Uganda: Bank to write off sh450m Owino debt

By David Ssemijja, New Vision

FINCA, a local microfinance institution, plans to write off over sh450m worth of loans advanced to clients, whose merchandise was destroyed by fire that recently razed St. Balikuddembe (Owino) market.

The development will mitigate the loss magnitude and enable traders get back into business.

The institution’s chief executive officer, Julius Omoding, said over 250 clients suffered losses, prompting the ongoing negotiations with insurance companies to have the victims compensated.

“We regret the losses you incurred because of the fire accident. However, all loans we advanced to you will be paid by the insurance company,” he said.

He was addressing traders during a meeting last week at FINCA’s head office on Ben Kiwanuka Street.

Officials from CHARTIS, an insurance company providing FINCA with loan insurance, attended.

“Affected clients are advised to consult our branches around the country for detailed information on how to qualify for the compensation,” Omoding said.

John Bosco Kalema, the CHARTIS manager in charge of production and accidents, said genuine claims would be settled within the shortest time possible.

“We are working out modalities to enable you offset some of the losses. We ask you to be patient as we take the necessary steps to settle your claims,” he said.

Kalema told journalists that in 2009, CHARTIS paid over sh1.25b worth of claims from over 10 financial institutions, whose clients lost merchandise during a fire in the same market.

IFC starts to credit Azerbaijani credit institutions in manats

From News.az

International Finance Corporation (IFC) is going to expand cooperation with non-banking credit organizations in Azerbaijan.

IFC reports that on 14 April the Board of Directors of Corporation will consider the issue of raising $7 million credit to NBCO FINCA Azerbaijan in local currency equivalent(Azerbaijani manats). The corporation considers this NBCO one of leading microfinance company in the country , and the credit will enable the organization to offer new products to the clients.

By early 2011 FINCA Azerbaijan’s portfolio made $84 million and was distributed among 97819 clients. The organization maintains a network of 24 branches throughout the country.

FINCA Azerbaijan is 100 percent owned by FINCA International, Inc.

Fineko/abc.az

Can Microfinance Reduce Poverty?

By Morgan Ashenfelter, buildingmarkets.org -

Microfinance seems to be the latest buzz word in the international development world, thanks to several high-profile micro-lending organizations and the recent string of predatory lending schemes practiced by several Western-world, wealthy lenders. Muhammed Yunus, who won the 2006 Nobel Peace Prize for his microcredit institution Grameen Bank, distinguishes between micro-lenders who are there to help the poor and those that are there only to benefit an already-wealthy set of Wall Street and international investors. The direction microfinance takes in the future will determine whether microfinance can help alleviate poverty on a large scale.

The differences between the two systems and their effects on the individual and community levels are obvious. Grameen bank, and other micro-lenders like it, is self-funded by deposits made by local community members and in the local currency, interest rates are not above 20 percent and any profit made is poured back into the community via local projects or the bank’s local members.

Microfinance institutions following the other model are created by foreign investors who charge high interest rates (sometimes as high as 90 to 100 percent), bring foreign currency and keep the profits for themselves—far removed from the poor village whose local economy could benefit from the money.

But it’s not just foreign, and arguably predatory, microfinance institutions that have come under criticism; the notion that micro-lending reduces poverty is also up for debate. A recent Brookings study argues that “there is no compelling evidence that microfinance has led to sustained poverty reduction anywhere.” The report goes on to say that the vast majority of loans function temporarily, either by filling the financing gap in consumption or “softening the blow of poverty.”

The second function–that microloans only temporarily allay the more acute symptoms of poverty for individuals–certainly seems true when one reads microloan success stories, particularly stories featuring women, who are targeted for microloans because they are more likely than men to use the money to support their children. As microfinance organization FINCA reports on its Web site, microloans gave one woman in Uganda the ability to expand her fish-selling business so she could afford to giver her children more than just two meals a day; another in Guatemala was able to expand her baking shop immensely, which in turn allowed her to employ neighbors, her older children and send the younger ones to school; a third story comes from India where a woman used a microloan to buy a rickshaw to transport her wheat to market. She saved 50 percent of her profits that otherwise would have gone to paying someone else for transportation.

This post isn’t meant to diminish the positive effects of microfinance. Often with over-arching discussions on development methods, the human element can all-too-often be forgotten. Individuals, who are focused, have a business plan and are hard working, can benefit greatly from microloans. They can educate their children, save for emergencies, expand existing businesses and seek medical help when needed, all things that they wouldn’t have been able to without loans.

