The Rating service in Uganda is a new concept that is slowly spreading within the microfinance industry. The spread of the microfinance services in Uganda has correspondingly brought about various challenges to the microfinance sector; the challenges faced by Microfinance Institutions (MFIs) tend to differ from institution to institution.
Some MFIs are supervised and regulated by Bank of Uganda e.g. the Microfinance Deposit Taking Institutions (MDIs) and others; in fact the majority of the small micro finance institutions like the Savings and Credit Cooperatives (SACCOs) and smaller Non-governmental organizations are not supervised nor monitored by Bank of Uganda.
Microfinance institutions that are not regulated by Bank of Uganda are the Tier 4 institutions. Such institutions hold savings from clients and give out loans from these savings. The key question is, how safe are the client?s savings when the institutions they financially transact with are not supervised nor monitored by any responsible recognizable body? The question indicates a gap that exists within the Tier 4 institutions that requires bridging.
It?s because of the above gap that the Local Rating Service concept was developed in 2005 by the Support to Feasible Financial Institutions and Capacity Building Efforts (www.SUFFICE.or.ug), a European Union ? GoU programme and DFID?s Financial Sector Deepening Project in Uganda (www.FSDU.or.ug) with the purpose of assessing the performance of the Tier 4 Institutions in order to enhance performance & transparency of the Micro-finance sector, hence strengthening the micro-finance industry in Uganda.
Among others, the Association of Micro finance Institutions of Uganda (AMFIU) supports the rating service for two reasons. Firstly, Rating strengthens the case for a self-regulation framework for tier 4 MFIs. Secondly, it will enhance the information exchange within the industry, which has for long been spearheaded by AMFIU.
What is Rating?
This is the assessment of both the financial and non-financial areas of an institution. It gives a true picture of the overall performance of all the functional areas of the institution.
Procedure in carrying out the rating mission:
? Once the MFI has applied for a rating, the Rating Agency contacts the MFI before its scheduled date of rating to prepare certain information and documents in advance.
? The raters go to the MFI offices to brief the Board and Management about the purpose of the rating mission.
? The raters conduct a series of interviews with the Board, management, staff and clients of the MFI.
? They study the financial reports of the MFI.
? Examine the internal policies, procedures and products.
? Analyze the economic, social and cultural environment of the MFIs.
? Review the institutional landscape and areas of competition.
? Study trend analysis
? Prepare rating reports using field data.
? Present the reports to the local rating committee or to Planet rating committee in Paris for checks and balances.
What are the benefits of being rated?
? To the Institution: -
The institution gains an objective and accurate assessment of its performance about all the functional areas. The assessment therefore, gives a clear picture of the institution?s strengths and weaknesses and enables the institution to build on the strengths and bridge the gaps within the internal system.
? To the lenders and donors: -
Most of the Tier 4 institutions need a lot of technical and financial assistance. The lenders and donors will know how best to assist these institutions by using the rating reports.
? To the investors: -
The investors will easily know where to invest their funds basing on the results from the rating reports. The rating reports can enable the investors to make a risk-return analysis of the investment.
? To the policy makers: -
The policy makers will have a true picture of the Tier 4 MFIs and be able to make appropriate policies for them to enable them become sustainable and grow.
? To the consumers: -
These will have more confidence and trust in the MFI that has been rated and will view the institution as one interested in the enhancement of transparency, performance and professionalism.
? To AMFIU as the custodian of sound practices in Microfinance: -
Rating will strengthen the information role of AMFIU. Information collection has proven to be costly, and the rating service provides one avenue to overcome this constraint. Furthermore, rating can be a valuable element for a self-regulation framework for tier 4 ? particularly if the information is well disseminated.
What is the Local Rating service?
This is a system made up of two components; the Local Rating Agency and the Local Rating fund.
1. The local Rating Agency:
This is an independent institution that assesses the performance of the MFIs according to predetermined criterion. Currently, Planet Rating Agency, an International rating agency with Headquarters in France and with broad experience in the rating of small MFIs has been subcontracted to do the rating missions in Uganda.
Key areas the rating may address:
(a) Governance and decision making
(b) Information management system
(c) Risk management
(d) Activities such as products and services
(e) Financing and liquidity
(f) Efficiency and Profitability
In addition to the above, the Rating agency will assess the level of ?customer friendliness? of the MFI; this will be addressed by focusing on aspects like appropriateness of the products and services offered by the MFI in relation to what the customers want and need. After making the necessary assessment, the Rating agency prepares a rating report about the MFIs? performance.
2. The Local Rating Fund:
The Rating Fund is a multi-donor effort intended to enable the small MFIs and SACCOs in Uganda access the rating services at subsidized costs. Most of the Tier 4 institutions can?t afford to pay for the rating service offered to their institutions; it?s because of this that SUFFICE, FSDU, Micro finance Support Centre Ltd, GTZ/Sida and USAID/Rural SPEED have established a Local Rating Fund; which subsidizes the costs of rating.
The Local Rating Fund meets 85% of the rating costs and the MFI pays 15% only for the rating service offered by the Local Rating Agency. However, the maximum subsidy the Local Rating Fund can pay for any rating is USD 3,500.
How can an institution apply for a Rating subsidy?
This can be done by fulfilling the requirements set by the Uganda Rating Fund Steering committee.
The eligibility criteria requirements:
? The institution must be registered in Uganda.
? The applicant must have been in existence for at least three consecutive years.
? The institution must be with a culture of record-keeping.
Steps for subsidy application:
1. The MFI requests for a rating from the rating agency.
2. The MFI provides all institutional details requested for by the rating agency.
3. The rating agency makes a technical and financial proposal for the rating mission.
4. If acceptable, the MFI forwards the proposal to the Rating fund for co-funding.
5. The Rating fund reviews the request and informs the MFI if it is approved for co-funding.
6. The rating agency prepares and forwards a contract to the MFI for signature.
7. The rating agency carries out a rating mission and writes a report.
8. The MFI forwards the mission report and proof of payment to the Rating fund.
9. The Rating report is posted on the website of the Local Rating Fund (www.ratingfund.or.ug) and the rating fund pays the subsidy.
What progress has so far been made by the Rating Service in Uganda?
Carrying out rating missions: -
So far two MFIs have been rated: -
? Microfinance & Development Cooperative Trust Ltd (MAMIDECOT), August, 2005
? Teso Rural Development Trust (TERUDET), May, 2006
? Creating awareness about rating in various fora, such as conferences and Regional workshops.
? Receiving applications for rating from MFIs and SACCOs.
? Working with all the stakeholders to ensure that the programme is a success.
The Rating service is a key tool in the Microfinance industry, it will enable the small MFIs realize the importance of rating if they are to become sustainable and grow in the long run. There is no doubt that the small MFIs that will embrace the rating service on an annual basis and implement the appropriate strategies for growth and development will become MDIs in the long run. It is therefore, a challenge to all the stakeholders in the microfinance industry to help the small MFIs access the rating services so that the microfinance industry can get to a higher level of performance and transparency than it is today.
The Rating Fund Manager,
Tel: 041 236 554/5
031 2 261 570/1