TOP END SECTOR OF LARGE REGULATED INSTITUTIONS
Government of Uganda and other stakeholders in the industry (donors,
practitioners, and consultants) collaborated in creating the rules
and regulations for the microfinance industry from around 2000 to
2004 under the auspices of the Micro Finance Forum. These collaborative
efforts culminated into the passing of the MDI Act in 2003
and its associated Regulations # 61 to 65 of 2004 in
October 2004. The MDI Act created a new category (Tier 3) of financial
institutions: the Micro Finance Deposit-Taking Institution (MDI) to
be regulated and supervised by Bank of Uganda. Under this act, MDIs
are permitted to collect savings from the public and intermediate
them i.e. use them to make loans. In this sense, they perform one
of the traditional roles of a commercial bank. However other activities
of MDIs are significantly restricted (Sections 18 - 20 of the MDI
Act 2003) compared to those of a commercial bank (as laid out in the
Financial Institutions Statute, 2004).
Who has transformed?
Support for Transformation
the Effects of MDI Regulation
Impact Assessment of MDI Regulations in Uganda
10 16/2007) and as Housing Finance Company of Uganda prospects converting from a Tier 2 to a Tier 1 license by the end of 2007.
DFID’s Financial Sector Deepening Uganda Project (FSDU) believes that consolidation is the way-forward for weaker institution as they are faced with the challenge of competing for the same clients with larger and more efficient financial institutions. Consolidation provides smaller institutions with a graceful exit option by combining a small, unsustainable programme with a stronger partner to sustain delivery of financial services to the deserving communities. Allowing weak institutions to fail comes with undesirable consequences to the sector. The placement of FOCCAS under receivership in July 2006 caused a lot of damage to the sector in form of: negative media and political publicity, client unrest and suspicion, financial losses to social investors and wholesale lenders (commercial banks and others). In the right circumstances, consolidation can provide a way out, before an institution fails, to the benefit its clients and the industry as a whole.
Linkage banking is a strategic alliance, in which two or more entities operating in the same market (or locality) cooperate in the delivery of financial services. Typically, the arrangement involves a regulated financial institution and one or more Tier IV microfinance institutions. FSDU has adopted the approach of supporting eligible regulated financial institutions, termed Linkage Implementers (LI), to set up linkage structures targeted at serving Tier 4 institutions and their clients. The linkages allow the clients of Tier 4 institutions to access services such as secure savings, training, IT support, refinance facilities, money transfers, mobile banking, capacity building, and back-office services from the LI. The LI is able to access, directly or indirectly, a client base which it could not otherwise profitably serve and turn its competitors into partners in the delivery of financial services. FSDU co-financed aikan (a consulting firm), to undertake pre-feasibility studies for Centenary Bank in the Central Region, and Deloitte & Touche to undertake a similar assignment for PostBank in Northern Uganda. Centenary Bank and PostBank are expected to take this to the next level of undertaking full blown feasibility studies for preferred linkage options and the recommended linkage partners.
FSDU established the Consolidation and Restructuring Challenge Fund (CRCF) to facilitate consolidation and linkages in the financial sector. The fund was open to groups of two or more partners interested in exploring various consolidation options by co-funding activities such as: feasibility studies, asset valuations, legal reviews, market studies, e.t.c. The fund sought to encourage institutions to “think outside the box” win-win approaches to consolidation including, but not limited to: mergers, acquisitions, and linkage Banking arrangements. FSDU only completed the HOFOKAM merger i.e. merger of the microfinance program under the Catholic Dioceses of Hoima, Fort-Portal, and Kasese.
Effective July 2005, FSDU revised the matching requirements under the CRCF to provide a generous grant of up to 80% of the costs of agreed studies and consultancies i.e. the FSDU paid up to 80% while the benefiting financial institution paid 20%. Full details on the fund application criterion were provided on this link Consolidation & Restructuring Challenge Fund.