building among its mem-bers and non-members in order to promote a culture that puts the client at the centre of their business decisions. This is aimed at enhancing mutual trust and confidence among the financial institutions and the clients

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Sector Coordination and Consensus-Building

In January 2015, a national microfinance conference organised by AMFIU, in conjunction with the Ministry of Finance was held and it attracted over 250 stakeholders. This act of having stakeholders coming together and having a consensus on what the sector needs to move forward is an important ingredient that can move the sector forward.

This conference attracted participants from the East African region, presenting an opportunity for sector co-ordination in the wider East African community. One of the recommendations from the conference was the harmonization of all financial inclusion initiatives in the East African region including; regulatory frameworks; reporting mechanisms; definition of financial inclusion, performance measurement in financial inclusion, and actions/programmes that enhance financial inclusion.

5.3 Recommendations

The following recommendations are based on findings from this report and target MFIs, Policy Makers and other stakeholders.

Recommendations for Microfinance Institutions

Professional conduct and adherence to sound practices that will lead to improved portfolio quality and profitability. The current situation where many of the tier 4 institutions only produce reports for donors and development partners, instead of their own internal assessment is one of the reasons that has contributed to a decline in the portfolio quality

Recommendations for Policy Makers

Expedite the process of regulation and supervision for the entire Microfinance Sector in order to promote best practices that include, among others, expansion of credit reference system/services to cover the whole financial sector. This will help mitigate the risk of client over-indebtedness, and facilitate more prudent credit management by financial institutions.

Recommendations for All Industry Stakeholders

Strengthening and facilitating country level and regional forum for industry

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information exchange, knowledge and experience-sharing and collaborative research on critical issues, through networks.

Also the implementation of a sector code of conduct for financial institutions will ensure clients are protected and enhance professionalism in the sector.

Enhance and/or initiate and facilitate partnerships between Governments, development partners and the private sector for increased financing of start-up enterprises and innovations. This will promote the development of local entrepreneurship and contribute to reducing on the challenge of client over-indebtedness.

5.4 Conclusion

Over the years, the stakeholders worked together on common strategies to develop a strong and professional sector. This common interest gave the industry a strong foundation in terms of institutional development and operational efficiency. For some time the stakeholders lost this focus and the result was simply a growth in number of financial institutions most of them weak , unsustainable and with no impact on outreach. The past glory was lost and with fraud, poor management escalated leading to collapse off many of those institutions.

It is important that the recent efforts to bring together the key stakeholders to discuss the future of the sector must be encouraged and supported. Over the last four years, AMFIU and the Ministry of finance Planning and economic development have mobilised stakeholders to come together in a national conference during which important resolutions about the sector have been made. These can form a strong basis for future interventions but they must be promoted and integrated in planning interventions.

Across the region, reliable data for microfinance sector planning and development has been limited and where it is available it is not comparable. The PMT can provide this opportunity overtime but will require the support of all key stakeholders. Uganda must promote it, beginning with integrating it in the national policy and then marketing it in all across the region.

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PARTICIPATING INSTITUTIONS

INSTITUTION DISTRICTADVANCE MICROFINANCE KAMPALABAGEZZA SACCO LTD MUBENDEBUKINDA CO-OPERATIVS VILLAGE FINANCIAL SERVICES LIMITED

KABALE

BUNYARUGURU DEVELOPMENT SACCO BUSHENYIBUREBERO SACCO NTUNGAMOBUSIU SACCO MBALEECUMENICAL CURCH LOAN FUND (ECLOF) KAMPALAENTERPRISE SUPPORT AND COMMUNITY DEVELOPMENT TRUST (ENCOT)

