Microfinance in Uganda - OECD

1 Commissioned by the austrian Ministry of Foreign Affairs, Department for Development Cooperation Not for distribution Wien, 17. Dezember 2001 Lechner, Reiter und Riesenfelder Sozialforschung OEG A-1060 Wien, Liniengasse 2A/1 Tel: +43 (1) 595 40 40 - 0 Fax: +43 (1) 595 40 40 - 9 E-mail: Andy Carlton, Hannes Manndorff, Andrew Obara, Walter Rei-ter, Elisabeth Rhyne Microfinance in Uganda L&R SOCIALRESEARCH 2 Table of Contents Abbreviations 4 Part I: Microfinance in Uganda Sector Overview 7 1 Introduction 8 Background to the Study 8 Microfinance and its context 8 2 Microfinance Context in Uganda 10 Overall Context 10 The Private Sector 12 The Financial Sector 12 3 History and Current Status of the Microfinance Industry 16 4 Clients and Impact of Microfinance Services 19 Clients of Microfinance Institutions 19 Client Impact of Microfinance Services 21 Gender and Empowerment 23 5 Government Policies.

2 Programs and Regulatory Framework 26 Government Policies 26 Government Microfinance Programs 28 Regulatory Framework 29 6 Stakeholder Coordination Mechanisms 31 7 Microfinance Capacity Builders 35 8 Microfinance Providers and their Services 37 9 Competition and Commercialization of Microfinance 45 10 Conclusion: Why is Uganda ahead? 51 11 Remaining Challenges 53 Annex I: Donor Initiatives in Microfinance 54 3 Part II: Structure of the austrian Develeopment Cooperation in relation to Microfinance in Uganda 56 1 The austrian Development Cooperation in Uganda in difficult times effects of budget cuts 57 2 Perspectives for the austrian Microfinance Interventions in Uganda 60 3 Structure and Actors of the austrian Development Cooperation 62 Country Desk Officer 63 MSM sector consultant 63 Regional Bureau in Kampala 64 NGOs 65 4 Information Flows and Systems 66 Technical Information System 66 Documentation of Sector Interventions 66 Policy and Program Discussion 67 6 Structure of Cooperation 68 7 Recommendations

3 69 Systematization of reporting in order to professionalize communication structures 69 Decision-making mechanisms promoting sector coherence 71 Stabilization of the Regional Bureau 72 Bibliography 73 List of People interviewed 77 4 Abbreviations ADB African Development Bank ADC austrian Development Cooperation AMFIU Association of Micro En-terprise Finance Institu-tions of Uganda BoU bank of Uganda CBO Community Based Organi-zation CERUDEB commercial bank providing Microfinance services CMA Postbank and Capital Mar-kets Authority as main partners CMF-PRESTO Rural Microfinance Sup-port Program (formerly PAP)

4 CML a privately owned microfi-nance institution DREPS District Resource Endow-ment Profile Survey ERP Economic Recovery Pro-gramme EU European Union FSA Financial Service Associa-tions FSD Financial System Devel-opment Project GoU Government of Uganda GTZ Gessellschaft f r Techni-sche Zusammenarbeit IMF International Monetary Fund 5 IPC International Project Con-sult MCC Microfinance Competence Center MDIs Microfinance Deposit-taking Institutions MFIs Microfinance industry in Africa.

5 Some MFPED Ministry of Finance, Plan-ning and Economic Devel-opment MSEs micro and small enter-prises . NGO non-governmental organi-sation PAP Poverty Alleviation Project PDSP Private Sector Develop-ment Program PEAP Poverty Eradication Action Plan PMA Plan for Modernization of Agriculture . PSD/CB Private Sector Develop-ment/Capacity Building PSDP Private Sector Develop-ment Program PSDSG Private Sector Donor Sub-Group RFSC Rural Financial Services Component RMSP Rural Microfinance Sup-port Project ROSCAs Rotating Savings and Credit Associations SACCOs Savings and Credit Asso-ciations SPEED Support to Private Enter-prise Expansion and De-velopment 6 SUFFICE Support for Feasible Fi-nancial Institutions and Capacity Building Efforts Programme UCA Uganda Cooperative Alli-ance UCSCU Uganda Cooperative Sav-ings and Credit Union.

6 UIB Uganda Institute of Bank-ers UMU Uganda Microfinance Un-ion UNDP United Nations Develop-ment Program USE Uganda Security Ex-change , UWFT Uganda s Women Finance Trust WOCCU World Council of Credit Unions 7 Part I: Microfinance in Uganda Sector Overview 8 1 Introduction Background to the Study This overview presents part of the findings of the evaluation of Microfinance as an instrument of the austrian Development Cooperation (ADC) in Uganda . The evaluation has been con-ducted by Lechner and Reiter Institute of Social Research, Vienna, and commissioned by the austrian Ministry of Foreign Affairs, Department for Development Cooperation.

7 The evaluation team consisted of the Walter Reiter (team leader), Andy Carlton, Hannes Manndorff and Andrew Obara. Elisa-beth Rhyne acted as additional advisor and was involved in the preparation of the evaluation and the analysis of the find-ings. The evaluation of Microfinance as an instrument of the Aus-trian Development Cooperation has comprised three stages: The first stage consisted of the assessment of Austria s micro-finance interventions in Zimbabwe and was carried out in 1999. During the second stage, ADC s Microfinance strategies and their application in Mozambique and Namibia were evalu-ated in early 2000. The assessment of Microfinance as an instrument of the austrian Development Cooperation in Uganda represents the final stage of the evaluation cycle.

8 While in the first two stages the evaluations have focused on the analysis of the institutions supported by Austria and the assessment of ADC s policies and structures, the focus of the final stage has shifted to the analysis of the environmental conditions of Microfinance in Uganda and how these condi-tions impact on the performance of the Microfinance industry and the institutions supported by Austria. This overview is part of the output of the evaluation and is open to a wider public than the assessment of ADC s Microfinance policies and strategies in Uganda . Microfinance and its context Interest in Microfinance has soared in the recent decade and the instrument is now seen as one of the most promising tools to tackle poverty in the developing world.

9 The fascination with Microfinance derives from the fact that the provision of finan- 9 cial services can contribute to poverty reduction and pass the test of sustainability at the same time. For donors, microfi-nance is especially attractive as it can be delivered in an insti-tutional and financially sustainable manner that permits them to withdraw after making relatively modest investments. How-ever, Microfinance has sometimes disappointed its support-ers. Only few of the hundreds of Microfinance programs inau-gurated in the last decade have proven their sustainability. A growing body of evidence indicates that the instrument does not meet the high expectations initially placed on it in terms of client impact. Few microenterprises experience sustained growth, while a majority grow only a little or maintain their op-erations at a constant level.

10 It is also unusual for credit to trig-ger a continuous increase in technical sophistication, output or employment. It is much more common for each of these vari-ables to reach a plateau after one or two loans and remain in a steady state. As far as empowerment is concerned, microfi-nance services have shown little potential to thoroughly change existing inequalities in power relations or the role of women in society. (Buckley 1997; Goetz and Gupta 1996; Hulme and Mosley 1996; Zaman 1998). However, empirical evidence shows that Microfinance inter-ventions have indeed the capacity to reduce poverty, contrib-ute to food security, and change social relations for the better. Positive impacts have been detected at the enterprise as well as household level. Newer research indicates that participa-tion in Microfinance programs contributes to reduced vulner-ability to economic risks.