SACCOs and MFIs

A SACCO Annual General Meeting in Lango, Northern Uganda
Chapter Five
SACCOs and MFIs
125
5.1 Failing SACCOs: Who Cares?1
Visiting a member of MAMIDECOT, a successfully managed SACCO in Masaka.
Section 1
Evidence of Failure
Why should anybody care about failing, – thus SACCOs seldom live their “full
missing or untraceable SACCOs? Are not lives”. They therefore do not serve their
institutions, like biological organisms, full purpose before dying.
supposed to be subject to the immutable
ii) In the remote rural areas, SACCOs are
law of entropy? Are they not supposed to be
often the only providers of financial
born, grow, decline and die? And, given this
services for most people. When the
pattern, should the failing of SACCOs be an
SACCOs fail, this leaves people with
issue?
little or no alternative services.
There are three principal reasons why we
iii) SACCO collapses leave people poorer
should all be concerned about the failure rate
and more desperate as they lose their
of SACCOs in Uganda:
meager savings
i) Whereas in countries like Kenya the
iv) Losing their money in failing SACCOs
life of a SACCO spans over decades,
makes poor people more cynical of
the failure rate in Uganda suggests that
using financial institutions. Such a
most SACCOs fail after only a few years
1 Author: Andrew Obara, FRIENDS Consult
126
polluting effect entrenches financial iii. While the census team was remarkably
exclusion as more low-income / poor thorough, there may have been some
people get discouraged from accessing institutions which exist but were simply
financial institutions’ services. hard to find;
Therefore, SACCO failures have overall iv. An unknown number of institutions

adverse negative effects on the rural economy have become dormant or collapsed and
and on the fight against poverty. disappeared;
There has always been confusion over the v. Some SACCOs were registered but
Chapter 5 SACCOs and MFIs

number of SACCOs in Uganda, with most have never actually operated on the
estimates putting it above 1,000. In 2006, ground (briefcase institutions).
the Ministry of Finance, Planning and
Economic Development and the DFID- The actual problem was bigger than
funded FSDU project conducted a SACCO anecdotal discussions and the MoFPED
census to ascertain the true number of census had revealed. While reconciling
SACCOs operating in Uganda. The results of SACCO lists2 before going to the field, the
the census revealed a significant difference FRIENDS Consult study team found that
between the number of institutions that of the 628 SACCOs that the MoFPED team
were legally registered and the ones that had identified, 194 were not in the Register
were found operational by the census team. of Cooperatives. This meant that only 434
Compared to a number of 1,724 registered of the SACCOs that were in the register
by the Department of Cooperatives, the had been identified by the census team. By
team found only 628 (about half) traceable implication, 840 or 66% of the SACCOs that
and operational SACCOs. then existed in the registry had not been
traced by the census team. These were for
A follow-on study jointly commissioned the time being labeled “missing SACCOs”.
by AMFIU and FSDU and conducted
by FRIENDS Consult in 2007 was very A pre-testing of several possible causes found
revealing. The assignment was to track and the above hypotheses (i. to v.) to be the most
report on the status of “missing SACCOs” credible, and thus the study proceeded to
in Uganda. This was to qualify and better empirically test each of them. On the basis of
understand the status or fate of the missing a rigorous and robust sampling framework,
SACCOs. On the basis of discussions with tool development, field survey, consultative
SACCO stakeholders and generally known meetings and document reviews, the study
conditions, the study set out to test the concluded that hypothesis iv. (collapse
following possible hypotheses about the of SACCOs) accounted for 57% of the
reasons for the disparity: missing SACCOs; hypothesis iii. (SACCOs
existing but difficult to find) accounted
i. The “missing SACCOs” actually operate for 30% while the other three in aggregate
but without a fixed location; accounted for 13%. The interpretation was
clear: SACCOs were missing because they
ii. The “missing SACCOs” were in the collapse and disappear fast, in most cases
gap between registration and receipt without anyone keeping track of them. They
of their registration certificates, yet the thus continue to appear in the Register even
census team only counted institutions after collapsing.
that could produce a registration
certificate;
2 The one produced by the MoFPED study team and the one drawn from the Dept. of Cooperatives
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Table 1 below summarizes the study findings on the reasons for the absence of the “missing
SACCOs”.
Table 1: Reasons for Missing SACCOs according to hypotheses
No fixed No Difficult Collapsed3 Never Total

