kai chen micro finance presentation

8/9/2019 Kai Chen Micro Finance Presentation

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Microfinance and SACCOs (Savingand Credit Cooperatives) in Uganda

Kai Chen - CFA, CPA

B.B.A. - Accounting, Economics and Finance Baylor University, 2002Master of Accountancy Baylor University, 2003


2/18

Uganda Overview Population and Demographic

2

89.0% 88.0% 87.0%87.0%

11.0% 12.0% 13.0% 13.0%

16.7

24.4

27.328.2

5.0

10.0

15.0

20.0

25.0

30.0

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

1991 2002 2006 2007

% of Population living in Rural areas % of Population living in Urban areas Total Population (in Million)

CAGR: 2.8%

CAGR: 3.3%

CAGR: 3.5%

CAGR: Compounded Annual Growth Rate

Source: Uganda Microfinance Industry Assessment, 2008, The Association of Microfinance Institutions inUganda


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Uganda Overview GDP and Economic Sectors

3

44.3% 45.8% 47.1%

52.8%

35.1% 33.3% 31.9%

22.6%

20.0% 20.9% 21.0%24.6%

$335

$353

$400

$490

$300

$350

$400

$450

$500

$550

$600

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

04/05 05/06 06/07 07/08

ectorC

ontributiontoGDP(%)

Year

Services Agriculture Industry GDP Per Capita (US $)



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Population and Employment: Rural vs. Urban

4

As illustrated by previous slides, Ugandas population

continues to grow at a rapid rate with majority (87%) of peoplestill living in the rural areas

About 86% population and 77% of active labor force in ruralareas are employed or self-employed in agriculture sector

Despite large rural population and labor force, agricultureproductivity and share of GDP continue to decline

Rural population has not benefited from overall economicgrowth. In fact, over 96% of Ugandans who live belowabsolute poverty line (US $1) live in the rural areas

Source: Poverty Eradication Action Plan (PEAP) (2004/05-2007/8)


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State of Financial Service Industry in Uganda

5

As of December 2007, there are 16 commercial banks, 4

credit institutions, 4 Micro-Deposit taking Institutions (MDIs)that constitute the formal financial service sector under thesupervision of Bank of Uganda


Tier I (Commercial Banks) Tier II (Credit Institutions) Tier III (MDIs)

Tier IV (All financial

Institutions notregulated by Bank of

Uganda)

Examples Barclays, Stanbic Banks,

Bank of Baroda, Equity Bank

Post Bank, Faulu Uganda,

CMF

Pride Microfinance,

Finance Trust, FINCA

SACCOs, NGOs, ASCAs,

VSLAs, ROSCAs

Services Provided Savings, Term Deposits, Short

and Long term loans, credit

and overdrafts, leasing, forex

transactions

Savings, Term Deposits,

short and medium term loans,

mortgages, money transfer

agents

Savings facilities, short

term loans, Money

transfers, micro

insurance

Savings and short term

credit

Regulatory LawsMDI Act 2003

Co-operative Societies

Statute 1991Financial Institutions Act 2004


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State of Financial Service Industry in Uganda

6Source: Uganda Microfinance Industry Assessment, 2008, The Association of Microfinance Institutions inUganda

Tier I (Commercial Banks) Tier II (Credit Institutions) Tier III (MDIs)

Tier IV (All financial

Institutions not

regulated by Bank of

Uganda)

Services for Low

Income Market

Mainly target corporate and high-

end retail markets. Beginning to

move toward middle income

customers. Only Centenary

Bank has microfinance portfolio,

targeting mainly active low

income

Two institutions (CMF and

PostBank) have microfinance

portfolios. CMF mainly target

urban economically low income.

PostBank targets active poor as

well.

Targets low income and

economically active poor in

urban, peri-urban and rural

areas. Beginning to look up

markets to middle income

segments

Targets economically active

poor in peri-urban and rural

areas

Number 16 4 4 >1000

Number of Towns

Served55 18

44 towns (11 with no Tier 1

or 2)

33 towns (9 with no Tier 1,2

and 3)

Number of Branches 290 39 88 926

% of rual branches 35% 43% 63% 70%

As indicated by the table above, most established financial

institutions (Tier I and II) focus on urban markets and Ugandanssaving deposit base is disproportionately concentrated in Tier Ibanks (60%)


