By Faridah Kulabako, Daily Monitor
Low uptake of insurance in Uganda explains why the insurance sector did not make money for the better part of 2011.
Insurance penetration in Uganda is about 0.6 per cent, the lowest in the region, compared to Kenya’s 2.6 per cent, and Tanzania and Rwanda’s 1 per cent respectively.
Players now eye new targets set during 2011 to uplift the industry in 2012 and beyond.
After years without a full Commissioner for Insurance, the Finance Ministry in June appointed Mr Ibrahim Kaddunabbi Lubega head of Uganda Insurance Commission – the regulator of the insurance industry.
Three months later, parliament passed the long awaited Insurance Amendment Act in September 2011.
The Act provided for among others, the rebranding of Uganda Insurance Commission (UIC) to Insurance Regulatory Authority of Uganda (IRA).
The Act also stipulates regulation of micro insurance and health insurance, allows banks to be involved in selling insurance products and delinks IRA from Bank of Uganda supervision.
With the delink from Bank of Uganda (BoU), the Act brings IRA under Finance Ministry supervision and instructs an increase in the amount of security deposit to an insurer from 10 to 50 per cent.
The Act also demands that a local reinsurance company is created. The proposed Uganda Re which should have been passed before close of 2011 seeks to save the country billions of shillings channeled overseas for reinsurance services annually.
Building the image
In October, UIC officially rebranded to IRA. The changes, in the Amendment Act should improve services in the sector. During 2011, IRA raised insurance companies’ minimum paid-up capital requirements in a bid to build a strong and competitive local industry.
Effective October 2012, insurance companies should have minimum paid-up capital of Shs4 billion for non-life insurance and Shs3 billion for life insurance companies, up from Shs1 million for both policies. Brokerage firms should have minimum paid-up capital of Shs75 million, reinsurers – Shs10 billion, up from Shs50 million and Shs2.5 billion respectively.
Uganda has the lowest paid-up capital requirements in East African when compared to Kenya’s Shs16.6 billion for reinsurance firms, Shs4.9 billion for life insurance service providers, Shs10 billion for non-life insurance firms while brokerage companies are required to have paid-up capital of Shs51 million.
In Tanzania, reinsurers are required to have minimum paid-up capital of Shs14 billion, Shs6.3 billion for life and non-life while brokerage companies are required to have paid-up capital of Shs28.5 million.
“…this problem of insignificance of the insurance sector must stop. We have given ourselves up to three years within which the paid-up capital must be doubled. Once we have strong companies we shall have a better place in the financial sector in Uganda,” Mr Kaddunabbi said.
This, he says, will strengthen the financial base of the industry, as players quickly settle claims, to fund bigger risks such as those in the oil industry and grow insurance penetration.
Uganda Insurers Association chairman Mathew Koech said the two-year grace period to October 2014 gives players enough time to mobilise resources for the minimum paid-up capital requirements or else they quit the industry.
Mr Kaddunabbi, stressed that new entrants will not be licensed unless they meet the new minimum paid-up capital requirements, except Uganda Re, which should have a Shs5 billion capital to be licensed and should have raised Shs10 billion capital within three years.
During the year, players also agreed on timelines within which all claims should be paid. For instance, insurance firms are required to pay claims of up to Shs10 million within 10 working days after receiving a discharge voucher.
Claims of between Shs10 and Shs50 million should be settled within 15 working days while those above Shs50 million should be paid within 20 working days after receiving a discharge voucher or on receiving a cash call payment receipt from reinsurers.
A Policy Holders’ Fund to settle clients’ claims in case individual insurance companies fail to pay was established after some clients complained about firms that did not pay their claims. This has worked against the industry’s reputation, driving away potential policy holders.
Mr Kaddunabbi says, a compensation fund assures people that they will be compensated in case a risk occurs.
The industry also attracted a new player, Britam Insurance Company, in July, bringing the number of players in the local market to 23.
However, 2011 also had hiccups in the industry. Makerere University Academic Staff Association (Muasa) sued the National Insurance Corporation (NIC) over a Shs16.7 billion pension savings package it claimed the insurance giant owed it.
It was later reported that NIC was selling off some of its money-spinning assets including three apartments with 18 flats of 2-3 bedrooms and a vacant piece of land in Kansanga, a Kampala City suburb, to raise money and pay the institution’s Academic Staff.
The regulator also observed that some insurers were undercutting or charging premiums that are far below the approved minimum rates to attract customers, a scenario Mr Kaddunabbi said leads to unfair competition and robs the industry of revenue.
He added that such an unprofessional act of non-compliance with the law affects both insurers and reinsurers and sometimes leads to companies’ inability to pay claims in the wrong run.
The minimum premium rate for motor comprehensive policy cover for private vehicles is 4 per cent of the car value while that for buses and other passenger service vehicles is 7.5 per cent.
