Andy Carlton, Hannes Manndorff, Andrew Obara, Walter Rei-

ter, Elisabeth Rhyne

Microfinance in Uganda

Commissioned by the Austrian Ministry of Foreign

Affairs, Department for Development Cooperation

Not for distribution

Wien, 17. Dezember 2001

L&R SOCIALRESEARCH 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: office@[Link]
[Link]
 Table of Contents

Abbreviations 4

Part I: Microfinance in Uganda Sector Overview 7

1 Introduction 8
1.1 Background to the Study 8
1.2 Microfinance and its context 8

2 Microfinance Context in Uganda 10

2.1 Overall Context 10
2.2 The Private Sector 12
2.3 The Financial Sector 12

3 History and Current Status of the Microfinance

Industry 16

4 Clients and Impact of Microfinance Services 19

4.1 Clients of Microfinance Institutions 19
4.2 Client Impact of Microfinance Services 21
4.3 Gender and Empowerment 23

5 Government Policies, Programs and Regulatory

Framework 26
5.1 Government Policies 26
5.2 Government Microfinance Programs 28
5.3 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

2
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
3.1 Country Desk Officer 63
3.2 MSM sector consultant 63
3.3 Regional Bureau in Kampala 64
3.4 NGOs 65

4 Information Flows and Systems 66

4.1 Technical Information System 66
4.2 Documentation of Sector Interventions 66
4.3 Policy and Program Discussion 67

6 Structure of Cooperation 68

7 Recommendations 69
7.1 Systematization of reporting in order to
professionalize communication structures 69
7.2 Decision-making mechanisms promoting sector
coherence 71
7.3 Stabilization of the Regional Bureau 72

Bibliography 73

List of People interviewed 77

3
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)
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 für Techni-
sche Zusammenarbeit
IMF International Monetary
Fund

4
IPC International Project Con-
sult
MCC Microfinance Competence
Center
MDIs Microfinance Deposit-
taking Institutions
MFIs microfinance industry in
Africa. 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

5
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 .
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

6
Part I:
Microfinance in Uganda
Sector Overview

7
1 Introduction

1.1 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. 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.
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.

1.2 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. The fascination with
microfinance derives from the fact that the provision of finan-

8
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. 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. Microfinance services help the poor
to diversifying their income sources, building up physical, hu-
man and social assets, focus on good money management,
rebuild the household’s base of income and assets after eco-
nomic shocks have occurred and to smooth consumption
(Cohen 1997; Cohen 1999; Hulme 1998, Ito 1998; Sebstad
and Chen 1996). The impact assessment studies carried out
in Uganda confirm positive affects of microfinance services on
poverty reduction, as will be outlined in Chapter 4.2.
The success of a microfinance program – defined in terms of
outreach, financial sustainability and/or socio-economic im-
pact – depends on an interaction between the characteristics
of the program itself (both its design and the way it is man-
aged) and the context in which the program is implemented.
The program environment can influence the success and im-
pact of microfinance interventions in two distinct ways. First,
socio-economic conditions may affect both the ability of clients
to benefit from their loans and their capacity to repay. Second,

9
the environment directly influences the operation of the pro-
gram itself, for example by restricting the possible range of
program activities or the terms on which services can be of-
fered (Snodgrass 1997).
Uganda is generally seen as the country with the most vibrant
and successful microfinance industry in Africa. Some MFIs
have experienced strong growth and are now reaching a con-
siderable number of clients, with three serving between
25.000 and 45.000 clients. A number of microfinance provid-
ers are close to financial sustainability or have already sur-
passed it. A series of impact studies conducted in Uganda in
the past years have demonstrated that the provision of micro-
finance services contributes to reduced client vulnerability to
economic risks, results in strengthening linkages of clients
and their households to the agricultural sector, and enables
clients to acquire valued skills.
Moreover, all observers agree that the success of microfi-
nance in Uganda is closely linked to a number of enabling
contextual factors specific to the country. The overview will
therefore put emphasis on the description and analysis of the
environment in which microfinance has developed over the
past years. Thus, the objective of this paper is to contribute to
the understanding of practitioners, policy makers and donors
why microfinance has worked in Uganda and to draw some
general conclusions in terms of external factors conducive
and/or adverse to microfinance success.

2 Microfinance Context in
Uganda

2.1 Overall Context

Uganda is a country with a remarkable development. Having

emerged only ten years ago from a savage civil war with the
economy in ruins and its international reputation destroyed by
25 years of dictatorship, it is now held up as one of the few
African success stories of the last decade. On the economic
front Uganda can boast some very impressive statistics. Over
the past decade, the size of Uganda’s economy has more
than doubled with average growth rates of about 6% per an-
num. According to a recent survey, Uganda ranked second in

10
Sub-Saharan Africa in terms of GDP growth since
[Link] the same period, inflation was brought down from
the dizzy heights of 240% pa in 1986/87 and has been less
than 10 percent in the last five years. These achievements
can largely be attributed the government’s commitment to
macroeconomic stability and the liberalization of the economy
including the financial system (MFPED 2000; Wright et al
1999a).
However, a closer look at the situation of poverty in Uganda
reveals a much less encouraging picture. Recent surveys
conclude that between 1992 and today, Uganda has made
little headway in the fight against poverty. Although different
methodologies to gauge the extent of poverty in Uganda have
been used, all analysts agree that at least 50% of the popula-
tion lives below the poverty line. With an estimated US$ 290
GNP per capita Uganda still ranks amongst the twenty poor-
est countries in the world. While infant and maternity mortality
remain very high, the fertility rate (6,7 children per woman) is
one of the highest in the world. Economic liberalization has
created a health care system that places the poor at a stark
disadvantage. Life expectancy has fallen from 48 years in
1980 to 43 years in 1995, largely due to the impact of the
AIDS epidemic. The disease takes a particularly heavy toll on
the economy as it tends to rob society of its most productive
members in their 30s and 40s (MFPED 2000; Wright et al
1999a).
Poverty is particularly prevalent in rural areas. With a share of
nearly 50% of GDP, agriculture continues to dominate the
Ugandan economy. Despite considerable productivity and
output improvements for certain cash crops following the gov-
ernment’s liberalization efforts, the rural economy is still
largely dominated by low productivity subsistence production.
While cash crop producers have benefited from liberalization,
the large smallholder sector with average holdings of 1,6 hec-
tares has seen very little real growth over the last decade due
to lack of access to agricultural inputs and financial services,
declining soil fertility, poor infrastructure, information and
communications and the inability to access output markets.
The poorest 20% of the population, who have no or very little
involvement in the production of cash crops, may actually be
worse off (Wright et al 1999a).

11
2.2 The Private Sector

The Government of Uganda wants the private sector to be-

come the “engine of growth” of the Ugandan economy and a
central pillar for increasing incomes, creating employment and
consequently poverty reduction on a sustainable basis. The
structural adjustment policies pursued in the 1990s triggered
public sector retrenchments and severe cuts in government
expenditure, which has resulted in the massive lay-off of gov-
ernment and parastatals employees. Modernization and re-
structuring of the private sector, including the banking indus-
try, further contributed to huge job losses in the formal sector.
The under- and unemployed are increasingly forced to en-
gage in a variety of economic activities to generate sufficient
income. With men as the traditional income providers finding it
ever more difficult to support their families, an increasing
number of urban and peri-urban women enter the labor mar-
ket to engage in various sectors ranging predominantly from
petty trading to service provision and in some cases even
manufacturing activities on a significant scale. The vast major-
ity of these activities take place in the informal sector, which is
estimated to account for about 80% of Kampala’s current em-
ployment (Wright et al 1999a).
As a result of the prevalence of self-employment, the Ugan-
dan private sector is dominated by micro and small enter-
prises (MSEs). According to several studies, around 80% of
all firms fall under the MSE category and only about 10% can
be classified as large firms with sales over US$ 500.000. Mi-
cro and small enterprises employ the greatest number of peo-
ple. The micro enterprise sector is estimated to provide 90%
of the total non-farm employment. However, the private sector
is still constrained by various factors, including: inadequate
provision of vital utilities, insufficient access to appropriate
financial services, an inadequate commercial justice system, a
high level of corruption, an insufficient tax administration, poor
regulation and a weak institutional framework. As a result,
private sector investment remains low, currently estimated at
13% of GDP, a good deal below the Sub-Saharan average of
20% of GDP (MFPED 2000; Wong 1999).

2.3 The Financial Sector

Prior to the launching of the Financial Sector Reform Program

in 1993, Uganda’s formal financial system was considered to

12
be one of the least developed in sub-Saharan Africa. It was
small in terms of value and volumes transacted and had only
a very limited number of financial products for business entre-
preneurs. The reform program included improving the effec-
tiveness of monetary policy, the revision of financial legisla-
tion, strengthening the central bank and restructuring some
insolvent banks. The financial system reform has shown some
positive results. A number of private sector financial institu-
tions promoted by both Ugandan and foreign investors have
been licensed. This has increased competition and encour-
aged efficiency. Interest rates as well as the foreign exchange
market have been liberalized, which has resulted in increased
private and foreign capital inflows into the economy (Bategeka
1999; MFPED 1998).
However, the formal financial system has continued to be
extremely fragile and underwent a serious crisis between
1997 and 1999. Five banks including the popular Cooperative
Bank unexpectedly closed because of internal financial prob-
lems, partly due to inadequate prudential supervision, which
led to gross violation of banks regulations. They fell short of
capital requirements stemming from problems of poor loan
documentation, inadequate provisioning, insufficient risk as-
sessment capacity, internal fraud and other management
weaknesses. Moreover, the partial privatization of the Uganda
Commercial Bank, which resulted in the closing of many rural
branches, left large areas of the country without any formal
financial services (MFPED 2000).
Banks registered in the past years have failed to contribute
significantly to the expansion and deepening of the financial
market. They have hardly introduced any additional services
and products. Many services such as adequate deposit facili-
ties, checking transaction accounts, letters of credit and equity
investment are provided to individuals or firms only to an in-
sufficient extent. As in many other parts of the developing
world, commercial banks have been very reluctant to open
their doors to poor clients as these are usually not able to
meet the requirements asked for by banks in terms of collat-
eral, minimum balances, etc. In response to the Bank of
Uganda’s increased capital adequacy requirements and in
pursuit of prudent operations and efficiency banks have be-
come more conservative in their lending practices. However,
this may have been taken to an extreme as most formal banks
have resorted to investing in Treasury Bills as opposed lend-
ing to the private sector (MFPED 1998; Mutesasira et al;
1999; Wong 1999).

13
Although interest rates have fallen from as high as 40% in
1992 to around 20% in 2000 as a result of low inflation and
structural reforms in the financial sector, real rates still remain
prohibitively high for many businesses. The major single fac-
tor for continuing high real interest rates has been the high
intermediation costs, which have been driven up by inefficien-
cies in the banking sector and a large proportion of non-
performing assets in the banks’ portfolios (MFPED 2000). The
overall repayment rate of the commercial banks continues to
be extremely weak and may be as low as 55% according to a
banking insider. As far as the geographic distribution of com-
mercial banks is concerned, it can be ascertained that the
central and southwestern regions are very well served with
banking facilities while the rest of the country remains under-
banked.
The closure of a number of banks may suggests that the bank
of Uganda (BoU) lacks the capacity to fulfill its role of super-
vising and regulating the financial sector. In particular, BoU
seems to have an insufficient number of experienced and
qualified staff and has also not been able to resist political
pressure (Wong 1999). The BoU itself argues that the closure
of banks shows that the central bank is in fact working effec-
tively, as these banks only had to close down because the
BoU as supervisory body forced them to do so. A new Finan-
cial Institutions Act will soon be presented to Parliament,
aimed at strengthening prudential regulation and supervision.
The proposed Act also provides for the regulation and super-
vision of deposit taking microfinance institutions. However, in
light of the above-described circumstances, many actors of
the Ugandan microfinance industry doubt that the Bank of
Uganda has the capacity of to take on the additional respon-
sibility of supervising deposit-taking MFIs.
As a result of continued economic and financial instability,
financial deepening has been very low and improved only
slightly over the past decade. Measured as the proportion of
broad money to GDP, it increased from about 9% in 1990 to
11% in 1996. This compares negatively with countries at a
similar level of development like Tanzania and Kenya, where
the ratio of broad money to GDP was 35% and 40% respec-
tively in 1990 and 1996. Uganda’s savings rate of currently
about 11% is one of the lowest in Sub-Saharan Africa and
also constitutes a serious impediment to further economic
growth (Obwona and Ddumba-Ssentamu 1999; Bategeka
1999).

14
Currently, the formal financial sector includes the Central
Bank (Bank of Uganda), 18 commercial banks, 6 credit institu-
tions, 3 development banks, 20 insurance companies, one
leasing company, a savings and credit union with over 2000
participating savings and credit associations, a post office
savings bank, and a national social security fund. As will be
discussed in Chapter 6, most of these institutions do not pro-
vide services to micro and small enterprises and poor house-
holds (Katimbo-Mugwanya 1999; Opiokello 2000).
The closure of banks and bank branches as well as the drive
for prudent operations and efficiency of the banking industry
has cut off the fast growing micro and small enterprise sector
and the low income population generally from access to finan-
cial services. This gave microfinance institutions the
chance to fill the gap and expand rapidly from the mid-1990s
onwards. Microfinance came to be viewed as the most obvi-
ous vehicle for delivering financial services to the urban and
peri-urban low-income earners as well as to the rural popula-
tion. The following chapters will describe the making and de-
velopment of what is now generally regarded as the most ad-
vanced microfinance industry in Africa.
As already outlined above, the poor and very poor have ex-
tremely limited access to formal sector institutions. While the
microfinance sector is growing rapidly, it provides financial
services to only a minority of around 150.000 clients. Most
poor people rely on the informal sector to manage their
money. A recent study (MFPED/UNDP 2000) revealed that of
all people borrowing money 79% obtained credit from informal
sources in comparison to 21% borrowing from commercial
banks. More or less everyone saves some cash at home or
with a close family member or friend, though the poorest may
experience periods when they can’t do so. Among group-
based devices Rotating Savings and Credit Associations
(ROSCAs) are especially popular in Uganda. Even within
FINCA Village Banks members have established their repay-
ment ROSCAs. Despite an obvious need for safe opportuni-
ties to save small amounts of cash, there are only few deposit
collectors operating and those that there are, lack the degree
of standardization and professionalism found among them in
West Africa. The poor and not-so-poor have almost no access
to moneylenders of any sort, a fact that contributes to the
widespread popularity of the MFIs (Bagazonzya and Mbabazi
2000; Rutherford 1999). Informal and formal financial service
providers as well as semi-formal arrangements like Savings

15
and Credit Cooperatives will be examined in more detail in
Chapter 7.

