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Unsolicited Policy Proposal

Increasing the Accountability of Rural SACCOS while reducing overhead Facilitating effective Mid-Level Credit Expansion in Rural Uganda

November 14, 2008

To: The Honorable President Yoweri Museveni, The Government of The Republic of Uganda From: Samuel Chereskin, University of Chicago


Samuel Chereskin 10/11/10 Introduction to the Political Economy of Development Professor Simpser

The Suggestions in this paper are directed towards the Government of Uganda, the Ugandan Ministry of Finance Planning and Economic Development, the Ugandan Co-Operative Credit and Savings Union, and The Bank of Uganda.

Abstract: Long-term credit initiatives, as a means to inciting economic growth in developing economies, have two fundamental (and pseudo-sequential) aims: 1) To flatly increase the number of people who have access to credit, and 2) To ensure the ‘effectiveness’ of the credit granting organizations that one has just established. In the terms of this paper, the first goal can simply be interpreted as the evocation of a scheme to get credit granting organizations to people who – as part of a binary - didn’t have access before. It is the purpose of this paper to focus on the second goal, and to recommend policies that will increase the effectiveness – the accountability, transparency, and expandability – of the Savings and Credit Co-operatives (SACCOs) initiative in Uganda. I postulate that the Ugandan government, by starting the SACCOs program, fulfilled part one of the above requirements; I donate this paper as part of the means to achieving goal number two – so as to increase the effectiveness of what others have already started. This proposal examines the SACCOs initiative in terms of its legal accountability to its members; and its transparency as a means of resilience to rent seeking behavior and corruption over the period of 1991 - 2007. Analysis over this period will expose the project’s past and current organizational shortcomings, and this paper will propose how digitizing the financial records of these tier 4 Microfinance Institutions (MFIs) will simultaneously curb the project’s organizational problems while cutting costs, and opening up the possibility for easy expansion of the project in the future.

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Samuel Chereskin 10/11/10 Introduction to the Political Economy of Development Professor Simpser

Relevant Background Information: Savings and Credit Co-operatives (SACCOs) were conceptually and legally established in Uganda in 1991. They are rural finance cooperatives that are intended to give reliable, safe, and sustainable access to micro and mid-level credit. 1 The President of Uganda, Yoweri Kaguta Museveni incorporated SACCOs into his “Prosperity for All” (Bonna Bagaggawale) campaign – a blanket initiative to end poverty and bring development to rural Uganda through information and institution building. They are operated under the umbrella of the Ministry of Tourism, Trade, and Industry (MTTI), and one of its subordinate agencies the Uganda Cooperative Savings and Credit Union Ltd. (UCSCU).

SACCOs are meant to be citizen started. Ugandans are supposed to mobilize their communities and combine whatever capital they wish in order to register with the MTTI. There are few to no barriers to approval – a SACCO must only come up with a name and a list of its founding members. 2 Once registered and approved all members of the SACCO elect a governing committee. This committee sets regulations and interest rates (typically between 12-18%); they also hire a manager and support staff to run the establishment day-to-day. 3 Only SACCO members (those who pay the committee-set entrance fee, and buy a single share in the cooperative) can take advantage of the available credit lines. SACCOs vary from a few members up to several thousand. 4 SACCO members are encouraged to know each other, and SACCOs are often arranged around places of mutual member acquaintance (e.g. SACCOs are commonly established around common places of work like industrial centers or in rural townships). 5 6 Security and repayment in the cooperative are supposed to be ensured via peer pressure from 3


Samuel Chereskin 10/11/10 Introduction to the Political Economy of Development Professor Simpser

one’s fellow members and through the assumption that one would not want to default on a loan one’s own capital contributed to. The consolidation of these two mechanisms has proven effective for some “well-functioning” SACCOs, but default rates vary countrywide.

UCSCU is supposed aid these efforts by sensitizing the population to the promises of SACCOS; by providing training for members; by promoting a legal climate that is conducive to starting/ maintaining SACCOs; and by providing support and oversight to those SACCOs that request such assistance. At the beginning of the program, SACCOs were promised that once they were established, on the foundation of user sponsored co-operative finance, that they would later have access to Ugandan state reserves in order to finance increasingly large lines of credit to burgeoning Ugandan entrepreneurs. In this way, SACCOs were meant to bridge the gap between microfinance organizations and mid-level credit institutions. Depending on the circumstances on which a SACCO was founded, members would first be able to receive the small amounts of short-term credit that have come to typify microfinance. The average SACCO loan seeker is a 30-39 year old familial matriarch that uses the short-term capital to invest in one or two business ventures (formal or informal). After secondary funding became available to the SACCO, it was intended that members would be able to build off of their good credit history within their local SACCO and get increasingly large lines of credit. These larger (typically between US$5000 and US$100,000) were supposed to let SACCO members make larger investments with the hope of receiving larger returns. This was meant to be a member’s path to a higher income and a higher standard of living.

