James Abola
29 September 2007
opinion
The reach and access to conventional financial institutions in Uganda is quite limited. This situation provides the perfect environment for alternative services like microfinance institutions to flourish.
Although reference to microfinance in Uganda always conjures the picture of credit, microfinance is more than that but embraces other forms of financial services like savings, insurance and funds transfer.
In August and September, the media has carried stories about things not being very fine, on the legal and regulatory front, with microfinance institutions in Uganda. First was the story that people who had deposited money with a microfinance institution known as Cowe had sued both Cowe and Bank of Uganda in a bid to recover their savings. According to media reports, Bank of Uganda had frozen the accounts of Cowe but Cowe successfully sued the Central Bank in the High Court to have the freeze lifted. Bank of Uganda then appealed the High Court verdict in the Court of Appeal.
Then word came out that the Uganda Police is investigating four other microfinance institutions. The matters covered in the police investigations include allegations that some members of the public who had deposited funds with these institutions were being given the run-around whenever they made efforts to withdraw their savings. Those who are lucky to get some money are disappointed that the amounts they received are far too little compared to their deposits.
So how are microfinance institutions in Uganda regulated? The bulk of microfinance institutions are not licensed and are therefore not regulated by the Bank of Uganda. These institutions operate as Non Governmental Organisations (NGOs) or Community Based Organsitions (CBOs). It is no longer uncommon to find a Savings and Credit Cooperative Society also involved in the business or practice of microfinance.
In 2003, Uganda introduced the Microfinance Deposit Taking Institutions (MDI) Act which allows licensed microfinance institutions to take deposits from the public and on lend such funds. About four microfinance institutions are currently operating under the MDI Act.
So far the institutions against whom the public are complaining are the ones that are not licensed by Bank of Uganda. These are the institutions that cannot take deposits from the public and then on lend them. The non deposit taking microfinance institution should always be in a position to give money to any client who wants to withdraw his or her savings, except for the time required for the microfinance institution to get the funds from its bankers. So why is it that these same institutions are attracting complaints? There are four possible reasons.
The first possibility is that the allegations are false. We ought to appreciate that microfinance institutions also bank with commercial banks. This means that when the microfinance institution requires a bit of time to move money from their banker to their premises. It is understandable that a client who wants to get his savings on demand would be disappointed to be told to wait for three days.
The second possibility is that some microfinance institutions are involved in what I would describe as "creative deposit taking." Although the law only permits institutions having MDI licenses to take deposits and on lend, some institutions seem to have found a clever way around this provision. The clever way is to register as a Savings and Credit Cooperative Society Organisation (Sacco). Now the law allows a Sacco to use the savings of its members to lend to other members.
So how about if you become a Sacco which allows any person that can deposit even Shs10,000 to buy shares and you make the share to become a precondition for lending to such individuals. The challenge comes when you over lend and do not have money on your bank account to meet the withdrawal demands of savers.
The third possibility is that the institution is using the savings of clients to give big loans to managers or directors -- insider lending. The licensed institutions have regulations that limit the level of insider lending but not so with non licensed microfinance institutions. History also tells us that whenever a financial institution engages in unregulated insider lending the loans in most cases become bad because first it becomes a free-for-all where nobody is cautioning anybody and secondly borrowers tend to put the proceeds of the loans in fixed illiquid assets like land and building.
The fourth possibility is where an institution is using the savings of its clients to finance its operations. Given the importance of microfinance institutions in our economy we hope for a speedy and thorough police investigation and also a great measure of self regulation by the institutions themselves.
Mr Abola is a business/finance consultant.
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