Empowering Micro, Small, and Medium Enterprises: The Influence of Microfinance Group Lending

Empowering Micro, Small, and Medium Enterprises: The Influence of Microfinance Group Lending

By the MicroSave Consulting and FSD Uganda teams

Across the globe, the lack of collateral is a primary barrier that economically excludes individuals notably young people especially women from accessing formal banking services. To get around this obstacle, the underserved population has resorted to establishing informal community-based financial systems to fulfill their financial requirements. These alternative arrangements, such as Village Savings and Loans Associations, Rotating Savings and Credit Associations, and Table Banking, have emerged as a means for the marginalised to access the financial resources they lack from traditional banking institutions. To extend financial services to the underbanked and unbanked, formal financial institutions have emulated and adopted some of the positive practices in the informal financial systems.

Informal or formal, financial institutions that offer loans use one of two approaches, individual or group lending. This is the same with the Tier III and IV financial institutions that are on-lending under the Mastercard Foundation Micro and Small Enterprises (MSE) Recovery Fund, a five-year program implemented in partnership with the Financial Sector Deepening Uganda. This initiative was launched in February 2022 and is under the Young Africa Works strategy, which seeks to facilitate direct access to finance 50,000 MSEs (at least 40% women, 30% youth). Designed during the aftermath of the COVID-19 pandemic, this revolving fund provides concessional capital to participating financial institutions for onward lending to micro, small, and medium enterprises negatively impacted at a reduced borrowing rate. The participating financial institutions follow their in-house credit processes to assess the enterprises given their needs.

Group lending vs individual lending

The Fund is working with both Tier 3 and Tier 4 financial institutions. Based on the data so far, one Tier 3 Microfinance institution has effectively employed the group lending methodology for a broader client outreach. Since the Fund’s commencement (just under two years), over 26,000 MSEs have successfully accessed credit, and 60% of this has been disbursed by the Microfinance, a testament to its distinctive strategy. The Microfinance has disbursed UGX 7 billion to 16,166 majority of them youth and women-led enterprises within 12 months. Conversely, two SACCOs that employ an individual lending approach, have managed to extend credit to 842 and 503 enterprises and disbursed UShs 3.4 billion and UShs 2.25 billion respectively within 12 months.

For both approaches, the critical difference is in the collateral criteria. With group lending, all that’s needed is a group guarantee, unlike individual lending products that demand traditional collateral. The Microfinance’s group methodology

explores unique features that have positively impacted young people, especially women, and offers lessons for other financial institutions: Here is what makes this institution’s group lending approach work.

How the Mircofinance’s group lending approach works

Central to the approach is that the institution has dealt with the access to finance obstacle created by the need for traditional collateral. To do this, the institution employs the segmented and combined group strategy, coupled with the delegation of credit approval authority to group members.

To implement this, the Microfinance employs a two-fold group methodology: branch-based and community-based groups. The former gathers at the bank, while the latter convenes locally, delivering tailored flexibility to diverse client needs.

The institution looks out for people organised in groups and creates sub-groups of six to seven members to whom loans are exclusively accessible. These sub-groups operate like well-coordinated “cabinets,” complete with designated leaders. This structure not only encourages governance but also strengthens bonds among members. The institution’s loan officers play a modest role in the lending process. Group members collectively greenlight loans without the intervention of the bank. This empowers the groups, enabling them to take charge of credit underwriting, member selection, and loan recovery. This proactive approach ensures that disbursed amounts grow, and the quality of loans improves over time.

Once the groups have been formed, members of branch-based groups can access loans up to UShs 5 million per member without the need for collateral. On the other hand, community-based groups can borrow up to UShs 3 million per member, securing approvals at the group level—an embodiment of the Microfinace’s dedication to client empowerment. For more substantial loan amounts, up to UShs 30 million, collateral is a requisite to manage potential risks. This balanced approach ensures that prudent risk mitigation measures are also upheld while empowering clients

A client’s story

Emily a 28-year-old tailor in Bukoto whose business was adversely affected by the Covid-19 pandemic is one of the Microfinance’s clients served under the group ledning model. Her faulty manual sewing machine didn’t help matters as it affected her output’s quality, efficiency, and income so much that she could hardly meet her daily basic needs. “Things changed when through my savings group which banks with the Microfinance, I received a loan of UGX 800,000 and bought an electric sewing machine,” she says.

The tailor is now efficient, and her turnaround time has been reduced from three hours to one hour for some jobs. “This has helped me regain my client’s confidence and also get new clients. I now make at least UGX 15,000 daily and I can meet all my basic needs. This wasn’t the case before when I made no money on many days and had to skip some meals and move in with a relative because I couldn’t afford rent. Because of the increased volume of work, Emily is planning to employ one other person to support her.