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Samuel Chereskin 10/11/10 Introduction to the Political Economy of Development Professor Simpser

The Problem: This simple vision has largely gone unrealized. As of 2002, there were 680 SACCOs registered with the Registrar of Co-operatives. 7 In 2007 there were 1500, and the number is continuously growing. 8 The problem is that the MTTI has no ability to monitor and support the 1500 (or more) SACCOs currently registered across the country. 9 According to interviews done by the Financial System Development Programme of Uganda, “the most serious problems in the sector are weak management and leadership, fraud, insider lending, poor financial performance and improper record keeping.” 10 Without the government support and oversight they were promised, an unknown number of these SACCOs are stagnant or have already failed. 11

With its limited staff and budget, the MTTI is unable to monitor and continue training staff in a timely manner. Cursory training, if any was offered at all, has led to the production low quality financial records by the ground staff in many SACCOs. This has led to a dearth of fiscal transparency among the cooperatives across the country. The system starts to unravel as SACCO’s funds start to go missing, and the air of promise and legitimacy the Ugandan government tried to engender disappears. The government, in response, took to encouraging cooperatives to hire outside auditing services as a solution, but the skill level of staff at external auditing services has proven to not be high enough to help remedy mis-kept books through audits. The point is moot though. Even if external auditing companies offered sufficient services as to revitalize the fiscal records of many SACCOs, the cost of an external audit is too high for many rural SACCOs to afford.12 This solution became unviable.

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Samuel Chereskin 10/11/10 Introduction to the Political Economy of Development Professor Simpser

How to Make the SACCOs program come closer to fulfilling its objectives – Possible/Attempted Solutions: 1. Allocate Resources Efficiently – Further incentivize good performance and only extend support to ‘well performing’ SACCOS: As of 2007, the Ugandan government instituted a policy where only ‘well performing’ and ‘effective’ SACCOs could be eligible for state expansion of their capital reserves. 13 The Ugandan Government instituted a voluntary rating system. SACCOs would voluntarily submit themselves to be rated (The author could find no reference to which condition each SACCO was evaluated on by the time of this printing).

Whether or not a SACCO would assist through extra funding was

determined by the outcome of these ratings. Analysis: The program did not meet expectations by the end of its first fiscal year, and it does not promise that it will do so next year either. The Financial Sector Deepening Project Uganda (FSDU) – the group charged with orchestrating the rating procedures planned on rating 30 SACCOs in 2007, but the group only completed ratings of 12 cooperatives. Many people would schedule appointments only to cancel, often at the last minute. 14 The shortcoming was not from lack of funding but rather from an inability to market the service. SACCOs leaders did not have the proper incentives to comply with government officials, or they were unconvinced that they needed the service.

2. Make Banking Mobile – Bring trained personnel to the clients via armored cars: PostBank Uganda along with the UK’s Department for International Development invested in two armored vans. 15 These armored vans, complete with satellite links, are meant to bring trained bookkeepers to rural Ugandans in need of credit. The project 6


Samuel Chereskin 10/11/10 Introduction to the Political Economy of Development Professor Simpser

changes the nature of the SACCOs program, as this attempt at accountability no longer leaves hiring ground staff to the SACCOs leaders. The project is also intended to be highly visible: these red buses are meant to be very ostentatious representations of how hard some high-level Ugandan organizations are trying. The first two were launched September 14, 2007. Analysis: The costs and risks involved in expanding Uganda’s rural credit in such a manner are simply too high. The costs are two fold. First fiscal transactions are limited to when the truck is in a particular district. The means to productivity are limited to the availability of a select number of buses. This point could be negated if there were a large enough fleet of mobile banks, but that leads me to my second point. The costs of such a fleet are prohibitively expensive; the boost to rural productivity because of the access to credit could very well be offset by the costs of these buses. 3. Cell phone banking – A way to ensure real time auditing of financial figures: My suggestion is to centralize the bookkeeping system. Using free software16 and cheap cellphones, the MTTI could create a mobile nexus of SACCO users who would have to enter their book keeping figures in real-time via SMS messaging. These numbers would be automatically calculated against original figures, and publicly accessible (with proper privacy considerations) for transparency. If figures were not accurate 99 times out of 100 (statistically), if funds were requested without figures being entered, or if cell-phone operators did not check in once a week regardless of activity, then access to state credit lines would be cut off. The institution of this policy would increase transparency,