Reason for absence
locations registration to find operated
certificate
Proportion (%) 4.3% 1.4% 30% 57.1% 7.1% 100%
The foregoing paragraphs present the tenets microfinance industry, a stand-alone rural
concerning an otherwise vital sector that financial infrastructure or as financial service
is unorganized, poorly facilitated, weak set-ups only remotely related to other drivers
and struggling due to macro and micro of the rural economy.
level failures – which brings us to the vital
question: “Why are the SACCOs failing?” With the production and marketing system
fragmented and somewhat unorganized,
there are no obvious economic flows that
at the local level feed into the SACCOs.
Section 2 Overall, failure to resuscitate the whole rural
Reasons for the Failures cooperative sector which fuels business
culture and strengthens the production-
processing-marketing chain in the rural
The widespread SACCO failures principally economy is likely to leave SACCOs largely
stem from macro (national) level failures that weak and prone to failure.
trickle down into regional and eventually
institutional (SACCO) failures. Minimal success with implementation
of SACCO-focused strategies. Whereas
2.1 National level Government has a well thought-out policy
The structures and performance of the rural for rural development, implementation
economy are weak. When the people who are has faced chronic challenges ranging from
now in their 40s and 50s were school children, poor understanding by implementers, inept
cooperatives including SACCOs were the personnel, inadequate logistics and conflicts
true engines of rural development. The whole of interest, all the way to fraudulent practices.
agricultural production, marketing, input Government’s sound broad policy for
-supply and payment system was organized harnessing SACCOs to provide financial
in a clear and highly functioning way from services in rural areas has, for instance, not yet
the national level (marketing boards) down produced a significant impact. There has for
to the village level (primary cooperatives). long been confusion over what, in the context
SACCOs were the people-owned financial of the one-SACCO-per-subcounty move,
service arm of a highly integrated rural Prosperity for All (which when translated is
economy. The integrated system has even more misleading) really means. This
since broken down and SACCOs are has not been helped by the sometimes flawed
today inappropriately seen as part of the mobilization by inadequately trained and
3 But not de-registered.
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questionably motivated local leaders (who 2.2 Regional level
have founded SACCOs on the expectation
that ‘easy’ money will come to them from Geographical location also plays a part in
Government). the relative success of SACCOs. SACCOs
and other community based financial
The “missing SACCOs” study confirmed the organizations are particularly weak in the
above observations. According to the study North and North-East regions of the country,
findings, the key national-level causes of where conflict and insecurity have adversely
SACCO failure are: affected community solidarity. They are
relatively stronger in the west and central

• SACCOs formed alongside production
regions. Part of the reason also lies in the fact
and marketing cooperative societies
that unlike the central and western regions
have collapsed following the change in
that rely on coffee (perennial crop with a
market trends which have rendered the
ready market and relatively clear marketing
business of production and marketing
channels despite weakness of cooperatives),
cooperatives ineffective
the north and east have traditionally relied
• Some institutions which were on cotton which is labour intensive and
formed with short-term objectives of needs more market and extension linkages.
obtaining resources from Government With the rebuilding of the northern region
programmes such as Poverty Alleviation communities and national efforts to revive
Project (PAP) collapsed when and before the entire cooperative system, SACCOs will
the programmes ended hopefully be less vulnerable to failure in
future.
• Inadequate supervision and monitoring
of the SACCOs by the District
Commercial officers (DCOs) due to
2.3 Micro level
inadequate facilitation and low-skills
capacity. At the institutional level, things are not any
better. SACCOs typically suffer from bad
• The closure of the Cooperative Bank in
governance, incompetent management,
1999, which affected the performance of
interference, abuse by the more powerful
SACCOs because the Cooperative Bank
members, financial illiteracy of most
was the main bank for these institutions.
members and related vices.
The SACCOs which had their accounts
in Cooperative Bank were unable to According to the findings of the “Missing
recover their money in time to continue SACCOs” study, the most frequent causes of
their activities. Some SACCOs closed collapse included the following:
because as soon as the members could
access their savings, they quit. • Failure to cope with competition
especially from commercial banks,
• Lack of effective external audit and MDIs and other MFIs which offer
financial management assistance, similar services. SACCOs have lost their
causing SACCOs to fall under the burden members to these institutions which
of ill governance, poor management and offer better services and look more
financial imprudence. stable.
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• Fraud – loss of funds leading to a complete crippling and closure of the SACCOs.
• Over-indebtedness of SACCOs resulting from poor financial management. Coupled with

