(Extracted
from Ojijo’s Successful Saccos -
Managers' Guide to Acquire, Retain and Grow Membership, Savings and Assets
& Ojijo's Financial Services Law
Handbook.)
Microfinance is the provision of financial services
to low-income people. It refers to a movement that envisions a world where
low-income households have permanent access to high-quality and affordable
financial services to finance income-producing activities, build assets,
stabilize consumption, and protect against risks.
Microfinance institutions are legally registered
entities which work to develop products and deliver methods to meet the diverse
financial needs of low-income people. For example, unlike other forms of
lending, microcredit loans use methodologies such as group lending and
liability, pre-loan savings requirements, and the gradually increase in loan
sizes to evaluate clients’ credit worthiness.
Microfinance institutions can be classified into
three major categories, namely:
1. Village Savings and Loans Associations/Village Banks:
2. Cooperatives (Savings and Credit Cooperative Societies (saccos)
& Multi-Purpose Cooperatives)
3. Micro Deposit Taking Institutions (MDIS)
However, in addition to traditional operators, such
as microfinance institutions, credit unions, cooperatives, and banks, other
entities, including mobile network operators, are using technology to develop
new delivery methods to bring these services to the poor, sometimes in partnership
with existing financial institutions.
Cooperatives
(Savings and Credit Cooperative Societies (Saccos) & Multi-Purpose
Cooperatives)
Cooperatives, either registered
as savings and credit cooperatives (SACCOS), or multi-purpose cooperatives, are
the most common forms of micro finance institutions.
They are groups of people, not
less than 30, who come together to save, access credit, and in case of
multi-purpose cooperatives, to engage in various businesses, for their welfare.
The process of registering a
cooperative include:
§ Step 1: Reserve a name, with the registrar of business names;
§ Step 2: Purchase cooperative by-law books from the department of
cooperatives. The by-laws vary depending on whether the cooperative is a sacco,
or a multi-purpose cooperative;
§ Step 3: Fill the by-laws with names and contact details of the promoters,
who should number at least 30;
§ Step 4: Fill the by-laws with the details of shares amounts, disciplinary
fees, business address, and related issues on management of the cooperative;
§ Step 5: Submit documents to the district or area cooperatives officer for
approval. This includes signed by-laws by all members and incase the members
are more than the space provided in the by-laws, attach the full member list;
financial statements of the society (Income and Expenditure +Balance Sheet); a
comprehensive schedule of all shareholders showing shares held by each member;
entrance fees, shares, savings, and loans if any; and photographs of respective
people to handle the cooperative's accounts, that is, Chairman, Secretary, and
Treasurer.
§ Step 6: On approval of documents, which may include the cooperatives
officer attending a meeting of the cooperative, the cooperative will pay
registration fees.
§ Step 7: Get a certificate of registration of the cooperative. With this certificate, the cooperative should
open a bank account, and deposit the funds you have to the bank account; get a
business license from the city council authority, or local government authority;
and start active recruitment of members.
It is advisable to use a consultant, as the process
can be long winded. The consultant will cost approximately USD. 2,500, and the
entire process can take upto 2 months to set up. Apart from consultancy costs,
the approximate costs of establishing a branch, with operational equipment’s,
stat up capital, and working capital, is projected at USD. 50,000.
Village banking is a microcredit methodology whereby
financial services are administered locally rather than centralized in a formal
bank.
A village bank is an informal self-help support
group of 20-30 members, predominantly female heads-of-household.
The members, mostly women, meet once a week in the
home of one of their members to avail themselves of working capital loans, a
safe place to save, skill training, mentoring, and motivation. Loans normally
start at $50–$100 and are linked to savings such that the more a client saves
the more she can borrow. The normal loan period is four months and is repaid in
weekly installments.
They are run by non-governmental organizations,
registered as such, or as companies limited by guarantee. They can also be
branches of mainstream commercial or retail banks
To eliminate the need for collateral (the poor man's
obstacle to receiving bank loans), village banks rely on a variation of the
solidarity lending methodology. It relies on a system of cross-guarantees,
where each member of a village bank ensures the loan of every other member.
This system gives rise to an atmosphere of social pressure within the village
bank, where the cost of social embarrassment motivates bank members to repay
their loans in full. The admixture of cross-guarantees and social pressure
makes it possible for even the poorest people to receive loans.
Village banks are highly democratic, self-managed,
grassroots organizations. They elect their own leaders, select their own
members, create their own bylaws, do their own bookkeeping, manage all funds,
disburse and deposit all funds, resolve loan delinquency problems, and levy
their own fines on members who come late, miss meetings, or fall behind in
their payments.
Market interest rates apply to village bank loans.
The village bank itself will usually mark up this rate when it on-lends to
individual members. While these rates seem high, they are low compared to those
charged by local moneylenders in most countries. Unlike rural banks and credit
unions these microfinance institutions do not provide savings services directly
to their clients.