3 History and Current

Status of the Microfinance
Industry
Compared to other well-advanced microfinance countries like
Bolivia or Bangladesh, the microfinance industry in Uganda is
fairly new. Informal financial arrangements like ROSCAs have
existed in many forms in Uganda for several decades. From
the mid-1980s on credit schemes started emerging as side
components of social welfare programs. Like in all other parts
of the developing world, these components usually followed a
project-oriented approach, disbursed credit at subsidized in-
terest rates, had very poor repayment rates and were there-
fore typically rather short-lived.
The first true microfinance institutions like FINCA and
Uganda’s Women Finance Trust (UWFT) appeared in the
early 1990s. However, they did not start to expand in terms of
significant client outreach and receive recognition until the mid
1990s. With increased interest from donors and NGOs dis-
covering that they can make a lasting impact on poverty alle-
viation by offering sustainable financial services, the microfi-
nance industry began to take shape. In January 1996, USAID
sponsored a microfinance seminar that was considered to be
an eye opener for many practitioners, who were exposed to
best practice methodologies and the importance of sustain-
ability for first time in earnest. At the same time, the govern-
ment started to view the private sector as the most important
contributor to economic growth and identified improving the
access to financial services as one of the key strategies. Mi-
crofinance became an issue for the Ministry of Finance and
Economic Planning (MFPED) as well as the BoU, as both
made themselves acquainted with national and international
experiences and practices in this field.
In early 1997, PRESTO/Center for Microfinance started to
provide trainings and technical assistance to MFIs in key ar-
eas like loan tracking, interest rate setting, business planning,
product development, and ownership and governance. Over
the past years other projects and institutions also began to

16
provide valuable capacity building to the microfinance indus-
try. From 1997 onwards a strong collaborative effort emerged
among donors, government, the central bank, practitioners
and capacity building providers. What started in 1998 as a
consultative working group has now developed into a full Mi-
crofinance Forum which meets monthly to discuss topics, ex-
change information and share ideas on key issues affecting
the sector. In 1997, the Association of Micro Enterprise Fi-
nance Institutions of Uganda (AMFIU) was set up to serve as
a practitioner platform to share experiences and technologies
and act as a lobby and advocacy body for Ugandan MFIs.
In mid 1999 many key players of the Ugandan microfinance
scene, especially among donors, left the country. After a brief
period of less intense coordination, a microfinance workshop
facilitated by AFCAP brought the donor community together
again in April 2000. A joint vision for the development of the
microfinance industry for the next five years was mutually
agreed on as well as strategies needed to achieve this vision.
Donors defined very ambitious outreach expansion plans and
agreed on a coherent strategy for a demand driven capacity
building initiative. Other workshops and seminars also includ-
ing practitioners, government and the Bank of Uganda fol-
lowed and further strengthened the microfinance community.
At the moment, a number of initiatives like common donor
guidelines, universal reporting standards, a rating system,
guarantee funds, a capacity building initiative for MFIs gradu-
ating to formal status, etc. are discussed with broad participa-
tion from most stakeholders.
As outlined earlier, the closure of banks and bank branches
as well as the adoption of more stringent lending policies
among commercial banks left almost all micro and small en-
trepreneurs and poor households without access to financial
services. The microfinance industry, which over the past years
came under pressure to fill this gap and become self-
sustaining, has to some respect succeeded in doing so. A
significant number of MFIs have taken important steps to-
wards professionalisation and transformation into well-
organized, well-managed and commercially viable institutions
that provide financial services to an increasing number of cli-
ents with proven poverty reducing impact.
The environmental conditions in which the Ugandan microfi-
nance industry has thrived over the past years can generally
be described as favorable, including macroeconomic stability,
strong and competent MFIs, practitioners and donors commit-
ted to best practices, MFIs with international alliances, a by

17
and large supportive government and a constructive coopera-
tion among stakeholders. The industry was also able to over-
come the results of former instability and bad practices. The
long-lasting civil strive has probably destroyed part of
Uganda’s social capital, the history of poorly managed credit
schemes has damaged the credit culture in some parts of the
country, and the closure of a great many banks has eroded
the trust of clients into financial institutions. However, none of
the bigger MFIs faced serious delinquency problems once
they had embraced professionalism. This can probably be
ascribed to the fact that these MFIs have applied their meth-
odologies in a very disciplined way and put a lot of emphasis
on building an effective repayment culture among their clients.
Currently, there is one commercial bank providing microfi-
nance services (CERUDEB), one recently established pri-
vately owned credit institution (CML), about 15 larger MFIs
and around 80 CBOs and NGOs providing savings and credit
services on a smaller scale. The top five institutions (CE-
RUDEB, FINCA, PRIDE, UMU, UWFT) have already sur-
passed or are close to full financial sustainability. New provid-
ers continue to enter the market and join a relatively mature
and professional industry. Competition in Kampala and the
surrounding region is becoming strong and some providers
fear that some urban areas in these parts of the country may
already be close to saturation for the types of products of-
fered. One of the most pressing challenges for a large number
of MFIs in Uganda are high drop out rates, indicating that cli-
ents make use of increased competition and shop around, but
probably also suggesting that clients are not satisfied with the
products offered. In fact, a closer look at the methodologies
reveals that the services and products offered by the majority
of microfinance providers are very similar to each other and
are not adjusted to the specific needs of different client
groups. The following chapters will discuss microfinance cli-
ents, the role of the government, the new legislation, stake-
holder coordination mechanisms and initiatives, microfinance
providers and capacity building initiatives in more detail.

18
Tabelle 1: Table 1: Microfinance Providers in Uganda

MFI Year of Methodology No. of clients Sustainability

establish-
ment
CERUDEB Trans- Individual lending 14,000 bor- Full financial sus-
formed into rowers tainability
a commer- 45.000 savers1
cial bank in
1993
FINCA 1992 Village banking 23.500 Full financial sus-
tainability
PRIDE 1995 Adjusted village 24.500 Close to opera-
banking tional sustainability
UMU 1997 Solidarity group lend- 10.000 Close to opera-
ing and individual tional sustainability
lending
CMF LTD. 1999 Group and individual 13,000 Close to financial
lending sustainability
UWFT 1985 Group lending and 35.000 Operational sus-
individual lending tainability
FOCCAS 1995 Village banking with 7,500 Approx. 50% op-
education erational sustain-
ability
FAULU 1995 Group and individual 8,000 Just below 50%
operational sus-
tainability
UWESO 1996 Group 8,000 Below 50% opera-
tional sustainability

4 Clients and Impact of

Microfinance Services

4.1 Clients of Microfinance

Institutions

Microfinance Providers in Uganda reach low-income house-

holds in both rural and urban areas, but not the poorest of the
poor. The average client is female, married, between 30 and
39 years and sufficiently literate with an average household of
7 people, many of whom are dependents. Commerce is the
main activity of clients, followed by agriculture, services and

1
Only CERUDEB, as a commercial bank, is entitled to mobilize savings,
apart from savings and credit cooperatives.

19
manufacturing. Clients of MFIs tend to cluster around the
poverty line. Most users of MFI services appear to be non-
poor, but not wealthy: they tend to come largely from house-
holds that can usually meet their daily needs, have access to
primary education and basic health services, and have accu-
mulated some assets. They tend to spend a high proportion of
their earnings on basic needs such as food and education of
children. This group of clients are in the “comfort zone”, they
enjoy a relatively stable income source and sufficient liveli-
hood diversification, allowing them to service regular repay-
ments even when faced with small crises. However, they re-
main vulnerable to shocks, and access to microfinance has
proven to play an important role in managing this vulnerability
(AIMS 1998; COWI 2000; MFPED 2000c; Mutesasira et al
1999; Wright et al 1999a).
Those significantly below the poverty line do not seem to join
Ugandan MFIs. This occurs for several reasons, including
(CGAP 2000; Wright et al 1999b):
„ exclusion by the MFIs themselves due to their focus on
microentrepreneurs with sufficient repayment capacity;
„ exclusion by groups unwilling to take responsibility for the
poor in case of delinquency;
„ self-exclusion due to a fear of credit;
„ product exclusion where the “one-size-fits-all” working
capital loan on offer does not meet their needs; and
„ emphasis on credit delivery and little attention to the
needs of the poorest for safe and accessible savings ser-
vices
However, critics of microfinance based on “not reaching the
poorest” tend to overlook the dynamic nature of poverty. Not-
so-poor households hit by severe crisis (fire in houses and
businesses, theft of business assets and chronic illness in-
cluding HIV/AIDS, etc.) may be transformed into “poorest”
households with alarming rapidity. This is why microfinance’s
role in assisting in development and maintenance of robust
household economic portfolios is so important for everyone
who does not have access to formal financial services (Wright
et al 1999a).
Presently, about 150.000 clients are served by MFIs in
Uganda. Compared to an estimated 7.5 million economically
active Ugandans living below the poverty line, this is still a
relatively low outreach. Although many MFIs claim to serve
predominantly the rural population, the participants of the two
microfinance workshops in April and June 2000 estimated that

20
80% of the MFI clientele was urban and 20% rural. In these
workshops, the microfinance community agreed on the vision
to expand the rural coverage to 40% of the total MFI clientele
within the next five years. Given that the microfinance industry
is expected to grow by 50% per year in the same period, this
estimate seems to be very optimistic. Although the population
density in rural Uganda is much higher than in most other
parts of Africa, rural outreach expansion still faces the chal-
lenges of insufficient infrastructure, low education levels, in-
creased intermediation costs, greater risks due to higher ex-
posure to agricultural production, etc. As will be argued in
Chapter 7, Community Based Organization (CBOs) and Sav-
ings and Credit Associations (SACCOs) operating in rural
areas seem to be an appropriate vehicle to reach more rural
savers and borrowers. However, most these institutions have
displayed a formidable lack of systems, governance, owner-
ship and management. Therefore, they will have to receive
substantial amounts of capacity building until they will be able
to serve large quantities of rural clients in an effective and
sustainable way.

4.2 Client Impact of Microfinance

Services

Over the past years, a number of attempts have been made to

assess the impact microfinance providers are having on the
livelihoods of the poor in Uganda (AIMS 2000; Barnes, Morris
and Gaile 1998; Gaile, Duursma and Eturu 1999; Mutesasira
et al 1999; Wright et al 1999a; Wright et al 1999b). MFIs that
participated in these evaluations included FINCA, PRIDE,
FOCCAS, UWFT and CERUDEB. Although the studies place
emphasis on different aspects, they all reveal positive impacts
from participation in MFI programs:

Participation in microfinance programs

contributes to reduced vulnerability to economic
risks.

The poor are very vulnerable to risks (such as illness or death

of a household member, medical expenses, funeral costs,
crop failure, the loss or theft of a key asset, or a dramatic
change in prices), and microfinance services in Uganda have
proven to help the poor to protect against these risks. Indi-
viduals and households pursue strategies to protect against
risks ahead of time. As MFIs provide loans for working capital

21
and to purchase productive assets, clients are able make their
enterprises more competitive and increase profits (although in
most cases only to a limited extent), diversify their income
sources and broaden their asset base. Participation in micro-
finance programs also appears to enable clients to build the
households’ human assets, for example by investing into chil-
dren’s education or household members’ health. Even when
loans are used for business, the household’s own capital is
thus freed for other investments, particularly in school fees
and health care.
Group-based lending schemes provide clients with an oppor-
tunity to build their social assets by reinforcing reciprocal rela-
tionships and social networks. Membership of microfinance
groups links individuals, households and enterprises into a
vital web of business and personal relationships that enables
members to better cope with the challenges of life. However,
in some cases membership to groups can also become a so-
cial liability, especially where there is a consistent pattern of
non-payment and mounting peer pressure. Access to financial
services also allows the poor to cope with shocks or economic
stress events once these take place. Clients use MFI loans to
re-stock their businesses and to smooth consumption. As
most MFIs offer only inadequate savings services, only few
clients were able to use these as source of liquidity in times of
emergencies.

Participation in microfinance programs results in

strengthening linkages of clients and their
households to the agricultural sector.

MFI clients are actively involved in the agricultural and natural

resource based marketing chain. Loans to microentrepreneurs
strengthen their position in the agricultural sector. Microfi-
nance program participation results in clients expanding the
amount of land they cultivate and diversifying the crops they
grow for sale and domestic consumption. Clients of MFIs are
more likely than non-clients to increase their remittances to
rural dwellers.

Participation in microfinance programs enables

clients to acquire valued skills

In self-assessments, clients tend to mention acquisition of

business related knowledge and savings skills among the
most important positive results of participation in their microfi-
nance program. Many clients also testified that they had learnt

22
leadership and public speaking skills from participation in MFI
groups. Numerous clients gave proof of this by joining wider
institutions and standing for election in local councils. Partici-
pation in a credit with education program results in clients
trying new health and nutrition practices and informing others
about these practices.

The lending strategies of MFIs appear to be more

of a deterrent to continued participation than
factors within the clients households and
enterprise

Reasons clients give for departing a MFI program tend to re-

late more to the lending methodology than problems with loan
repayment. Most drop-outs complain about inadequate loan
amounts and terms, mandatory weekly meetings and having
to pay for group members who default.

Participation in MFIs does not help the poor to

meet their savings needs

Most MFIs only offer loan-linked, compulsory, locked-in sav-

ings system and no poor-friendly savings products. Also for
legal reasons, Ugandan MFIs are not providing facilities that
allow the poor to save in a way that would help them to meet
their current needs and opportunities and to save for the fu-
ture. As a consequence, the poor are often forced to use high-
risk (and often high-loss) informal savings mechanisms.