poor management of the loan portfolio, this means liabilities build up as asset values shrink
till the SACCO is insolvent.
• Retrenchment and/or closure of mother institutions (for employee-based SACCOs).
• Lack of competent human resources - inadequately skilled personnel and management with
insufficient experience to run microfinance operations.
Case 1
Kaiffe Brokers SACCO in Kamuli was dormant for 8 years following the death of the
charismatic founder and sole vision holder who rallied all the members around a
common cause during his life time. The SACCO eventually collapsed due to loss of
morale and lack of direction by members.
• In some SACCOs, only one person bears the vision for the whole institution and reserves
the right to make final decisions. When such a person is not experienced in microfinance,
leaves, dies, or even decides to run down the institution, it collapses.
• Poor governance: Some SACCOs have illiterate committee members who lack basic skills
to effectively supervise operations and thus they get defrauded by management who take
advantage of their ignorance. There are also increasing cases of highly placed individuals –
in politics, Government or SACCO boards – influencing SACCOs to lend them large sums
of money (often without security) which they later fail to service in time or totally default
on. There are documented cases where such instances have led to severe crippling of the
affected SACCO.
• Fraud and mismanagement by board executives and management.
Case 2
“…Kiryansaka SACCO in Masaka obtained a capacity building grant which was diverted to
purchase land that was fraudulently registered under the name of the SACCO Treasurer.
An annual audit revealed the fraud which led to the arrest of the Treasurer and the use
of SACCO funds for litigation. The Treasurer was never convicted, resources dwindled to a
trifle and members lost morale in the SACCO leading to its collapse…” DCO Masaka
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On the single-most important reasons for failure, the following featured:
Key Reasons for the Collapse of SACCOs.
Restructuring / closure of other Institution 25%
Bad governance / mismanagement 23%
Default by members 16%
Inadequate sensitization 9%

Closure of co-operative 7%
Other reasons 20%
Source: Missing SACCOs Study Report
Section 3 The financial sector needs to care because

if enough SACCOs fail with people’s money,
Who Should Care ….and Who it can trigger systemic instability that can
Cares? start to affect the non-SACCO financial sub
sectors.
We should all care about the failure of
Meso level organizations that support
SACCOs because those failures have effects
SACCOs need to care and support both the
which are more far reaching than is ordinarily
SACCOs and other initiatives that make
realized. As a country, the attainment of the
the SACCO members viable savers and
Millennium Development Goals and the
borrowers. Training and capacity building
objectives of our National Development Plan
should be tailored to making the SACCOs
all necessitate provision of well responsive,
strong, well governed and sustainable.
secure and consistent financial services to
all people, especially the poor in rural and Rural communities should care that
remote areas – and this can best be done with their SACCOs are not messed up by a few
the SACCO model. people or by external people who in most
cases are self-seeking. Communities should
Accordingly:
seek information and education on how to
Government needs to care that the structures establish, govern and manage their SACCOs
and engines running the rural economy are decently and prudently. They should be
well designed for success and engendering sensitized to reject retrogressive and wrong
confidence in all who use them. Messages messages that badly affect their SACCOs
on SACCOs and other rural economic
Local governments and other grassroots
development programs need to be packaged
authorities should care because
as development programs – not as political
developments in their localities need
favours. Holistic revival of the cooperative
financial services for all. In rural areas, this
sector and deliberate efforts at inculcating
necessitates strong, reliable SACCOs and
business culture are necessary.
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other rural financial institutions. They should SACCO registration and supervision
ensure that the SACCOs are well nurtured, authority for better performance.
supervised and overseen so that they operate
prudently and sustainably. iii. Promote and pass legislation
for financial cooperatives either
The financial sector regulator, BoU, should alongside the rest of Tier 4 financial
care because a simple cancer that begins with organizations or as a stand-alone law.
a tiny organ can spread to the rest of the body. Either way, financial cooperatives
The not-in-my-back-yard approach, which should be regulated and supervised
would confine BoU to only concentrating with the prudence necessary to oversee
on regulating Tiers 1 to 3 and to avoid blame financial institutions. They should not
for all else, is a temporary solution to a long be supervised merely as if they were
-term problem as it mounts. trading cooperatives.
iv. Place the SACCO supervisory

authority under the purview of BoU
Section 4 so that minimum financial sector
prudence can be demanded of both
Solutions SACCOs and their regulator.
So what should we do to help? The problems v. Establish and facilitate an effective
identified suggest their own solutions. SACCO audit and investigations
The areas of concern and causes of failure facility, perhaps under a strengthened
mean that strategic activities should be supervisory organization.
implemented along the following lines:
vi. Support the re-establishment of a
i. Intensify and sustain the revival of the sustainable, prudently run bank for
rural cooperative sector in a holistic cooperatives - including for SACCOS.
way.
ii. Re-examine and if necessary revamp,