As a result, this dynamic formula has enabled the bank to extend credit to a broader spectrum of customers, especially women and youth who lack conventional collateral. Given that women are more likely to belong to groups, the group lending approach is one that financial institutions from Tier 1 to IV should learn from and integrate in order to reach young people, especially women

Share:

Bridging the gap between youth and access to financial services

Bridging the gap between youth and access to financial services

Social norms, product suitability and lack of collateral are some of the hindrances to inclusive finance for women and youth cited by the Mastercard Foundation partners under the Young Africa Works Program in Uganda.

This was discussed during the launch of the Young Africa Works community of practice on inclusive finance in January 2023. Inclusive finance means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit, and insurance – delivered in a responsible and sustainable way.

The community of practice on inclusive finance will provide a platform to convene and share ideas, resources, and lessons on a wide range of topics related to financial inclusion. It is one of many collaborative and intentional approaches of the Mastercard Foundation Young Africa Works program to ensure more impactful delivery and achievement of benefits for young people.

“The ultimate intention of the community of practice on inclusive finance is to deepen understanding of the various aspects of inclusive finance and drive a more collaborative and intentional approach to program implementation,” said Arnold Byarugaba the Foundation’s MSME Finance Lead during the launch.

Composed of all partners under the Young Africa Works program in Uganda, the community of practice on inclusive finance will review ongoing challenges, gains, and opportunities affecting financial inclusion within the Young Africa Works interventions in Uganda and pivot accordingly to achieve greater impact.

During the first gathering, partners learnt from each other what others are doing to sustainably enable young people in work. Group discussions brought to light the financial inclusion gaps for each partner as well as recommendations on how these can be filled or addressed for that matter.

Even though the community of practice on inclusive finance membership is primarily for Young Africa Works partners, bridging the gap between youth and access to financial services isn’t exclusive to the partners. Establishment of the community is evidence that all stakeholders seeking to impact youth need to reflect on their financial inclusion gaps, come up with solutions on how they can be bridged and implement them.

A steering committee was set up and is responsible for both governance and technical aspects of running the community of practice on inclusive finance, including tasks such as setting or reviewing the community’s objectives. Going forward, meetings will be held on a quarterly basis tackling different themes that are relevant to the impactful implementation and deepening access to finance amongst women, youth and refugees under the Young Africa Works Programs funded by the Mastercard Foundation.

Since its launch, one quarterly meeting has been held in March 2023. The theme of the meeting revolved around ‘unlocking access to finance partnerships for program participants’.  A key highlight from the meeting is acknowledgement that traditional financial institutions are not sufficient to meet the needs of startup enterprises yet majority of these make up the Young Africa Works target group. Partners agreed to intentionally craft solutions on how to meet the finance and growth needs of businesses at ideation and start up stage.


About the Young Africa Works Program

The Young Africa Works Program works closely with key stakeholders to enable young women and men, including refugees, internally displaced youth, and those living with disabilities, to acquire the skills needed to find employment or create work opportunities. Financial sector Deepening Uganda is leading the partnership on financial inclusion.

Share:

Ensuring Resilience in the Supply of Agricultural Finance amidst the COVID-19 Pandemic: Lessons from the Integrated Cooperative Model.

Ensuring Resilience in the Supply of Agricultural Finance amidst the COVID-19 Pandemic: Lessons from the Integrated Cooperative Model.

    Download Toolkit

    COVID-19 disrupted the supply chains of the agricultural sector. Much as farming was one of the essential services that were exempted from the government lockdown measures, the distribution of the agricultural produce was limited due to restrictions on movement during the lockdown.

    Over the last decade there has been an increased emphasis on cooperative development which has resulted in exponential growth in the Savings and Credit Cooperative Organizations (SACCOs). However, SACCOs are insufficient in addressing the financing challenges of agriculture because they are limited in how far they can mitigate against the risks inherent in agriculture.

    Share:

    Covid – 19 Market Diagnostics and Options for Long-Term Recovery (Supply – Side Report)

    Covid – 19 Market Diagnostics and Options for Long-Term Recovery (Supply – Side Report)

      Download Report

      The overall objective of the study was to develop practical solutions for preserving and building relevant elements of the financial system to support the survival, recovery, and growth of micro and small enterprises (MSEs) in Uganda. The core of the market analysis was to understand how the supply of finance to the MSE sector in Uganda had been affected by the COVID-19 crisis and what options were available to build on ready measures to mitigate the impact. This analysis identified both threats and opportunities for inclusive finance service providers (IFSPs) to meet the financing needs of MSEs.

