Micro Credit: Good or Bad for Uganda’s Poor Population?

Jul 2017
Uganda, July, 11 2017 - Micro-credit is fast becoming a darling to millions of Uganda’s population following the rollout of new credit windows between financial institutions and telecom firms. But financial experts are worried that the new products may not create as much impact to the economy because of the high interest rates due to the risky nature of the credits. The experts says the micro-credits are also geared mainly towards consumption and emergences rather than investments.

“The financial institutions or banks at the moment are trying to be innovative to capture everybody who would want to get into the credit area for them to make money but is not good for the economy,” said Ramathani Ggoobi, a policy analyst and a lecturer for economics at the Kampala-based Makerere University Business School.

He said the interest rates for micro-credits are very high compared with the rates being charged on conventional banking credit products, a scenario that is likely to make the population lose more money in interest payments.

He said the recent  growth of the telecom’s mobile money services shows that more  people especially in rural areas are  yawning for banking services, which are only located in urban areas.

“Financial institutions simply need to find ways of bringing the unbanked population into the formal financial sector to deepen financial inclusion,” he said.

Presently, merely eight million adult out of the 34.9million people own a bank accounts in the country’s 24 commercial banks, according to the latest World Bank Economic update for Uganda released in February this year.

Analysis carried out by The Independent shows that individuals accessing micro-credits via mobile phones are paying between 40%-88% higher as interest rates to financial institutions compared with the current average interest rate of 20% that are being charged on traditional banking products per annum.

But the population is still interested in accessing the micro-credits amidst the high costs.  For instance, Finance Trust Bank, one of the financial institutions offering a micro-credit facility known as Loan Ku-Ssimu through its Trust Bank’s mobile banking platform dubbed Trust Mobile since March this year,  has seen a surge in the product uptake,  with the customers hooked to the system now standing at 5,420.

The bank, which has so far disbursed Shs371million ranging between Shs100, 000 and Shs1million via mobile phones, charges a 5% interest rate per month, payable within three months. This translates into 60% interest rate per annum.

Commercial Bank of Africa (CBA), which unveiled the MoKash – a micro-savings and loans platform – in partnership with MTN last August has seen customers grow hitting a 2million mark as at the end of last month, according to bank CEO Samuel Odeke.

However, he remained cagey on the loan portfolio registered so far.  MoKash allows borrowers loans of up to Shs 1 million repayable within 30 days at an interest rate of 9% per month, which translates into 108% interest rate annum. On the other hand, savers earn 2-5% as interest during the same period under review.

Equally, a South African based financial digital firm, Jumo, has partnered Airtel to give micro-credit to active mobile money users based mobile telephone usage information in Uganda.  The firm also has operations in Kenya, Tanzania, Rwanda and Ghana.

Jumo lends individual customers between Shs8, 000 and Shs500, 000 at a processing fee of 8% and Airtel Money agents between Shs100, 000 and Shs1, 000,000 at 6.7% interest rate per month.

The new credit facilities uses telephone usage information including calling records, airtime usage, data purchases and mobile money transactions to assess the credit worthiness of customers before the micro-credit is disbursed upon application.

Annet Nakaunde Mulindwa, the managing director at the Finance Trust Bank, says with the innovation in the information and communication technology, financial institutions are now creating micro-credits to customers that were initially deemed unbankable.

“…formal banks have been reluctant to offer services to the poor who cannot supply sufficient collateral to secure loans. As a consequent, poor households tend to be excluded from formal financial services, not only borrowing but also savings and insurance, which in turn prevents the poor from investing in various profitable projects, smoothing consumption, and improving their ability to cope with various unexpected shock,” she told The Independent in an interview.

As an alternative, she says, financial institutions are coming up with new ways of including the unbankable population to their services riding on telecom networks to not only alleviate them from poverty but also enable financial institutions grow their loan portfolios.

This new development comes at the time mobile money users have grown exponentially over the past few years surpassing bank account holders.

Latest data from Bank of Uganda shows that mobile money users have increased to more than 19million customers since mobile money was introduced eight years ago while the value of transactions has increased from merely Shs490million in March 2009 to Shs4.96trillion as at the end of March 2017.

