Savings schemes a solution to poverty

May 29, 2008

Towards the end of 2004, the national service delivery survey concluded that although the Government had put in place policies and programmes which advocated for credit facilities for production, as well as savings mobilisation, many obstacles still remained. The major obstacles identified included

By Salim Saleh

Towards the end of 2004, the national service delivery survey concluded that although the Government had put in place policies and programmes which advocated for credit facilities for production, as well as savings mobilisation, many obstacles still remained. The major obstacles identified included lack of collateral security, high interest rates, and non-availability of credit facilities in the localities and lack of knowledge of where and how to apply for credit.

The Government, therefore, had to re-think the delivery system that could minimise or completely eliminate, where possible, the factors that prohibit the majority of Ugandans from access to credit and secure savings. It was agreed that the only institution that does not insist on collateral, can charge low interest rates and is in close proximity to the clients, and preferably owned by the communities, are savings and credit cooperative organisations (SACCOs). Consequently, in October 2005, the Cabinet approved the rural financial services strategy.

In June 2006, the Cabinet approved the policy framework for the delivery of rural financial services.

In February 2007, the revised delivery system was launched at Masindi.

Between November 2006 and January 2008, leaders and administrators at sub-county level have trained in the essential elements of prosperity-for-all.

In January, the Cabinet approved the institutional framework for the delivery of financial services to the whole country.

The way forward, therefore, is to facilitate the development of a nationwide network of rural financial infrastructure in our districts.

We must embrace a paradigm shift from using market forces as a basis for delivery of microfinance services and support the formation of SACCOs where they do not exist, and have them linked to regulated financial institutions. This means facilitating, mobilising and sensitising communities about SACCOs. It also involves facilitating training of communities during the formation phase, backstopping SACCO operations and providing critical start-up kits, including the requisite infrastructure. This is the approach that the Government has taken.

SACCOs are financial organisations, owned, used and controlled by their members. The strength of the approach of using SACCOs, is the mobilisation of savings, and the use of pooled resources for loans at reasonable interest rates.

The issue of fair interest rates should and will continue to be debated at length as an effective mechanism of saving poor households from use of the expensive informal credit. We must strive to ensure that the interest rates in the microfinance industry are reduced to ensure affordability by the poor. Keeping low interest rates in the microfinance industry would ideally follow from reduced operational costs; a complex issue to effectively address given the micro nature of services and loans transacted.

The challenge, therefore, is to identify innovative and sustainable mechanisms for containing the interest rates. As a bridge gap measure, we are planning to facilitate SACCOs and access wholesale funds for lending to their clients at interest rates below the market rates. Although these funds will be channelled to the SACCOs through district linkage banks, the banks will be committed not to crowd out our intention of affordability. I thus warn partner organisations who have accessed funds from MSC Ltd to stop charging exorbitant rates.

Future plans to reduce operational costs will entail use of simple technology, for example automatic teller machines (ATMs) at every sub-county. The feasibility and scope of this modality will impinge on the level of ICT development in the country. The way forward for our countries is to ensure effective development and rollout of appropriate and affordable information communication technology (ICT), for enhanced communication, as well as reduced operational costs for the microfinance industry.

To ensure smooth operations of microfinance institutions, we need to institute effective supervision and regulation arrangements to build community confidence. There have been instances where microfinance institutions have ripped off clients. There is need to enact laws to guide the operations of the microfinance institutions. Some of the areas to be regulated would include financial operations, lending norms, capital adequacy standards, and liquidity levels. We have already enacted the Microfinance Deposit taking Institutions (2003) Act, have proposed the formulation of a SACCO-specific Act as well as revocation of the money lenders Act.

Lastly but importantly, we must support entrepreneurial development of the microfinance clients to foster effective use of the loans. Studies have shown that clients, who take loans and are also trained in business acumen, have prospered even after loan repayments have been effected.

Since many financial institutions are profit-seekers and, therefore, bent on minimising operational costs, training of clients may not be high on their agenda. In the case of microfinance, which is already very costly in terms of provision, governments must find ways of supporting the credit-giving institutions to include training of clients in the package offered. This initiative has already been taken up by the Association of Microfinance Institutions of Uganda, the Uganda Cooperative Savings and Credit Union and Enterprise Uganda who need financial and technical support.

In conclusion, developing countries need to fully exploit the potential of the microfinance industry. To this effect, our way forward entails enhancing access of microfinance for the underserved populations, preferably through publicly-supported community-based organisations. The microfinance institutions must be supervised and regulated to provide credit at affordable interest rates. In addition, the use of ICT to reduce operational costs must be promoted, as well as entrepreneurial development of the clients.

The writer is the Minister of State for Microfinance

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