For the case of burglary and house breaking, the premium rate is 0.1 per cent of the total value, plus 0.5 per cent without first loss while that with first loss has to add 1.1 per cent.
In case of school fires, the minimum premium rate is 0.15 per cent while that of offices is 0.125 per cent.
Reinsurers should not take on risks priced below the minimum premium rates. A Shs10 million fine will be slapped on companies that undercut rates.
Sneek peak into 2012
To boost this industry, the public should understand what insurance entails in addition to industry players reviewing other laws such as motor third party. If all players in the industry follow the set targets, 2012 will be a good year for the industry.“We expect growth of not less than 10 per cent in 2011 and not less than 20 per cent by the end of 2012,” Mr Kaddunabbi said.
Banks should start expanding outreach services to accommodate the unbanked customers who disadvantaged by the informal banking methods so that such customers can enjoy banking products like other customers.
The call was made by Ms Justine Bagyenda, the executive director supervision at Bank of Uganda while commissioning the Uganda Agency For Development (Ugafode) micro finance as a microfinance deposit taking institution.
She said in pursuance of sound financial systems, banking institutions must expand outreach services to reassure the depositors about the safety of their money so that they do not spend sleepless nights worrying about their money.
Warned against negligence
She warned the directors of the new micro-finance institution against negligence, adding that most banks which have previously collapsed were due to weak principles and corporate governance structures.
“The directors must uphold good corporate governance structures because most bank failures have been due to weak corporate governance structures,” said Ms Bagyenda
She said banks should tap into the 12 million bankable populations of which only 4 million are banked meaning the remaining 29 million are being served by the informal and unscrupulous banking institutions which are not monitored and regulated by Bank of Uganda.
Ugafode becomes the seventh MDI in the country to be granted a licence by Bank of Uganda.
According to the Chief Executive Officer Mr Wilson Twamuhabwa, the financial institution will provide financial solutions to people in rural areas.
He said the financial institution has so far built over 2,800 houses for low income earners in pursuance improving the peoples’ living standards.
The institution is expected to engage in a number of services including among others, micro-insurance for the agriculture and cash in transit services.
By Julius Businge, The Independent
Bank of Uganda to introduce consumer protection mechanism
What would make you borrow Shs 500,000 from a money lender at an interest rate between 15% and 30% per month? Many reasons but at the heart of each is on common feature; desperation – you want money badly.
Unfortunately, if an interesting case Chief justice Benjamin Odoki is handling says anything, such desperate borrowing is usually the start of real trouble.
The case the CJ is handling involves about 48 inmates of Luzira Prison claiming money lenders, court bailiffs, and magistrates are colluding to extort money from borrowers by locking them up in an “illegal mafia-like syndicate”.
According to them, the dirty deal starts with a sweet hook. All the lender asks you for is a postdated cheque or simple loan agreement. Trouble starts when, as the lender knows already might happen, you fail to pay according to the stipulated terms. Without you being summoned to explain, bailiffs raid your home, office, or business.
Since you, like most people, believe you have a name to protect, you will quickly try to hush up any scandal by agreeing to pay quickly. No way. In the example the prisoners give, the case will be taken to a magistrate in their racket who will order you to pay the principal Shs 500,000 plus interest, lawyer’s fees of Shs 1 million, and bailiff’s fees of Shs 2.5 million. For the simple loan of Shs 500,000 they give you, the racket will squeeze up to Shs 4 million from you.
Unfortunately, there is nothing really new in the prisoners’ story. In fact, they might have read similar stories before getting that loan that got them in trouble. Desperate borrowers tend to get trapped in a cycle of debt. Commercial banks understand this. That is why they lend money basing on the borrower’s business plan, especially its cash flow element, and not on the borrowers problem or the collateral. Informal money lenders understand this too. But, unlike established banks, they are not interested in your business plan but in your assets. They ask you to stake movable and immovable property and sign transfer deeds. At the slightest default, they proceed to grab a borrower’s assets.
Such dangerous borrowing has come under focus recently because there is a new batch of MPs in town, most of them believing they have finally hit the jackpot. It is feared they will fall prey to money lenders.
“Members have urgent issues to solve and banks can’t easily help,” says Barnabas Tinkansimire, who has been an MP for Buyaga County and has seen it before, “Unfortunately, the money lenders are not patient and so they end up grabbing security of the borrower.”
Apprehension over the money lenders is so bad that as part of their induction, the Speaker of Parliament, Rebecca Kadaga held a closed door meeting to advise new MPs about the danger of what she called “conmen and manipulative money lending institutions.”
“Some MPs call me to get them out of prison and this time I am not ready to do this and that’s why we had to warn them,” Kadaga told journalists.
