Why microfinance institutions have failed to fight poverty

Tuesday September 28 2021
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A teller in a banking hall. The reputation of microfinance institutions is marred by the rampant fraud especially SACCOs and the unethical practices by some money lenders. PHOTO/Edgar R. Batte

By RACHEAL NABISUBI

To attain middle income status, the government was set to ride on the back of microfinance institutions spread across the country to deliver households and communities from the biting poverty, exacerbated by the Covid-19 pandemic and its resultant containment measures.  

The Uganda National Household Survey, 2019/20 conducted by Uganda Bureau of Statistics (Ubos), indicates that during the 2019/20 financial year, income poverty (which also means living below the poverty line), worsened during Covid-19, increasing from 19 per cent to 22 per cent.

The survey indicates that the number of poor Ugandans during the period increased from eight million to 8.3m people.

By making affordable financing available, microfinance institutions and Savings and Cooperative Credit Institutions or Saccos not only firm financial stability in communities but also deepen financial inclusion in the process.

The Financial sector is divided into four tiers each with specifications responding to varied groups within the same communities or economic sectors.

Tier 1 – Commercial banks; Tier 2 – Credit Institutions and Finance Companies; Tier 3 – Microfinance Deposit-Taking Institutions (MDIs) and Tier 4.

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Under Tier 4, there are microfinance institutions comprising of – Saving Credit and Cooperative Organisations (Saccos), Development parish model, Emyooga, Non deposit taking microfinance institutions and Self-help groups among others.

Government is putting Saccos at the centre of implementing the parish model and many others such as Emyooga.  Infact, through the Micro Finance Support Centre, the implementation of the Emyooga initiative involves creating Savings groups at the parish level which come together at the constituency level with the larger Sacco.

There is no doubt then that tier 4 financial institutions sit at the centre of providing financial services and championing savings among the majority of the population. With that foregoing, these institutions are not living up to their expectations and this still begs the question: Why?

Politicisation, poor management

Mr Leonard Okello, executive director, UHURU Institute, says the biggest challenge is that most of these well intended interventions of the government are unleashed during election campaigns.

“The population then views it as ‘kasimo’ – a Luganda word meaning token of appreciation for voting well,”Mr Okello says.

When the driving factor “money” is given to these institutions, it meets them with weak and disorganised structures that ensure the money is misused and the intention for them to grow is not achieved.

“A Sacco that has a chairman who is also the manager is a sign of a failing management.  There is need to streamline management within any Sacco,” according to Tibbs Arikiriza, the manager Saccos at the Uganda Microfinance Regulatory Authority that partially regulates Tier 4 institutions.

He recommends that a Sacco, for instance, must have a credit policy paper. “If you manage a Sacco without any credit policy paper, it is hard to succeed. You have to know what members you are going to lend money to and at what interest, there must be a business plan or strategic plan, “he says.

The inherent management challenges within Tier four institutions is what affected for instance, the implementation of the first round of the Emyooga initiative.

“The people did not receive adequate sensitisation which is very critical in financial management,” according to the Afred Ejanu, head of credit and investment at the Micro Finance Support Centre. 

In a very short time, the Micro Finance Support Centre was charged with establishing more than 200,000 parish savings associations that were a result of village saving groups besides creating 6,700 saccos. That these were established and the Shs30 million in the Emyooga came before the training! So were the negative outcomes surprising?

For instance in March 25, 2021, Daily Monitor published a story titled: Microfinance Support Centre fails to account for Shs3.4b’ indicating that the Microfinance Support Centre, had by June 2020 failed to account for Shs3.4b, a year and half after the money had been disbursed to different persons to promote government programmes, according to the Auditor General.

There is no evidence that the Emyooga initiative is about to stop its initial implementation but clearly demonstrates the need for training and sensitisation to come after the money.

The management of Saccos is member-based and not only anchored by top management.

Tibbs Akiriza, the manager Saccos at the UMRA, confirms a cornerstone of successful Saccos.

“Most people do not really own these SACCOS. Owning a SACCO means you have bought shares, you are saving money there and it feels like yours. As a member you are given a card, you know how much you have and what other members have and their shareholding.”

According to Mr Akiriza, insider landing is a big issue for Saccos.

“A Sacco has a management and governance board which will approve and take loans for themselves and they end up defaulting. If they default, they will decide if they are to write off these loans, which if they do, it corodes the value of the SACCO leading to its collapse,” Mr Akiriza said.

These governance problems continue because the regulatory regime is not as clear and strict as in the case of tier 1 to 3 of the financial sector under the Bank of Uganda. It is thus imperative that management challenges be tackled by government if it is going to realise its intended goals in relying on Tier 4 institutions even with the greatly touted Parish Development Model.

Regulatory challenges

 For a Sacco to finally belong under the jurisdiction of the Micro Finance Regulatory Authority (UMRA), it must be registered with the Ministry of Trade first and stays under that jurisdiction for at least two to three years.

Officials in these two institutions are reluctant to speak about this issue but it is one of the issues that weakens regulation in these Tier four institutions.

“There is need to simplify the licensing process. With the new capital requirements by the BoU for Tier 1 to 3 institutions, Tier 4 financial institutions are going to play an even greater role in our economy,” Mr John Walugembe- ED, Federation of Small & Medium Enterprises (FSME) adds.

The regulations of micro Finance institutions for example by UMRA is sometimes more complicated by affiliations some have with third party non-financial sector players.

Mr Leonard Okello, executive director, UHURU Institute, says “MFIs should be founded based on self-responsibility and clear values. This means that any external help from NGOs, donors and government should just be an additional and not the core agenda of any micro finance group or SACCO.

According to Julius Mukunda, the executive director Civil Society Budget Advocacy Group, “Lack of microfinance financial infrastructure in the country has escalated its mismanagement issues ranging from lending at very high rates, mostly concentrated in large customer areas and having unfair recovery policies once a customer defaults.”

Streamlining government regulators such as UMRA and fully giving them the mandate and adding them the requisite staff and infrastructure is critical for the Tier 4 section of the financial industry targeting most Ugandans and at the center of government’s poverty alleviation initiatives.

There are about 950 licensed microfinance institutions and money lenders across the country of which 774 were money lending companies, 156 were non-deposit taking microfinance institutions. Saccos number in the thousands and more will be created as the parish development model takes route as the key facet in government’s programme implementation.

Uganda has seen the fair success that comes with regulation with commercial banks, credit institutions and Deposit taking Micro Finance Institutions. There is no escaping the need of effective regulation of the Tier 4 entities if the goal of effective financial inclusion as a pillar of development will succeed.

In the parish development model, there have been funds put aside for training and mobilising the communities. But how effective this is will show in the results. Good results come from good planning and implementation and this cannot be more emphasized than in improving financial intermediation to get the biggest chunk of Ugandans out of poverty.

Streamline regulation of microfinance institutions

Streamlining government regulators such as UMRA and fully giving them the mandate and adding them the requisite staff and infrastructure is critical for the tier 4 section of the financial industry targeting most Ugandans and at the center of government’s poverty alleviation initiatives.


There are about 950 licensed microfinance institutions and money lenders across the country of which 774 are money lending companies, 156 were non-deposit taking microfinance institutions. Saccos number in the thousands and more will be created as the parish development model takes route as the key facet in government’s programme implementation.

There is no escaping the need of effective regulation of the Tier four entities if the goal of effective financial inclusion as a pillar of development will succeed.

Good results come from good planning and implementation.

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