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MICROCAPITAL PAPER WRAP-UP: Microfinance Policy and Regulatory Framework in Uganda by Gen. Caleb Akandwanaho S.S of the Ugandan Ministry of Finance, Planning and Economic Development (MoFPED)

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Written by Gen. Caleb Akandwanaho S.S. published on July 24, 2009 by the Ministry of State for Finance, Planning and Economic Development (MoFPED) as number 008 of MoFPED’s released documents, 8 pages, available at:

In 1999, the Bank of Uganda (BOU) created the Policy Statement on Microfinance Regulation as a policy framework for Ugandan microfinance institutions (MFIs). The statement served the policy needs of Tier 1, 2, and 3 MFIs; however, it was unable to provide for Tier 4 institutions. Furthermore, the existence of multiple laws scattered across various policy documents, as opposed to a consolidated legal framework afforded to Tier 1-3 MFIs, has made it difficult for Tier 4 MFIs to navigate their way through microfinance in a manner that protects savings and provides consistently reliable service.

To consolidate the existing dispersed policies, and to ensure that users of Tier 4 financial services in Uganda are guaranteed safety of their savings, MoFPED has organized a policy paper to discuss the issues of regulation for Tier 4 institutions, and proposed plans for 2005-2015 to implement a corresponding legal framework.

MoFPED outlines five objectives of a new policy framework in the Ugandan microfinance sector:

1. Increase access to microfinance services countrywide

2. Improve safety of savings through effective regulation and Supervision

3. Enhance microfinance institutional sustainability

4. Improve consumer awareness and demand for cost effective financial service delivery

5. Develop institutional and product range in the microfinance industry through research and training.

1. Increase Access to Microfinance Services Countrywide

Challenge: MoFPED argues that one of the biggest challenges facing the microfinance sector in Uganda is the concentration of financial institutions in urban and peri-urban areas, depicted by a high concentration of people per financial institution [1].

Solution: Financial intermediaries, whose outreach is more diverse in rural areas, are needed to assist MFIs that are overwhelmed with borrowers, such as a Savings and Credit Cooperative (SACCO). SACCOs are credit unions that act as intermediaries between MFIs and borrowers. The Kenya Union of Savings and Credit Cooperatives Ltd (KUSCCO) helps members with this. While conventional banks require a minimum deposit of USD 67, KUSCCO accepts deposits of USD 2.70 [2].

For MicroCapital coverage on SACCOs, click here .

2. Improve Safety of Savings through Effective Regulation and Supervision

Challenge: Activities like taking deposits from those with excess funds, and lending to those with investible proposals, has resulted in financial loss where transparency is not practiced.

Proposed solution: Intermediaries must ensure that the depositor is able to access his/her savings when they need/want them or according to agreed withdrawal terms. This can be achieved through close supervision and thorough operations management by an MF Regulatory Authority (MFA) to ensure

repayment of loans and proper procedure followed by intermediaries [1].

3. Enhance Microfinance Institutional Sustainability

Challenge: Capacity building serves primarily urban areas, is generally only targeted to MFI managers and not MFI members, and can be very costly. Capacity building entails the development of skills and competencies, such as providing training workshops for financial literacy. MFI members have had little to no exposure to financial education and are thus less inclined to hold managers accountable for fraudulent behaviour and mismanagement.

Solution: The capacity of Uganda Cooperative Savings and Credit Union (UCSCU) must begin forming SACCOs and conferring them the tools to build capacity amongst microfinance management, staff, and members. This includes logistical support, certification in operations and management, certification in corporate governance, management tools, governance tools, and enhanced monitoring and evaluation techniques.

4. Improve Consumer Awareness and Demand for Cost Effective Financial Service Delivery

Challenge: Several institutions that once played a role in increasing public awareness, such as the Co-operative Education and Publicity Programme (CEPP), collapsed during the decline of the Cooperative Movement.  Stirling Smith of the Co-Operative College says “co-operatives have had a long history of government interference, followed by neglect in the 1980s and 1990s. As the World Bank forced privatisation and liberalisation on Africa through ‘structural adjustment programmes,’ the movement went into a decline” [2].

Secondly, MoFPED argues that inadequate, inaccurate, and/or delayed dissemination of news and warnings regarding such things as fraudulent behaviour have left the unsuspecting public more vulnerable to get-rich-schemes.

Solution: MoFPED says borrowers must be trained to recognize healthy situations in MFIs. The MFA should be in charge of developing and monitoring health indicators for Tier 4 MFIs. Under this development scheme, “consumer education messages will be designed and standardized training modules developed.” Furthermore, transparency regarding pricing and performance must be practiced on the part of MFIs.

5. Develop Institutional and Product Range in the Microfinance Industry through Research and Training

Challenge: MoFPED argues that there is a lack of research on Uganda’s financial sector, particularly where informal financial institutions are concerned. Second, microloans and their associated activities in the informal sector are not being documented scrupulously and consistently. Third, service delivery across different tiers of the financial sector is very costly. MoFPED does not provide specifics suggestions as to how this challenge can be overcome [1].

As at 31st December 2005, KUSCCO had 3000 active SACCO Societies with a membership of about 3 million. The share capital and deposits stood at USD 1.6 billion while loans outstanding were USD 1.2 billion [4]. For a more information about KUSCCO, click here .

By: Diya Chopra, Research Associate


[1] Ministry of Finance, Planning and Economic Development

[2] Co-Operative College

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