Uganda Microfinance

1
Uganda Microfinance

• Regulation and Transformation

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Uganda Microfinance

• Presently over 500 MFIs
• 5-8 covering all costs (FSS)
• Highly competitive and saturated in areas (urban)
• Most MFIs using blend of Grameen/Village Banking
  methodology
• Weekly payments
• 4-6 month loan terms
• Group lending
• Compulsory savings
• Cater to trade sector more than agriculture
• Minimal voluntary savings services

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Uganda Microfinance

• Increasing pressure to provide savings services
  to poor and in rural areas
• New law recently passed to regulate Micro
  Deposit-taking Institutions (MDIs)
• Assistance from donors (GTZ, USAID)
• Highly consultative process
• MFI practitioners, MPs, Bank of Uganda,
  government and donor representatives all in
  agreement

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MDI Bill

• MDIs can
• Accept deposits from the public
• On-lend these deposits
• MDIs cannot
• Engage in foreign exchange transactions
• Operate current accounts
• Use the term Bank in their name
• Onlend compulsory savings

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MDI Bill

• To qualify for an MDI license
• Company limited by shares
• Proven track record in microfinance
• Minimum paid-up capital of 25,000 currency points
  (currently one point is Ush20,000 or US10)
• Capital adequacy ratio of 15 of risk-weighted
  assets
• No single owner with more than 30 shares
• Any person holding more than 10 shares must be
  approved by BOU
• Senior management and board members must be
  approved by BOU

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Benefits of Regulation

• For institution
• Diversify sources of funding
• Decreased reliance on donor funds/ whims
• Increase services to clients/Professional image
• Become more efficient and financially sound
• Gain competitive advantage over non-regulated
  MFIs
• For clients
• Savings services
• Potential reduction in costs
• For industry
• Increased outreach to rural areas

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Things to Consider

• Institutional Structure
• Ownership (ideal mix social/commercial
  investors /NGO/founders exit strategies)
• Legal form (share company finance company bank)
• Transfer of assets (move clients or portfolio?
  donor contributions cash requirements)
• Capitalisation and leverage (minimum capital
  growth plans hurdle rate debt/equity split of
  NGO investment)
• Governance (role of NGO board seats board
  constitution voting rights terms committees)

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Things to Consider

• Operational Issues
• Senior management
• Corporate culture NGO vs. for-profit
• Financial management/treasury
• Risk management and internal control
• Back-office operations
• MIS
• Market, products and services
• Human resources
• Budget/costs

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Challenges

• Technical challenges
• Inadequate skills in management and staff often
  board as well
• Modest MIS (or inadequate)
• Inadequate internal controls risk management
• How to instill systemization/standardization (key
  qualities for Central Bank) without losing
  flexibility/innovation (key for customer service)
• Low product innovation new target market
  wealthier clients demanding savings and
  individual loans
• Lack of appropriate TA providers locally

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Challenges

• Transition from founder controlled institution to
  share company with external investors/directors
  (hard for founders to cede control of
  institution)
• Managing staff expectations (fear that there
  won't be place for them in new institution)
• Finding necessary local skills for key new
  management positions (treasury, internal audit,
  CFO, etc.)
• Finding equity investors local and
  social/commercial investors (need mechanisms for
  local stakeholders to participate in initial
  capitalisation and avoid domination of external
  shareholders)

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What has worked well?

• Clear transformation plan, with clearly
  identified activities, timeline and
  responsibilities
• Full time, supported Transformation Manager
• Easiest with local MFIs with competent board and
  management (imperative)
• Cooperation with Central Bank, donors and
  government
• Direct technical assistance and training (often
  drawing from international experience)

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What have we learned?

• Commitment by all board members to transformation
  process and to external investors (need buy-in
  from the top for it to work)
• Senior management skills critical
• TA funding in key areas (knowledgeable donors)
• Market analysis and customer care aspects
  critical
• Need solid communication strategy (both internal
  and external)
• Sound regulatory environment critical
• Long and expensive process (but worth it!)