equip or change and strictly task the
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5.2 A Typical, Troubled and Tired SACCO
in Northern Uganda 1
Record keeping
Section 1
Agriculture in the SACCO’s
Area of Operation
The typical, troubled and tired SACCO in b) A night-time robbery was committed by
Northern Uganda discussed in this article highly skilled thieves, who broke into
is a net borrower SACCO with a poorly the SACCO’s strong room and used an
performing loan portfolio in terms of quality oxy-acetylene torch to crack open the
and productivity. It is faced with serious safe. They took off with UGX 20M.
governance and management challenges.
These challenges include two recent blows These problems come on top of a poorly
to the SACCO: performing loan portfolio, which is mainly
funded by externally borrowed funds which
a) Loans worth some UGX 44 million were is around 60% of the total loan portfolio.
disbursed to an individual close to the
Board, who is highly placed in one of The members of this SACCO are drawn
the key Government ministries. These from thirteen sub-counties within three
advances are currently in arrears. It is districts of West Lango region. Agriculture
also believed that these loans were made is the main economic activity and major
without security. livelihood source in West Lango region. It
1 Authors: Patrick Kawanguzi (Best Africa Consult) and Justine Kasoma (GIZ/FSD)
133
provides employment to over 90,000 people • The livestock and poultry sub-sector
who constitute 94 percent of the working is not well developed. Both animals
population, the majority being women. and birds are kept mainly as savings
They are mainly engaged in subsistence for meeting emergencies and other
farming with an average farm holding of social financial needs, rather than as
some two acres per household, under the agribusiness enterprises.
customary clan land tenure system. They
use rudimentary and traditional technology, • Aquaculture and apiculture are other
producing numerous farm commodities emerging income-generating activities
characterized by highly variable quality in the area. Fish farming is mainly carried
(Oyam 2007 and RALNUC 2009). This on in the areas which are far away from
makes it difficult for them to bulk produce in the River Nile. The main varieties of fish
order to attract buyers offering better prices. stocked include tilapia, mirror carp and
This resulting lack of competitiveness leads Claris catfish. (Oyam 2007)
to lower returns for farmer-members of the
SACCO. The region has water bodies that can be
used for farming purpose. Members from
One of the positive factors about the the parishes of Amati, Nora, Kamudi and
troubled SACCO is the close proximity Atula can use the Nile while those from the
of two large village markets: Loro Market villages of Atapar a and Amwa can tap water
(Oyam District) and Anekapiri Market from Tochi River for vegetable production,
(Kole District). These markets attract fruit and timber tree nurseries. The Okole
buyers from West Lango region and beyond swamp has the potential for rice production,
including Gulu, Lira, Masindi, Nakasongola vegetable growing, tree nurseries and fish
and Southern Sudan. farming.
The dominant agricultural activities in

the SACCO’s area of operation are: crop
production, fish farming, livestock and
Section 2
poultry rearing. Basic Information about the
SACCO
• The crop sub-sector includes: cassava,
sweet potatoes, millet, beans and pigeon The troubled SACCO under discussion in
peas. These are the dominant crops, this article shares the common philosophy
produced both for home consumption “it is cheaper to serve an existing client than
and for commercial purposes. Sunflower to satisfy a new one”. Good selection, caring
and tobacco are the main traditional cash and building of mutual relationships with
crops, while maize, simsim, ground nuts members by the management staff has
and rice are non-traditional crops grown resulted in high client retention rates and
for sale in the SACCO’s area of operation. promotion of the SACCO to attract new
Grafted mangoes and citrus fruits, members. The SACCO is known for its
namely lemon, oranges and tangerines strong belief in growth. Since inception,
are the fruits being promoted by the the SACCO has been able to mobilize over
National Agricultural Advisory Services 4,600 members with 98% of them being
(NAADS) as perennial crops in the area. engaged in farming or farming-related
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activities along agricultural value chains. Details of membership, and membership growth,
are given in Table 1 below. By December 2010 the members share capital totalled UGX 136.6
million, while savings deposits were UGX 548.5 million. At the same time the loan portfolio
was UGX 988.9 million outstanding to 1,385 member-borrowers.
Table 1: Membership, Savings and Loan Portfolio at the SACCO
Details Year

