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Saturday, May 30, 2009


I just want to thank Quint for putting all of the information that I was going to put in my blog. So, I will try to take the microfinance topic on a new level.

As Quint mentioned, one of the aims of microfinance is to inject capital into the economy and allow poorer individuals and companies to grow. It allows the poor farmer to buy another cow so that he can better feed his family. It allows the small company to slowly expand so that they can make more money and be more profitable. Overall, I was very impressed with the presentation and discussion that we had at Brac and left feeling very optimistic for the economy of Uganda because I knew that some individuals were actually trying to fix some of the problems in the economy.

But, after we left and I had some discussions with the professors, I am starting to question how big of an impact microfinance will have on this economy. First, lets back up and look at some basic information. The banks in the area charge 22% per year for a loan. That is a very expensive form of financing and it is very unlikely that you will be able to invest in a project that will be able to return to the company or individual 22%. Now, we look at microfinancing and Barc in particular. They only charge 1.8% interest. This obviously sounds like a better option, until you learn that it is 1.8% per month, or compounded annualy to roughly 28%. The better thing about the microfinancing is that it requires no collateral and if you cant pay, its not as big of a deal, or thats what I took away. Also, you are obtaining credit that you may not have otherwise been able to before.

Now, I get to my point. Microfinancing is about sustainability. Its the fact that you can obtain financing and education to stabalize your family's finances or your business so that it exists in the future. But, how much good is this doing? This country lacks a serious infrastructure and supply chain program so its hard to ship products out of the country. So, even though you are able to grow your company, you are still going to hit a glass ceiling. So, my question for you guys is this: Should microfinancing firms, like Barc, reconsider what firms they give money to? Should they select firms that help with infrastructure to help grow the country? Or, should they stick to their current stategy? So basically, what can microfinancing firms do to make this country more sustainable through financing? And what do you think about the interest costs? Is the high interest rates hurting or helping the country?

Hope you guys are enjoying your trip:)


    Some times micro finance is taken as an emotional(helping the poor- like allowing the poor farmer feed his family) and not the financial perspective of developing capacity like moving from subsistence agriculture (grow food and eat it all with your family) or better put TRADING (here barter trade is fine exchange your maize harvest for Salt).

    Mr Koreykd, before you start lamenting about the interest rates you have to look at the economy in totality here are some stats:
    Uganda Economy:
    -Inflation 13%
    -Bank rate 15%
    -Bank accounts less than 2million out of 34 million people.
    -Informal Credit (Loan sharks)- interest rates range between 15%-30% per month and these guys hold a sizeable market of finance seekers due to the ease and quickness of access to such funds, yes they operate clandestinely, but they presence cannot be ignored- a huge gap between demand and supply.
    Mr K, unless your professors want our Banks and Micro finance institutes to collapse clearly the risk of providing these funds is high and I must add that due to these factors the Return on Investment is high as well, so if at all these monies are used appropriately everyone is happy including the micro finances beneficiaries.

    Micro finance is not only about sustainability, since this word is limiting in that it keeps you in your state of affairs (maintaining the status quo), its also about development pushing someone much higher than they were.
    Where there is a WILL there is WAY
    Forget the infrastructure, America didn’t have that much in the start, ask yourself instead that; Is the will there? On the supply chains- how comes we are importing a lot of stuff, where does it pass- in a one way supply chain??

    Mr K, I don’t agree with the glass ceiling philosophy instead I could say that The glass is half-full.

    Answers to your questions;
    Should microfinancing firms, like Barc, reconsider what firms they give money to? Should they select firms that help with infrastructure to help grow the country? Or, should they stick to their current stategy?

    Of course, they should bench mark from the private sector micro finance institutions like Pride Microfinance, Equity Bank (formely Uganda Micro finance). They should view it from the fiancĂ© perspective and not ‘helping hand’ coz at the end both parties lose…

    So basically, what can microfinancing firms do to make this country more sustainable through financing?

    They should stick more on teaching to fish and not simply giving a fish, Yunus (GramenBank I think) model in Bangladesh could be of great help.
    Also am reading a book by one of the American professors(Bottom of the Pyramid ) there is this Indian Bank that has revolutionalised micro finance….
    Also the microfinance beneficiaries should style up or remain poor, I mean one time disbursed funds called “Entandikwa” (luganda word for new begining) and some of these beneficiaries used the money to marry more women, buy a bicycle.. a case of financial indiscipline

    And what do you think about the interest costs? Is the high interest rates hurting or helping the country?