4.3 Gender and Empowerment

The vast majority of clients of Ugandan MFIs are women:

loans to female clients constitute around 75% of the loan port-
folio and 80% of the savings portfolio (MFPED 2000c). Some
microfinance providers like FINCA, FOCCAS or UWFT only
target female clients. Most MFIs focus on women for two rea-
sons. First, lending to women is thought to benefit the whole
family and strengthen the role of women in society. The sec-
ond reason is that women, like in most other parts of the
world, have proven to be better repayers. In some cases,
women groups of female-only MFIs accept men if they replace
their deceased wives. CERUDEB, a commercial microfinance
provider with slightly larger average loans than most other
MFIs, pursues an equal access policy and asks for collateral.
This sometimes excludes women. However, it is not uncom-

23
mon that a loan is in the husband’s name but the woman is
running the business. In most microfinance institutions, espe-
cially in those only targeting women, at least half of the work-
force is female. While MFIs increasingly recruit female credit
officers and women constitute approximately half of senior
management (varying form organization to organization),
board members are still mainly men.
Although most MFIs in Uganda specifically target women, only
few have altered their methodology in significant ways for this
reason. Most microfinance providers feel that women’s em-
powerment is an important aspect of financial service provi-
sion, but that they are first of all obliged to seek efficiency and
sustainability in order to guarantee a durable access to finan-
cial services to the greatest possible number of poor clients.
As the impact studies conducted in Uganda (AIMS 2000; Bar-
nes, Morris and Gaile 1998; Gaile, Duursma and Eturu 1999;
Mutesasira et al 1999; Wright et al 1999a; Wright et al 1999b)
mainly evaluated MFIs with exclusive or at least large female
clientele, the impact results presented above mainly concern
women. Two studies (Barnes, Morris and Gaile 1998; Wright
et al 1999a) looked at gender issues in more detail and gen-
erally confirm the gender-related findings of the other re-
search initiatives. MFI participation helps women to protect
themselves and their households against risks by rendering
their enterprises more competitive, diversifying their income
sources, broadening their asset base, re-stocking their busi-
ness and smoothing consumption. The impact study con-
ducted for CERUDEB (Barnes, Morris and Gaile 1998) found
that women clients have significantly greater positive eco-
nomic impacts relative to female non-clients than do male
clients over comparable non-clients. Female CERUDEB cli-
ents also expressed greater satisfaction with the credit and
savings services provided by the bank than did their male
counterparts.

Box 1: Ugandan microfinance clients

Client A

Maria Mutola2 is a member of a FINCA village bank in south-

eastern Uganda. She is on her ninth loan cycle, and has had
few problems with repayment or any other aspect of being a

2
Name changed by authors.

24
borrower. Her business is wholesaling dried small fish, known
as mukeje. Twice a month she travels for one and a half days
to the island of Chisugu, in the middle of Lake Victoria, 30
miles from the shore. There she buys the mukeje from the
local fishermen. Her average purchase is 500kg, at about
USD 2,5 per kg. She hires a boat to bring the fish back, then
transports it to Kampala where she sells it to various custom-
ers, mainly to a large industrial feed company. If demand is
high, she charges USD 3, making a profit on her work of USD
25. If demand is low, she drops her price to USD 2,7, but is
still able to make a comparatively good living out of her busi-
ness, according to her own words.

Client B

One of the FOCCAS clients had borrowed USD 60. However,

the entire stock of her tiny food retailing business had been
worth that much. When asked what she had used the loan for,
she answered that she put USD 45 into school fees, bought a
sow (female pig) for USD 10, and used only USD 5 on stock
for her business. The sow was a sort of insurance policy in
case she could not afford the loan repayments. She would
fatten the sow and sell it when the loan became due. How-
ever, the sow turned out to be pregnant, and had a litter of 10
piglets. So she diversified her activities and also went into the
piggery business.

The above-mentioned studies also revealed that participation

in microfinance programs allows Ugandan women to acquire
business and non-business related knowledge, learn from
each other, strengthen their business and personal relation-
ships and learn leadership and public speaking skills. Many
women that had performed management roles in microfinance
groups have been elected into local councils. Belonging to
MFI groups also provides women with status and prestige in
the community, makes them less dependent on their spouses
for money, increases their influence and bargaining power
within the household and improves their self-confidence.
Some researchers (Goetz and Gupta 1996; Mayoux 1997)
have suggested that microfinance programs make women
even more vulnerable to gender-based conflict since they
sometimes pass their loans to their husbands. This practice of
giving loans to the husband to use seems to be less common
in Uganda, and when done, it is usually economically rational
(Wright et al 1999a).

25
As described above, parts of the Ugandan microfinance in-
dustry are moving towards sustainability and commercializa-
tion at an impressive speed. Most donors and a considerable
number of practitioners are committed towards turning the
provision of microfinance services profitable and independent
from donor money. While hardly debated in the Ugandan mi-
crofinance industry, this trend might lead to less attention to
empowerment issues. For example, some MFIs are consider-
ing or are already experimenting with individual loan products,
which have less potential to strengthen women networks and
female solidarity than group loans. Also, some female-only
MFIs are planning to open their doors to men, mainly because
where some urban markets might be close to saturation men
are seen as an untapped client group. Although these devel-
opments might have some negative impact on women’s em-
powerment, it could be argued that an expanding and sus-
tainable microfinance industry has probably more overall posi-
tive gender effects than a smaller industry that concentrates
primarily on empowerment. Moreover, even if an increasing
number of MFIs also promote individual lending, in a growing
industry group lending will expand, too.

5 Government Policies,
Programs and Regulatory
Framework

5.1 Government Policies

It is widely accepted that the establishment of an enabling

environment by Government of Uganda (GoU) has played an
important role for the development of a healthy national micro-
finance industry. Like in other countries where microfinance
emerged robustly, macroeconomic stability and serious finan-
cial sector reforms set the stage. In addition, with microfi-
nance becoming a constituent part of the financial sector and
emerging as an instrument of poverty reduction, the GoU has
over the past years developed a special interest and expertise
in it.
After the end of nearly two decades of civil strive, an Eco-
nomic Recovery Programme (ERP) was launched in 1987
with support from the International Monetary Fund (IMF) and

26
the World Bank. Since that time, the GoU has pursued struc-
tural adjustment policies and succeeded in stabilizing the
macroeconomy and fostering growth. As mentioned earlier,
inflation has been reduced to single digit levels since 1990
and average growth rates have been around 6% per annum.
Since 1993, when the Financial Sector Reform Programme
was launched, the GoU has promoted a more market-oriented
financial sector approach, deregulated interest rates and lib-
eralized the exchange rate in 1994. Moreover, the privatiza-
tion of state controlled banks was initiated, although not very
successfully (MFPED 1999a; Opiokello 1999).
The economic strategies of the Government of Uganda for
poverty alleviation are laid down in the Poverty Eradication
Action Plan (PEAP) and the Plan for Modernization of Agricul-
ture (PMA). Both policy documents identify efforts to increase
the ability of the poor to raise their incomes – either by in-
creasing their productivity or by entering new productive ac-
tivities – as important strategies to improve the quality of life of
the poor. Moreover, both policy documents identify microfi-
nance as an important instrument to alleviate poverty. The
GoU also acknowledges that the role of the government in
microfinance is limited to the provision of the appropriate legal
and policy environment and capacity building (MFPED 1999a;
MFPED 1999c).
Within the GoU, the Private Sector Development/Capacity
Building (PSD/CB) policy unit in the Ministry of Finance, Plan-
ning and Economic Development (MFPED) handles microfi-
nance issues. As one of its activities, the policy unit is in the
process of establishing a comprehensive microfinance data-
base that should promote coordination, monitoring and
evaluation in the industry. Representing the GoU, the head of
the PSD/CB policy unit hosts and chairs the Microfinance Fo-
rum, the most important coordination mechanism in the indus-
try. Moreover, the PSD/CB policy unit has been involved in
the process of developing a regulatory framework, which will
be discussed below. In general, the Ministry of Finance, Plan-
ning and Economic Development has been supportive of the
microfinance industry, accessible to the needs and ideas of its
stakeholders, and has tried to engage in a constructive dia-
logue on relevant issues. The government’s commitment to
microfinance has probably been linked to the crisis of the tra-
ditional financial sector and with microfinance at least partly
filling the gap left by the closure of formal banks. However,
other Ministries have been less accessible to good microfi-

27
nance practice and continue to support grant based pro-
grams.
Although the microfinance industry is committed to educate
the public and government about its practices, there has re-
cently been some disquiet over the interest rates and recovery
methodologies used by some MFIs. Newspapers have pub-
lished articles about exploitative microfinance providers and
parliamentarians have repeatedly accused MFIs of usury.
While these incidents may partly be due to ignorance regard-
ing microfinance best practices, individual MPs also seem to
engage deliberately in MFI-bashing campaigns, expecting to
gain some popularity out of it.

5.2 Government Microfinance

Programs

The GoU was involved directly and indirectly in microfinance

service delivery to clients through a number of projects and
programs, such as NURP and SWARP, the Cotton Subsector
Development Programme with a line of credit in the BoU, and
the Rural Farmers Scheme. However, all of these programs
have been characterized by high delinquency rates and low
levels of self-sufficiency (MFPED 1998).
In response, the GoU has promoted a new generation of
Government funded programs that channel funds to clients
through existing NGOs and CBOs. The two most important
programs are PAP (Poverty Alleviation Project) and En-
tandikwa. Although these programs were better designed than
the older generation of credit schemes, they have run into
similar problems. For example, most clients have conceived of
Entandikwa as politically motivated, because loans have often
been approved through local councils. This perception has
encouraged loan recipients to default. Other problems with
Entandikwa include unsustainably low interest rates, insuffi-
cient institutional capacity and lack of staff for monitoring and
supervision. Currently, Entandikwa is in the process of being
converted into a line of credit for MFIs (MFPED 2000a).
As PAP has performed only slightly better than Entandikwa,
the credit scheme has been phased out and transformed into
the Rural Microfinance Support Project (RMSP). The project
will operate as an apex organization, providing capacity build-
ing as well as lines of credit to existing MFIs. These two func-
tions will be separated and MFIs will only receive resources to

28
on-lend after they have proven their capacity to do so. RMSP
will mainly focus on small-scale CBOs, but will keep its line of
credit open to larger MFIs. While RMSP seems to have some
potential to become a successful initiative, there remains little
doubt that the GoU has so far failed as microfinance provider.
The GoU has contributed to the erosion of credit culture
where its programs have acted on politically motivated
grounds and disbursed credit without insisting on repayment.

5.3 Regulatory Framework

The regulation and supervision of microfinance activities has

been one of the most debated topics in the Ugandan microfi-
nance industry over the past years. The Financial Institution
Statue (1993) in its current form does not cover the provision
of microfinance services directly, leaving most microfinance
operators in a regulation-free state. Only CERUDEB, a com-
mercial bank microfinance provider, is currently under super-
vision of the Bank of Uganda. Efforts to develop a regulatory
framework for microfinance in Uganda began with an Aus-
trian-financed project in 1996 aimed at educating the central
bank about microfinance and setting up a rating system for
MFIs. While discussions about a rating system have only now
been taken up again, ensuing events resulted in the develop-
ment of legislation for the regulation and supervision of micro-
finance activities. The legislation is still in draft form, but has
already been agreed on by Cabinet and will soon be pre-
sented to the parliament.
The development of a regulatory framework has been a rela-
tively consultative effort, with a number of practitioners and
donors eager to support the initiative from the beginning. Over
the past years, the German agency GTZ has provided techni-
cal assistance in the area of regulation and supervision to the
central bank. The principles of the framework have been dis-
cussed in various meetings and all stakeholders had ample
opportunity to comment. However, most practitioners feel that
the process has become less consultative over the past year.
At least in part, this may be due to the authorities’ under-
standable qualms about negotiating regulations with those
who are to be regulated. Policy papers, like the BoU policy
document on Microfinance Regulation of last year, remained
silent on some key issues, triggering fears among providers
that the regulation may contain provisions that could be harm-
ful to them.

29
The proposed microfinance regulation views microfinance as
a line of business, which can be done by organization li-
censed as a microfinance provider. The Bill will cater for the
specific requirements of Microfinance Deposit-taking Institu-
tions (MDIs) and will most probably follow the approach of
risk-based supervision, i.e. concentrate on institutional as-
pects such as quality of corporate governance and manage-
ment, business policies and procedures, effectiveness of in-
ternal controls, and the adequacy of the MIS. Quantitative
analysis, i.e. financial ratios, will still play a role but will be
understood as complementary within the framework of risk-
based supervision. The proposed regulatory framework will
only provide for those MFIs with a track record and those
which reach at least financial self-sufficiency, meet stringent
governance, portfolio quality and capital adequacy require-
ments. Microfinance providers that do not mobilize and inter-
mediate deposits will not be affected by the Bill.
As already mentioned above, there is concern in the Ugandan
microfinance community that the regulation may be too strict
in some areas and damage the industry. For example, if pru-
dential licensing requirements for community-based MFIs pro-
vide for a minimum number of members that is very low, this
could put out of business many organizations that offer sav-
ings services in places where no one else is likely to provide
them. Another concern is that the minimum capital require-
ments might be too high for some emerging MFIs, which could
endanger their survival. Savings-oriented initiatives, like Mi-
croSave Africa, argue that it should be left primarily to the
savers where and how to save, as no system of supervision
will secure savings deposits. Alternatives suggested for su-
pervising MFIs that accept deposits include a savings guaran-
tee foundation to which MFIs subscribe, a rating agency that
grades and certifies MFIs, a market-driven savings deposit
insurance scheme, etc. (Mutesasira 1999). On the whole, the
regulators face the difficult task of finding a balance between
protecting deposits and securing the health of the financial
system on the one hand, and providing a framework that does
not restrict the expansion and development of the Ugandan
microfinance industry.
As already discussed in Chapter 2.3, there is considerable
doubt about the capacity of the Bank of Uganda to take on the
additional responsibility of supervising deposit-taking MFIs.
The striking number of recent bank failures suggests that the
BoU does not have what it takes to fulfill its role of supervising
and regulating the financial sector. Whether the Government

30
of Uganda will succeed in strengthening and expanding the
central bank’s supervisory capacities remains to be seen.

