What if microfinance implementation strategies could transform service delivery in Gulu District? This study reveals how Balanced Scorecard principles, despite their indirect application, highlight critical performance gaps in microfinance institutions, reshaping our understanding of their effectiveness and potential for growth.
2.7 – Role of Microfinance in serving very poor people
The definitions of microfinance institutions proposed by some scholars and organisations are different from one another.
However, the essence of the definitions is usually the same in which microfinance refers to the provision of financial services, primarily savings and credit, but also other financial services to poor and low-income households that do not have access to commercial banks.
Ledgerwood (1999, p.1) states in her Microfinance Handbook, published by the World Bank, that the term microfinance refers to the provision of financial services (generally savings and credit) to low-income clients.
The clients are often identified as traders, street vendors, small farmers, service providers (hairdressers, rickshaw drivers), and artisans and small producers, such as blacksmiths and seamstresses.
She points out that many such clients have a stable source of income since they have multiple sources of income.
Although they are poor, they are generally not considered to be “the poorest of the poor”.
Microfinance has become a strategy for reducing poverty, by providing small loans and savings facilities to people who are excluded from commercial financial services.
Access to credit and deposit services is a way to provide the poor with opportunities to take an active role in their respective economies through entrepreneurship, building income, bargaining power and social empowerment among poor women and men (Maes & Foose, 2006).
Although most MFIs aim to reach poor people, it has become increasingly apparent that they rarely serve very poor people.
Most MFIs reach the “upper poor” in much greater numbers than the “very poor” (Hickson, 1999).
The extent to which microfinance programs are able to reach the poorest of the poor remains an open debate.
Certain practitioners argue that it is important to have permanent operations based on a wider geographic outreach, with quality financial products delivered by competitive, efficient microfinance institutions.
This approach to breadth of outreach is based on a long-term view of microfinance services and the belief that, in many cases, there is a limit to depth of outreach.
This approach thus accepts a trade-off between sustainability and reaching very poor people.
Other practitioners argue that microfinance should make reaching very poor people a priority because credit is a human right in the fight against economic exclusion.
This approach requires narrow targeting of very poor people.
Both breadth and depth of services are very important for the microfinance industry.
What has become apparent, however, is that very poor people are unlikely to be served by microfinance programs unless these programs are intentionally designed to reach them.
In order to design products and services for this target market, it is important to understand the factors that contribute to the dire conditions of very poor people” (Maes & Foose, 2006).
2.8 – Categories of Microfinance Institutions
MFIs encompass a wide range of providers that vary in legal structure, mission, and methodology.
All these MFIs offer financial services to the low-income people who do not have access to mainstream banks or other formal financial service providers.
In the context of Uganda, the MFIs are the registered and institutionalised microfinance providers that consist mainly of NGOs (both local and foreign), SACCOs, and even some commercial banks like Centenary Rural Development Bank (CERUDEB).
The MFIs provide microfinance services to mainly small and medium scale enterprises (SMEs).
Current financial sector regulation divides Microfinance institutions into four “tiers” (Rani et al, 2006): Tier I, consists of Commercial banks, licensed under the financial institutions Act 2004, which are permitted to offer a full range of financial services, including deposits, and there are 15 commercial banks operating in Uganda (AMFIU, 2006).
Tier II, consists of Credit institutions, licensed under the financial institutions act 2004.
They can take deposits, but are restricted from providing foreign exchange services.
There are seven tier II institutions in operation, including Post Bank, and Commercial Microfinance Ltd, which styles itself as a microfinance bank.
Tier III, consists of Microfinance Deposit taking Institutions (MDIs).
These are transformed MFIs authorized to take voluntary deposits from the public, and licensed under the Micro Deposit-Taking Institutions Act of 2003.
MDIs are prohibited from operating demand checking accounts and cannot perform any foreign currency operations.
There are four tier III institutions in operation.
Then, tier IV, consists of all other non-deposit taking institutions involved in microfinance business that do not fall under the categories of Tier I, II, & III, e.g.
NGOs, membership-based SACCOs and CBOs.
They operate under a variety of legal regimes including the Cooperatives, Companies, and NGO Acts.
Tier IV institutions share two key features: The Bank of Uganda (BoU) does not exercise prudential supervision over them, and they are forbidden to mobilize deposits from the public.
SACCOs can only accept member savings (voluntary deposits and share capital), whereas MDIs can only collect compulsory savings from borrowers.
There are over 1,000 tier IV institutions operating in Uganda.
In addition, the tiered framework allows for graduation from one tier to another.
There are also some informal institutions operating in the country, for example, rotating savings and credit associations (ROSCAs), accumulating savings and credit associations (ASCAs)2, etc.
These institutions have no legal status and they are in several thousands.
Table 1 shows the structure of the financial sector in Uganda.
| Table 1 – The Ugandan Financial Sector Structure | |
|---|---|
| Tier | Description |
| Tier I | Commercial banks licensed under Financial Institutions Act 2004 (15 institutions) |
| Tier II | Credit institutions licensed under Financial Institutions Act 2004 (7 institutions) |
| Tier III | Microfinance Deposit-taking Institutions (MDIs) licensed under MDI Act 2003 (4 institutions) |
| Tier IV | Non-deposit taking institutions (NGOs, SACCOs, CBOs) – over 1,000 institutions |
Source: AMFIU (2006)
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2 Définition donnée par l’article 62 de la loi sur les nouvelles régulations économiques (NRE) du 15 mai 2001. ↑
Frequently Asked Questions
What is the role of microfinance in serving very poor people?
Microfinance refers to the provision of financial services, primarily savings and credit, to poor and low-income households that do not have access to commercial banks, helping them take an active role in their economies through entrepreneurship and social empowerment.
Which categories of microfinance institutions exist in Uganda?
In Uganda, microfinance institutions consist mainly of NGOs (both local and foreign), SACCOs, and some commercial banks like Centenary Rural Development Bank (CERUDEB), offering services primarily to small and medium scale enterprises (SMEs).
How do microfinance institutions measure performance?
Microfinance institutions were found to be indirectly using Balanced Scorecard principles, which proved effective for performance measurement through its blend of financial and non-financial metrics.