The Microfinance Transparency report from 2011, lauded Uganda as the most vibrant microfinance industry in Africa. Yet, despite this success in Uganda as well as many other African nations, poverty levels within the population would indicate that the job to ensure economic inclusion is far from over.
Microfinance institutions are organizations that provide loans to low-income clients, including micro-companies and the self-employed, who traditionally lack access to mainstream sources of finance from Banking Institutions. The Microfinance Industry in Uganda faces many challenges, and we discuss a few of them below.
The first hurdle in the Microfinance Industry is Regulation. A lot of work still has to be done to get regulators in developing countries to update their financial regulations.
Microfinance institutions are organizations that provide loans to low-income clients, including micro-companies and the self-employed, who traditionally lack access to mainstream sources of finance from Banking Institutions. The Microfinance Industry in Uganda faces many challenges, and we discuss a few of them below.
The first hurdle in the Microfinance Industry is Regulation. A lot of work still has to be done to get regulators in developing countries to update their financial regulations.
If the regulations limit digital banking, as is the case in most countries, innovators cannot gain entry into the microfinance industry and improve the services offered.
An enabling regulatory approach is required.
One that not only implements the recommendations of global standard setters but also takes a functional and proportional regulatory approach to allow banks and non-bank providers to compete, as well as to establish different types of partnerships for the provision of mobile money.
Second is the reality that credit can be expensive. Traditional banks still give out costly loans, due to the credit regulations set by the central bank as well as the monopoly they have in the market. So, by the time this money reaches the person borrowing from microfinance institutions, the interest is very high.
One that not only implements the recommendations of global standard setters but also takes a functional and proportional regulatory approach to allow banks and non-bank providers to compete, as well as to establish different types of partnerships for the provision of mobile money.
Second is the reality that credit can be expensive. Traditional banks still give out costly loans, due to the credit regulations set by the central bank as well as the monopoly they have in the market. So, by the time this money reaches the person borrowing from microfinance institutions, the interest is very high.
Another challenge is that banking is counter-cultural in particular sections of society. Unfortunately, the practice of banking is still a foreign idea in some rural areas and even among the urban poor. According to the Finscope survey of 2018, only 11% of adults used services from banks, the majority (52%) of whom live in urban areas while (48%) are in rural areas. This ratio is not particularly revealing until you consider the fact that 76% of Uganda’s population are rural-based. Moreover, education is a significant factor influencing the number of banked adults. The majority, 38% have at least secondary level education, 27% have a primary level education, and 24 % have specialized training in their industry. Among the unbanked demographics: they traditionally borrow money from friends and relatives and then repay the same amount of money borrowed regardless of how much time has passed. Therefore, it becomes difficult for them to understand the advantage in banking which requires that they pay interest on loans.
Lack of infrastructure is yet another reality holding back the Microfinance Industry. The near absence of necessary infrastructure is one of the most fundamental problems microfinance banks have. This lack of basic infrastructure compounds the operational difficulties of these banks, which ordinarily are faced by high operating costs because of their nature of business. They deal with many clients making small transactions; thus, the transaction costs of microfinance institutions are usually higher than those of conventional banks. On top of that, these banks also have to incur additional charges to provide themselves with electricity and water. The lack of good roads, particularly in rural areas, also affects their ability to reach into the communities. All these things work together to drive up the costs of operations.
Competition with Commercial banks. This competition exists because many microfinance institutions merely mimic the practices of the commercial banks and the services they offer, rather than developing contextually appropriate systems. However, this competition is not altogether surprising since in leadership in Microfinance institutions draws heavily from staff with prior experience in commercial banks. That coupled with the fact that there are still things being discovered about how to differentiate Microfinance institutions from commercial banks while keeping them profitable. This competition takes away their ability to be clear about their agenda, and best serve their client base, whose needs are unique.
Finally, corruption continues to wreak havoc in many sectors of the economies in developing nations, and the microfinance industry is no exception. It manifests in many ways, such as corporate governance failures, frauds and forgeries, theft and refusal by customers to repay loans. The standard of corporate governance in some microfinance banks is low.
There have been instances of board members misusing their positions to obtain facilities way above the regulatory limit for insider related loans and worse still without any intention of repaying such facilities. They also use their positions to unduly influence and manipulate the recruitment processes in favour of their associates. Frauds and forgeries by both insiders and outsiders to the banks are widespread, and people generally obtain loans with no intention to repay.
There have been instances of board members misusing their positions to obtain facilities way above the regulatory limit for insider related loans and worse still without any intention of repaying such facilities. They also use their positions to unduly influence and manipulate the recruitment processes in favour of their associates. Frauds and forgeries by both insiders and outsiders to the banks are widespread, and people generally obtain loans with no intention to repay.
Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
The Microfinance Transparency report from 2011, lauded Uganda as the most vibrant microfinance industry in Africa. Yet, despite this success in Uganda as well as many other African nations, poverty levels within the population would indicate that the job to ensure economic inclusion is far from over. Microfinance institutions are organizations that provide loans to low-income […]
In any Investment Club, there is likely going to be a whole lot of movement of cash. Any money dedicated to covering the operational costs of the Club and its investments: from administrative needs to the payment of suppliers and staff, needs to be managed appropriately. It is of utmost importance to the survival and […]
The word Fintech is being used in discourse more and more every day, which should not come as a surprise considering the scope of its definition. Still many of us outside the financial sector remain unfamiliar with this phrase, so I will explain it. Fintech is simply the abbreviated way to say Financial technology; a […]
The Microfinance Transparency report from 2011, lauded Uganda as the most vibrant microfinance industry in Africa. Yet, despite this success in Uganda as well as many other African nations, poverty levels within the population would indicate that the job to ensure economic inclusion is far from over. Microfinance institutions are organizations that provide loans to low-income […]
In any Investment Club, there is likely going to be a whole lot of movement of cash. Any money dedicated to covering the operational costs of the Club and its investments: from administrative needs to the payment of suppliers and staff, needs to be managed appropriately. It is of utmost importance to the survival and […]
In the article concerning the expectations and realities of Investment Clubs, we pointed out that Uganda has witnessed an exponential growth in these associations over the last decade. The Capital Market Authority places the number of Investment Clubs at over 8,000. Despite this growth spurt, a good number of Investment Clubs do not survive in […]
When was the moment you discovered the wisdom in investing and decided that Investment Clubs were worth paying attention to as your gateway to financial freedom? Were you prompted by the realization that you have been working and earning an income for several years, but have no tangible assets to show for it, or was […]