6 Stakeholder Coordination
Mechanisms
Compared to most other African countries, Uganda stands out
for a relatively strong and effective coordination among stake-
holders of the microfinance industry. While the consolidation
of practitioner, government and donor interests has not been
without frictions, the general willingness to listen to each
other, learn from each other and coordinate and cooperate is
widely acknowledged as one of the key reasons for Uganda’s
success in microfinance.
As described in Chapter 3, the microfinance industry began to
take shape in the mid 1990s. Before that, very little coordina-
tion took place and most projects providing financial services
displayed a remarkable lack of appreciation for good prac-
tices. With increased interest from donors, exposure to inter-
national experiences, growing government commitment to
private sector development and practitioners linking to interna-
tional microfinance organizations like FINCA International and
PRIDE Africa, the expansion and development of the industry
commenced. Early on, key donors started a dialogue with
strategic government representatives and tried to sensitize
them to microfinance issues. While all MFIs were still quite far
away from self-sufficiency, some crucial practitioners, like
FINCA and PRIDE, as well as donors clearly promoted a fi-
nancial systems approach from the mid-1990s on, stressing
institutional and financial sustainability of MFIs and the impor-
tance of a viable financial sector. The USAID sponsored mi-
crofinance seminar in January 1996, which brought together a
number of practitioners and exposed them to international
microfinance know-how, can probably be considered as the
first broad-based coordination effort.
From 1997 onwards, a strong collaborative effort emerged
among donors, government, the central bank, practitioners
and capacity building providers. In 1997, the Association of
Micro Enterprise Finance Institutions of Uganda (AMFIU) was
set up to serve as a MFI platform and advocacy body. One
year later, a consultative working group was established and
developed into the Microfinance Forum, which meets monthly

31
to exchange information, share ideas and initiate collaborative
efforts. It is chaired and hosted by the Ministry of Finance,
Planning and Economic Development, with an average num-
ber of 60 participants from all stakeholder parties. The Micro-
finance Forum has formed two sub-committees, one on lobby-
ing and one on the question of financial and capacity building
apexes. Each committee is mandated to develop strategies
and recommend actions for the Forum’s approval.
The most important mechanism for donor coordination is the
Donor Group and its Private Sector Donor Sub-Group
(PSDSG). The PSDG meets monthly or as per need to dis-
cuss and form concerted opinions primarily on the policies
and strategies proposed by the Government of Uganda on
issues like private sector development, deregulation, privatiza-
tion, environmental conditions, etc. Often, GoU and delegates
of the private sector, represented through the Private Sector
Foundation, are invited to the meetings. Rather informally, an
internal microfinance donor coordination group has been es-
tablished as sub-group of the PSDSG, bringing together the
most important and active donors in this field, including
USAID, EU/SUFFICE, GTZ, DfID and ADC.
The single most important recent donor meeting was the do-
nor workshop facilitated by AFCAP in April 2000. After a pe-
riod of less intense cooperation mid 1999, the workshop
brought people together again and donors mutually agreed on
a joint vision for the sector. Donors sketched very ambitious
plans regarding client growth rates (50% per annum) and rural
outreach expansion (from currently 80% urban and 20% rural
to 60% to 40% respectively) for the next five years. In order to
meet these targets, donors agreed that a coherent strategy for
demand-driven capacity building and an active promotion of
product development for rural areas would be needed.
Another donor led initiative to strengthen the Ugandan micro-
finance industry is the current attempt to develop and adapt a
set of uniform performance indicators and reporting standards
– which are acceptable to all current and potential stake-
holders, i.e. donors, wholesale lenders, investors, depositors,
regulatory authorities, and the MFIs themselves. This set of
indicators and reporting standards would be used by microfi-
nance institutions to apply and report to donors, lenders, gov-
ernment and networks using one format, hence streamlining
the information flow and saving valuable time and resources
for the MFIs. Donors and other promoters of microfinance
would be assisted in their assessment of performance among
MFIs, as well as in the comparison and general assessment

32
of the developments in the industry. New donors would get an
up-front tool to direct their assessments of needs and per-
formance, which would in turn decrease inconsistencies and
distortions in an industry characterized by a mix of competition
and subsidies. Moreover, the government and central bank
would also be assisted by a uniform set of performance stan-
dards in their need to obtain more reliable and useful data, as
more and more MFIs learn to report in accordance with
agreed standards. This donor initiative will be integrated with
AMFIU’s effort to establish a format for reporting by MFI
members to the GoU and the Uganda Cooperative Alliance
(UCA) initiative to develop a set of performance indicators and
a rating system for good practice SACCOs in Uganda (SUF-
FICE 2000).
Another example of a donor joint activity is the co-funding of a
study visit of key executives of the Ugandan Institute of Bank-
ers and the Bank of Uganda to sister institutions in Denmark
and Germany in June 2000. However, there were also some
initiatives where cooperation among donors and other stake-
holders has been less constructive. For example, in both the
District Resource Endowment Profile Survey (DREPS), sup-
ported by UNDP and the GoU, and in the microfinance study
conducted by COWI and funded by the GoU, little efforts have
been made to integrate the donor community and learn form
their experiences.
As can be seen from the Table 2 below, donors currently sup-
port a broad range of microfinance activities and initiatives.

33
Tabelle 2: Donors and their initiatives3

USAID PRESTO/Center for Microfinance with follow-up project

SPEED (Support to Private Enterprise Expansion and
Development); support to several individual MFIs
EU Support for Feasible Financial Institutions and Capacity
Building Efforts Programme (SUFFICE)
DANIDA Agricultural Sector Programme Support with Rural Finan-
cial Services Component (RFSC)
DfID MicroSave; Support to BoU
GTZ Financial System Development Project with BoU, Uganda
Institute of Bankers (UIB), Uganda Security Exchange
(USE), Postbank and Capital Markets Authority (CMA) as
main partners
ADC Support to several MFIs and flexible funding for strategic
efforts
ADB Rural Microfinance Support Project (RMSP)
GoU SUFFICE ; RMSP
UNDP Private Sector Development Program (PDSP); MicroSave

As far as gaps in donor funding for microfinance are con-

cerned, many stakeholders are of the opinion that despite
announced commitment to rural outreach expansion, there
are still not enough resources channeled into this area. While
initiatives like RMSP and DANIDA’s Rural Financial Services
Component have the potential to reach a considerable num-
ber of rural borrowers and savers, it is not clear whether
USAID, the biggest microfinance donor in Uganda, will step
up its efforts to promote rural finance or reduce its commit-
ment. Most donors are aware that in order to reach the target
of 60% urban to 40% rural clientele, support for rural outreach
expansion and rural product development will have to be in-
creased. While most donors feel that MFIs should continue to
receive subsidies for pushing the frontier and venturing into
risk areas like product innovation for agricultural finance or
expansion into underserviced areas, no coherent strategy to
do so has yet been defined.
A particular dilemma facing donors in Uganda is how to use
subsidies in a competitive environment. Withdrawing subsi-
dies from individual MFIs gives a competitive advantage to the
others. Currently, all MFIs, including the commercial ones,
receive subsidies in various forms, most often including funds
to cover operational cost. Only very few MFIs, like FINCA and
PRIDE, are nearly subsidy-free, but have to compete against

3
See Annex I for more details on donor initiatives.

34
providers which are still heavily supported by donors. The
transformation from grant or soft loan funded operations to
commercially funded institutions has proven difficult in other
parts of the world and will require substantial capacity building
and a revision of MFI ownership and management structures.
The donor community is currently working on donor guide-
lines, which will include entry and exit strategies as well as a
code for grant usage, so that market distortions and biased
competition can be minimized. However, most stakeholders
are aware that these guidelines will probably not solve the
problem of subsidy provision in a competitive environment
entirely.
Coordination among capacity builders, with support from
donors, has resulted in the current attempt to locate capacity
building providers under one roof in order to improve visibility,
access, standardization of trainings and marketing. Along with
the joint effort of capacity builders to establish a national certi-
fication and accreditation system for independent microfi-
nance trainers and consultants, this initiative will be discussed
in more detail in the next chapter.
The main coordination mechanism at MFI level is the As-
sociation of Micro Enterprise Finance Institutions of Uganda,
which was set up to serve as a MFI platform and advocacy
body. However, AMFIU has not lived up to expectations and is
considered to need more institutional strengthening. Efforts to
set up a credit information bureau to exchange information
between MFIs in order to identify bad borrowers have been
thwarted by the lack of a national system of identification
cards.

7 Microfinance Capacity
Builders
Much of the growth and vibrancy of the microfinance industry
in Uganda can be attributed to international organizations
providing capacity building to their affiliated national MFIs and
the initiative of national capacity builders like CMF-PRESTO,
the Rural Microfinance Support Program (formerly PAP) and
MicroSave Africa. The national organizations have provided
training and technical assistance to a large number of Ugan-
dan MFIs, increasing their knowledge about best practices
and improving their skills to apply these. CMF-PRESTO alone

35
has worked with over 40 microfinance institution. Capacity
builders have linked a great deal of MFIs to the national mi-
crofinance industry and integrated them into policy, vision and
strategy discussions. Moreover, many stakeholder coordina-
tion and cooperation initiatives have been initiated and im-
plemented by capacity builders. For example, as regards the
proposed microfinance legislation, capacity builders took a
lead role in the policy dialogue between the GoU and central
bank on the one hand, and the practitioners on the other, ac-
tively sensitizing policy makers and practitioners on regulation
and supervision issues.
The Center for Microfinance under PRESTO is widely ac-
knowledged to have been the leading provider of capacity
building services in the microfinance industry since its incep-
tion as a USAID project in March 1997. PRESTO has trained
managers, loan officers and accountants of MFIs, conducted
seminars, provided on-site technical assistance to microfi-
nance operators, offered grant assistance to MFIs to scale up
their programs, and run a microfinance information center.
MicroSave has mainly focused on pro-poor savings initiatives
and community-based organizations and has thereby exerted
a considerable influence on practitioners, donors and other
stakeholders to give more attention to client-responsive ser-
vices and products. UNDP’s Private Sector Development Pro-
gram (PSDP) has made some impact by training savings and
credit associations and other community-based microfinance
organizations, but has been limited by its narrow financial and
technical base.
Other national capacity builders include the Development Fi-
nance Department of the BoU, which has piloted basic MFI
training courses, the Uganda Cooperative Alliance (UCA),
which has mostly replicated and adapted CMF materials for
SACCOs, and the Uganda Rural Development Trust. How-
ever, these service providers have had little outreach and are
generally considered as weak. The Microfinance Competence
Center (MCC) has recently been established within the Ugan-
dan Institute of Bankers. The MCC plans to provide training
and technical assistance to larger MFIs that request a license
to operate as deposit-taking microfinance providers under the
proposed legislation.
While the positive impact of national capacity builders can not
be underestimated, international microfinance organizations
were the first to capacitate and professionalize Ugandan
MFIs. Parent companies and international alliances (like
FINCA International, PRIDE Africa, IPC for CERUDEB,

36
Women’s World Banking for UWFT, Freedom from Hunger for
FOCCAS, etc.) continue to provide critical inputs in terms of
capacity building, technical assistance, human resources and
exposure to international experiences to their affiliated na-
tional MFIs. Advisors and program managers with interna-
tional expertise have allowed many MFIs to leapfrog the long
learning process that has gone on in the region and around
the world. As a result, MFIs with international alliances were
at the forefront of Ugandan microfinance development. The
importance of international expertise in the Ugandan financial
sector is also highlightened by the fact that all 18 commercial
banks have expatriates as CEOs.
The major coordination initiative currently under way among
national capacity builders is their effort to locate their offices
together. Six capacity building providers, including all larger
ones, agreed to move together into the premises of the Ugan-
dan Institute of Bankers. The rationale is to improve visibility
and enhance access to capacity builders, facilitate joint devel-
opment and standardization of trainings, to enable joint mar-
keting of services, and to improve the effectiveness of joint
lobbying for the industry. Moreover, a physical point will pro-
vide the possibility of growing these initiatives into a regional
reference center for best practices in capacity building and
thus positively influence the microfinance industry in the other
countries of the region. Another joint effort of the major Ugan-
dan capacity builders currently in discussion is the establish-
ment of a national certification and accreditation system for
independent microfinance trainers and consultants. The initia-
tive will adapt AFCAP’s approach of training and certifying
trainers, hence the working title U-CAP. The aim is to develop
a cadre of apt and high quality private sector capacity builders
for the Ugandan and possibly regional microfinance industry.

8 Microfinance Providers
and their Services
Uganda is endowed with a variety of microfinance operators
offering a broad range of products. Currently, there is one
commercial bank providing microfinance services (CE-
RUDEB), one privately owned microfinance institution (CML),
about 15 larger MFIs and around 80 NGOs and CBOs provid-
ing savings and credit services on a smaller scale. New op-

37
erators continue to enter the market and join a relatively ma-
ture and professional industry.
Most of the commercial banks are concentrated in Kampala
and only two of them provide financial services to microentre-
preneurs and poor households. The large majority of banks
have neither the know-how nor the commitment to serve the-
ses client groups. The poor themselves hardly use formal
banks as they are intimidated by the banks’ appearance and
staff attitudes, tend to lack the required collateral, and are not
able to afford the high transaction costs. The amounts saved
by the poor are usually too small to meet the minimum bal-
ances of savings accounts at mainstream commercial banks.
The Cooperative Bank used to provide savings and credit
services to the poor, but it became insolvent for reasons hav-
ing nothing to do with microfinance, and CERUDEB took over
many of its branches. CERUDEB and CML are the only com-
mercial operators that offer microfinance services. CERUDEB
developed its services with donor support and technical assis-
tance from an international microfinance organization (IPC).
By offering individual loans to micro and small entrepreneurs,
it is also able to skim off those – very lucrative – costumers
from its competitors, that have graduated from group-lending
schemes. Although the bank did not have a special strategy to
reach small depositors, by lowering its minimum balance re-
quirements to approximately USD 6, it has been able to attract
a large number of small savers. CERUDEB is also one of the
few lenders which offer agricultural production loans, and it is
developing agricultural insurance, home improvement and
investment credit products. CML has only recently opened its
doors and is funded by private social investors.
The insurance industry does not provide services respon-
sive to the needs of the poor. The tainted reputation of the
industry has hindered the use of insurance companies as sav-
ings services (Mutesasira et al 1999). However, one commer-
cial insurance provider has worked in partnership with a mi-
crofinance institution (FINCA) to extend life insurance to cli-
ents. The pilot has been considered successful and other
MFIs are thinking about introducing similar products.
Savings and Credit Cooperatives (SACCOs) are user
owned and managed organizations under the Cooperative
Act, and range in size from a handful to several thousand
members. Most SACCOs are organized around the work
place (formal employers), markets among vendors or around
a specific product (the most prevalent being coffee) in rural
areas. SACCOs are, in many ways, well poised for providing

38
savings and credit services to the poor, especially in rural ar-
eas, but are fraught with historical problems ranging from
management capacity weakness to fraud (Mutesasira et al
1999). According to the Uganda Cooperative Alliance (UCA),
there are currently approximately 500 SACCOs countrywide.
With ten SACCOs registering per week, they are the fastest
growing sector of the cooperative movement. About 65% of
members are men and 35% women.
Some SACCOs receive technical support from the Uganda
Cooperative Alliance or the Uganda Cooperative Savings and
Credit Union (UCSCU). Out of the 500 or so registered, only
60 are considered “functioning” in one form or other. The ma-
jority of users are net borrowers with as few as 10% being net
savers. Among members, SACCOs are popular because they
are sources of easy and cheap loans compared to banks, are
accessible and often located near member workplaces and
homes, provide daily deposit collection services, and extend
quick short-term loans that can be used to ease cash flow
pressure and smooth consumption. From a legal point of view,
SACCOs have the advantage of being entitled to mobilize
savings and use them for on-lending (Mutesasira et al 1999).
As in most other parts of the developing world, SACCOs in
Uganda have faced a series of problems that have tainted
their reputation as financial service providers. Traditionally,
they suffer from opaque governance and lack of simple and
transparent rules. The separation of ownership and manage-
ment often does not work and some chairmen consider them-
selves as owners of the institution. The lack of involvement of
the membership in the affairs of the institution regularly pro-
vides opportunities for the Board, management and their
friends to take loans without living up to their repayment du-
ties. Accounting systems are usually unnecessarily complex
and often only half understood and half followed. Audits are
infrequent and incomplete. In addition, as most members of
SACCOs are generally net borrowers, they seek to minimize
their interest rate charges on loans – resulting in inadequate
incentives to save and insufficient revenues to run the organi-
zation. SACCOs often lend out both share capital and sav-
ings, leading to frequent liquidity management problems.
Lending policies are usually poorly enforced and systems to
track and manage arrears hardly exist. As a result, most
SACCOs in Uganda have large portfolios in arrears, with
overdue loan repayments stretching back into the distant past.
Many if not all SACCOs have experienced considerable diffi-
culties realizing collateral – as community-based, community-

