IS MICROFINANCE A RIP OFF?

As Ugandans fight the unending war out of poverty, and as some try to rescue their collapsing small businesses, it is almost irresistible to seek financing from micro-finance institutions.

Unlike commercial banks, the process of acquiring a loan from these institutions appears less stringent, going by their promotional adverts.
Most claim to charge low interests rates (1-3%) compared to 18-25% charged by commercial banks. They also claim that no collateral is required.

It is this rosy picture that has seen many poor people rush for financial redemption. But as some may have found out, not all that glitters is gold.

Many people who have accessed this credit from these institutions are not smiling anymore. Some have become even poorer as their only belongings have been seized to repay the loans.

For those who had borrowed money to steady their ailing small businesses, a good number have closed shop as servicing the loans becomes too expensive.

Besides, some experts are beginning to wonder whether micro-finance is a panacea for poverty alleviation, considering that not everyone can become an entrepreneur. They are asking why more effort is being put into micro-finance as opposed to job creation.
So what went wrong?

Part of the problem, key players in the sector say, is that many of these institutions hoodwink people by claiming to offer services that they do not, or have no capacity to provide.

David Baguma, Executive Director, Association of Micro-finance Institutions of Uganda (AMFIU), the body that brings together more than 1,000 micro-finance organisations, warns that some of these institutions are not well run and are not transparent.

In this category, he says, are Savings and Credit Co-operative Organisations (SACCOs). These are not members of AMFIU and are not regulated by Bank of Uganda.

A good number sprung up last year after government announced it would be channeling money for its Bonnabagagawale (Prosperity for all) programme through SACCOs.

Baguma said: “Many of these bodies do not tell people the truth. Even when you look at the concept of SACCOs and how they are supposed to be managed, they do not conform to the right procedures.”
Theoretically, Baguma says, SACCOs are supposed to be small organisations set up by a group of people to mobilise savings from each other and lend to members.

Ideally, they should convert these savings into shares which guarantees membership. Under this arrangement, members elect an executive committee to govern them and largely determine how the co-operative should be run.

Baguma explained that because of their size in terms of membership and savings, SACCOs are supposed to be restricted to a given geographical area for easy operation.

In this case, a SACCO say in Kawempe would not accept someone from Bwoyogerere as a member because it complicates the process of tracing the person in case of defaulting.

However, in reality most of these SACCOs are now owned by individuals who control their direction and whose major aim is to make profits at the expense of the people they serve.
“This explains why some have resorted to taking deposits yet they are not licensed by the Bank of Uganda as deposit taking institutions,” Baguma says.

Under the law, Bank of Uganda is only mandated to regulate three types of financial institutions: Commercial banks, credit institutions such as Commercial Microfinance (CMF), and Micro-finance Deposit Taking Institutions like PRIDE, FINCA, Uganda Finance Trust and Uganda Micro-finance Union.

How SACCOs work

The Weekly Observer has established that before accessing credit from these institutions, an applicant must open an account in which one is expected to make regular deposits up to a given percentage that varies from one SACCO to another.

Most require savings of 20-30% of the loan sought. For instance, if one hopes to borrow Shs 1 million, that person must first deposit at least Shs 300,000 on his/her account.

Yet unknown to most applicants, other costs push up the cost of processing the loan as Yiga Muwonge, Managing Director of Front Page Micro-finance, who operate as a SACCO confirmed.

Muwonge said that his firm charges an additional 2% of the loan as insurance and 3% as a charge for processing the loan.
Once these charges are deducted, it means that a person who had intended to borrow Shs 1 million will end up getting about Shs 500,000. And considering that the same person would already have saved Shs 300,000 with the SACCO, the equation becomes even more complicated.

At the end of one year, that person will have to pay back Shs 1,120,000—in essence gifting the SACCO a Shs 700,000 profit in interest charged on the Shs 1 million.

Baguma argues that practically, these institutions cannot survive on 1% interest rate and what they do is charge many hidden costs.
Dr. Willibrord Okecho, a micro-finance expert, says that many of the SACCOs are run by people who have no training in financial management.

“If you entrust me with Shs 100,000, it means when I come to get it, it should be there. But many of these people are irresponsible when it comes to handling money,” he said.

Essential service

Yet despite the shortcomings, SACCOs render services to many who otherwise would not access bank loans. School fees, boda boda loans are available.

At Front Page, Yiga says it takes one to three months to apply and get a loan depending on availability of money. He said that they have the capacity to lend even Shs 60 million and for this kind of loan, they sometimes have to borrow from commercial banks.

But Okecho says there is no way a SACCO can lend such huge amounts of money let alone borrow from a bank, which charges a higher interest—- and lend to people at a lower interest rate.

“It cannot be,” he says, “unless that person is a money lender operating under the guise of a SACCO. These are some of the things that SACCO owners should be transparent about,” he said.
Yiga argues that they try to be as transparent as possible but because 80% of their clients are semi-illiterate, they sometimes do not get the facts well.

He also blames the negative talk about SACCOs on stiff competition in the market. “Some people want to pull you down so they concoct all kinds of stories, including going to the press,” Yiga says.

On the whole, however, recent surveys indicate that most Ugandans rarely engage in any kind of formal transactions with financial institutions.

A national survey on ‘Access to Financial Services in Uganda’ released last week by research group Steadman indicates that more than 8.1 million Ugandans do not use financial institutions of any kind mainly because they are too poor to accumulate any meaningful savings.


SOURCE: UG OBSERVER