Uganda: Credit Crunch Hurts Tiny Loan Holders

Nov 2008
Kampala, Uganda, November, 26 2008 - A global credit crisis that has felled large investment banks and prompted multi-billion dollar bailout packages is also hurting Uganda's microfinance industry.

Microfinance has helped poor women and farmers start small and medium enterprises, grow crops and keep livestock, transforming agriculture into a commercial activity. But as credit tightens and largesse from corporations and socially-minded investors dries up, microfinance will be hit, affecting poor people who lack access to other sources of finance.

"There is a general increase in costs, directly affecting our micro-finance institutions' operation and profitability," said David Baguma, the executive director Association of Microfinance Institutions in Uganda (AMFIU).

"Most of the MFIs depending on grants will see the inflow reduce like those ones depending on donations. A liquidity crisis is the worst-case scenario for microfinance institutions." Baguma said the slowdown of the micro-finance business will leave people that depend on it a bad situation and they could go from success back to poverty.

"It is true growth in the microfinance industry will be slow, but it will continue," he said.

"This is because MFIs are innovative and competitive. They will always come up with solutions to ensure they survive."

In rural Uganda, microfinance has given hope to thousands, especially women and orphans, who have built successful businesses that have changed their lives. But these may now be under threat because of tighter credit.

"For MFIs, the cost of their funds has gone up and they're under pressure not to raise lending rates. At some point that becomes unsustainable." MFIs have served the poor but able clients. The market is forecast to expand with the outstanding loan portfolio increasing annually. Banks have focused on MFIs as part of the Government's priority lending to ensure smaller businesses access funds.

But with banks becoming cautious, MFIs may suffer, particularly smaller ones that cannot afford higher interest rates or have access to private equity or venture capital.

Now that banks are facing the heat, they might either resist lending to MFIs or increase interest rates further. On the other side, MFIs might resist borrowing, thereby hurting their chances for growth and success.

When they see MFIs cutting back, borrowers may also be unwilling to repay loans, which is critical to maintaining liquidity and giving fresh loans. That will lead to belt-tightening, and for poor people, it means tightening a belt, which is already tight.

"This is actually a good time for banks to raise lending to MFIs as their business model is a lower risk than large loans for a few big corporates, which are also in a slowdown," Baguma explained.

"Some social investors are coming to Uganda to invest in microfinance. The financial crisis has some positive impact on the growth of the sector."

AMFIU has over 90 registered institutions.

Source : All Africa

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