39
owned and managed organizations, the officers responsible
are reluctant the seize and sell the assets from their relatives
or neighbors (Dichter 1997; Mutesasira et al 1999, Wright
1999).
Most key players in the Ugandan microfinance community
believe that SACCOs and other community-based organiza-
tions have in theory the potential to contribute to the expan-
sion of financial service provision to the poor, especially in
rural areas. However, due to their poor performance to date
and their inherent governance problems, most stakeholders,
including government officials, are wary about the future of
CBOs. One executive manager of a large microfinance pro-
vider declared that democracy was fine in the polling booth,
but that it did not work well in financial institutions.
Both the Uganda Cooperative Alliance and the Uganda Co-
operative Savings and Credit Union are considered weak and
struggle with methodological and capacity building issues
(Wright 1999). However, UCA is following a revised and po-
tentially successful approach and a growing number of SAC-
COs, currently around 20, appear to perform well. In general,
there seems to be some renewed interest in community based
savings and credit organizations. The restructured RMSP as
well as DANIDA’s RFSC initiative will increase support to
CBOs. Also, the World Council of Credit Unions (WOCCU) is
planning to come to Uganda by the end of 2000, funded by
USAID, to work with SACCOs. Savings and credit associa-
tions collaborating with WOCCU will have to hand over their
operation and management to WOCCU and commit them-
selves to a comprehensive restructuring effort.
Other CBOs, like Financial Service Associations (FSAs), have
faced similar problems like SACCOs. However, owing to their
different institutional set-up and management structure as well
as to technical assistance, some FSAs have performed re-
markably well, in spite of operating in difficult rural environ-
ments. Their more business-oriented approach gives them a
comparative advantage over SACCOs and makes them po-
tential vehicles to provide financial services to clients and ar-
eas that are usually not served by traditional mainstream MFIs
(DIFID 2000).
As already pointed out in Chapter 2, the informal sector is
considered more vibrant than the formal financial sector. As
the poor have extremely limited access to formal financial
institutions and only limited access to the new breed of MFIs,
most people rely on the informal sector to manage their

40
money. Often clients of commercial banks and microfinance
institutions continue or sometimes even intensify their in-
volvement in informal financial arrangements like ROSCAs.
These group-based devices satisfy social needs and appeal
to the poor due to their flexibility, speed and proximity. How-
ever, informal savings and credit mechanisms are often char-
acterized by high transaction cost and high risks. As a conse-
quence, the poor regularly lose their savings to fraudulent
schemes, dishonest “friends” and neighbors, to thieves, to
unnecessary spending or (in case of in-kind savings systems
such as livestock) to illness. Moreover, informal credit ar-
rangements often do not provide the liquidity and reliability the
enterprising poor need (Mutesasira et al 1999).
Microfinance institutions offer credit services and to some
extent savings facilities to micro and small-scale entrepre-
neurs and poor households who cannot obtain these services
from the formal financial sector. MFIs now cover the whole
country, although in some districts only one provider operates.
Microfinance providers are concentrated in the central region,
which can be explained by the high rate of economic activity
prevalent in this part of the country. Some MFIs, like FINCA,
PRIDE and UWFT, have close to or even more than 15
branches. With approximately 150.000 clients now using mi-
crofinance services, national coverage is still low in compari-
son with the population (about 21 million). However, competi-
tion in Kampala and the surrounding region is becoming
strong and some providers fear that some urban areas in
these parts of the country might already be close to saturation
(MFPED 2000c; MFPEF/UNDP 2000).
As already described in Chapter 2.1, clients of MFIs tend to
cluster around the poverty line and primarily engage in com-
merce, followed by agriculture, services and manufacturing. A
recent study (MFPED/UNDP 2000) revealed that the clients of
the 42 MFIs supported by the largest capacity builder, CMF-
PRESTO, borrowed around USD 250 on average. Savings
per person in these MFIs was only approximately USD 40.
The entire credit portfolio of all MFIs corresponds to more
than 6% national domestic credit and the savings portfolio
makes up 15% of the national financial savings, showing the
importance of the microfinance sector (MFPED 20000c).
According to PRESTO's unpublished information, there are
presently around 17 well established and well performing
MFIs in Uganda. Although there is no official classification of
microfinance providers yet, MFIs in Uganda could be broadly

41
categorized according to their respective stages of develop-
ment as follows:

Tabelle 3: Categories of MFIs in Uganda

Category Number Characteristics

"A" 5 Includes one commercial bank (CERUDEB), one spe-
cialized privately owned microfinance bank (CML) and
three top MFIs (FINCA, PRIDE-Uganda and UMU); at
or nearing financial self-sufficiency; advanced opera-
tional and management systems; well qualified staff;
good leadership
"B" 12 Mainly NGOs, also registered as companies limited by
guarantee; charging market interest rates; have
adopted a business-oriented approach to financial
service provision; moving towards operational self-
sufficiency; fair operational and management systems
“C.1” 43 Mainly small local NGOs with limited resources and
clientele; most have attended microfinance training
courses and some have tried to implement good prac-
tices; are fairly exposed to the industry's information
loop; most have only a modestly qualified management
and are still far from operational self-sufficiency
“C.2” 40 (Estimate) Very small community based organizations; generally
not well known in the sector; largely outside the na-
tional microfinance information loop; most are un-
trained and generally little aware of best practices

Most Ugandan microfinance institutions follow the mainstream

minimalist approach and offer only a single product. Also for
legal reasons, savings are usually compulsory, blocked and
used as guarantee for outstanding loans, providing little incen-
tive to save more than necessary. A whole range of possible
products has not been explored at all or is offered by only one
provider, including payment systems, emergency loans, hous-
ing loan products, investment loans, insurance products, agri-
cultural loans, leasing, etc. Only few MFIs provide additional
services. For example, FOCCAS uses a village banking
model combined with low-cost nonformal education with the
overall objective to improve household food security and nutri-
tional status, particularly for rural women and children. During
the weekly group meetings, which are used for repayments
and savings, the field agent conducts interactive learning ses-
sions on health and nutrition topics, group management and
microenterprise development.
A number of key players in the Ugandan microfinance com-
munity feel that quantity in terms of client numbers has re-
ceived more emphasis than quality, and that blueprint replica-

42
tion, without reference to the local situation and environment
is the norm. Many MFIs offer financial services following the
Grameen-type approach, developed in distant lands and cul-
tures, with little consideration of the clients’ needs or the
Ugandan context. Recent research indicates that conservative
systems and products not responsive to the needs of the cli-
ents are the main reason for high drop-out rates, which all
larger MFIs are faced with and cost them dearly (one provider
calculated that a new client costs them 17 times more than a
retained client). Relatively well-off clients primarily leave to
seek larger loans, usually on an individual basis. The not-so-
poor seem to leave or are forced out as the loan and thus
weekly repayment size mounts. Poorer clients drop out from
MFIs primarily because they find problems repaying their loan,
having fewer, less diversified sources of income and thus be-
ing vulnerable when illness or death strikes. So far, most mi-
crofinance providers have not responded to the different client
characteristics and adjusted their products accordingly (Mute-
sasira et al 1999; Wright et al 1999c). However, some ob-
servers of the Ugandan microfinance industry feel that it has
to be acknowledged that the methodologies used in Uganda
have proven to attract significant numbers of clients and that
the rigidity applied may have been quite appropriate for the
start-up and learning period of the industry.

Box 2: Uganda Microfinance Union – a

spearhead of innovation in Uganda

The Uganda Microfinance Union (UMU) was set up by two

friends – one Ugandan and one American – who decided dur-
ing their student days to re-invent microfinance in Uganda.
After extensive preparatory work, UMU was established with
the help of a USD 50.000 grant from the Bank of Uganda as a
locally owned, non-governmental organization in the summer
of 1997. Feeling that most microfinance providers, especially
the well-established bigger ones like FINCA and PRIDE, of-
fered only inflexible and restrictive products, the two founders
wanted to do microfinance in a different way.
UMU now provides a whole range of products, including cur-
rent accounts, fixed deposits, working capital loans, individual
lending with employer guarantees and capital asset loans.
Solidarity groups exist for working capital loans as well as for
capital asset loans, with the latter being larger and having
longer loan terms than the former (1-6 months for working
capital loans and up to 1 year for capital asset loans). At dis-

43
bursement, each member of a solidarity group can decide for
herself (70% of UMU clients are women) how much she wants
to borrow (within certain limits), how long she wants the loan
for (e.g. from 1 to 6 months in the case of working capital
loans) and how she wants to repay: weekly, bi-weekly or
monthly. UMU does not ask for blocked savings, weekly meet-
ings or formal collateral, and it allows prepayments. The pre-
credit training only takes 1-2 hours and loans are disbursed
three days afterwards. Once a month one or two members
from each group have to attend a meeting, which is more of a
forum for discussion and exchange of experiences than a
monitoring meeting.
UMU also offers loans to employed individuals without physi-
cal collateral, provided that their employer guarantees the
credit. These loans are very popular among the working poor
in urban areas. For example, half of the staff of one of the
biggest microfinance capacity builders in Uganda has such a
loan outstanding with the Uganda Microfinance Union. Cur-
rently, UMU’s 10.000 clients are evenly spread around urban,
peri-urban and rural areas. In spite of the fact that UMU is
offering considerably lower effective interest rates (40% to
52%) than almost all other MFIs in Uganda, the MFI is close
to operational self-sufficiency – after only 3 years of operation.
UMU believes that its secret of success is that it is offering
products that clients actually like and need. Moreover, UMU is
cross-subsidizing loans to poorer clients with the low mainte-
nance and more lucrative employer guarantee loans.
When UMU opened its doors three years ago, very few
wanted to believe in the concept. It took UMU at least 2 years
until it became accepted by the microfinance community and
donors are still far from swamping UMU with money. How-
ever, nowadays the Ugandan microfinance industry has real-
ized that UMU has set standards for client responsiveness
and rapid progress and many MFIs have started to copy
UMU’s innovative and flexible approach.

Partly following innovators like UMU (see box 2 above), partly

due to increased competition and donor pressure, several
microfinance providers have started to experiment with new
products more responsive to the needs of the clients. For ex-
ample, FINCA is trying to broaden its product range to reach
clients both up-market and down-market from its original vil-
lage banking product. Individual lending will be introduced in
early 2000, mainly to retain those clients that graduate from

44
groups and that would otherwise be skimmed off by providers
offering larger individual loans. In response to internal studies,
which found clients to complain about the burden of lengthy
pre-credit training, FINCA plans to reduce its training sessions
from five weeks to four or even less. Moreover, FINCA has
introduced a health insurance scheme, which is especially
attractive to poorer clients more vulnerable to external shocks.
The launch of an agricultural lending product has also been
considered, however, no appropriate methodological ap-
proach has yet been found. Other microfinance providers,
including well established large MFIs as well as smaller ones,
also think about introducing new products, or are already ex-
perimenting with them, including emergency loans, drought
insurance and attractive savings facilities.

9 Competition and
Commercialization of
Microfinance
Competition for clients among microfinance providers is a
relatively new phenomenon in Uganda and the degree of
competition is not as intense as in other well-advanced micro-
finance countries like Bolivia, Chile or Paraguay. However, the
forces of competition have already changed the face of the
Ugandan microfinance landscape. In Kampala, all large MFIs
(CERUDEB, FINCA, PRIDE, UWFT, UMU, FAULU) and a
number of smaller microfinance providers have set up branch
offices and compete head-on against each other. Even in a
smaller city like Masaka, six MFIs offer financial services to
more or less the same client group. However, competition is
only prevalent in the urban areas of the central region, espe-
cially along the Kampala to Jinja and Kampala to Entebbe,
Mbale and Masaka corridors. Some MFIs fear that these mar-
kets are already close to saturation, however, most key play-
ers believe that as long as providers keep growing, as they
do, and until no microfinance institutions have to close down
or merge, saturation may still be far away. By way of contrast,
in the rural areas only very few microfinance providers oper-
ate, thus leaving most of the rural population without access
to MFI services.
Nearly all key players of the Ugandan microfinance industry,
including all larger MFIs, believe competition is a good thing.

45
While most providers find the growing competition challeng-
ing, everyone agrees that clients benefit from it, receiving
more and better services. So far, the large majority of microfi-
nance institutions has offered similar services and products,
with little consideration for the diversified needs of diversified
client groups. With usually only one supplier offering microfi-
nance services in one area, clients were not in the position to
make a choice. Along with growing competition, MFIs are now
forced to give more attention to the needs and preferences of
the clients and have started to craft products more responsive
to these needs and preferences. Microfinance providers have
began to examine their own products vis-à-vis the products of
their competitors. As urban clients of the central region have
started to exert consumer preference, what CGAP’s Robert
Christen calls the “yellow pajamas” myth – that clients would
respond to nearly any requirement that microfinance pro-
grams imposed, even standing outside in yellow pajamas – is
disappearing in this region.
While the large majority of Ugandan MFIs are still providing a
single product or a very restricted range of standard products,
most larger MFIs have started to consider, or are already
adopting, new strategies to attract and retain clients. Among
the early responders, UMU has been innovative from the very
start and CERUDEB has had a competitive advantage over
non-bank providers, being able to offer various savings facili-
ties. FINCA is putting increased emphasis on understanding
its clients and is now conducting comprehensive market re-
search before opening new branches, establishing focus
groups for service assessments, and conducting client impact
and preference studies that include drop outs. FINCA is also
developing a culture of marketing within its staff. Among its
market strategies adopted are: promoting and professionaliz-
ing its public image through higher quality passbooks and
promotional materials, sponsoring public events, training its
staff in sales techniques and the importance of service quality,
and using impact and preference studies to craft appealing
services and messages. While some of these changes may
have been made in any case, the competitive environment
has pushed organizations to do so more urgently.
Competition has also led MFIs to reinforce their sustainability
efforts. Microfinance providers are no longer in monopoly po-
sition, neither vis-à-vis their clients nor in relation to donors.
MFIs are now trying to provide credit and savings facilities
more efficiently and increase cost-recovery, thus having more
resources available to improve their service quality. Moreover,

46
as donors willing to support microfinance are now able to se-
lect from a broader range of providers, MFIs have become
more mindful of donors’ preferences for sustainability. Along
with the pending regulation and other factors, this has in-
creased the industry’s cohesiveness and drive for sustainabil-
ity.

