Notes from the Field: Uganda

At the invitation of USAID's Rural SPEED project, CGAP’ team conducted the 5th country-level savings assessment in Uganda, Oct. 24-28. The fieldwork concluded with a debriefing session where the review team made a presentation (zipped ppt 600 KB) on its preliminary findings.

Encouraging Developments, but Access Still Low

As detailed in the Uganda Microfinance Sector Effectiveness Review conducted by CGAP last year, Ugandan microfinance benefits from a high degree of donor coordination and a talented set of managers. However, overall access is still shockingly low, with 42,459 people per branch of deposit-taking institutions (as compared to 9,000-12,000 per branch in Mexico, Philippines, Benin, and Kenya). Not surprisingly, this manifests itself in low usage of formal and even semi-formal services: one recent study found just 7% of rural Ugandans saving in ROSCAs and ASCAs, 4% in SACCOs and a scant 2% in MFIs.

On the bright side, there is a relatively high degree of awareness among government, donors and industry actors vis-a-vis the propensity of the poor to save (in both financial and non-financial forms). This recognition undergirds the 2003 Micro-Deposit Taking Institutions (MDI) Law, which opens a regulatory window for MFIs to legally extend the supply of high-quality, secure deposit services downmarket. Four top-performing MFIs have grasped the MDI mantle and now mobilize a volume of savings comparable to all other MFIs and cooperatives combined. Unfortunately, prospects for MDIs to expand their geographic reach appear to be limited, at least in the short term. Knowledgeable observers estimated the cost of becoming a MDI at between USD 1 and 3 million, much of it to meet Bank of Uganda requirements for weekly reporting and physical security at branches. The investment has precluded current MDIs from being able to expand their branch system, and may reduce the number of MFIs willing and able to join the ranks of regulated deposit-taking institutions.

Which Way Forward?

Traditional savings pots used by many Ugandans in lieu of a formal sector savings account

A good deal of thinking has been triggered at all levels in Uganda by the low level of access and the apparent reality that MDIs will take time to expand, especially to rural areas. Some are looking to insufficiently-supervised Saving and Credit Cooperatives (SACCOs) as an alternative, with large streams of funding already available or on the horizon. In 2005 the Government of Uganda announced a Microfinance Outreach Plan which aims to encourage start-up of new SACCOs and strengthen existing ones. Upwards of $25 million may eventually be devoted to the plan, in parallel to an additional $25 million in existing apex funding for SACCOs and rural MFIs.

This represents a substantial investment in a set of institutions with promising proximity to the rural poor, but substantial management challenges. As in Benin, Mexico and the Philippines, institutions with the best proximity to the unbanked are typically the least secure repositories of poor people's savings. Large amounts of external funding could have deleterious effects on institutions with weak governance, unless properly targeted and used to effect in strengthening management. The lack of regulatory capacity is also an issue. Whereas banks and MDIs have capable oversight from the BOU, SACCOs fall under a separate Cooperatives Law administered by the Ministry of Trade Tourism and Industry which possesses limited staff capacity and know-how to fully perform the job delegated to it. The several SACCO associations are candid about their lack of resources to police members, were they to be delegated the responsibility.

New Ideas, New Avenues for Ramping Up Rural Access

Given the complementary strengths of different institutional types, many are looking to linkage banking to resolve the paradox of proximity and security. While BOU regulations currently prohibit co-branding of products, linkage banking relationships could funnel excess SACCO liquidity into formal sector deposits in banks, and might involve TA from the regulated institution. Donors and other entities may play a role in helping midwife these relationships.

An equally pressing need may be consumer education around savings. Multiple studies indicate that Ugandans choose to save primarily in cash or in-kind. Rural savers also rank security as their top concern about depositing funds in institutions. A consumer education campaign might go beyond detailing the benefits of saving in formal institutions to give rural Ugandans useful advice for telling whether an institution is financially stable.

Next steps

These findings will serve as an input into Rural SPEED´s strategy going forward. Several institutions have also expressed a desire to work with CGAP on downscaling or building out their mass-market strategy. CGAP may also work with some of the Ugandan institutions on a deposit costing exercise planned for early 2006.