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Financially

Unserved, 62%

Informal

Financial

Groups, 17%

Formal Banks,

16%

MDIs, 2%

SACCOs, 2%MFIs, 1%

Access to Financial Services


62.0%

52.0%

65.0%

38.0%

48.0%

35.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Overall Urban Rural

Access to Financial Services

With Access to Financial Services No Access to Financial Services

Access to Financial Services by

Ugandans

Rural markets are severely underserved by financial institutions


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Major Barriers to access Financial Services for Low-Income and Rural Ugandans


Unsuitable products for the segment (the poor/ low income people,

especially in rural areas where farming/ agriculture is predominant) Inaccessibility and lack of basic infrastructure in some rural and

remote rural areas of the country

The high cost of delivering financial services to the ruralcommunities, which makes services expensive for clients and lessattractive to financial institutions

Sustainability considerations for the institutions in rural and remoteareas where there is no critical mass to sustain delivery of services

Lack of regular income (on the part of the poor rural populations) to

save in order to open and maintain a bank account Discomfort (on the part of low-income, less educated people) about

perceived complexity of financial services and banks and inability tospeak their language


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Private Sectors Initiatives to assist Low-Income andRural Communities


To bridge the gaps, local and international NGOs have been active

in mobilizing rural communities and establishing informal financialservice providers at grassroots levels There are now more than 1,000 Village Savings and Loan Cooperatives

(VSLAs), Accumulated Savings and Credit Associations (ASCAs), RotatingSavings and Credit Associations (ROSCAs) in Uganda

Local communities have also formed their own Saving and CreditCooperatives (SACCOs) to facilitate savings and loans among themembers Formed, owned and operated by cooperative members within the communities,

SACCOs are highly suitable and effective for reaching out rural areas due totheir simple and cost effective structure, and their flexibility to meet members

needs


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Saving and Cooperatives (SACCOs) in Uganda

10Source: Uganda Cooperative Savings and Credit Union

Currently, SACCOs in Uganda are governed by Cooperative

Societies Statute of 1991 and Cooperative Societies Regulations of1992

Requirements for forming a SACCO: Minimum of 30 members

Register with Department of Cooperatives under Ministry of Trade

Form a Management Committee of SACCO Draft cooperative bylaws or constitution

How does a SACCO function: Each member must purchase a minimum number of shares as determined by

SACCO bylaw and constitution to partake SACCOs ownership and participate in

future profit sharing

As determined by bylaw and constitution, each member also saves monthly andsavings are usually split between voluntary and compulsory saving accounts

Once a member has sizeable savings and establishes his or her credit worthiness, amember can apply for a loan based on the shares/savings to loan ratio mandated bythe SACCO


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SACCOs Emerging Importance in Uganda

11Source: State of Microfinance in Uganda: 2008: Analyzing AMFIU Members; Uganda Microfinance IndustryAssessment, 2008, The Association of Microfinance Institutions in Uganda

2,656,671

1,071,582736,910

423,333 311,538 243,271

Banks - Tier I Credit institutions -

Tier II

Non-Deposit Taking

Financial Institutions

(NDFIs) - Tier IV

MDIs - Tier III NGOs - Tier IV SACCOs - Tier IV

Average Size of 1st Loan Given to Clients byInstitutions (Figures in Ugandan Shillings)

SACCOs are becoming increasingly important as they focus on serving

low-income clients and have potential to reach millions of people in ruralareas

However, lack of regulation and government supervision also contributes tofrequent failures of SACCOs. In 2005, there were 1,274 SACCOsregistered with the Department of Cooperatives. As of Dec, 2007, only 628

remaining active


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Rural Financial Services Program (RFSP) UgandaGovernments SACCO Initiative

12

SACCOs potential has attracted Uganda governments attention. In

2006, the government initiated a new Rural Financial ServicesProgram, also known as Prosperity for All, or Bonna Bagaggawale

in local language

Rural Financial Services Program plans to use a SACCO per sub-county strategy to channel both agricultural and commercial loans

at below market rates to borrowers in every sub-county, in both ruraland urban areas

Under the plan, government-sponsored SACCOs will accessfunding from the government for commercial and agricultural loans

at 9% and 13%, and extend commercial and agricultural loans at13% and 17% respectively

Ugandan Parliament is also drafting a new SACCO law whichspecifically governs the formations and operations of SACCOS

Source: State of Microfinance in Uganda: 2008: Analyzing AMFIU Members; Uganda Microfinance IndustryAssessment, 2008, The Association of Microfinance Institutions in Uganda