      With the support of the Association of Microfinance Institutions of Uganda (AMFIU) and with some direct provision of information by IFSPs, the study team had detailed operational and financial information on 30 SACCOs and 11 MFIs. Due to confidentiality/nondisclosure policies, AMFIU provided anonymous data, stating only the region in which the entity operates and its institutional form.

      Share:

      Covid – 19 Market Diagnostics and Options for Long-Term Recovery (Demand- Side Report)

      Covid – 19 Market Diagnostics and Options for Long-Term Recovery (Demand- Side Report)

        Download Report

        The COVID-19 pandemic has had significant impact on the Ugandan economy especially hitting the micro- and small enterprises (MSEs) in the informal sector. MSEs have been facing unprecedented income losses and uncertainties about their future because of business disruptions due to the outbreak of COVID-19.

        FSD Uganda commissioned a demand side market diagnostic study to assess the impact of COVID-19 on micro and small enterprises in Uganda. The overall objective was to develop practical solutions to preserve and build relevant elements of the financial system to support the survival, recovery and growth of micro and small enterprises in Uganda.

        From the research, only 3% MSEs reported to be completely recovered. 71% of the surveyed MSEs are yet to return to normal pre-COVID-19 operations timing. Several factors such as reduced hours of operation, disruptions in movement, and general low customer turnout have impacted the businesses severely.
        MSE owners hope to bounce back, however, some issues continue to plague the recovery of enterprises. These include, on an average 50% of reduction in household income due to low revenue from the business, job losses in the family, or depletion of other income sources hit by the pandemic.

        Women-led enterprises have suffered a greater average loss in income (50%) compared to men-owned MSEs (33%) from the pre-pandemic level of income. Also, while MSEs in urban areas have been able to attain 57% of the pre-pandemic income level, MSEs in rural areas have recovered up to 50% of the pre-pandemic income level.

        As per the estimates of the World Bank, the COVID-19 crisis has pushed around 2.6 million Ugandans into poverty. With longest closure of schools in Uganda, not only the education sector but many other businesses providing services in the ecosystem suffer a great deal in their bid to recovery to pre-pandemic level.

        Share:

        IRA Regulating for Innovation – Case study

        IRA Regulating for Innovation – Case study

          Download Case Study

          The enactment of a new Insurance Act, which came into operation in early 2018, expanded the Insurance Regulatory Authority (IRA)’s mandate from market soundness and consumer protection to also include market development. As part of this new mandate, the IRA is committed to encourage and facilitate innovation in its market. However, encouraging innovation may introduce new risks, thereby leading to conflict between the different mandates. To strike the right balance, the IRA recognised that it needed to update some of its existing supervisory processes and regulations, plus introduce new tools to steer its interaction with the market.

          Share:

          The Overall Impact of COVID on The Economy; An Agile Scenario Analysis

          The Overall Impact of COVID on The Economy; An Agile Scenario Analysis

            Download Report

            This agile scenario analysis conducted in partnership with the Ministry of Finance, Planning and Economic Development and The Bank of Uganda explored the potential short and mid-term economic effects the pandemic would have on the key labour segments. Using additional insights from ongoing economic recovery efforts, the team also identified the potential role various sectors could play in strengthening the inclusiveness of the country’s recovery efforts.

            Share:

            Assessing the Economic Resilience of Ugandan Households During COVID

            Assessing the Economic Resilience of Ugandan Households During COVID

              Download Report

              This phone-based survey conducted between April 2020 to September 2020 over five waves provides a detailed analysis on the resilience of the sample surveyed. It demonstrated:

              Share:

              Highlights: Impact of COVID-19 on the economic resilience and financial behaviour of Ugandans

              Highlights: Impact of COVID-19 on the economic resilience and financial behaviour of Ugandans

                Download Report

                FSD Uganda partnered with the Ministry of Finance, Planning & Economic Development and undertook a COVID-19 tracker survey which traced the impact of COVID-19 on livelihoods, financial behavior, and social responses of Ugandans. The phone-based survey was conducted in 5 waves between April and September 2020.

                Similar surveys were conducted by the FSD Network in Kenya, Rwanda, South Africa, Nigeria, Zambia, and Ghana. The COVID-19 Tracker explored composite data sets from across the continent.

                This highlights document is based on an analysis of data from the five waves of the tracker survey and presents insights on how the pandemic continues to affect Ugandan adults across several domains.