Helen Kawesa, the Public Relations Officer of Parliament says although parliament does not have any formal agreement with money lenders or commercial banks to transact business with any MP, the House accounts section often gets involved when the “parties involved sign their transfer deeds and do their business.”
Unsurprisingly, however, some money lenders like Timothy Sali, the Director of Tim Tim Investments Ltd told The Independent that the MPs and not the lenders are the cause of the problems.
“One MP failed to clear my money,” he told The Independent, “I warned him several times but the fellow could not respond. He lost the car which he staked as security to the business.”
MPs are particularly vulnerable because they are `honourable’ and fear to lose their dignity and will usually keep quiet about such scandals. Others who are targeted are salaried workers of prestigious organizations, and business people with collateral.
However, not all clients of money lenders are unhappy.
Patrick Bacurana, says money lenders have aided his breakthrough in business, especially when he needs to solve urgent problems.
“The system is friendly because I sign an agreement with the lender and put security and in just a few minutes I get the money I want and the bussiness goes on.
“It is cheap for me to obtain a loan from a money lender who is a friend of mine. It only takes me a phone call and the money is availed to me. Prior to that I had tried a bank they asked for a land title which I didn’t have,” Bacurana said.
Bacurana, who does mobile money, graphics design and sell clothes at City Centre Complex Kampala in a business he values at over Shs 25million, says most of the equipment he uses comes from the money borrowed from informal lenders.
“I pay my loans slowly by slowly, some lenders are my friends they give me time. Others threaten to retain my property due to late payment but I talk to them and here I am,” he says, proudly pointing at his shop.
In Kikuubo, the busy business trading lane in downtown Kampala, the money lending business has attracted foreigners, including Chinese and Indians, who lend big money.
Usually they use local front men like Muhonge, to get customers for a commission.
“We can even lend Shs500million to a client as long as collateral that almost doubles the money being lent is staked,” Muhonge, who is an agent for Chinese lenders, said. They charge 15% percent interest per month which is many times higher than the official rate but Muhonge says they often negotiate in case of defaulters. But the bottom line is the same.
“A customer who fails to pay the interest and the principle after the agreed period loses his security,” Muhonge said.
Annet Atukunda, who has been operating her business in the Seguku suburb of Kampala city for six years, has clients from all classes; rich businessmen, members of parliament and poor teachers and civil servants.
In her business, instead of indicating the asset staked as collateral for a loan, money lenders often require customers to sign transfer forms indicating that they have sold the asset to the money lender. In case of securities like cars or other vehicles, they require the customer to park the vehicle at an agreed parking yard till the money lent is paid back.
Atukunda says business is good.
“We have many plots of land in Kampala and upcountry, many vehicles are packed at our home, we pay school fees for our children through this business, we have many houses constructed around town and more good things are yet to come,” Atukunda said.
She says the biggest sum she has ever lent out is Shs 80 million and charges a monthly interest between 15% and 20% depending on the customer.
This means that if you borrow Shs 50million from her, Atukunda expects to earn up to Shs10 million in a month. If you default, the interest is compounded. In effect, although her rate is low compared to most money lenders, Atukunda charges an annual interest rate of 240 percent. That is 10 times higher than the 24% maximum mandated by the Money Lenders Act as amended in 2000. Commercial banks currently charge between 18 to 20% per annum but there is obviously very little consideration among money lenders for the contents of Section 7 of the Money Lenders Act 2000 that prohibits charging of compound interest rate by virtue of default in repayment of sums due by the borrower.
Many MPs, among them Rubanda South MP, Henry Banyenzaki, who is also the Minister of State for Economic Planning, want to change that.
“There is need to amend the money lenders Act to prevent money lenders from overcharging borrowers,” Banyenzaki told The Independent.
Unfortunately, the MPs have tried that before and it appears not to have worked. The Money Lenders Act as amended in 2000 is clear on the responsibilities of a money lender. They include obtaining a certificate from a magistrate who has jurisdiction over their area annually, obtaining a license from their local authority annually, lending at interest not exceeding 24 percent annually, and writing contracts between the lender and the borrower for legal purposes.
But as The Independent found, none of the above are strictly followed.
Guma Davis Banda, the Managing Director and an Advocate of Guma & Co Advocates told The Independent that the provisions in the Act are as good as nothing since none of them today applies. “The ministry of Finance needs to urgently draw up guidelines to monitor the operations of money lenders,” he said.
Already, Bank of Uganda (BoU) is working on a new regulation; the Consumer Protection Mechanism (CPM) to protect borrowers from being cheated or exploited by money lenders.
Robert Mbabazize, BoU’s Assistant Director Financial Stability, says as of now however, the central bank has no mandate to regulate money lenders. It only deals with commercial banks and other microfinance institutions.
