Tier 4 lenders challenged to strengthen governance
Kaggwa said Tier 4 institutions act as a link between the formal financial system and people who are not adequately served by commercial banks.
The conference brought together founders, directors, board members, chief executives, regulators, financial institutions and development partners to discuss governance, leadership, accountability and the sustainability of Tier 4 institutions. (Courtesy photo)
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The Government has urged Tier 4 financial institutions to strengthen governance, leadership and accountability to ensure their sustainability and ability to provide financial services to millions of Ugandans who remain underserved by conventional banks.
Tier 4 institutions are small-scale financial service providers that offer microfinance or credit services to communities and businesses that may not have access to conventional banking services. They include SACCOs, non-deposit-taking microfinance institutions, moneylenders and self-help groups, which operate outside the commercial banking system.
Moses Kaggwa, the Director of Economic Affairs at the Ministry of Finance, Planning and Economic Development, said microfinance institutions and money lenders play an important role in Uganda’s economic transformation because they provide financial services to people and businesses that may not meet the requirements of commercial banks.
Kaggwa said many Ugandans, particularly those operating small businesses and in the informal sector, are unable to access conventional bank services because of requirements such as formal employment, registered businesses and collateral.
He said Tier 4 institutions fill this gap by providing credit, savings facilities and business development services.
“They are very important institutions, but how do we ensure that they are sustainable and that they are not going to close?” Kaggwa asked.
He said the answer partly lies in strengthening governance, accountability and transparency within the institutions.
Kaggwa was speaking during the inaugural Annual Founders, Directors and Board Members Conference for Tier 4 institutions held at Motiv Creations in Bugolobi, Kampala last week. It was organised by the Association of Non-Deposit Taking Microfinance Institutions in Uganda (AMFIU) in partnership with the Private Sector Foundation Uganda (PSFU) and the GROW project.
Kaggwa said Uganda’s economic transformation cannot be achieved by Government and large commercial banks alone, noting that small businesses, farmers, traders and other informal-sector players also require access to financial services.
He said Tier 4 institutions act as a link between the formal financial system and people who are not adequately served by commercial banks.
Raymond Kiwanuka, the chairperson of the Association of Non-Deposit Taking Microfinance Institutions in Uganda, said governance remains one of the major issues affecting the growth of institutions in the sector.
Kiwanuka said the association, which has more than 150 members, organised the conference to help institutions prepare for the next stage of their development.
“The question we are answering today is: can we have institutions that can transcend their founder?” Kiwanuka said.
He said proper governance would help institutions make decisions on growth, expansion and operations while also making them more attractive to funders and development partners.
Kiwanuka said some partners were willing to provide funding but preferred institutions with established governance structures rather than businesses dependent on one founder.
“We need to have a board and a working board, not just a ceremonial board,” he said.
Kiwanuka also raised concerns about the 2.8% monthly interest rate cap, saying institutions were facing increasing operational and loan-recovery costs.
He said the cost of doing business had increased, while recovering money lent to borrowers could take considerable time and resources.
Kiwanuka said some institutions could spend more money pursuing a defaulting borrower than the amount they were trying to recover.
“If you lend out money like one million, five hundred thousand shillings or two million shillings and you have to spend three million to recover it through court processes, it becomes expensive,” he said.
Jonan Kandwanaho, the president of the Money Lenders Association of Uganda, said lenders and borrowers need to understand the numbers behind their businesses before entering into credit arrangements.
Kandwanaho said some money lenders charge interest rates as high as 10% or 15%, but the actual return can be significantly lower when the rate of default and operational costs are taken into account.
He said a lender could have a loan book showing a high interest rate but still make little or no profit if most borrowers default.
He said lenders therefore need to examine their businesses carefully and determine how much they are actually earning after taking into account defaults and operating expenses.
Kandwanaho also urged borrowers to understand their own financial position before taking credit.
He said borrowers should ask themselves how much profit their business generates, whether they can afford the loan, what security they have and what would happen if the expected income from the business does not materialise.
“Before I come to access credit, how much am I making? Am I able to pay this money? Can I afford it?” he said.
Kandwanaho also encouraged borrowers to explore alternative sources of financing before taking interest-bearing loans.
He gave an example of a businesswoman who approached him seeking Sh25m in financing. After reviewing the amount she wanted and her cash flows, Kandwanaho said he advised her that she could not afford the loan. Instead, he advised her to contact some of the customers she supplied and ask them for advance payments. He said the woman later informed him that she had secured Sh25m from a customer as an advance payment for six months without paying interest.
Kandwanaho said the example demonstrated the importance of considering alternatives before taking expensive credit.
He said businesses should understand their financial position and explore available options before committing themselves to loans.
Edith Tusubira, the Commissioner of the Microfinance Regulatory Department at the Ministry of Finance, said Uganda currently has more than 1,500 Tier 4 institutions, including money lenders, while about 300 are non-deposit-taking microfinance institutions.
She said Tier 4 institutions include SACCOs, money-lending organisations, non-deposit-taking microfinance institutions and self-help groups.
Tusubira said the institutions play an important role in expanding financial inclusion because they provide financing to people operating at the lower levels of the economy.
She said the growth of the sector makes it important for institutions to strengthen their capacity and governance as they expand.
The conference brought together founders, directors, board members, chief executives, regulators, financial institutions and development partners to discuss governance, leadership, accountability and the sustainability of Tier 4 institutions.