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.
- 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 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, SUFFICE Programme Tel: 041 236 554/5 031 2 261 570/1 Murtala Courts Kampala, Uganda