Our trip to Uganda covered our module on microfinance and poverty reduction and featured a number of meetings with different individuals and groups taking out loans with different microfinance institutions as well as the institutions they borrow from. We visited Finca, DFCU and BRAC.
Finca began as an international NGO but their branch in Uganda is now a for profit lender. They offer loans at slightly over the national interest rate of 24%. (Uganda is facing very high inflation right now.) Their loans are smaller than those typically offered through large commercial banks and have very short repayment periods. We had the opportunity to speak with a client, which was an eye-opening experience. It might have been the language barrier or maybe the woman did not feel comfortable talking to us but it was very hard to get her to answer our questions the way we wanted her to. We were trying to figure out how she had benefitted from taking out microloans but all she would tell us was that her business had expanded and she had plans to expand further in the future. She did tell us that she took out a 1 million shilling loan every four months. (About 450 USD) When we asked what her interest rate was she did not know but she knew that she paid back 1,200,000 every four months. Meaning that her interest rate is 20%. This was actually a low rate compared to many of the groups and individuals we spoke with. Also when we asked her whether or not she saves with FINCA she said no but her loan officer interjected himself and explained that she does have a savings account with them.
Again, I do not know if it was the language barrier or the situation that caused her to answer incorrectly. While financial literacy needs extensive expansion and revision, I do not think this woman would have been unaware of a savings account that she opened. These high interest rates with short repayment terms are typical for many microfinance lenders. Through many of our discussions in the group about this we wonder whether, and doubt, that people realize how much money they are paying in the long term to borrow large sums of money for short periods. Other than the fact that they have flat interest rates, they really are not much different from payday loans or similar schemes in America. However, there are other microfinance organizations that take an approach that integrates micro-lending with other community development services.
BRAC was one of these types of microfinance institutions. The organization was started in Bangladesh and is hugely successful there. They are fairly new in Uganda but seem to be making an impact there. Before BRAC distributes loans to their clients they have to undergo a month long training program where they are educated on what their loan means and ensuring that they have a practical business that will enable them to pay back their loans.
In addition to offering loans, BRAC administers programs in agriculture, poultry, livestock, health and employment/livelihood for youth education in Uganda. These programs are mostly educational and capacity building and also increase access to resources in each of these areas for their clients. Through these programs they hope to not only help with community development and poverty alleviation but the businesses of their clients will expand noticeably over time instead of simply maintaining themselves.
One of BRAC’s downfalls is their 45-55% interest rates on microloans. These seem absurdly high but when you really thing about it they kind of make sense. Going off a base of the national interest rate of 24% they are only making 20-30% on loans they give out. While the amounts repaid by clients are a lot to them they might not be that substantial to an international NGO like BRAC. Also when I see these high interest rates and hear about the programs that they institute in their areas I consider them as more of a subsidy for the cost of these services provided to clients. I am sure that they are still making a profit – we did not ask about this or see any financial reports so I am speculating – but it seems pretty reasonable. Regardless, an organization like BRAC is going to be much more sustainable if they can support themselves instead of relying solely on aid funds for all of their operations.
DFCU is more like FINCA than BRAC. We spoke with a woman there who talked to us about the basics of loans and clients there. Then we had the opportunity to speak with a group who took out loans as a Savings and Credit Cooperative (SACCO). SACCOs tend to benefit individual members by providing a safety net should they fail to repay a loan at any period. The groups also generally provide loans within themselves. Members will save up and on a weekly basis the savings will go to one member who repays the loan with interest and the process repeats over and over. It was a group of people who all sold dried fish in the nearby market. We asked a few questions and the loans they were taking seemed to be helping them improve their quality of life. Many of them had bought land and built houses instead of renting, their children were going to school and overall they seemed pleased with what they were doing. These are the types of things we keep hearing from clients of microfinance organizations. While I am all for them improving their overall quality of life they do not seem to be expanding their businesses. I might be letting my western ideas of business loans influence my opinions here but I feel that the loans should be helping the clients increase their business productivity, thus increasing their household income which would eventually lead to them not needing these loans because they would be making enough money without them. Microloan clients seem to be stuck in a cycle where they have become dependent on their loans instead of saving and increasing their own profits.
After we spoke with the group we went into the nearby market to see their stands. The market is located in Old Kampala and is MASSIVE. There is anything you could want to buy and a million of them. It is overwhelming to say the least. One of my classmates and I bought some mangoes and avocados for later but other than that there was way too much to take in and not enough time to do it in. The market was crowed and filled with so many smells. There was garbage everywhere and so many people. It was crazy.