                Share:

                Unlocking the Potential of Uganda’s Housing Value Chain Through Strategic Partnerships and Collaboration

                Unlocking the Potential of Uganda’s Housing Value Chain Through Strategic Partnerships and Collaboration

                  Download Presentation

                  By Jimmy Ebong and Maria Nkhonjera
                  Uganda’s Financial Sector Development Strategy (FSDS) estimates the country’s housing deficit to be 1.6 million units, with an annual requirement between 180,000 and 210,000 units. Given rapid rates of population growth and urbanisation, a widening housing need may overwhelm cities in the near future. Uganda has the third highest population growth rate in Africa (at 3.6%), while the country’s urbanisation rate is projected to be 5.6% per annum. Urban households are expected to grow to 3.8 million in 2025, from 2.9 million in 2020 – a 31% increase. Uganda’s urban areas are therefore poised for a rapid increase in households, implying a huge demand for adequate, affordable housing. Only 44% of the urban population own their dwellings[1], while the 2018 FinScope Survey indicates 19% of adults aspire to acquire a house.

                  Share:

                  Regulating for Innovation Supervisory Toolkit

                  Regulating for Innovation Supervisory Toolkit

                    Download Toolkit

                    The fast-paced changes in the financial sector are primarily driven by innovation and advancements in technology. Proactive engagement with the market will help policy makers and regulators build their understand of trends and allow them to effectively assess the opportunities new technologies present against any emergent risks.

                    Share:

                    Cooperatives as Engines of Transformation

                    Cooperatives as Engines of Transformation

                    By Anthea Paelo

                    Cooperatives continue to be an important engine for economic productivity and growth in countries like Uganda. They play a critical role in mobilizing savings, increasing access to credit, and facilitate various activities along production value chains, including procurement, storage and distribution. Where, for example, a farmer might find it challenging to access a tractor to plough his fields, or credit to purchase seeds, as a part of a cooperative he can access these inputs more readily and at much better terms. It is perhaps for this reason that as of January 2020, agricultural cooperatives numbered over 9,000, double the number just twelve years ago1.

                    Share:

                    Determinants of Interest Rate Spreads in the Ugandan Banking System

                    Determinants of Interest Rate Spreads in the Ugandan Banking System

                      Download Presentation

                      FSD Uganda Executive Director made a presentation as a discussant at the Bank of Uganda (BoU) and International Growth Centre (IGC) Policy Seminar on lending rates. Download the presentation to find out about why we should care about bank interest rate spreads and how it affects every day Ugandans and Ugandan businesses.

                      Share:

                      Insurance Innovation Dialogue; Opportunities in the time of COVID-19

                      Insurance Innovation Dialogue; Opportunities in the time of COVID-19

                      By The FSD Uganda Team

                      The Insurance Regulatory Authority (IRA) of Uganda, in partnership with FSD Uganda and the Innovation Village, hosted an interactive virtual workshop on 19th November 2020, to discuss the opportunities and challenges to innovation in the Ugandan insurance market.

                      Share:

                      Market Research on Unsecured Lending for MSMEs

                      Market Research on Unsecured Lending for MSMEs

                        Download Report

                        Micro, small, and medium enterprises (MSMEs) (including smallholder farmers) struggle to access formal credit due to a lack of collateral and poor record keeping preventing them from making productive investments.

                        FSD Uganda works to build inclusive credit market infrastructure to address the retail and business credit gap. FSD Uganda commissioned a study about unsecured lending to MSMEs in high density markets in Kampala, aimed at understanding the demand and supply challenges in accessing working capital. Examples of high-density markets include: Owino, Nakawa and Kalerwe markets.

                        Share:

                        Informal Sector Pensions: Protecting millions of East Africans from old-age poverty

                        Informal Sector Pensions: Protecting millions of East Africans from old-age poverty

                        By Joseph Lutwama.

                        It is everyone’s desire to retire with a roof over their head and a decent income that will sustain them through their old age. However, very few ever realize that ideal, and it remains a dream that eludes millions in the region. Many East Africans never retire but die while toiling away as their productivity decreases. Economists and financial experts tell us that it is possible for one to save for retirement, and if those savings are invested well, they stand a better chance of reducing their old-age vulnerability and living their retirement dream. However, this is not the case in East Africa. Kenya, which has the highest pension sector coverage, sees only two out of every 10 working adults save for retirement. What could explain this paradox? In East Africa, the pension system is predominantly focused on the formal sector, leaving the informal sector largely unattended to. With levels of informal employment in East Africa as high as 91 percent, it follows that there would be such low levels of formal retirement savings.

                        Share:

                        Our Donors & Partners

                        European Union Logo
                        Report a concern anonymously

                        FRAUD AND ETHICS HOTLINE

                        Subscribe to our PUBLICATIONS

                        OUR CONTACTS

                        ADDRESS:
                        Plot 7A, John Babiha (Acacia) Avenue, Kololo
                        P.O. Box 608 Kampala, Uganda
                        TEL: +256 393 231260/2

                        © Copyright FSD Uganda 2015 – 2022. All Rights Reserved.