Micro finance institutions need help
Aug 21, 2006
I am glad that President Yoweri Museveni appointed a minister of state for micro-finance. Ugandans will have a smile on their faces since this is a step towards poverty eradication in Uganda. However, a number of things need to be done for the business community to benefit from the micro-finance an
Sarah Nakibuuka
I am glad that President Yoweri Museveni appointed a minister of state for micro-finance. Ugandans will have a smile on their faces since this is a step towards poverty eradication in Uganda. However, a number of things need to be done for the business community to benefit from the micro-finance and for the government not to lose out.
Government should establish a fully-fledged Credit Reference Bureau to provide accurate information relating to the creditworthness of borrowers. What is happening today with the micro-finance institutions is debt collection through court bailiffs and not credit referencing. Adequate information on credit referencing works to reduce the number and amounts of bad loans underwritten by lenders, thereby reducing the cost of borrowing and increasing the amount of well-underwritten loans. The World Development Report (WDR 2005) shows that information on credit history can reduce the processing time, costs, and default rates by more than 25%.
It further shows that on average, countries without credit registries have a private credit-to-GDP ratio of 16%; those with publicly owned credit registries about 40%, and those with private bureaus about 67%. Such information encourages micro-finance institutions to lend at lower interest rates and to a wider public since reduced margins on lending will be compensated by large lending volumes.
Another issue that is crucial is capacity building for small and medium enterprises. Small borrowers should be sensitized on how to improve their access to business finance particularly from micro-finance institutions.
More emphasis should be put on controlling risk and improving repayment culture through maintenance of sound business records by small and medium enterprises. In order to address this, government needs to support the private sector in designing and setting up programmes through which to recruit, train and deploy ‘financial extension workers’ (just like is the case with agriculture). These will study and assist small and medium enterprises to compile business records and help them write their cash flows.
Such financial extension workers will be required to be prudent enough to command credibility from the micro-finance institutions to which borrowers are affiliated. Financial extension workers will be required to build a track record and be accredited to specific banks and therefore shall not be expected to submit fraudulent records to such banks. Private Sector Foundation Uganda can manage such a scheme.
The writer is the Communication Officer, Private Sector Foundation
I am glad that President Yoweri Museveni appointed a minister of state for micro-finance. Ugandans will have a smile on their faces since this is a step towards poverty eradication in Uganda. However, a number of things need to be done for the business community to benefit from the micro-finance and for the government not to lose out.
Government should establish a fully-fledged Credit Reference Bureau to provide accurate information relating to the creditworthness of borrowers. What is happening today with the micro-finance institutions is debt collection through court bailiffs and not credit referencing. Adequate information on credit referencing works to reduce the number and amounts of bad loans underwritten by lenders, thereby reducing the cost of borrowing and increasing the amount of well-underwritten loans. The World Development Report (WDR 2005) shows that information on credit history can reduce the processing time, costs, and default rates by more than 25%.
It further shows that on average, countries without credit registries have a private credit-to-GDP ratio of 16%; those with publicly owned credit registries about 40%, and those with private bureaus about 67%. Such information encourages micro-finance institutions to lend at lower interest rates and to a wider public since reduced margins on lending will be compensated by large lending volumes.
Another issue that is crucial is capacity building for small and medium enterprises. Small borrowers should be sensitized on how to improve their access to business finance particularly from micro-finance institutions.
More emphasis should be put on controlling risk and improving repayment culture through maintenance of sound business records by small and medium enterprises. In order to address this, government needs to support the private sector in designing and setting up programmes through which to recruit, train and deploy ‘financial extension workers’ (just like is the case with agriculture). These will study and assist small and medium enterprises to compile business records and help them write their cash flows.
Such financial extension workers will be required to be prudent enough to command credibility from the micro-finance institutions to which borrowers are affiliated. Financial extension workers will be required to build a track record and be accredited to specific banks and therefore shall not be expected to submit fraudulent records to such banks. Private Sector Foundation Uganda can manage such a scheme.
The writer is the Communication Officer, Private Sector Foundation