Delay in passing legislation affecting microfinance sector

By Billy Rwothungeyo               

The delay in passing tier four legislation is affecting coordination and focused growth of the microfinance sector, according a new report.

Titled the “Uganda Microfinance Sector Effectiveness Review, 2014 Uganda,” the report urges the strengthening of the legislation.

“Transitioning to high Tiers has only happened marginally, partly due to related costs of compliance and competition that undermine the desired benefits,” said Dr. Fred K. Muhumuza who read out the review at the recent launch of FSD Uganda.

Bank of Uganda regulates financial service providers under a system that consists of four tiers.
Tier one category consists of commercial banks, while tier two category is made up of credit institutions. Credit institutions do not take deposits.

Tier three category is made up of Micro Finance Deposit Taking Institutions (MDIs) that are regulated under the Microfinance Deposit Taking Institutions Act 2003.

The last category; tier four comprises of Non Deposit Taking Institutions such as credit only Non-Governmental Organisations (NGOs), SACCOs, and small member based groups.

Currently, the central bank does not regulate tier four, although stakeholders are taking steps to change this.

“Mobile money has been key in areas of money transfers but has more potential that requires regulatory approval as well as improving partnerships,” the review says.

Other key findings of the review are that institutional development and sustainability has varied within and across different Tiers.

Also, the review says that the new policy of government to bank roll provide direct funding to Savings and Credit Co-operative (SACCOs)  is counter-productive to efforts of building market-based sustainability and governance

The Review was initiated by FSD Uganda to keep abreast with the developments in the sector since the last such review was published over a decade ago in 2004

The 2014 report was informed but did not exactly follow same aspects as the first, given the dynamism of the sector