Like with other micro finance institutions such as
saccos, small loans are more expensive to process than large ones because they
take longer to process. Without employment history or collateral, microfinance
loans require a more hands-on, time-intensive assessment to determine
creditworthiness. Microfinance institutions (MFIs) usually send a
representative to visit the client as part of this process, making the process
even more challenging and costly in remote or sparsely populated areas. Once a
loan is approved, MFIs often send loan officers to disburse loans and collect
payments in person, which also adds significant expense when compared with the
way traditional banks operate. MFIs have to charge rates that are higher than
normal banking rates to cover their costs and keep the service available.
Village banks are registered as non-governmental
organizations, or as associations, with district commercial officers.
The process of registering a district association is
clear and forward, and involves the group visiting a district commercial
officer, who will give them a form to fill their names, and then, they can
choose to open a group bank account with any bank, and start operations.
The process of registering an NGO is a long winded
process, which involves the following:
1.
Name reservation at registrar of companies;
2.
Getting recommendation letters from LC1, LC2, LC3, RDC, Line
ministries, law firm, one already operational NGO, district NGO supervisory
committee, and an individual.
3.
Submitting the above, together with application letter for
registration, constitution, one year plan of operations, report of operations
(if already operational), budget, organization structure, sources of funding,
and membership minutes to register the NGO, in three copies of files, to the
NGO board.
4.
The NGO board meets once a month, and will approve (mostly, very
few rejections), the operations.
It is good to
use a consultant, as the process can be long winded. The consultant will cost
approximately USD. 4,500, and the entire process can take upto 3 months. Apart
from consultancy costs, the approximate costs of establishing a branch, with
operational equipment’s, stat up capital, and working capital, is projected at
USD. 30,000.
MDI
is an institution regulated by the central bank to take deposits and offer
other banking services. They have reduced capital requirements, as opposed to
commercial or retail banks. MDIs are
allowed to take deposits from the public and on-lend these. They are classified
as Tier II institutions. The main activities of MDIs as the taking of time
deposits or savings from the public and their employment in lending, which can
be and is interpreted as the exemption of deposits from members. Micro Finance
Deposit-Taking Institutions (MDI) Regulations address 1) licensing, 2)
liquidity and funds management, 3) capital adequacy, 4) asset quality, 5)
reporting for microfinance deposit-taking institutions and 6) list of
restricted activities.
MDIs
are registered first as a legal entity, either as non-governmental
organizations, as companies limited by shares, or as companies limited by
guarantee (foundations).
Then
the company seeks to get license to operate as a micro finance deposit taking
(MDI) organization, by submitting the following:
1. CVs and
Profiles of proposed directors (who must have not been convicted of financial
impropriety, or financial fraud.
2. Statement of applicant’s
relevant experience in micro finance business. Though this is not a determining
factor, indicating experience of directors is key.
3. Business plan
for the organization.
4. Scope of
operations, to include services to be offered, area of operation, and related
activities.
5. Proposed staff
development programs, with clear explanations of how staff skills and expertise
will be developed.
6. Management and
administration, including capacity of the proposed senior management.
7. Evidence of
applicant’s ability to provide adequate capital through retained earnings. (Through business financial projections of P&L
and Cashflows).
8. Evidence of
applicant’s ability to meet the statutory minimum paid up capital, and minimum
ongoing capital adequacy requirements, and the applicant’s ability to inject
core capital when needed in the future.
9. A copy of
registration documents, either articles or memorandum of association for
companies, or certificate of registration as NGO.
10. Verified
official notification of company’s registered place of business.
11. Amount
authorized and paid up capital.
12. The prospective
place of operation, indicating that of the head office.
13. Certificate of
time deposit equivalent of 75% of the required minimum paid up capital, that
is, UGX. 3 Billion, since the minimum capital is UGX. 4 Billion. The applicant
needs to deposit at least 75%, that is, with the bank of Uganda, or a licensed
bank, and provide evidence of the money deposit, and will be retained until the
license is approved.
14. Sworn
declaration of assets and liabilities of founder shareholders.
15. Biographical
data on each of the founding shareholders, with a breakdown of proposed
ownership structure and proposed directors and officers, using a stipulated
form (Schedule No. 1).
16. In case of a
wholly owned subsidiary of a commercial bank, or financial institution, a copy
of board resolution approving the propose investment.
17. In case of a
foreign financial institution, a copy of approval granted by home regulator.
18. In case of a
company in operation, a copy of the latest audited balance sheet and profit and
loss accounts for each of the three years preceding application.
19. Two copies of
feasibility study of the institution, showing the nature of planned business,
organizational structure, planned internal monitoring procedures, and projected
financials. It should also include mission statement and overall goals, market
research, ownership and corporate governance, management, business strategy,
and projected financial statements.
20. Detailed notes
to financial statements, including sources and uses of funds, provisions for
bad debts, cash and other liquid assets to be maintained, small scale and micro
credit to be made and interest receivable, interest payable, major sources of
deposits, investments and earnings to be made, stating policy and categories of
business and productive activities to be financed, fixed assets, including
business premises, operating expenses including rent, salaries, benefits and
directors remuneration, capital structure, other income, including commission
fees, net operating profit or loss, financial analysis, and interest rate
sensitivity analysis.
