Shs10b threshold for MDIs a threat to economic growth

The scare generated by the Shs5 billion minimum threshold for Microfinance-taking Deposit Institutions (MDIs) had hardly evaporated, and then…another bombshell. Doubled to Shs10 billion. The money is the minimum capital requirement for a business seeking to trade as an MDI. 

Under Uganda’s financial sector regulatory regime, an MDI is classified as a tier three financial institution, which can take deposits from the public, basically operating like a mini bank. And since the dawn of savings and credit cooperatives (saccos), a good number have grown to levels requiring close monitoring, thus the establishment of the Uganda Microfinance Regulatory Authority, and Bank of Uganda supervision, classifying them as tier four financial institutions. 

I believe this new threshold for saccos to grow into MDIs is a self-stab in the foot for Uganda, on many fronts. From an investment and business angle, the Shs10b threshold will push Ugandan saccos that were aspiring to grow into MDIs, out of the formal financial sector. The same applies to Ugandan individuals or institutions, seeking to invest in the sector, without taking the graduation path of saccos and investment clubs and village saving-lending associations and all, as we have them in Uganda today. 

Investing as MDIs will become accessible only to foreign speculative capital, thus further alienating Ugandans from formal productive participation in the financial sector, limiting them to borrowing their own money in saccos and tier four financial institutions. This is a stumbling block. The threshold should be reduced even below the earlier Shs5b. If capped at Shs1b, for example, it will enable the milliard saccos in the country go formal, with the accruing advantages. Notable is the growing of domestic national savings, both for public and private sector borrowing. 

The opportunities coming with this are immense, not least attracting global institutional impact investors. Currently, we attract speculative venture capital as opposed to impact investment capital, thanks to the limited narrow formal microfinance sector.  The way out is to spread wide and capture the last coin into the formal sector. And this is only possible through lowering the minimum share capital requirements for MDIs, the most feasible channel for bottom-of-the-pyramid big numbers of us ordinary Ugandans. 

The power of numbers is our secret weapon. Saccos, investment clubs, village saving schemes, retirement schemes, emergency saving schemes…can pool resources as institutional investors into MDIs. This will be a reliable strategy to killing informality, since MDIs operate according to established best practices in the sector and the larger corporate world. Besides credit, MDIs can offer business development services under agreed outsourcing terms, especially for the businesses they finance, including overseeing operations of an entire value-chain linking together different stakeholders at the various stages of the chain.

Mortality of micro and small enterprises is largely occasioned by bad business practices. Reversing this is one sure way of economic transformation at the base, where the majority of us are. And from a national and strategic angle, leaving milliards of small saccos and other saving schemes unregulated creates loopholes into which ‘dirty money’ can be plugged with all its multifaceted bad intentions and schemes. Any wrong element with evil intentions can come under the cloak of humanitarian or philanthropic objectives, infiltrate thousands of unregulated community-based organisations (CBOs) and use them to advance their malicious agenda against national interests. 

We are into strange times. And the effect will permeate everywhere, even into the formal sector, reversing the gains recently attained in preventing and monitoring ‘dirty money’ into the country. Leaving the Financial Action Task Force (FATF) grey-list as a country is an achievement that must be protected, nurtured and sustained. One such sure way is extending formality and supervision to the last mile in the financial sector. MDIs as pinnacle investment vehicles for saccos and savings schemes hold the key to this noble goal. This is the reason the current proposed minimum capitalisation requirement for MDIs must be revisited. It is in our national interest. 

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