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Rural Financial Services Program (RFSP) UgandaGovernments SACCO Initiative

13

However, government's initiative has raised serious concerns

among the microfinance industry practitioners The initiative is politically motivated rather than market oriented:

By setting an interest rate ceiling that can be charged by SACCOs (and inevitably forother types of microfinance institutions and practitioners), the government indirectlyimpacts the profitability and sustainability of many existing MFIs

The government has yet to specify the targeted beneficiaries of the program, which

means not only the most vulnerable and marginalized economic groups (i.e. ruralwomen) will qualify for the program, but other people who already have access tofinancial services as well

Governments intervention creates potential moral hazard:

Government-backed SACCO members may access the loans under the assumptionthat governments fund doesnt need to be repaid and loan repayment rate will likely

suffer

SACCO members may no longer save for future investments, bur rather as means toqualify for a government loan.

Source: State of Microfinance in Uganda: 2008: Analyzing AMFIU Members; Uganda Microfinance IndustryAssessment, 2008, The Association of Microfinance Institutions in Uganda


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Lessons Learnt from Previous Ugandan GovernmentIntervention in Microfinance Industry

14

Previous governments intervention only resulted in failures and market

disruptions: In mid-1980s and early 1990s, government intervened by introducing aSME (Small Medium Enterprise) loan program to rural farmers, whichultimately failed due to 1). Lack of market access by the farmers 2). Poorloan features 3). Inappropriate loan allocations to city/ town businessmen(who later defaulted) instead of the intended borrowers 4). Corruption and

misappropriation Other two interventions by the government in mid and late 1990s also failed

due to poor loan repayments (people take money as gift from the

government), poor implementation by local officials and corruption andmisappropriation

Since late 1990s, governments role has been as an enabler and promoter

of microfinance service, rather than a direct provider

In 2001, government completely pulled out of direct delivery of financialservices



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Uganda Microfinance Industry Growth with minimal GovernmentIntervention: 2000 2007



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Opportunities and Challenges for Uganda Microfinance andSACCOs

16

Although the impact of governments RFSP remains to be seen, the

microfinance industry faces significant challenges and opportunities: Challenges:

Radical change in focus and direction by the government, making it a directprovider of microloans to the people rather than a promoter of marketoriented microfinance

Concentration of MFIs in the urban and peri-urban areas and clientssometimes take out multiple loans from different MFIs, which increasesMFIs credit risk exposures

Inadequate rural outreach with limited financial products for agriculture

Insufficient human resource and weak organizational capacity as theindustry grows at a much faster rate than the actual development pace of

personnel and skills required

Lack of technology and tools such as computer and software for someinstitutions and insufficient knowledge and skills within some MFIs to fullyutilize their MIS and performance monitoring technology



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Opportunities and Challenges for Uganda Microfinance andSACCOs

17

Opportunities:

Building upon the current and future laws governing the financialinstitutions, develop an integrated and comprehensive industry-wide self-regulatory system to promote transparency and accountability

Develop financial products suitable and sustainable for rural areas. MostMFI products and delivery mechanisms still do not suit or exist in ruralareas. There could be tremendous business opportunities as majority of

Ugandans remain unserved by financial institutions Effective resources sharing and performance benchmarking within financial

institutions across all Tiers to improve service delivery to the clients

Ugandas economy continues its impressive growth and more of the

countrys population move out of absolute poverty. Favorable

macroeconomic environment creates more demand for formal or informalfinancial services



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Outlook for Microfinance in Uganda

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Microfinance Industry in Uganda is currently at integration and

consolidation stage: In June 2008, Equity Bank, a Kenyan bank acquired Uganda Microfinance

Limited, the leading MDI of Uganda

Industry consolidation and integration continue as MDIs likely to move up toTier I or II institutions and stronger Tier IV institutions seek to transformdirectly into Tier I and II to avoid governments regulatory constraints on

Tier III MDIs

As industry matures and competition intensifies, many NGO sponsoredMFIs will fail or become increasingly insignificant if they dont achieve

profitability and self-sustainability in the next 5 to 10 years

The industry will also need to overcome the negative impacts of

governments direct intervention which has only failed and disrupted themarket in the past

If an appropriate regulation for Tier IV institutions can be implemented withstronger consumer education and financial literacy for the mass population,the industry will likely experience significant growth


kai chen micro finance presentation

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