    You know you cannot compare rates amongst countries with different dynamics, so the rates here are appropriate factoring in risk vis a vis return; very low rates breed laziness and complacency just like foreign Aid.

    Muhimbise A
    Entebbe, Uganda

  2. I think that when Barc is experiencing loss in its net income is when it should more closely filter what loans they give out. In the meantime, I feel like the more loans that they give out (as long as they are having a good payback percentage), the more opportunities there are for Ugandans to figure out solutions to some of their problems. If the loans given out are being repaid, I do not see any problems with the opportunity growing. I think Ugandans will eventually figure out some of their problems, which will lead to progress within the country as a whole.

    The interest rates do trouble me, however. The 1.8% monthly, as we figured out, add up to an annual effective 28%, which is extremely high. I think in that perspective Barc, and companies like it, should lower them a tad. Subsequently, the payback percentage could increase as well.

  3. Pietz, This could give an indication to the high Interest rates in Uganda.
    Best regards
    Muhimbise A.
    Entebbe Uganda
    By John Ssempebwa

    THE high interest rates in Uganda continue to frustrate the private sector. But why are interest rates high? What is not correctly diagnosed can only be cured through miracles.

    Interest rates depend on four rates namely the Treasury Bill (TB) rate, inflation rate, risk rate and bank profit rates after taxes.

    In Uganda, the TB rate is 11.7% (central bank, April 2009), that is the Government sells risk-free (sure-deal) TBs to banks at 11.7% to control inflation and to finance its activities. This is why banks can not lend at below 11.7%, for they would rather lend to the never-defaulting government at 11.7%.

    Uganda’s headline inflation is 13.4%, meaning that if a bank has liquidity worth sh1m on January 1 2009, on January 1 2010, the same million will be worth sh866,000.

    To retain its sh1m, the bank factors in inflation by charging 11.7 (TB rate) multiplied by 134/100 = 15.7%. This is why banks can not lend below 15%.

    Thirdly, many banks have bad loans of up to 10%. Every time borrowers do not pay back in time or do not pay back at all, interest rates increase.

    Business is risky. Many times the private sector fails to pay back. Banks must, therefore, charge above 15% x 110/100 = 16.9% as a minimum.

    Finally, banks are not Father Christmas, they must earn profits after paying government taxes and meeting their operational costs.

    Assume that banks earn a modest gross profit rate of 10%, interest rates can’t fall below 16.6% x 110/100 = 18.3%. Enter the effective tax man, who collects 30% corporate tax, meaning that interest rates can’t fall below 18.3%x130/100 (URA) = 23.8%.

    Logically, this is the minimum rate at which banks can lend to the private sector in Uganda.

    If the Government reduced its TB rate to 1%, interest rates would fall to 1% (TB rate) x 134/100 (inflation) x 110/100 (risk) x 110/100 (profit) x130/100 (URA) = 2.1%.

    In the US, the TB rate is sometimes 0%. But this is not easy because the Government must control inflation, which if not controlled, will increase interest rates. The Government must also pay its suppliers, the private sector.

    The best gift the Government can give Ugandans amidst the current global and national crunch is a significant expenditure cut. But this will not be easy and can frustrate the private sector. But if the Government allowed rural banks that lend to rural-based companies, agriculture, manufacturers, agro-processing, education, ICT, musicians, tourism, transport, for example, to pay 15% corporate tax, interest rates would fall to 1% (TB rate) x 134/100 (inflation) x 101/100 (risk) x 110/100 (profit) x 115/100 (URA) = 1.86%.

    Banks would get motivated to spread further out to ‘tap into the rats’ menu (money kept in pots and holes)’ to increase credit available to the private sector.

    The private sector has a role to play too! If only 1% defaulted on bank loans, banks would pride in “corporate private sector responsibility” to reduce interest rates to 1% (TB rate) x 134/100 (inflation) x 101/100 (risk) x 110/100 (profit) x 115/100 (URA) = 1.71%.

    This is not easy because the private sector doesn’t intentionally default, but is hampered by many reasons, many of which are beyond its control.

    Finally, every year, Ugandans lose sh120b to foreign reinsurers, money which would increase available credit. The Uganda Reinsurance company is long over-due.

    Cutting interest rates is a huge national challenge. Both the Government and the private sector have a role to play. Probably, with more banks being established, the rates will fall due to competition.

    The writer is the Private Sector Foundation of Uganda Director for trade development