Almost two years ago, the Smart Campaign surveyed financial service providers in Uganda as part of our study, What Happens to Microfinance Clients Who Default (WHTCWD). In summarizing what they described, we did not mince words, reporting the environment as “Hobbesian” at the time. Providers in Uganda described default as a major issue of concern for them. Borrowers in arrears would skip town or change their name, behaviors enabled by the lack of government IDs and credit bureaus.
MFIs often adjusted for these thin credit envelopes and their high distrust of clients by meting out harsh, inflexible punishments on an immediate basis to those who missed a repayment. For instance, providers, suspecting customers of being at flight risk often seized collateral immediately after missed payments in ways that contrasted sharply with the Client Protection Standards and best practices guidance. Some providers explained that they had to act quickly because borrowers have multiple loans and if they didn’t seize the collateral quickly, another lender would swoop in, leaving them with nothing. Unfortunately, all of this was occurring in an environment of weak due process and slow legal enforcement, and we heard about instances where lenders were paying off local law enforcement, turning to local councils to pressure defaulters, and even getting clients thrown in jail.
We observed major gaps in the consumer protection regulatory frameworks and supervisory enforcement. At the time of the WHTCWD study, the Bank of Uganda only regulated commercial banks and a few leading MFIs, and its 2011 consumer protection guidelines pertained only to larger deposit-taking providers. The roughly 2,000 NGO MFIs and savings and credit cooperative organizations (SACCOs) were effectively unregulated and registered as Tier IV institutions, which fell under the purview of the Ministry of Trade, Industry, and Cooperatives. SACCOs, often the only option for the rural poor, particularly in the underserved north, offer loans, including emergency loans, with interest, and savings, and are often additionally capitalized by government ministries and international NGOs for purposes of channeling money to support local development such as agricultural business (e.g. Prosperity for All project). These types of organizations represented a large share of microfinance debt and were described in our WHTCWD interviews as among the most frequent client mistreatment offenders.
In the time since WHTCWD, the media have continued to raise sector issues, and SACCO’s big losses and financial management issues are increasingly in the news. For instance, news stories over the last year drew attention to SACCOs with high profile fraud and major losses for members in the Rakai and Sembabule districts. State Minister for Microfinance Haruna Kasolo recently emphasized the importance of SACCOs taking responsibility and staff working together to expose fraud and hold one another accountable.
Yet, the winds of change might be blowing in Uganda. After more than a decade of work, in July 2013 new regulation was passed pertaining specifically to Tier IV non-banking and micro deposit taking institutions (MDIs) including SACCOs, NGOs, and community groups. These laws place them under the control of a new Uganda Microfinance Regulatory Authority (UMRA). UMRA will license and supervise them, but the institutions will not be permitted to collect savings (as deposit taking institutions are in Tier III). Further, we read statements in New Vision last week indicating that the government would be taking a harder line against SACCO misbehavior. Haruna Kyeyune warned SACCOs that they would be closed down if caught cheating clients.
At the same time, the national ID card system, launched in Uganda in the spring of 2014, is now in its second year of registration and could help improve client records with positive implications for the sector.
These developments all suggest that the environment for consumer protection at the low end of the Ugandan market is improving, thanks to commendable work to put regulations and systems in place. The foundation for better consumer protection is becoming stronger. We are eager to hear from those on the ground in Uganda on the differences these developments will make over time. For instance, will national IDs and affordable credit bureau reference checks lead to reduction in the risk of client flight and better institution-client relationships? What will this mean for financial service providers and their operational costs? We have heard concerns about the challenge the government will face in regulating and supervising 2,000 or so new institutions. We’ve also heard complaints that reporting will be burdensome and that the new requirements may lead to some sector consolidation. Finally, some of our partners also expressed the sense that it would be crucial to educate clients directly as well regarding these new Tier IV regulations. After all, SACCOs’ reputation among many clients is poor and one of UMRA’s goals is to improve the sector’s credibility and trust between providers and customers. Even Kyeyune in his announcement said that it will be important to educate citizens about the new Tier IV regulation for positive impacts to be assured.
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