Box 3: The Effects of Microfinance

In recent years, the market for microloans in Bolivia's cities

has reached a high degree of saturation. On the order of
300,000 loans are outstanding, against a population of micro-
entrepreneurs estimated at 600,000. The resulting intensive
competition among microfinance institutions and consumer
lenders reveals effects that may occur elsewhere when com-
petition increases.
Bolivian microentrepreneurs are taking advantage of their
choice of several providers to be more demanding and to ac-
cess more credit. One notable effect has been a race to pro-
vide faster, more convenient services. Loan approval times
are now measured not just in days but in hours. Customers
have shown a strong preference for individual rather than
group loans: most group lenders are adding individual loan
products to protect themselves against client desertion, and
individual lenders are growing faster than group lenders.
Customer loyalty has faded, as clients sample various institu-
tions, attracted to whichever lender offers the largest loans. It
has even become a status symbol to have more than one loan
at a time. Loan size escalation and multiple loans have cre-
ated a dangerous syndrome of sobreendeudamento (overin-
debtedness) in which clients exceed their debt capacity. As a
result, delinquency and default have surged throughout the
system. Improvements in the credit bureau (Central de Ries-
gos) and tightening of regulations have helped but have not
eliminated the problem.
These conditions, combined with a recession, are creating
great stress among Bolivian microfinance institutions. Profits
are down, and several institutions are seeking merger part-
ners. Most institutions are developing new products to attract
customers. Some observers worry that competition will drive
microfinance institutions away from the poor. Although it is
clear that most lenders are making more large loans, they do
not seem to be abandoning low-end customers. Bolivia’s ex-

47
perience shows that competition brings better services to cli-
ents, but makes life much more difficult for providers.

Unlike in Bolivia (see box 3 above), where intense competition

has increased delinquency and default, no serious negative
consequences of growing competition can yet be observed in
Uganda. Clients have become more experienced and cogni-
zant about their choices, sometimes threatening to leave and
switch to other providers. In response, some MFIs have loos-
ened their formerly rigid procedures and rules. For example,
one large provider seems to have accepted higher in-cycle
delinquency, provided that clients pay at the end of the term.
As most MFIs are faced with a considerable drop-out problem,
client retention has become one of their key concerns. Micro-
finance operators feel that they can no longer afford to push
out all clients that miss some payments or attend meetings
only irregularly, as long as they keep paying their dues.
Clients are starting to take advantage of increasing competi-
tion also in other ways. In areas where competition is most
intense, multiple lending is becoming a problem. Some clients
seek multiple loans which exceed their repayment capacity, or
move to new institutions to escape bad credit histories. Efforts
to identify bad borrowers systematically have been thwarted
by the lack of a national system of identification cards. Bor-
rowers can simply change the names they use. Microfinance
institutions have attempted to get hold of regular defaulters by
circulating photographs or attending each other’s meetings,
without too much success, though. However, multiple lending
seems to have had little effect on delinquency indicators yet,
but providers are aware that it could endanger the health of
their institution in the future.
Observers of the Ugandan microfinance scene are also con-
cerned that competition could result in MFIs concentrating on
the wealthier and thus more profitable clients, leaving the poor
behind. However, there is little evidence of such a trend. So
far, only CERUDEB focuses primarily on upper-level borrow-
ers by providing individual loans against collateral. CERUDEB
is partly skimming off the most profitable clients from its com-
petitors, which offer only group-based credit. As already men-
tioned above, many MFIs operating in competitive environ-
ments have already reacted and are planning to introduce
individual loans, too.
However, competition has so far not led providers to stop
lending to the poor. FINCA, for example, is not only trying to

48
grow up-market, but also attempts to serve more clients
down-market. Among the strategies to do so, FINCA has in-
troduced a health insurance scheme, moves its operations to
areas ever less prosperous, and generally putting more em-
phasis on understanding the true needs of poorer clients.
FINCA’s average first loan has not grown over the past two
years, clearly demonstrating that FINCA is not moving away
from the poor. Other providers have also indicated that their
response to competition is more product and client diversifica-
tion – in order to serve formerly untapped markets – than
moving up-market. In addition, competition is strongest for
larger loans in Uganda, providing less incentive to concentrate
on wealthier clients.
Critics of commercial microfinance usually mention that com-
petition in microfinance may result in less attention to social
goals and participation. In a competitive environment MFIs
may not be able to afford maintaining the extra non-financial
services that support social goals like better nutrition or em-
powerment (Marr 2000). In Uganda, most larger MFIs follow a
minimalist credit approach and concentrate on the provision of
credit and savings services. Additional services hardly exist
and can therefore not be eliminated. Those microfinance insti-
tutions that do provide extra services, like FOCCAS providing
credit with education, usually operate in rural areas where
little or no competition exists. The general manager of UWFT
even believes that competition and commercialization enables
the institution to better meet their social goals, because the
attainment of these goals is based on institutional sustainabil-
ity and maturity. Moreover, the coming legislation will permit
sustainable MFIs to become licensed to provide savings facili-
ties. As outlined in Chapter 4.2, it will especially be the poorer
households that profit from access to savings facilities.
Another area where competition might have negative conse-
quences is client participation in governance. Some providers,
especially the community-based organizations, see grassroots
participation in governance as a core value. Commercializa-
tion may render such organizations less competitive, as they
tend to be less technically versatile, less flexible and endowed
with less resources to respond quickly to new market situa-
tions (Rhyne and Christen 1999). In Uganda, savings and
credit associations and similar community-based organization
have been fraught with a number of management and gov-
ernance problems, and have therefore had little significance
as financial service providers. Currently, a number of initia-
tives are under way to strengthen and professionalize these

49
organizations. Whether competition and success in urban
microfinance has in the past been detrimental regarding sup-
port to rural community based initiatives and/or is now in-
creasing interest in CBO-approaches, is open to speculation.
Client participation in governance also plays a role in main-
stream microfinance. In keeping up with the village banking
movement worldwide, FINCA has phased out its internal loan
product in response to insufficient capacity of groups to man-
age their own loans. FINCA has recognized that the original
objective of creating self-sustaining village banks is difficult to
achieve, and has moved away from it. Moreover, FINCA has
also come to the conclusion the internal loans are competing
with the MFI’s own loans to the groups and denying the MFI
the opportunity lend more and earn more. Most other MFIs
regard client participation in governance as difficult to attain
and even potentially dangerous when clients have too much
control over operations and management.
The current drive of the Ugandan microfinance industry for
sustainability and commercialization is a response to the com-
ing legislation, which provides that only sustainable MFIs will
be granted licenses as deposit-taking microfinance institu-
tions, as well as a result of an increasingly inherent commit-
ment of MFIs to sustainability, fostered by donors and capac-
ity builders. However, a number of MFIs complain that the
donor community is putting too much pressure on them, ask-
ing for sustainability and expansion at the same time, without
providing the necessary resources. Especially when asked to
expand into rural areas and develop new products, providers
feel that donors should continue to support them. Also, micro-
finance providers state that they will need extra resources to
meet the possibly very stringent requirements to become li-
censed under the new law. Most of the donors and capacity
builders agree that MFIs need further support for the devel-
opment of new products and for pushing the frontier of finance
into more rural areas. However, they also feel that microfi-
nance institutions should increasingly look for commercial
funding sources.
Already, a number of Ugandan microfinance institutions have
lines of credit with commercial banks, however, fully guaran-
teed by donor initiatives. Attracting private capital for microfi-
nance will be very difficult in the prevailing weak state of the
Ugandan financial sector, but it has been set as a goal by the
microfinance industry. So far, savings mobilization as funding
source has only been available to commercial banks. Those
MFIs that plan to apply for a license as soon as the new regu-

50
lation is in force, intend to make use of savings as funding
source. One MFI, the new Commercial Microfinance Limited
bank, has managed to attract social investors, which might
inspire other investors to join the bandwagon. Other funding
sources, such as issues of bonds, have not yet been tried for
microfinance in Uganda. Some donors are thinking about set-
ting up a joint guarantee fund, so that a common set of stan-
dards applies for all credit requests. The proposed donor
guidelines will also help to reduce subsidies and promote ac-
cess to commercial funds in a consistent way.

10 Conclusion: Why is
Uganda ahead?
While four to five years ago only a few moderately performing
MFIs existed in Uganda, the country is today endowed with
one of the strongest and most dynamic microfinance industry
in Africa. Uganda’s microfinance providers still do not serve as
many clients as similar institutions in Asia and Latin America,
but the industry has reached a stage of development in terms
of sustainability, outreach and coherence that is unmatched in
other parts of Africa. The principle reasons for this success
include:

Enabling environment

Macroeconomic stability, high population density in urban,

peri-urban as well as some rural areas and favorable ecologi-
cal conditions have provided a favorable economic and physi-
cal environment. An enterprising population combined with
massive formal sector lay offs has resulted in the rapid growth
of the micro and small enterprises sector. The population’s
experience with informal financial arrangements has further
assisted its willingness to access microfinance services.

Weakness of formal financial sector

With a substantial number of bank failures, microfinance be-

came to be viewed as the most obvious vehicle for delivering
financial services to the poor and became expected fill the
finance gap.

51
Government commitment

Besides ensuring macroeconomic stability, the Government of

Uganda has been committed to private sector development.
While the government’s approach to microfinance was initially
less beneficial (supporting bad practice and politicized credit
programs), the government is acknowledging that the its role
in microfinance is mainly limited to the provision of an appro-
priate legal and policy environment. The GoU has also be-
come more accessible to the needs of the microfinance indus-
try and is now actively encouraging stakeholder coordination.

Donor commitment

Early on, key donors supported the development of a healthy

microfinance industry and pushed MFIs towards sustainability.
Donor support and commitment to microfinance has increased
over the years.

Committed MFIs with strong international

alliances

International microfinance organizations have provided critical

inputs in terms of capacity building, human resources and
exposure to international experiences to their affiliated na-
tional MFIs.

Strong national capacity builders

National capacity builders have provided training and techni-

cal assistance to a large number of Ugandan MFIs, increasing
their knowledge about best practices and improving their skills
to apply these.

Stakeholder coordination

Stakeholders, including practitioners, capacity builders, gov-

ernment and donors, have increasingly learnt to listen to each
other, learn from each other and coordinate and cooperate.

Competition

More recently, growing competition has forced microfinance

institutions to become more responsive to clients’ needs, put
more attention on service quality and engage in the develop-
ment of new products.
While it is not possible to gauge precisely the contribution of
each of the above mentioned factors to the observed microfi-

52
nance success in Ugandan, it is obvious that all stakeholders
involved performed very well. Donors and particularly gov-
ernments can learn that support and commitment to the crea-
tion of a favorable environment pays off in microfinance and
thus poverty reduction. Factors like population density and
climatic conditions can hardly be influenced, but governments,
supported by donors, can promote macroeconomic stability,
financial sector reforms, conducive regulatory policies and
private sector development in order to make microfinance
work. Uganda could be pictured as model for donors to follow.
Donors have not only supported government in their effort to
create enabling conditions, but have also displayed commit-
ment to coordinate with stakeholders and invest significant
resources into capacity building.

11 Remaining Challenges
As outlined throughout the report, Uganda has a well-
established and vibrant microfinance industry. However, some
challenges remain to be tackled, including:
„ reaching out to rural areas in a sustainable manner;
„ strengthening community based organizations so
that they can become a viable option to reach poorer
and more remote clients;
„ developing new products more responsive to the
needs of different client groups, including savings ser-
vices, payment systems, emergency loans, housing
loan products, investment loans, insurance products,
agricultural loans, leasing, etc.;
„ preparing MFIs for the transformation from NGOs to
licensed microfinance providers;
„ exploring and promoting commercial funding
sources and reducing subsidization by donors;
„ developing a stronger MFI network able to effectively
coordinate the industry;
„ educating stakeholders in order to prevent negative
publicity from the press, politicians and the public;

53
Annex I: Donor Initiatives in
Microfinance
USAID/Uganda was the first donor to provide substantial sup-
port for the development of microfinance in Uganda. USAID
started to fund MFIs in the early 1990s and sponsored the
microfinance seminar in January 1996. The Center for Micro-
finance under PRESTO has been set up in 1997 with the help
of the Americans and has since than acted as the lead train-
ing and technical assistance provider for MFIs. The project will
be succeeded in 2001 by SPEED (Support to Private Enter-
prise Expansion and Development), which is still in the design
stage and will probably have a broader scope than PRESTO-
CMF. In general, USAID puts microfinance in Uganda in the
context of its wider private sector development program.
With its Financial System Development Project (FSD), GTZ
strives to contribute to a stable, efficient and competitive do-
mestic financial sector. GTZ does not support individual MFIs
but follows a systemic approach and puts considerable effort
into policy dialogue. As part of the program, BoU is supported
by a GTZ team in the modernization of the national payment
system. FSD also cooperates with other actors in the financial
sector in order to contribute to the development of sound and
sustainable institutions, including the Uganda Institute of
Bankers (UIB), which is currently setting up a Microfinance
Competence Center (MCC), the Uganda Security Exchange
and the Capital Markets Authority. Finally, as one of the main
FSD project activities, the GTZ team is supporting the Bank of
Uganda to develop the legal framework for the regulation and
supervision of microfinance.
The European Union has a rather unsuccessful history of
credit interventions in Uganda. It’s Microprojects Program,
started in 1984 and implemented in cooperation with the GoU,
was characterized by politization, poor portfolio quality and
little efforts to apply good practices. In 1999, the program was
restructured to fold all microfinance related activities into one
program. SUFFICE now follows a financial system approach
and supports the development of an inter-linked chain of sus-
tainable and efficient MFIs. SUFFICE provides lines of credit
to microfinance institutions, matching grants to MFIs to cover
costs of training, technical assistance and institutional

54
strengthening, and promotes research, documentation and
coordination.
Of all donors, DANIDA is currently implementing the most
extensive program for agricultural credit in their Rural Finan-
cial Services Component (RFSC). Besides support to
MFPED, working with the Uganda Institute of Bankers to as-
sist MFIs, and promoting CBOs that provide microfinance ser-
vices in rural areas, their largest contribution will be expanding
the licensed bank Commercial Microfinance Limited (CML).
With a loan provided by the African Development Bank, the
GoU is restructuring its PAP project and is currently in the
process of transforming it into the Rural Microfinance Support
Project (RMSP). The project will operate as an apex organiza-
tion, providing capacity building as well as lines of credit to
MFIs. The Austrian Government, which used to be one of
the key donors in the early stages of the microfinance indus-
try, has lost some of its influence due to budgetary restric-
tions. It continues to support several MFIs and provides flexi-
ble funding for strategic efforts.