Another way out would be for commercial banks and microfinance institutions to embrace new technologies, like mobile banking, that move credit to customers far away from formal lending institutions and speed up the borrowing process.
BoU’s Deputy Governor Louis Kasekende, made this point at the annual conference of the Association of Microfinance Institutions in May. He blamed the reliance on money lenders for quick money on two problems; the large segment of the population that persists outside the formal banking sector and the sectors failure to provide innovative products fit for the purpose.
He said only 26 per cent of the adult population above the age of 16 have ever used the formal banking sector like commercial banks, credit institutions and microfinance deposit taking institutions (MDIs).
He said, however, even those Ugandans with bank accounts take loans from informal credit institutions or individuals because bank loans are inaccessible and have lots of red tape. A senior official of one of the commercial banks conceded that the strict rules and procedures that commercial banks demand from customers to get a loan could be helping informal lenders to take off.
“You need to be a customer having an account with us in order to access a loan. You also need to be with business alongside security which would pay back the loan to us. If you don’t have the above we advise you to get them and be served,” the official said. That needs to change, because as everyone knows, all of us at one point might need to borrow money quickly. We should be able to get it safely from our bank and not be left at the mercy of a loan shark.
By Sylvia Juuko, New Vision Uganda –
REGULATING the micro-finance sector will encourage more people to use its services and protect clients’ savings, Ruth Nankabirwa, the micro-finance state minister, has observed.
“One area that will give confidence to the masses is to have a law under which all micro-finance institutions can be regulated and supervised,” she said.
Nankabirwa noted that the law would improve delivery of financial services, especially in the rural areas. A policy framework to regulate micro-finance activities is expected before the reading of the 2010/2011 budget in June.
The minister was speaking at the third financial inclusion advisors conference convened by the Bank of Uganda, the Bank Negara Malaysia and the CPTM smart partnership movement at the Kampala Serena Hotel recently.
It brought together financial services providers, policy-makers and regulators to seek efficient ways to deliver financial services to the rural areas through micro-finance institutions.
According to statistics presented by the minister, a huge portfolio of funds within the savings and credit organisations is not regulated. Nankabirwa also revealed that out of the 1,085 administrative units, 613 had SACCOs.
“The results so far are promising because the membership of savings and co-operatives has grown from 644,318 in 2008, to 1,154,715 in 2009. Savings have risen from sh55m to sh83b,” she explained.
She said the loan portfolio within the unregulated institutions stood at sh122b.“The rural financial services programme has shown that poor people can save and are trustworthy, but they need guidance. The rural folk borrow money and pay back.
“These small loans have made big differences in their lives. For instance, women have been able to pay fees for their children,” she noted. According to Nankabirwa, there are over 1,340 micro-finance firms in Uganda that are not regulated.
Justine Bagyenda, the Central Bank’s executive director for supervision, suggested that the financial service providers adopt home-grown technologies that can support branchless banking to reach the unbanked population.
However, leveraging mobile phone technology to provide banking solutions to a wider population could face challenges of poor infrastructure and high branch start-up costs.
“The sector should devise ways to establish branchless banking so that we can extend financial services to the rural areas. “We need policies that can guide the implementation of financial inclusion for the unbanked,” Bagyenda explained.
By Martin Luther Oketch, Daily Monitor –
Ms Ruth Nankabirwa, the state minister for Microfinance, has said commercial banks should extend mobile banking to the rural poor through the use of Information Communications Technology.
The Minister said during a Smart Partnership conference on financial programme in Kampala recently that technological innovations in communication can be utilised to extend financial services to the poor. “Today, thousands of Ugandans use mobile money to make payments. What needs to be done is for Bank of Uganda, the Communications Commission and financial institution to dialogue on how mobile money transfer can operate in a regulated environment to serve the financially excluded,” she said.
Uganda is seeing remarkable growth of between 25-30 per cent in the telecommunication sector, where by the mobile phone platform is being utilised to reach people in hard to reach areas.
Ms Nankabirwa said Uganda should focus on financial inclusion that goes beyond ensuring a bare minimum access to bank accounts and views it in a much wider perspective. “Having an account alone can’t be regarded as an accurate indicator of financial inclusion,” she said adding that it should be considered as a linchpin in the social and economic transformation of people.
She said the government has realised that large parts of the population lack information on the financial sector, which impairs their ability to participate in development. Under the Rural Sector Services Programmes, the government has designed a communications strategy to inform the public on financial literacy in languages they understand.
In its efforts to offer financial services to the unbanked population in the country, in 2007 government designed a policy for financial inclusion under the ‘Prosperity for All’ programme with the aim of establishing cooperative unions in 1085 sub counties in the country. Micro-finance, as a form of delivery of financial services to poot in Uganda with a considerable number of operators-ranging from groups to individuals.