The microfinance industry in Uganda : sustainability, outreach and regulation
Thesis (PhD (Economics)--University of Stellenbosch, 2007.
Using an econometric approach on panel data collected from 53 microfinance institutions (MFIs) in Uganda over a period of six years (annual), this study has identified the determinants of sustainability and outreach of MFIs. In addition, the study has also used survey data from 31 non-Bank of Uganda (BOU) regulated MFIs or Tier 4 MFIs, four BOU-regulated non-bank MFIs, 12 commercial banks and the BOU itself to assess the effects of financial regulation of MFIs on their sustainability and outreach. The results indicate that sustainability is positively and significantly driven by real effective lending rates and age of an MFI, and negatively by the ratio of gross outstanding loan portfolio to total assets, the ratio of average loan size to the national per capita income, the unit cost of loans disbursed, and a group-based delivery mechanism compared to an individual-based delivery mechanism. Outreach is positively and significantly driven by an MFI being a savings and credit co-operative (SACCO) compared to being a private company, effectiveness of governance, the age of an MFI, the ratio of gross outstanding loan portfolio to total assets, and the ratio of salary/wage paid to staff to the national per capita income, and negatively by the ratio of average loan size to the national per capita income and the unit cost of loans disbursed. In the short run, financial regulation negatively influences the outreach of MFIs, but positively affects their sustainability. In the long term, financial regulation positively influences both the sustainability and the outreach of MFIs. The results suggest a number of policy options. First, the MFIs should focus on the real effective lending rate, given its significance in their sustainability. Second, for a real effective lending rate to be relatively low, the rate of inflation should be low. This calls for prudent monetary policy management by the government. Thirdly, the cost of doing business should be kept low. This calls for prudence in business management by the MFIs and creating a cost-effective business environment by the government. While the results are tentative, in order to expand outreach more SACCOs should be established and the MFIs should commit more funds to lending purposes compared to other investments. Finally, before enacting financial legislation, it is important that its benefits and costs are adequately assessed to ensure that the benefits outweigh the costs both in the short and long term.