Uganda’s Microfinance Sector Effectiveness Review

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    The Uganda Microfinance Sector Effectiveness Review for 2014 is an initiative of the Financial Sector Deepening (FSD) Uganda based on a similar review that was done by the Consultative Group for Assisting the Poor (CGAP) and published in 2004. The report bears resemblance to the first review but has added new dimensions given the developments in the sector over the last decade.

    While some of the key drivers of the sector such as the involvement of the donors has remained constant, there have been some policy reversals that undermined the coordination and long-term strategy of building sustainability based on the market. In 2005, government intervened by injecting significant sums in the SACCOs as well as prescribing interest rates. Such actions are said to have undermined governance of beneficiary institutions and imposed a heavy political bearing on the free market forces. Accordingly, there was little left of the shared stakeholder vision.

    Efforts to introduce appropriate regulation for Tier IV have not yielded final results although some significant progress was noted during the last two years of the review period. There are also parallel processes aimed at amending the Financial Institutions Act to introduce products and services that are critical for the microfinance sector. Notable among these is agency banking and micro insurance, which should provide cost-effective avenues of serving the low income groups with more formal bank products and services.

    There has been limited activity in area of transitioning of financial institutions to the higher categories of financial institutions. Only a few institutions have joined Tier I and II. Some of the reasons cited refer to cost of compliance with higher regulatory requirements, competition with already established entities, and low profitability. Despite this, a few Tier 1 and II institutions that are leaning towards provision of microfinance, mainly Centenary Bank and Pride Microfinance, appear to be progressing well in terms of return on capital.

    The introduction of mobile money in 2009 sparked a revolution of inclusion, at least as far as the service of money transfer is concerned. Since then, additional initiatives have been designed to leverage mobile money although a few of them have delayed due to regulatory approval. The mobile money regulations issued by the Central Bank have been instrumental in guiding the growth or mobile money, although there is need for a more comprehensive regulation given the multi-sectoral scenario.

    The microfinance sector has impacted a large population especially in the area of increasing savings and access to credit. While there has not been a big impact on consumptions trends, there is reason to believe (based on global experiences) that the sector has helped to increase asset holding of low income people.

    Going forward, there is need to improve data collection, regulation and monitoring of the sector. A strong and effective coordination frameworks should be revived to ensure a common shared vision for the sector. Donors and government have got to ensure that their injections are market building and do not in any way offer perpetual subsidies that undermine institutional development and sustainability. Finally, the sector will definitely advance faster and be more effective with more adoption of digital financial services. The technological advancements in the digital space offer efficiency in terms of speed, accuracy and building of software platform-based linkages between the different tiers of institutions.

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