55
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
In 1999, the budget of the Austrian Development Cooperation
was severely reduced. With 60% less disbursements for pro-
grams and projects than in 1998, Uganda experienced the
sharpest drop of all countries supported by ADC, resulting in
severe problems for the Austrian Development Cooperation
and some of its national partners. The crisis situation was
compounded by two more factors. First, Austria held the presi-
dency of the European Union in the second half of 1998 and
stepped in for Finland in the first half of 1999 in Uganda,
which lacked an appropriate representation in Uganda. By
assuming this very time-consuming extra function in 1999, the
Austrian Regional Bureau could spend less time for its pro-
grams and projects in a period when an intensive dialogue
would have been of special importance. Second, the long-time
micro, small- and medium enterprise development (MSM)
sector consultant left Uganda in mid-1999 and was not re-
placed until early 2000. While the coordinator and other staff
members of the Regional Bureau tried to take over some of
the private sector responsibilities, the program and the project
partners could not be given sufficient attention. As a result of
these factors, Austria was not able to compensate the nega-
tive effects of the budget cuts through an intensified dialogue
with its partners. Consequently, Austria lost reputation and
influence at three levels:
The massive and sudden withdrawal of resources has mark-
edly weakened the Austrian position vis-à-vis the Govern-
ment of Uganda. The GoU is closely following such events
and responds to them. While the former sector consultant had
good relations with several key officials related to the private
sector and microfinance, his departure and non-replacement
for over half a year damaged the relationship with the respon-
sible Ministries. The efforts of the new sector consultant to re-
build these relations are constrained by the lack of resources
available to the Regional Bureau. While in the past, the RB
could support initiatives of the Ugandan government relatively
spontaneously – as long as they were in conformity to the

57
Austrian sector policies – and thereby build up considerable
good-will and reputation, it has now lost this option to a large
extent. Moreover, the GoU has tentatively started to coordi-
nate donor initiatives in the private sector and has designated
Austria, in accordance with the intentions of ADC, to continue
its support for PRIDE. Austria has not been able to live up to
this plan and thus lost some reputation. The process of the
marginalization of the Austrian Development Cooperation in
Uganda makes evident the connection between financial input
and significance at the government level.
Simultaneously, the budget cuts as well as the temporary ab-
sence of the sector consultant changed the position of the
ADC in relation to other donors. Austria was one of the
smaller donors but not amongst the smallest. Due to the
commitment and expertise of the MSM sector consultant, Aus-
tria was perceived as an important player, especially in the
field of microfinance. The budget cuts and the absence of a
sector consultant tarnished Austria’s good reputation. For ex-
ample, when Austria was no longer able to provide the prom-
ised support to FINCA, the RB was compelled to address to
the Norwegian government with a request to step in. While the
Norwegians followed this request and thus guaranteed the
survival of the MFI, Austria clearly suffered in terms of influ-
ence and reputation in the donor community. The current sec-
tor consultant is trying hard to re-establish Austria’s reputation
by engaging pro-actively in donor dialogue, however, in order
to regain profile The Regional Bureau needs funds to back up
the current efforts.
While all donors interviewed agree that the RB and especially
the new sector consultant are very committed to the develop-
ment of the private sector, particularly in microfinance, and
are also very dedicated to donor coordination, it also became
clear that the standing and influence of an individual donor is
dependent on the financial resources invested in this field.
According to the donors interviewed, small donors should also
perceive themselves as small donors and act accordingly.
While larger donors welcome contributions and coordination
efforts from smaller donors like Austria, they feel that larger
donors should be granted the proper visibility in joint initia-
tives. The Regional Bureau seems to heed this principle and
no interview partner complained about inappropriate flag post-
ing from the Austrian side.
The budget crisis has also affected Austria’s relations to mi-
crofinance institutions. For a long time, the extent of the
budget cuts and their effects on the financial resources avail-

58
able to the Ugandan Regional Bureau were not known. The
RB was therefore not able to inform its microfinance project
partners whether and when the promised funding would be
forthcoming or to what extent it would be reduced. For PRIDE,
this had severe consequences. When the promised funding of
USD 600.000 was not forthcoming, PRIDE suffered a liquidity
and crisis that almost brought the organization down. The only
way out of this crisis was to approach the central bank (Bank
of Uganda) and ask permission to on-lend a proportion of cli-
ent savings. This is strictly illegal for non-formal banks under
the Ugandan banking law. However, there was no other op-
tion apart from closing PRIDE, which would have shaken pub-
lic confidence in microfinance very badly. Bank of Uganda
gave permission to do this and PRIDE is still on-lending some
of its savings to its members, in contravention of the law.
In addition, the final, fairly small tranche of the Austrian fund-
ing prior to the budget crisis was not forthcoming, which
caused some difficulties for PRIDE. This incidence seems to
have happened due to a misunderstanding between the Aus-
trian Ministry of Finance, which disbursed funds to PRIDE, the
microfinance institution and the Regional Bureau. The situa-
tion was compounded by the departure of the sector consult-
ant without someone feeling responsible or having the neces-
sary information about the procedures and agreements be-
tween Austria and PRIDE. While PRIDE is still hoping that
Austria will one day continue its support, there seems to be
little financial room for this on the Austrian side at the mo-
ment.
As already mentioned, the Norwegian government stepped in
and compensated Austria’s failure to fulfill its funding pledge
in the case if FINCA. The third MFI supported by Austria,
FOCCAS, received its funding also later than promised, with
negative consequences for the planning and budgeting of the
microfinance organization. In summary, Austria lost consider-
able reputation and standing among its partners – govern-
ment, donors and MFIs – as a result of the budget cuts and
the failure to replace the country sector consultant in time, and
is currently obliged to put a lot of time and effort into rebuilding
confidence and strong working relationships.

59
2 Perspectives for the
Austrian Microfinance
Interventions in Uganda
Due to an active and knowledgeable country sector consultant
on the one hand, and the provision of relatively large sums to
the sector, at least for a small donor, Austria was at the fore-
front of microfinance development in Uganda in the mid-
1990s. Austria’s pioneering role was mentioned by all stake-
holders interviewed during the evaluation. It is generally ac-
knowledged that Austria pursued the right strategy to support
microfinance development in Uganda. The RB was one of the
first donors to support MFIs in Uganda and put a strong em-
phasis on institution building. Austria supported only those
MFIs that had strong international alliances with track records
as technical implementers. These alliances (FINCA Interna-
tional, PRIDE Africa and Freedom from Hunger for FOCCAS)
could provide the necessary input in terms of capacity build-
ing, technical assistance, technical advisors and expatriate
managers, and exposure to international experiences. This
support enabled their national affiliates to leapfrog the long
learning process that had gone on around the world. Both
FINCA and PRIDE now belong to the most advanced microfi-
nance institutions in Uganda. Austria’s support to these insti-
tutions has certainly contributed to demonstration effects, with
a number of MFIs having replicated their model and other
donors and even private (social) investors having developed
interested in microfinance.
It is also acknowledged that Austria supported these MFIs in a
beneficial way. ADC not only provided funding for institution
building, but also support for outreach expansion and product
development. Austria chose MFIs that had the capacity to
develop their own strategies and methodologies. While the
Austrian sector consultant actively looked for dialogue with the
partner MFIs, he did not design the programs or intervene at
management level. Agreements were established on few but
important performance targets that embodied the goals of
both ADC and the MFI. The Regional Bureau viewed its main
role as monitoring MFI performance and holding the organiza-
tion accountable for the results agreed upon in project targets.
Similarly, the RB understood that an enabling environment is
key to national microfinance development. The country sector
consultant realized that the responsible government body for

60
regulating the sector, the Bank of Uganda, lacked capacity
and needed support. The Austrian Development Cooperation
initiated a microfinance policy discussion by funding the
preparation of a rating system. Although this rating system did
not come into effect, the initiative is considered as one of the
first earnest attempts to collaborate with BoU on microfinance
and open a policy dialogue. Moreover, Austria has been one
of the first donors to venture into microinsurance in Uganda by
supporting a stand-alone community-based microinsurance
project, implemented by ILO in 1998.
However, during the late 1990s more donors entered the field
and stepped up their funding to microfinance initiatives. At the
same time, Austria’s contributions remained at more or less
the same level and experienced a sharp cut in the last year.
Austria is therefore in a comparatively much weaker position
than some years ago. This has been compounded by the de-
parture of the long-time country sector consultant. While the
new consultant appears to bring all qualifications necessary to
become an accepted and strong player in the sector, she is
severely hampered by the budget constraint and the long pe-
riod without serious Austrian participation in the Ugandan mi-
crofinance industry.
Especially in view of a very limited budget for microfinance,
the Austrian Regional Bureau is in the process of defining a
new microfinance strategy and re-positioning itself in the mi-
crofinance arena. The goal of this process is to find a suitable
role as small donor and increase the effectiveness and visibil-
ity of Austrian microfinance interventions. In general, the MSM
country sector strategy (program) is prepared by the country
sector consultant and discussed with the MSM sector consult-
ant, who prepares the overall MSM sector policy following the
international discussion and the Austrian MSM experiences in
the field.
While some funds have just been disbursed to FOCCAS, and
FINCA will probably also receive some more funding, the RB
considers direct support to individual MFIs not as one of its
future main strategies. First, Austria is not in a position to pro-
vide relevant financial support to MFIs. Second, in view of the
unstable budgetary situation, ADC does not want to commit
itself to long-term support, thus avoiding the dependency of
MFIs from regular financial contributions, which might again
not be forthcoming in a timely fashion. The Regional Bureau
rather views its possible role as a strategic and flexible sup-
porter of the Ugandan microfinance industry. Currently, there
Bureau follows three levels of intervention:

61
 „ Supporting innovation in MFIs. The RB continues its
support of FOCCAS and FINCA by funding product in-
novation and covering operational costs to increase
outreach
„ Support the establishment and improvement of the mi-
crofinance sector framework, mainly by providing pol-
icy and strategy inputs to the GoU and other stake-
holders of the industry
„ Supporting market and strategic studies. This third
level of intervention should strengthen the product in-
novation as well as the framework support intervention
level
„ Support and promote cooperation and collaboration ef-
forts of the microfinance industry
The Austrian Regional Bureau has prepared these strategies
in response to (1) the budget constraints, (2) according to the
Austrian comparative advantage at the current stage of devel-
opment of the Ugandan microfinance industry (3) and in rela-
tion to the framework of existent initiatives and strategies of
other donors. Already in the past, Austria acted as a flexible
and strategic supporter of the industry and the current Re-
gional Bureau tries to make use of these experiences and
resume this orientation. While the current efforts are adapted
to the new budgetary situation, the performance and success
of these efforts will continue to be related to the funds in-
vested. The new country sector consultant is putting a lot of
emphasis on strategic issues and is committed to joint donor
initiatives dealing with microfinance support structures, like
guarantee funds and training packages for MFIs graduating
from NGOs to formal banks. The Regional Bureau also con-
siders to act as flexible funder willing to fill gaps where they
arise, provided the initiatives are in conformity with Austrian
microfinance policies and strategies.

3 Structure and Actors of

the Austrian Development
Cooperation
As far as the instrument of microfinance is concerned, the
structure of the ADC includes on the side of the Ministry of
Foreign Affairs, Department for Development Cooperation: the

62
Regional Bureau with the country MSM sector consultant and
the head of delegation in the Regional Bureau, one sector
consultant responsible for MSM sector policy, and one country
desk officer in Vienna responsible for all East African coun-
tries. Outside the Ministry, project partners are implementing
Austria’s microfinance interventions. As far as the three micro-
finance projects looked at in more detail in this evaluation
(FINCA, PRIDE and FOCCAS) are concerned, the Austrian
Ministry of Finance transfers the funds on behalf of the Aus-
trian Ministry of Foreign Affairs directly to the Ugandan Minis-
try of Finance and Economic Planning (MFPED), which then
disburses the funds to the microfinance institutions.

3.1 Country Desk Officer

The country desk officer is responsible for all activities in the

countries he is assigned to, including microfinance programs.
Although the country desk officer has the final authority as
regards individual projects, he usually decides according to
the recommendations of the MSM country sector consultant.
Following the decentralization approach, an large part of the
administration tasks are also performed by the country sector
consultant.
The evaluation team views the role of desk officer in Vienna
as an information consumer and distributor of information,
rather than as an crucial partner involved in decision making.
This means that the current effort of Regional Bureau to re-
position itself strategically regarding microfinance interven-
tions is partly carried out without the assurance that these
decisions are in conformity with the views of the headquarter.
Thus, decisions may be taken and implemented in Uganda
with the risk that they might have to be amended at a later
time, in case other actors in the Ministry view them as not
corresponding to overall policies or positions of the Austrian
Development Cooperation.

3.2 MSM sector consultant

The MSM sector consultant’s main task is to prepare and co-

ordinate the overall MSM sector policy and to endorse country
sector programs. The sector consultant participates in the
international sector discussion and coordination, distributes
sector relevant information and responds to enquiries of the

63
country sector consultant. In the past, the cooperation be-
tween the MSM sector consultant and the former country sec-
tor consultant in Uganda was severely hampered by personal
disparities between the two actors and the ensuing break-
down of communication. Between these two actors hardly any
exchange of information took place. The country sector con-
sultant did not place attention on policy papers prepared by
the sector consultant and the sector consultant had only lim-
ited knowledge of the sector interventions and the strategies
pursued in Uganda.
Most actors of the Austrian Development Cooperation agree
that the role of the sector consultant as a hub for information
exchange is sufficient. The sector consultant functions as a
service provider and has no authority to intervene at the pro-
ject level. The responsibility for programs and interventions
lies with the Region Bureau and with the desk officer. The
sector consultant only provides additional input or becomes
more involved at project level when asked to do so by the
Regional Bureau or the desk officer.
According to the Regional Bureau, the role of the sector con-
sultant could be broadened by making her not only responsi-
ble for the distribution of sector relevant information but also
for a structured exchange of information. If this function would
be linked to certain criteria, for example commenting reports
and adding additional information, the information system
would gain in quality. According to the Regional Bureau, this
would assure more headquarter involvement in policy discus-
sions.

