Microfinance sector facing mounting exposure to financial crime as AI emerges

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Microfinance institutions (MFIs) across East Africa have been warned that they face growing exposure to financial crime and mounting regulatory pressure even as artificial intelligence (AI) opens new pathways for efficiency and financial inclusion.

Speaking at Hotel Africana on December 5, 2025, during the 3rd Annual Microfinance and SACCOS Governance Forum, Hofokam Ltd managing director Charles Isingoma said savings and credit co-operatives (SACCOs) remain especially vulnerable to money laundering due to lighter supervision compared to commercial banks.

Isingoma, who heads the largest SACCO in western Uganda, revealed that in regulated institutions any unusually large deposit—particularly one exceeding 20% of normal transaction behaviour—triggers immediate scrutiny. This, he said, is not consistently enforced within loosely supervised microfinance spaces.

He added that Ugandan authorities, including the Bank of Uganda and other stakeholders, are currently holding consultations to align the sector with global risk standards set by the Financial Action Task Force (FATF). The outcome of these engagements, he said, could significantly reshape microfinance regulation and supervision in the coming years.

Uneven regulatory adoption across East Africa

Across the region, countries have adopted international financial standards at varying speeds. Rwanda remains the most advanced, having implemented Basel II and III as well as a robust risk-based supervisory framework. 

Uganda has made “significant progress,” Isingoma noted, citing the Financial Institutions Act and the Bank of Uganda’s Anti-Money Laundering (AML) unit. Ethiopia, however, continues to diverge from several global supervisory benchmarks.

Human resource constraints pose another major obstacle. Isingoma questioned whether central banks in the region have the capacity to effectively supervise tens of thousands of MFIs and SACCOs, should they all fall under formal regulation. Uganda alone hosts over 22,000 community-based financial institutions.

Other longstanding challenges include limited interoperability between central bank systems and MFI management platforms, difficulties enforcing consumer protection measures, such as providing loan documents in multiple local languages and inadequate capacity building within regulatory authorities.

AI positioned to transform microfinance

Despite these challenges, Isingoma emphasised that the sector has major opportunities ahead. Regional harmonisation under the East African Community could strengthen cross-border information sharing, curb financial crime, and accelerate financial inclusion.

He singled out artificial intelligence and machine learning as transformative tools for the industry.

“AI can help MFIs increase efficiency and accuracy, automate processes, cut costs, and enhance customer satisfaction through quicker resolution times,” he said, arguing that institutions adopting such technologies will secure a competitive advantage.

Governance and digitalisation key to NDP IV wealth-creation agenda

Uganda Institute of Banking and Financial Services chief executive officer Goretti Masadde emphasised that microfinance institutions and SACCOs are central to Uganda’s national wealth-creation agenda, particularly as the country aims to grow its economy from USD 50 billion to USD 500 billion under the National Development Plan IV.

She stressed that strong governance, digital transformation, green finance readiness, and robust regulatory frameworks are essential for protecting members’ funds and ensuring institutional sustainability.

Masadde added that governance remains the foundation of ethical and mission-driven service delivery, and that emerging issues such as climate change require SACCO leaders to support adaptation and mitigation initiatives.

She added that regulation by the Bank of Uganda for Tier 4 SACCOs and by the Ministry of Finance for microfinance institutions is critical for accountability, consumer protection, and sector stability.

Sector leaders praise MFIs for expanding inclusion

The forum attracted over 70 professionals from the finance sector, including representatives from FINCA, Opportunity Bank, and Centenary Bank. Regulators from the finance ministry and managers from various SACCOs were also in attendance.

Moses Kaggwa, Director of Economic Affairs at the finance ministry, commended SACCOs for filling service gaps in communities historically excluded from mainstream banking.

“The ladies in the markets, the boda-boda riders, and our farmers in rural areas were not banked, and were not getting access to services they need to grow their businesses,” Kaggwa said. “Microfinance institutions come in handy to close this gap.”

As a result, he noted, Uganda’s financial inclusion levels have risen to over 80%, a significant improvement from previous years.

Prof Allan Katwalo, the CEO of Summit Uganda and a member of its board of trustees, delivered the keynote address focusing on aligning MFI governance frameworks with national wealth-creation and financial-inclusion goals.

Dr Denis Tukahikaho, a financial services specialist from the Private Sector Foundation Uganda (PSFU) and the World Bank–supported GROW project, delivered a compelling presentation on carbon credit banking in emerging economies.

Other notable regulators included Edith Tusuubira, Acting Commissioner at the Microfinance Regulation Department under the Ministry of Finance.