However, such positive gains in individual wealth do not mean microloans can raise the entire society out of poverty. We have to be careful to distinguish between the individual and societal effects of development programs. Investors and institutions working to alleviate poverty in third-world countries on a wide scale should donate to or invest in small and mid-size businesses, which, as opposed to individual ones, can move an economy forward and create jobs that will benefit a larger portion of the population. Funding only tiny, one-person businesses will certainly help that one person and his or her family, but will not spur major growth in the local economy. The answer to pulling developing nations out of third world status is to use all the methods at the Western world’s disposal; this includes giving microloans to individuals whose children will then be able to receive an education and work toward a better life and also includes giving loans and credit to larger businesses that can employ more people, stimulate growth, attract more investments and impact the local economy.

KfW Entwicklungsbank promotes private initiative of microentrepreneurs in Sub-Saharan Africa

From The FINANCIAL -

REGMIFA has disbursed the first loans totalling USD 13.75 million to microfinance institutions in Ghana, Kenya, Senegal and Tanzania.

Structured by KfW Entwicklungsbank, the Regional Micro, Small and Medium Enterprises Investment Fund for Subsaharan Africa (REGMIFA), the first of its kind, invests in microfinance institutions that grant loans to microentrepreneurs.

The first loan in Ghanaian cedi was granted to the Sinapi Aba Trust (SAT). The microfinance institution gives loans to microenterprises mainly located in rural areas, primarily through a group lending methodology. The second loan went to First Allied Savings and Loans (FASL), which offers mainly individual loans but also group loans to micro and small entrepreneurs. The third loan went to the Kenya Women Finance Trust (KWFT) for onlending in Kenya shillings to low-income women borrowers. Further loans went to Faulu Kenya, PAMECAS in Senegal and FINCA in Tanzania.

“The disbursement of these loans is an important milestone for REGMIFA, a fund designed to support employment and entrepreneurship of small businesses in Sub-Saharan African countries. It will help to deepen Africa’s economic growth and to improve the economic opportunities of small enterprises and poor population groups. REGMIFA will support particularly those institutions that act responsibly towards their customers and keep a watchful eye on their debt situation. Thus the Fund sets important standards”, said Dr Norbert Kloppenburg, member of the Executive Board of KfW Bankengruppe.

The Fund was officially launched on 5 May 2010, with over a dozen public investors committing over USD 150 million. The Federal Ministry for Economic Cooperation and Development and KfW Entwicklungsbank will contribute some EUR 30 million to the Fund. The Fund is expected to develop a credit portfolio of some USD 200 million by 2014. It is the first fund to offer microfinance institutions in Sub-Saharan Africa a range of financing instruments such as long-term debt capital and quasi-equity financings such as subordinate loans in local currency.

“The Fund has achieved a great deal in its first six months, it has acted quickly and effectively. Its portfolio will further expand with the scheduled disbursement of loans to microfinance institutions in Nigeria and Cameroon”, said Dr Kloppenburg.

REGMIFA will make funds available to numerous MSME lending intermediaries which will grant local currency loans to some 300,000 micro and small enterprises. The advantage is that the intermediaries will incur no currency risk and, hence, their debt burden will be lower.

KfW Entwicklungsbank is the world’s largest financier of microfinance in developing and transition countries. In 2009 alone, almost one third of its commitments (EUR 1.1 billion) went to the financial sector.

Microequity: A New Model for Financing Microentrepreneurship

Bhagwan Chowdhry, Professor of Finance and Faculty Director, MFE at UCLA Anderson School, Huffington Post –

Muhammad Yunus and Grameen Bank received the 2006 Nobel Peace Prize for pioneering the Microfinance revolution. Visionaries such as Fazel Hasan Ahmed of BRAC, who was recently knighted, and John Hatch, the founder of FINCA and the creator of Village Banking (not surprisingly, Grameen also means Village) were also the forerunners in this revolution. Though the word Microfinance does encompass microsavings and microinsurance, the focus of the initial efforts for nearly two decades in 1980s and 1990s was on microlending that involved microloans as small has $50 or $100.

What is remarkable about the various microlending models is the fact that the small loans are made to entrepreneurs without any physical collateral and despite the lack of physical collateral, the repayment rates have been unusually high — over 95% in many cases. Despite such high repayment rates, it has proved extremely difficult to create self-sustaining and economically viable models of microlending that do not rely not some form of explicit or implicit subsidy by governments, charitable organizations and socially conscious individuals who are willing to sacrifice their time and talent at levels of compensation that are way below what they could earn in many other jobs available to them.