MASINDI

FINANCE TRUST BANK KAMPALAFIVE TALENTS KAMPALAGATSBY MICROFINANCE LTD KAMPALAHAKASHENYI SACCO KABALEHOFOKAM KABAROLEHOIMA SACCO HOIMAHOPE MFI KAMPALAIMPETUS MFI KAMPALAISSIA SACCO IBANDAKAHUNGE RURAL SACCO KAMWENGEKASAANA EKINONI KIRUHURAKASAMBYA MUBENDEKIGARAMA PEOPLE’S BUSHENYIKIHANGA MPARO KABALEKIJURA KABAROLEKITAGATA SACCO BUSHENYIKOBOKO UNITTED KOBOKOKYAMUHUNGA SACCO BUSHENYIMADFA MASINDIMAMIDECOT MASAKAMT. OTCE METU SACCO MOYOMUSHANGA SACCO BUSHENYIMUTARA SACCO BUSHENYINGORA SACCO KUMINYARAVUR NEBBI

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OPPORTUNITY BANK KAMPALAPRIDE MFI MDI KAMPALARUKIGA SACCO KABALERUKIRI SACCO IBANDARUSHERE SACCO KIRUHURATALANTA FINANCE GULUTUJIJENGE BUSIAUGAFODE MFI MDI KAMPALAVISION FUND UGANDA KAMPALAOTHERS (NON-PMT INSTITUTIONS)BRAC KAMPALACENTENARY BANK KAMPALAFINCA UGANDA KAMPALAWAZALENDO SACCO KAMPALA

Licensed Commercial Banks as at April 10, 2015

ABC CAPITAL BANK LIMITEDBANK OF AFRICA-UGANDA LIMITEDBANK OF BARODA (UGANDA) LIMITEDBANK OF INDIA(UGANDA) LIMITED BARCLAYS BANK OF UGANDA LIMITEDCAIRO INTERNATIONAL BANK LIMITEDCENTENARY BANK LIMITEDCITIBANK UGANDA LIMITEDCOMMERCIAL BANK OF AFRICA (UGANDA) LIMITEDCRANE BANK LIMITEDDFCU BANK LIMITEDDIAMOND TRUST BANK LIMITEDECOBANK UGANDA LIMITED EQUITY BANK UGANDA LIMITEDFINANCE TRUST BANK LIMITEDGUARANTY TRUST BANK (UGANDA) LIMITEDHOUSING FINANCE BANK LIMITEDIMPERIAL BANK UGANDA LIMITEDKENYA COMMERCIAL BANK(UGANDA) LIMITEDNC BANK UGANDA LIMITED

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ORIENT BANK LIMITEDSTANBIC BANK UGANDA LIMITEDSTANDARD CHARTERED BANK UGANDA LIMITED TROPICAL BANK LIMITEDUNITED BANK FOR AFRICA (UGANDA) LIMITED

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REFERENCESAMFIU/SEEP/ (2012/2013): The State of Microfinance in Uganda

AMFIU (2015): Study on Expanding Credit Reference Services to Tier 4

Bank of Uganda (2015): Report on Financial Inclusion in Uganda

Bill & Melinda gates/ Bank of Uganda (2015): UGANDA-GIS Mapping Project Final Report

Global Microscope (2014): The enabling environment for financial inclusion

CGAP- Microfinance Consensus Guidelines 2012http://www.eajournals.org/wp-content/uploads/Determinants-Of-Growth-Of-Microfinance-Organisations-In-Kenya_edited.pdf

Alexandra Fiorillo: The Effects of Wholesale Lending to SACCOs in Uganda http://www.fsdu.or.ug/pdfs/The%20Effects%20of%20Wholesale%20Lending%20to%20SACCOs%20in%20Uganda.pdf.2006

Anne Nørgaard Jørgensen: The profitability of microfinance institutions and the connection to the yield on the gross portfolio.http://studenttheses.cbs.dk/bitstream/handle/10417/2914/anne_noergaard_joergensen.pdf?sequence= 2011

Veronica Gonzalez (2006) - Women’s participation in Microfinance

The World Bank: http://data.worldbank.org/country/uganda.

Uganda’s Economy http://www.indexmundi.com/uganda/economy_profile.html

AMFIUAMFIU House, Plot 679, Wamala Rd,

Najjanankumbi (off Entebbe Rd)P. O. Box 26056, Kampala-Uganda

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THE STATE OF MICROFINANCE IN UGANDA the microfinance sector in Uganda, the GIZ financial sector...

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