Unregulated SACCOs threaten the future of Microfinance in Uganda

If you have not already done so, read The Observer article by Moses Talemwa on unregulated Savings and Credit Co-operative Organisations (SACCOs). The article highlights the story of a woman who has been defrauded by a microfinance institution in Uganda. The fraud was made possible primarily because SACCOs operate without any state oversight. This unusual situation occurred when the government created a post for the Minister of State for Micro-Finance, thereby taking regulatory responsibility for microfinance institutions away from the Central Bank. It was not the wisest decision in retrospect, and was probably made so that the government would be well positioned to take credit for the positive developments that microfinance can bring to Uganda's economy.

Now though the government has a potential catastrophe on hand. The lack of regulation for microfinance institutions threatens to undermine the confidence that many have in the practice and expose the NRM as bad managers. And for all his political guile, it is unlikely that Museveni would escape the fall out entirely. In his eagerness to woo local voters and impress the international community the President added a national microfinance scheme to his election manifesto called "Bonna Bagagawale". He also appointed his brother as Minister of State for Micro-Finance. It is therefore in Museveni's interest to see this mess cleaned up before it spills over onto the State House lawn.

But this goes beyond politics. The fraudulent SACCOs are likely to overshadow the well-managed institutions that are delivering services and making a difference. If that happens, social entreprenuers are likely to stay away from Uganda's microfinance institutions, making it harder for them to find the funding they need to deliver their services. That would be a real pity since microfinance does have the potential to lift many Ugandans out of the poverty.

Kiva is a beacon of hope. The nonprofit organisation that started its operations in a small Ugandan village has made headlines over the past two years by making it easy for would-be lenders to connect with poor entrepreneurs over the internet. Transparency is key to Kiva's model. For this reason, its field partners are well vetted, meaning that the people who lend on its network can continue to do so with confidence in the absence of well-structured government regulations for SACCOs.