Three questions come to mind. Why use debt (as opposed to, say, equity)? Why are repayments rates high despite any lack of collateral posted by borrowers? Why has it been difficult to make money or even break-even despite such remarkably high repayment rates?

The answers to these three questions, it turns out, are related. Equity-type contracts require that entrepreneurs pay a fraction of what they make to their financiers. But that requires the financiers both observe what entrepreneurs are making and be able to enforce the stipulated terms of the equity contracts (these arguments were exposited in seminal papers by Professor Robert Townsend and Professor Douglas Diamond of the University of Chicago). If costs of such verification are very high, as they are likely to be for small loans, it would make no sense to write such contracts. Debt contracts are simple because they do not require financiers to audit what the entrepreneurs are doing with their money but be able to impose a sanction if the entrepreneurs fail to repay the principal and a pre-determined interest on the loan. For microloans, even the costs of enforcement, as a proportion of the loan amount, can be extremely high, which explains why interest rates charged often seem unusually high (read my blog and one by Beth Rhyne on this). The only way out then is to rely on contracts that are self-enforcing, in other words, create incentives so that entrepreneurs want to repay on their own without requiring any external enforcement.

It is often argued that if you create a system in which borrowers who default on their debt contracts are denied further credit in the future, it would provide an incentive to repay their loans. That argument is incomplete because unless the borrower had a prospect of borrowing more than what she was supposed to repay in principal and interest, her incentive to default are great because she could, in effect, default and become her own financier. But even the ever-increasing loans do have to reach a maximum at which point the incentive to default is great and working backwards, the argument falls apart. One possible reprieve from this hopeless conundrum is if the borrower begins to build some assets as she borrows ever-increasing amounts which she can eventually use as collateral when she “graduates” from borrowing from the microlender who does not require a collateral.

To make this work, then, two conditions seem necessary. One, design micro-contracts that do not require expensive monitoring or enforcement. Two, create an incentive, perhaps the possibility of being able to borrow at a low rate eventually when the entrepreneur “graduates” from micro-financing phase. But, if we are going to rely on self-enforcing incentives, we do not need to insist on debt contracts. Equity-like contracts would work just as well because we would rely on self-reports by entrepreneurs in the first place. Welcome Microequity!

Marco Lucioni, CEO of Confianza-USA, appears to be following a model that is similar in spirit to what I describe. He finances entrepreneurs in Los Angeles who directly pay a fraction of their credit-card sales to him. This makes it an equity-like contract. However, until recently, this was still, what he described, as “high-touch” business requiring substantial monitoring which in effect raises financing costs substantially. But recently he partnered with Opportunity Fund which finances relatively larger loans at reasonably low interest rates. Bingo! Now, if his “high-touch” customers could be given an incentive that they can graduate to larger loans funded by Opportunity Fund, perhaps it would alleviate the need for expensive monitoring. This is what we discussed at the Microfinance USA 2010 conference in San Francisco recently that I was invited to by Eric Weaver, CEO of Opportunity Fund.

At the conference, I also met Shivani Siroya, Founder and CEO of InVenture Fund, who appears to be converging to a similar model. Dylan Higgins, co-founder and CEO of SaveTogether, Lisa Kant and I brain-stormed at the conference and figured that if InVenture could help entrepreneurs save and build assets and partner with a bank that the entrepreneurs could graduate to, InVenture’s microequity model might work as well.

There are a number of attractive features of microequity over microloans. First, microequity automatically provides microinsurance to the entrepreneurs. If business is down and sales are low, the entrepreneur’s repayment burden is automatically reduced. Thus, it aligns the interests of entrepreneurs with interests of financiers. Also, in many countries practicing Islamic finance, payment of fixed interest rates is prohibited and thus microequity offers a viable alternative to serving the needs of small, poor entrepreneurs. It is time for both academics, like myself, and practitioners, such as Marco and Shivani, to fine-tune the theory and the practice, and explore the promise of Microequity.

Using microfinance to stimulate growth

By Faridah Kulabako, Daily Motion, Uganda –

Kampala

Selling less than 20 packets of yoghurt a day was all she thought could be done and earning below Shs40, 000 was nothing but a routine. The business had no records, no future prospects, but it was meant to survive with no set goals.

On-Farm Dairy Enterprise, a company that deals in the sale of fresh milk and yoghurt started as a family business in 2002, operated by Ms Joweria Namakula, a veterinary assistant with support from her husband, a dairy scientist.