3.3 Regional Bureau in Kampala

It is the opinion of the evaluation team that the good standing

and reputation of Austrian Development Cooperation in micro-
finance in Uganda until the budget cuts is closely related to
the ability of the well-staffed Regional Bureau with one staff
member being only responsible for the MSM sector, to inten-
sively deal with the microfinance sector, build up strong per-
sonal working relations, participate in coordination efforts, and
contribute to the development of the microfinance sector.
Moreover, a well-staffed Regional Bureau facilitates mutual
support, broad-based policy discussions and reciprocal moni-
toring of all staff members. The evaluators gained the impres-

64
sion that working relations within the Regional Bureau are
good and that the coordinator has been able to build a strong
team.
Under the present circumstances, a strong Regional Bureau is
of particular importance. The strategic re-positioning of the
sector program will only be successful when sufficient staff
resources will be made available. Especially in a situation
where financial resources are no longer a means of control,
interventions can gain visibility up to a certain extent by ade-
quate human resource input. In order to allow substantial con-
tributions in a field as vibrant and complex as the Ugandan
private sector and in particular the microfinance industry, the
sector must be attended by at least one Austrian sector con-
sultant.

3.4 NGOs

The strategic re-positioning of the Regional Bureau in re-

sponse to drastic budget cuts also impinges upon the role of
Austrian NGOs in microfinance. As discussed in the first chap-
ter and the sector overview, Uganda is endowed with a large
number competent microfinance providers, partly supported
by international capacity builders. For the Regional Bureau,
the main partners in microfinance have therefore been na-
tional providers and not Austrian NGOs. Confirming this strat-
egy, most microfinance intervention supported by Austria and
implemented by Ugandan partners have been successful.
According to the Regional Bureau, Austrian NGOs could be-
come more involved in microfinance in Uganda if they would
engage in competitive bids put out in Uganda. If Austrian
NGOs would place competitive bids, the Regional Bureau
would be willing to support them. However, most actors of the
Austrian Development Cooperation agree that Austrian NGOs
might find it difficult to stand up in competition against interna-
tional highly experienced and specialized microfinance or-
ganizations and technical implementers.

65
4 Information Flows and
Systems
The current effort of the Regional Bureau to re-position itself
in the private sector has to be based an stable system of in-
formation and cooperation between the Austrian actors in-
volved in the sector. However, information deficiencies exist at
three levels:
„ technical information system
„ documentation of sector interventions
„ policy and program discussions and coordination

4.1 Technical Information System

Information and communication between the Regional Bureau

and the relevant departments of the Austrian Ministry for For-
eign Affairs are hampered by a deficient technical information
system. The Regional Bureau has no direct access to parts of
the data bank in Vienna. As a consequence, the country sec-
tor consultant in Kampala has no information regarding, for
example, the status of funding proposals and dates of dis-
bursements. This is especially problematic when disburse-
ments are delayed and the Regional Bureau is not able to
give accurate information to its project partners, as it hap-
pened with the last tranche to PRIDE Africa.

4.2 Documentation of Sector

Interventions

The efforts of the Regional Bureau to define its new role are
also constrained by the fact that no systematic and preset
reporting system existed. As a consequence, the new country
sector consultant found no hand-over notes and the docu-
mentation on the initiatives promoted and supported by Aus-
tria was deficient. Moreover, this lack of documentation made
it difficult for the new sector consultant to refer to former
communication networks and re-establish strong working rela-
tions.

66
4.3 Policy and Program Discussion

The evaluation team believes that the sector policy and pro-
gram discussion among the responsible actors of the ADC is
not sufficient in its current form. Especially when confronted
with serious legitimacy problems in Uganda and the resulting
effort to develop new strategic positions, a close cooperation
and matching of interests between the headquarter and the
Regional Bureau is of particular importance. Otherwise, the
current delicate re-positioning of ADC in microfinance is en-
dangered by information gaps and decisions may be taken in
Uganda without full support from headquarter. Moreover,
close cooperation and continuous dialogue are especially im-
portant in a new field like microfinance, where the pace of
innovation is rapid.
Currently, the foci of intervention seem to be set by the Aus-
trian Regional Bureau without much participation and contri-
bution from the desk officer. While the Regional Bureau in-
forms the desk officer about its strategies and asks for con-
sent, no discussions in substance seem to take place. This
also means that the consequences of the budget cuts on pol-
icy and program issues have to be borne to some extent by
the Regional Bureau without sufficient backing from head-
quarter.
During the times of the last country sector consultant, the
country desk officer and the country sector consultant had an
informal agreement that the desk officer would concentrate
more on Tanzania and the country sector consultant more on
Uganda. While such arrangements are a result of time con-
straints on both sides, they also preclude substantial policy
and project discussions. A similar arrangement has not yet
been made with the new sector consultant.
This lack of information may impinge on crucial decisions
taken by the headquarter, for example in relation to financial
and human resources necessary to implement policies and
programs that meet the Austrian requirements of significance
and visibility. Insufficient information may lead to the failure of
the headquarter to realize the importance of a particular ap-
proach or strategy and thus to the lack of appreciation for fi-
nancial and human resources necessary to pursue this strat-
egy.
For the headquarter to fully understand and appreciate the
developments of the sector and in order to participate in policy
and program discussions with the Regional Bureau, head-

67
quarter has to be furnished with more sector information and
included more closely into the information system. This is
even more important in times of strategy developments and
when the focus of interventions switches from project to sector
and product support. While the support of individual projects is
much easier to administer in terms of finances and reporting,
new ways of communication and reporting have to be devel-
oped for initiatives on a more strategic level like donor coordi-
nation and policy development.
However, information flows have to be two-way. The head-
quarter including the sector consultant should provide regular
information on sector discussions within and outside the Min-
istry, report on important meetings like the Monday-meeting,
inform about decisions taken that could impinge on the situa-
tion of the Regional Bureau and the sector, comment on the
information provided by the Regional Bureau, etc.

6 Structure of Cooperation
As regards microfinance in Uganda, the structures of coopera-
tion within the Austrian Development Cooperation are formal-
ized only to a small extent. While the structures seem to be
clear on paper, most actors agree that they are less so in real-
ity. For example, there are no guidelines regarding the scope
and content of reporting between Kampala and Vienna and
vice versa.
As a result, the quality of the information flow and thus the
decisions based on this information is highly dependent on
the quality of the relationship between the actors involved. In
order to start information flows and keep communication go-
ing, close personal relations are necessary. This implies that
personal conflicts may lead to a considerable loss of informa-
tion, possibly impinging on the quality of sector interventions –
not only in the country concerned but in all countries with Aus-
trian initiatives in this field. As already mentioned, this is what
happened in Uganda between the MSM sector consultant and
the MSM country sector consultant. As a result of this conflict,
very little exchange regarding MSM sector policies, country
sector policies and programs, and microfinance experiences
in Uganda and other countries with Austrian MSM interven-
tions took place, resulting in a huge loss of information and
experience for the entire Austrian MSM sector.

68
In this context, arrangements should be made that give more
weight to the MSM sector policy with regards to individual
MSM sector interventions. Currently, the MSM sector consult-
ant has no means to enforce sector guidelines. While in
Uganda the microfinance interventions promoted by the coun-
try sector consulted were consistent with international best
practices and therefore in general also with Austrian guide-
lines, in other countries Austrian supported microfinance initia-
tives sometimes do not meet international and Austrian micro-
finance guidelines.

7 Recommendations
The following recommendations relate to the structure of the
Austrian Development Cooperation with regards to microfi-
nance interventions in Uganda.:

„ Systematization of reporting in order to professionalize

communication structures
„ Decision-making mechanisms promoting sector co-
herence
„ Stabilization of the Regional Bureau

7.1 Systematization of reporting in

order to professionalize
communication structures

One of the most essential findings of this evaluation is that

information flows between actors of the ADC are deficient.
This deficit results in:
„ the impression of actors to be not sufficiently informed
„ the lack of documentation of interventions, which can,
for example, make it for new consultants very difficult
to familiarize her/himself with the program
„ insufficient knowledge and understanding of the head-
quarter about the local framework in which sector
strategies are pursued, which may result in deficient
backing from headquarter

69
 „ insufficient knowledge of the Regional Bureau about
discussions and decisions in the headquarter, possibly
causing incoherence and loss of efficiency
„ communication structures being highly dependent on
personal relations between the actors involved
Especially in view of the difficult situation currently faced by
the Regional Bureau in Kampala, mainly caused by budget
cuts, and the resulting strategic re-positioning of ADC, this
information gap is very problematic. In a transition period it is
of utmost importance that all actors involved have the same
information at their disposal in order to assess the relevant
processes, form opinions, and make joint decisions.
There is also an urgent need to de-personalize communica-
tion between the actors and pursue the professionalisation of
information flows. The evaluation team thus recommends:
„ to dispose of the current highly informal information
system prone to inaccuracies
„ to establish a structured reporting system defining con-
tent and organization of information flows
Content-related systematization of reporting is taken to mean
that reports about sector developments and interventions in
Uganda have to be prepared according to agreed criteria, for
example requiring strategic decisions to be explained. An
stipulated number of persons (in particular the country desk
officer and the MSM sector consultant) will then be obliged to
comment on these reports. Moreover, the information flow
from headquarter to Kampala should also become more sys-
temized, for example requiring headquarter staff to report on
important decisions and discussions, like the Monday meet-
ing, or developments of other Austrian and international mi-
crofinance interventions. A possible approach could be the
weekly and/or monthly preparation of a list of all relevant dis-
cussions and decisions taken in headquarter, with references
to the persons involved and the probable consequences,
which is then distributed to all decentralized structures like the
Regional Bureau.
Organizational systematization will require the actors involved
to provide reports and comment to these at preset intervals of
time. Moreover, the information flows will have to be system-
atically documented.
However, the formalization of information flows should not be
interpreted or used as an instrument of control. The Regional
Bureau should not loose the autonomy granted to it as a re-

70
sult of decentralization efforts. Decisions about a systematiza-
tion of reporting and communication should be made in mu-
tual agreement of all actors involved. Intensified and system-
ized reporting should not result in less responsibility and deci-
sion-making power of the Regional Bureau, but provide a
clear framework for discussions and decisions.
The evaluation team believes that a systematization of report-
ing will not work unless someone is explicitly made responsi-
ble for it, for example the MSM sector consultant for all sector
relevant issues and someone within the Ministry for the dis-
semination of reports on overall discussions and decisions.

7.2 Decision-making mechanisms

promoting sector coherence

Currently, there is no structured arrangement to assess

whether MSM sector interventions correspond to Austrian
sector policies and guidelines. This means that one the one
hand the MSM sector consultant has no means to enforce
sector guidelines, and on the other hand sector experiences
on the ground can only partially be fed back into the sector
policy. Thus, the evaluation team suggests to implement a
structured decision-making mechanism, for example:
„ the sector consultant can initiated a decision-making
process if she is of the opinion that the MSM instru-
ment is not applied according to Austrian and/or inter-
national principles and guidelines;
„ thus, the sector consultant can call upon a team of
Ministry employees to review the intervention and as-
sess whether the instrument is applied correctly;
„ in the course of this analysis, the team has to seek the
opinion of the actors involved (for example the country
MSM sector consultant);
„ the MSM sector consultant does not participate in the
assessment, she can only initiate this decision-making
process;
„ the team has to state the reasons why it came to a
specific conclusion

71
7.3 Stabilization of the Regional
Bureau

The evaluation team is of the opinion that the current situation

requires a strong Regional Bureau, because:
„ the loss of reputation and standing of the Austrian De-
velopment Cooperation due to the budget cuts can
only be curtailed with the help of extensive human re-
source input from the Regional Bureau
„ the Austrian Development Cooperation needs the Re-
gional Bureau, which in spite of the budget crisis still
has considerable reputation in Uganda, if ADC contin-
ues to view visibility and a certain degree of flexibility
as an important element of its development coopera-
tion
„ the standing of the Austrian Development Cooperation
can only be consolidated if more financial resources
will be made available to the Regional Bureau in the
near future

72
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List of People interviewed

Richard S. Apire Dirk von Hook

Director Development Chief Executive
Finance Dept. Centenary Rural Development
Bank of Uganda Bank (CERUDEB)

Henry Bagazonzya Konstantin Huber

Chief Technical Advisor Legal Representative
Poverty Alleviation Project Austrian Development
Office of the Prime Minister Cooperation

Hanne Carus Ephraim Kamuntu

Technical Adviser National Co-ordinator
Agriculture and Natural Private Sector Development
Resources Programme
Royal Danish Ministry of For- undp
eign Affairs

Peter von Dijk Kashugyera Lance

Adviser Principal Economist
GTZ Head, Private Sector
Bank of Uganda Development Section
afrac Ministry of Finance, Planning
& Economic Development

Julie F. Earne Sheila Kawamara Mishambi

Africa Finance Planning and Co-ordinator
Monitoring Specialist Uganda Women’s Network
FINCA

Alfred Hannig Grace Bantebya-Kyomuhendo

Team Leder Head Consolata Kabonesa,
Financial System Lecturer
Development Project Department of Gender Studies
GTZ Makerere University
Bank of Uganda

77
Lene M. P. Hansen Joe S. Mononga
Programme Manager Suipervision Manager
EU and Government PRIDE Africa – Uganda
of Uganda
Suffice Programme Technical
Support Unit

Robert Hickson Leonard Msemakweli

MicroFinance Technica General Secretary
Support Spezialist UCA – Uganda Co-operative
AFCAP Alliance

N. Bantura Mugumya Owen Patrick Rader

Development Finance Dept. Private Enterprise Officer
Bank of Uganda United States Agency for
International Development
Mission to Uganda

Paul K. Musoke Cerstin Sander

General Manager Private Sector-Consultant
PRIDE Africa – Uganda Austrian Development
Cooperation
Eva Mukasa Evelyn J. Stark
General Manager Director
Uganda womens’s Center for Microenterprise
Finance Trust Finance
PRESTO

Leonard Mutesasira Y.B.K. Wadembere

Co-ordinator, research D/D Development Finance
and training Bank of Uganda
MicroSave Africa

Mary Margaret Nansubuga Ibrahim Wakeda

Manager Mikro Banking Co-ordinator, Microfinance
FINCA – Uganda Project
UCA – Uganda
Co-operative Alliance

Guy Winship
Country / Managing Director
FINCA – Uganda

78