A source in the industry, who spoke to The Independent on condition of anonymity because  is not authorised to speak to the media, said the surge in demand for micro-credit has been driven by the high demand for quick short term loans.

“The customers applying for this kind of credit are interested in solving an immediate need. For instance, he/she has ran out of fuel in the car or simply need to boost his financial capability to enable him/her go through the month,” the source said.

The source defended the high interest charged on the micro-credit saying the risks involved are very high as there’s no collateral for the credit advanced.

One of the micro-credit beneficiary is David Mutiba, 33, a small trader in downtown Kampala, who deals in buying and selling of new polythene packaging paper bags for three years now, says MoKash has kept on boosting his business.

He says while micro-credits may be expensive, it also saves him of time and costs of moving up and down to mobilise more funds in case he wants to purchase more products.

“I always borrow between Shs40, 000 to Shs100, 000 via my mobile money account every time I realise I need to buy more products yet I don’t have enough money,” he told The Independent.

Fred Muhumuza, an expert on financial inclusion and one of those who negotiated with Bank of Uganda to roll out MoKash, said the increase in demand for the micro-credit is attributed to the growing need for small amount of money to solve short term challenges.

“The customers applying for these small loans are interested meeting their needs at that particular time,” he said “You have a patient or a business deal and the only thing you need is some money immediately.”

He says many people are also interested in micro-credits because the loan application and approval process is faster compared with the traditional banking model.

Muhumuza said it is as a result of the surging demand for micro-credit that financial institutions are now coming up with new credit facilities targeting low income earners facilitated with technological innovations.

“The availability of technology is making loan processing cheaper and therefore these financial institutions can afford to give small loans and charge a little of interest rates. The target customer segment may be borrowing little but they are very many and at the end the financial institution benefit,” he said.

He added that the stiff competition in the financial sector is also forcing financial institutions to think ‘outside the box’ and come up with products that cuts across customer segments to grow their revenues.

Following Kenya’s footstep

The high uptake of micro-credit in Uganda appears to be following Kenya’s footstep, which has lately seen a surge in demand, boosting financial inclusion.

For instance, Mobile-based bank account KCB M-Pesa disbursed a total of Kshs10.3 billion (Shs 357.1bn) in loans to its customers since March last year, indicating a growing appetite for short-term loans.

The platform is said to have been advancing between Kshs25 million (Shs 866.9million) and Kshs30 million (Shs1.04bn) in loans daily since it was unviled in 2015.

The joint venture between the bank and Safaricom has signed up 6.4 million account holders with over Ksh286 million (Shs 9.9bn) saved on the platform.

The platform allows registered customers to save up to Sh1 million, earning up to 6% in interest. Account holders can also access up to Kshs1 million (Shs34.6million) in instant loans, accessible on the M-PESA menu. The loan can be repaid in up to 180 days.

Loans and credit disbursed via mobile banking has been growing despite banks seeing the stagnation of their loan books in the first six months of the year

Similarly, CBA has also partnered with Safaricom to offer short-term loans through its mobile money platform.

The product dubbed M-Shwari currently has 13 million customers and disburses loans for a period of 30 days for a one-off interest rate of 7.5 %

The maximum amount was initially capped at Kshs20, 000 but individuals with good repayment history can receive up to Kshs50, 000 disbursed into the mobile phones.

The lowest amount one can borrow is Kshs100 (Shs3, 400). M-Shwari is said to processes an average of 70,000 loans daily. CBA has also unveiled a similar service in Tanzania and Rwanda dubbed M-Pawa and MoKash in partnership with Vodacom and MTN Rwanda, respectively.

However, it remains unclear on how Uganda’s financial institutions plan to handle loan defaulters compared with their Kenyan counterparts.

For instance in 2014, CBA blacklisted more than 140,000 users of the mobile phone based bank account M-Shwari for defaulting on loans.

The bank forwarded names of  defaulters to credit reference bureaus locking them out from accessing the loans market for at least five years or consigning them to high borrowing charges.

Source : Independent

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