Programme description

Title: Financial System Development
Commissioned by: German Federal Ministry for Economic Cooperation and Development (BMZ); Swedish International Development Cooperation Agency (Sida), until June 2009
Country: Uganda
Lead executing agency: Bank of Uganda
Overall term: 1998 to 2014

Context

Uganda's financial sector has shown marked growth in recent years, and great progress has been made in its regulation. In March 2010, 28 regulated financial institutions were providing the country with financial services through 488 registered branch offices, compared with just 270 or so branches at the end of 2006. Despite the successes achieved, more than 70 % of Ugandans (compared to 82 % in 2007) have no access to formal financial services, with poor people and rural populations at a particular disadvantage. The inadequate access to basic financial services, such as savings, loans and payment systems, is one of the major challenges to economic development and poverty reduction. Women and smallholder farmers in rural areas are especially hard hit. Informal microfinance institutions, particularly the savings and credit cooperatives, or SACCOS, which receive strong support from the Ugandan Government, could play an important role in providing these population groups with alternatives. However, their potential remains limited due to low levels of training and the lack of regulation and supervision of the sector.

Objective

Sustainable financial services are accessible, especially for poorer people in Uganda. Financial inclusion is helping to implement the National Development Plan (NDP).

Approach

The programme supports the development of the Ugandan financial system. It analyses bottlenecks in the sector in order to develop ideas for poverty-oriented measures. By providing expert advice to the country's central bank, the Bank of Uganda (BOU), the programme is helping to improve conditions for broader access to secure and sustainable financial services. At the same time, it is promoting the exchange of information between policy makers in the field of agricultural finance, and supporting financial service providers in developing products for the agricultural sector. Lastly, at the micro level, it is also providing advice and training to microfinance institutions (MFIs) around the country, with the main focus on northern Uganda.

Besides working closely with KfW Entwicklungsbank, the programme also cooperates with its most important partner, BOU, as well as the Ministry of Finance Planning and Economic Development, the Plan for Modernisation of Agriculture, the Association of Microfinance Institutions of Uganda (AMFIU), Uganda Martyrs University, and a number of private companies, commercial banks, MFIs and SACCOs. Internationally, it cooperates actively with the financial sector platform, Making Finance Work for Africa, and with the Alliance for Financial Inclusion.

Results achieved so far

Improving conditions in the financial sector
The programme supported the Bank of Uganda and the government in developing and passing the Microfinance Deposit-taking Institutions (MDI) Act 2003. Now, microfinance institutions that operate according to the terms of this law and which allow themselves to be monitored by BOU are entitled to hold deposits made by private savers. By the end of 2009, more than 389,000 customers, mostly from poorer sections of the population, had taken advantage of this offer and opened savings accounts – double the number in 2005. Together with KfW, the programme is also helping BOU to establish a deposit guarantee fund for MDIs to protect the deposits of small-scale savers.

With KfW, the programme supports the development of the Credit Reference Bureau (CRB), one of the first in East Africa, which opened in 2008. Like the German credit bureau, SCHUFA, the CRB is a body whose purpose is to protect its affiliated institutions from credit defaults. In this way it aims to improve efficiency, interest rates and access to financial services in the medium to long term. Today, all branches of BOU-regulated financial institutions have been equipped with the requisite financial card system and are attached to the credit bureau. Between December 2008 and September 2010 the system collated the records of more than 400,000 customers. The CRB helps poorer customers, who are unable to offer collateral, to access credit as it allows them to build up a positive credit history.

The measures described here have been tied to other technical cooperation measures, which have enhanced the regulation of microfinance institutions and traditional banks, and increased the stability and security of the financial sector. With the improved legal framework and modern technologies, such as electronic transactions and a real-time gross settlement system, payment transactions have become faster and more secure. A direct consequence of this has been a rise in cashless payments (electronic transactions increased from 9,480 transfers per month in July 2005, to 176,169 in July 2010).

Development of skills and performance in the MFIs
The programme's support for AMFIU included assistance for introducing its Performance Management Tool (PMT), a standardised national instrument for monitoring the performance of MFIs. Already, 70 SACCOs have been identified for inclusion in the system. Around 20 PMT reports had been submitted by mid 2010 and a prototype of the reporting system has been launched on the association's website. This enables the SACCOs to track their own performance more easily, to compare and evaluate themselves, and to react accordingly.

SACCOs have assimilated model solutions and have also submitted themselves to due-diligence procedures. Twelve pilot SACCOs, including eight in northern Uganda, have benefited from support measures designed to strengthen their technical efficiency and institutional transparency. Underpinning these measures is the introduction of a management information system that uses the banking software MBWin, which was jointly developed by the Food and Agriculture Organization and the former GTZ (now GIZ). The necessary hardware is designed to suit the users' local conditions. For instance, solar panels are used to generate power for running the system. As a result of collaboration with the SACCOs, it is expected that as many as 40,000 members will benefit from their cooperatives' improved services. A number of SACCOs have already adapted the process of interest calculation and have also reduced their rates. This means the cost of borrowing is now considerably lower for the members.

A degree course in microfinance has been developed at Uganda Martyrs University. On average, 80 students graduate from this each year and take up jobs in the microfinance sector.

Rural and agricultural finance
The procedures used by regulated financial institutions and small deposit-taking banks to collect data on developments in the agricultural sector have improved. This makes it easier to monitor lending in the sector as a proportion of the total credit provided by banks in the financial sector as a whole.

In collaboration with BOU and the Plan for Modernisation of Agriculture, the programme produced Uganda's first Agricultural Finance Year Book in 2008. This discusses the findings, successes and challenges of agricultural finance in Uganda, and incorporates them into the sector dialogue. Since then, two further editions of the Year Book have been published, which were met with ever greater interest by politicians and the private sector.

Finally, the programme has supported financial institutions in expanding their operations into rural areas and in developing financial products that reflect the demands of specific agricultural value chains. In this way, for example, by working with a local partner, Centenary Bank, a successful credit facility was developed to fund purchases of draught animals, which is now benefiting impoverished farmers, especially in northern Uganda.