The Ugandan market for microfinance services has over 1,300 microfinance institutions (MFIs) in operation. While one would hope that such a glut of MFIs would necessarily ensure the market was being served, this is unfortunately not the case.

According to the Bank of Uganda (BoU), the industry suffers from an urgent shortage of licensed deposit-taking institutions. However, this does not mean that deposit services are not being offered illegally. Among Uganda’s many MFIs, just 3 are licensed to take deposits, while many more offer such services, even though unlicensed.

The scarcity of formal ways to save comes at an enormous cost to poor people, who have limited access to formal, regulated financial services (p. 3). They are generally left with no alternative to the non-regulated MFIs that accept deposits illegally. In Uganda, 99% of clients saving in the informal sector report having lost some of their savings (p.3), with losses averaging 22% of the amount saved in the past year.

If non-regulated microlenders follow the letter of the law, that is, they do not accept savings deposits, they forego valuable capital for their loan portfolios. Prospects are dim for small operations that may serve as few as 10 people (which make up the majority of MFIs in Uganda). The government’s effort to weed out unlicensed deposit-taking institutions includes setting minimum asset holding requirements in order to be eligible to legally take deposits.

In an ostensibly inclusive move, the Bank of Uganda is encouraging all microfinance institutions to apply for licenses to take deposits. This is far harder than it sounds. Smaller microlenders will not be able to meet this regulatory burden for many reasons, including taxes, onerous paperwork, and of course, reserve and capital requirements.

We have yet to see a government launch a wholesale attack on microlenders who illegally accept deposits. Will Uganda be the first? Probably not, as Ugandan government officials would be hesitant to take any action that might upset the misguided donors who have created this problem by subsidizing microlenders outside the law.

Additional Resources

1) Subscription only: "Central Bank to Crack Down on Unlicensed MFIs."

2) "Central Bank Warns MFIs On Deposit-Taking."

3) Consultative Group to Assist the Poor (CGAP): "Regulation and Supervision of Microfinance."

4) The Monitor: "Register or Close Down, MFIs Told."