21. Copy of
applicants risk management program, tailored to its needs, and circumstances
covering the following risks: credit, liquidity, interest rate, foreign
exchange, operational and strategic risk.
22. Credit manual ,
including but not limited to lending and provisioning, borrowers criteria,
amounts, terms and collateral, and lending policies and procedures must take
into account the different steps of credit process, including analysis,
negotiation, approval, disbursement, monitoring an collection, taking into
account sound and prudent practices including foreclosure.
23. Human resource
manual
24. Operations
manual.
25. Liquidity and
finds management policies and procedures
26. Accounting
procedures manual
27. Audit manual
28. A fully
completed questionnaire on the institutions premises (Schedule 5)
29. A written
request to the central bank for a date and time for an interview during which
its application for a license to operate an institution shall be appraised.
30. Availability
for onsite inspection of applicant’s institutions premises to determine
adequacy of the institutions security system, as well as to confirm other
matters.
31. Application fee
of approximately UGX. 500,000.
32. License fee of
approximately UGX. 1 million payable by successful applicants within 14 days of
the notification of the decision to grant a license.
33. Application for
a license to conduct micro finance business, as per Schedule 1, directed to the
Executive Director, Supervision Function, Bank of Uganda.
34. When the
application is accepted, there is a six month period for consideration and
grant or refusal to grant the license.
35. Set up a
banking information management system which functional and expandable features
including, but not limited to accounting, portfolio tracking, deposit
monitoring, customer information system, loan application, approval and
repayment information, savings account information, multiple branching, user
interface, reporting system, backup and recovery, end of period processing,
administration, support infrastructure and maintenance, and version control and
upgrade strategy.
36. The central
bank, shall, on the third working day after appraisal of interview, instruct
applicant to run public notice for three consecutive days in a daily newspaper
with national circulation as per a given schedule, and provide a copy to
central bank.
37. Directors and
shareholders and to be people who have not been involved in illegal financial
activities, or who have non-performing loans in financial institutions, or who
have been suspended from directorships in other financial institutions.
38. There is a
pre-licensing inspection which checks appropriateness of location offices is
key, and covers location, security, internal control systems, presence of cash
reserves, endorsement and evidence of payment of 100% of capital as stated in
the requirements, presence of information management system, safes, security
cameras, separation of banking hall from backrooms.
39. Public
announcement of establishment of a micro finance deposit taking institution,
also to be carried in at least three national dailies, for not less than 3
days.
Once
again, it is best to secure a consultant for the process, which will cost
approximately USD. 10,000, and the entire process will take between 6-12
months. Apart from consultancy costs, the approximate costs of establishing a
branch, with operational equipment’s, stat up capital, and working capital, is
projected at USD. 1.5-2 million.
Ojijo Pascal
Ojijo is the Founder & Lead at GoBigHub.com, the
solution to the ever present cry for youth that they lack capital for doing
business. GoBigHub creates provides a monthly meeting entrepreneurs to meet and
pitch to local institutional and individual investors, as well as business coaching,
office space, and online crowdfunding platform. GoBigHub is leading the move
away from grants, promoting trade, not aid, by offering African entrepreneurs a
chance to get equity funding, with board positions, transparency, and scrutiny
to make sure businesses funded are scalable, and hence, profitably sustainable.
Ojijo has also worked
extensively with collective investment schemes generally (namely, investment
clubs and cooperatives), as a consultant on financial literacy, legal advisory,
strategic planning, and leadership dynamics.
In this area, he has also authored two leading texts on collective
investment schemes, with one on Cooperatives, Successful Cooperatives -
Managers' Guide to Acquire, Retain and Grow Membership, Savings and Assets
and one on investment clubs, Making Money
Together - Ojijo's Investments Club Manual. He sits in bank of Uganda
Financial Literacy Advisory Group/ Financial Literacy Sharing Group (FLISG),
and is a co-founder of Uganda Ministry of Finance sponsored committee of
Champions promoting Investment clubs, Investment
Clubs Association of Uganda-ICAU. He has helped in the training and or
setting up of various cooperatives, including ministry of foreign affairs
cooperative; finance ministry cooperative; NEMA; NARO; Gender Ministry
cooperative, and Nsamizi Institute cooperative (Mpigi), to name but a few.
Ojijo is also a lawyer and
guest lecturer in Financial Services Law, ICT Law, Legal Rhetoric and Law Firm
Management; and a communications expert specializing in strategic planning, public
speaking, and writing skills. He has worked with various clients including
ministry of finance (Uganda); Bank of Uganda; Ministry of Gender; Technoserve;
AIESEC; AYDL; UMYDF; CCEDU; PEDN; Foundation for Human Rights; several universities,
companies, and individuals on personal branding, financial literacy, business
coaching, and entrepreneurship.