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Samuel Chereskin 10/11/10 Introduction to the Political Economy of Development Professor Simpser

strengthen legal accountability, and make the initiative more easily marketable to prospective SACCOs start-ups as the members get to keep their autonomy. Analysis: Ground staff at each SACCO would be responsible for inputting a series of numbers into a central data system using SMS messaging. Information would be sent once a week, and the system could require one message per transaction that happened at the SACCO. Data would be entered in the form of an easily decipherable code (e.g. xxxxxxxx-xxxxx-xxx where the Xs represent [SACCO #]-[Member #]-[Transaction amount][intended purpose of loan] and the purpose of the loan would be coded via simple preestablished rubric). A computer program could automatically flag SACCO accounts that were not completed on time, or transactions that caused the SACCO to exceed recorded capital holdings. These errors could be noted by a single team of officials and funds could be distributed or withheld accordingly. Average auditing costs for all Ugandan SACCOs members would approach zero. The plan aims to include auditing procedures and oversight into the process form the registration of the SACCO onward. Subsidizing the phone and service would incentivize to the short run transition to the mobile phone based system. Ground staff might be happy to enter numbers via text once a week in order to have a free phone. Promising state funding after six months of easily demonstrable ‘good behavior’ would provide incentives for the longer-term.

Also in this schema, all SACCOs would maintain physical control and autonomy over their capital reserves and loans. This would negate the need for immediately expanding anything except one’s GSM infrastructure. That too is relatively simple to expand upon in

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Samuel Chereskin 10/11/10 Introduction to the Political Economy of Development Professor Simpser

Uganda. The country is one of only two competitive mobile telephony markets. 17 Providing tax incentives for GSM providers to expand would be a great first step towards universal mobile-network coverage in the country. And studies indicate that it takes about a day to teach anyone to use a cell phone. 18

Figure 1 Map of Uganda – Red and orange markers highlight districts with “highachieving” SACCOS. Note the sporadic distribution.

Figure 2. Example of an armored mobile bank from Malawi. Photos of Ugandan equivalent not available.

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1

UGANDA COOPERATIVE SAVINGS AND CREDIT UNION LIMITED, New Vision Uganda, http:// www.enteruganda.com/brochures/bbucscu.htm, November 10, 2008 2

UGANDA COOPERATIVE SAVINGS AND CREDIT UNION LIMITED, New Vision Uganda, http:// www.enteruganda.com/brochures/bbucscu.htm, November 10, 2008 3

Possible Mechanisms to Regulate Tier 4 MFIs in Uganda, Financial System Development Programme, (Kampala: FSD, May 2003) 4

Possible Mechanisms to Regulat Tier 4 MFIs in Uganda, Financial System Development Programme, (Kampala: FSD, May 2003) 5

UGANDA COOPERATIVE SAVINGS AND CREDIT UNION LIMITED, New Vision Uganda, http:// www.enteruganda.com/brochures/bbucscu.htm, November 10, 2008 6

Possible Mechanisms to Regulat Tier 4 MFIs in Uganda, Financial System Development Programme, (Kampala: FSD, May 2003) 7

Possible Mechanisms to Regulat Tier 4 MFIs in Uganda, Financial System Development Programme, (Kampala: FSD, May 2003) 8

Uganda Annual Activity Report 2007, DFID Financial Sector Deepening Project, http://www.fsdu.or.ug/ monitoring.htm, November 13, 2008 9

Possible Mechanisms to Regulat Tier 4 MFIs in Uganda, Financial System Development Programme, (Kampala: FSD, May 2003) 10

Possible Mechanisms to Regulat Tier 4 MFIs in Uganda, Financial System Development Programme, (Kampala: FSD, May 2003) 11

Possible Mechanisms to Regulat Tier 4 MFIs in Uganda, Financial System Development Programme, (Kampala: FSD, May 2003) 12

Uganda Annual Activity Report 2007, DFID Financial Sector Deepening Project,

13

Uganda: Only Productive SACCOs to Get Funds, New Vision Uganda, November 4, 2008, http://allafrica.com/ stories/200708090108.html, 14

Possible Mechanisms to Regulat Tier 4 MFIs in Uganda, Financial System Development Programme, (Kampala: FSD, May 2003) 15

Uganda Annual Activity Report 2007, DFID Financial Sector Deepening Project, (Kampala: DFID, October 2008) 16

http://www.frontlinesms.com/what/

17

Review Of Sector Taxation Policies And Determining The Elasticity Of Penetration And Price Of The Various Telecommunication Services In Uganda, Uganda Communications Commission (Kampala: UCC, April 2007) 18http://www.ted.com/index.php/talks/iqbal_quadir_says_mobiles_fight_poverty.html

Increasing the Accountability of Rural SACCOS While Reducing Overhead  

Facilitating effective Mid-Level Credit Expansion in Rural Uganda. An unsolicited policy proposal.

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