The business started in a small rented room with only 10 litres of milk and Shs200, 000, which she used to buy packaging bags for yoghurt. However, when demand for the product increased and there was no ready cash for business expansion, Ms Namakula, the Kawempe-based company director took a Shs200, 000 group loan from the then Commercial Microfinance, now Global Trust Bank in 2004. “I was afraid of taking loans but I had no option because I did not have money to expand the business,” she recalls.

Ms Namakula’s luck to incorporate the fresh milk on her business portfolio came when the Diary Development Authority- the organisation in charge of development and regulatory services of the dairy industry- shutdown unlicensed and unhygienic milk businesses in 2003.

The pasteurizer-well-built stove to boil and destroy harmful bacteria milk-she used to use for her yoghurt production helped her venture into boiling milk giving her an opportunity for business expansion. Ms Namakula now earns her initial capital in just a day. Her daily earnings rage between Shs200, 000 and Shs25, 000.

The wholesale price for a 500ml On-Farm yoghurt packet is Shs700 and Shs1400 for a litre. A litre of milk ranges between Shs600 and Shs1200 depending on the season.
The executive director Private Sector Foundation Uganda Gideon Badagawa says since their introduction in the 1990s, microfinance institutions (MFIs) have supported small and medium enterprises which form the backbone of the private sector in emerging economies to create employment in the country. “Commercial banks need high-value security which is not available to SMEs, microfinance industry fills the gap,” he says.

Ms Namakula’s company for instance employs about 100 people as suppliers, processers, transporters and casual labourers among others who she pays commission and salaries. “We use bicycles, motor cycles and vans so that where cars can’t reach, a bicycle or motorcycle can (reach),” she says.

The first microfinance institutions in Uganda were FINCA and Uganda’s Women Finance Trust. Currently, there are over 93 registered MFIs which have proved competition with commercial banks.

Mr Daudi Migereko, the government chief whip and founder member of FINCA Uganda, a microfinance institution, estimates that over 200,000 families in Uganda have been tremendously transformed through FINCA’s intervention. He says that by concentrating on the lower market segment, MFIs have reached out to many small entrepreneurs with no collateral, which previously locked them out from accessing loans from commercial banks. “MFIs have shown that targeting customers previously considered ‘unbankable’ is profitable,” Mr Migereko says.

Ms Namakula, the winner of the 2008 micro-entrepreneurship Award of the Association of Microfinance Institutions of Uganda, now takes individual loans of up to Shs30 million.

During 1980s, barely any person with no collateral security had access to financial support from commercial banks. That, however, changed in the late 1990s when micro financing took a lead role in revitalising the microfinance industry by extending services to the poor in the effort to spur development and alleviate poverty.

Mr David Baguma, the executive director the Association of Microfinance Institutions of Uganda says since its establishment in 1996, the institution has professionalised the operations of microfinance institutions to improve efficiency.

AMFIU seeks to enhance sustainable delivery of financial services by all microfinance institutions and offer trainings to both clients and MFIs. Although MFIs have become popular among the underserved population, Mr Baguma says the reach is still low with only 2 million people accessing finances out of a population of over 30 million.

He, however, said that there was need to help MFIs to expand outreach to ease availability of credit, especially for medium-sized, rural-based enterprises. “The biggest challenge that hampers microfinance development remains lack of access. We are still scratching on the top,” Mr Baguma says. “The government should improve the infrastructure and communication facilities to make it easy for them to expand outreach to all corners of the country and ease availability of credit.”

The Association’s target is to have at least seven to eight million people access financial services. MFI loans range from Shs50, 000 to Shs30 million, which are paid back in small installments over a period of time.

Ms Namakula has been taking loans. ranging from Shs10 to Shs30 million, which she has used to build 11 more pasteurizers to meet the increasing customer demand in Kampala, Luwero, Kiboga and Masaka, where she sells her products.

Mr Baguma says that the reliability of the poor to repay loans has made micro financing economically viable for lending institutions in a competitive market. “Because we have done a good thing, commercial banks are now looking at us with a smile. They have also now scaled down to low class areas because they have realised that that’s where profits are,” he says.

Although there is no big difference between MFIs the interest rates and those of commercial banks, the conditions of payment in MFIs are more appealing to small borrowers.

Ms Namakula, who plans to improve her product quality to become competitive in a wider East African market notes insufficient loans as a hindrance to achieve the competitive edge. “I am constructing new factory premises but inadequate funds are stilling standing in my way to complete the structure,” she says, adding that MFIs have to have some trust in some of them and give them the money they need even with little collateral to put up developmental projects.