2005 2006 2007 2008 2009
Membership Male 805 1,014 1,572 3,091 3,283
Female 156 321 430 748 908
Groups 98 132 185 299 347
Institutions 24 37 58 83 93
Total 1,083 1,504 2,245 4,221 4,631
Farming % 100 98 95 95 95
Non –farming % 0 2 5 5 5
Share capital contribution UGX ‘000 8,112.3 21,200 34,095 116,315 136,605
Savings mobilization in UGX ‘000 104,676 198,003 466,702 456,128 548,455
Loan Portfolio Disbursements UGX ‘000 245,779 571,452 565,415 1,325,958 1,210,962
Outstanding balance UGX ‘000 147,360 309,480 418,348 735,271 988,926
Number of accounts 326 895 1,020 1,328 1,385
Source: SACCO Management Accounts and Reports
The SACCO pursues a vision of becoming a leading, self–reliant microfinance institution,

serving the active poor in West Lango region. It hopes to achieve this by economically
empowering the enterprising rural poor (micro-entrepreneurs and farmers) in the area by
providing accessible and affordable financial services. It has developed a number of strategic
arrangements with development partners sharing these objectives. These interventions are
outlined in Table 2 below, and are valued at approximately UGX 600 million over the last
several years.
Table 2: Quantified Capacity Building by Development Partners
Development Partner Period and Nature of Intervention Value in

UGX ‘000
Rabobank Foundation Grant for operation, purchase of motorcycle, completing the 58,000
SACCO banking hall and loan revolving fund (2005-2007)

UNDP/Government of Uganda In kind technical backstopping coaching and mentoring in 30,000
product development, financial information management

system, strategic business planning.
Microfinance Support Centre Borrowed funds for on-lending and training 408,000
SUFFICE EU/GoU Project Capacity grant for training, safe and motorcycle 15,000
GIZ/FSD Programme. Computerisation using the MBWin platform, training and 90,000
motorcycles
Total 601,000
Source: SACCO records. (This support spans several years)
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West Lango region is considered to be an dry rations, fruits, vegetables, and
important food basket for Lira Municipality, livestock and poultry products is
Apac Town Council, parts of Kampala and attributed to the rapid per-capita growth
southern Sudan. This forms good farming in the two fast-growing municipalities
prospects for the SACCO members. The of Gulu and Lira. Currently much of the
SACCO operates in an area underserved demand, especially for vegetables such
with formal financial institutions. All as tomatoes, cabbages and onions is met
existing financial institutions have outlets by supplies from Mbale and Kapchorwa;
in Lira and Gulu towns with only an livestock are from Nakasongola and
ATM (Stanbic Bank) at Oyam District Mbarara while the poultry products are
Headquarters in Acaba, targeting civil mainly supplied by Kampala, Jinja and
servants. This leaves the SACCO minimal Mukono Districts. All these suppliers are
competition in its market segment. outside Northern Uganda region.
Despite the SACCO being in a great 3. The net food-deficit position in southern
potential area surrounded by opportunities, Sudan has increased the demand for
minimal competition from formal financial non-traditional cash crops such as beans,
institutions, good farming prospects for the rice, simsim and maize.
members, good level of donor and other
forms of assistance, the SACCO is tired and These opportunities together with the
very troubled. introduction of affordable irrigation kits
have prompted the farming community
in the SACCO’s area of operation to start
transforming from subsistence and rain-fed
Section 3 agriculture to semi-commercial farming.
The Effective Demand for This would involve moving to year-round
Finance for Agriculture and production, for both commercial purposes
and home consumption.
Related Investments
This shift calls for adoption of new and
The effective demand for finance for appropriate farming technologies and
agriculture and the related investment by better marketing systems by the farming
the members of the SACCO has its premise community in the SACCO’s area of operation.
in three farm profitability-enhancing factors The improved farming technologies are now
namely: being promoted by NAADS. The desire
by many members to start using these
1. Improved terms of trade for oil seed technologies has led to a growing demand
growers has resulted from the increasing for finance for agricultural and related
demand for oilseeds by Mukwano investments. This demand is summarized in
Industries Limited, Mount Meru Millers three thematic areas namely:
and small and medium enterprise (SME)
oil processors. This buying market has • Productivity enhancement: Increase
made oil seed production attractive in primary farm production through the
the Lango region; provision of farm working capital and
acquisition of farm production assets
2. Increasing demand for food especially
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• Value addition: Improve the quality continued to increase. In 2010 it increased
and shelf life of farm products and by 133% from UGX 566 million in 2007 to
increase farm income though improved UGX 1.325 billion, facilitating the people of
production along the value chain, value West Lango region to invest over UGX 4.10
addition to primary products. billion in agricultural, trade and household/
community activities.
• Market access: Develop local agricultural
marketing systems that enable small As shown in Table 3, the portfolio
holder farmers to increase their farm outstanding has progressively grown in a

incomes and earn positive returns through similar trend. In 2010 it grew by 136% from
bulking and collective marketing. UGX 418.3 million in 2007 to UGX 988.9
million.
While the demand from the SACCO
members is for both seasonal and medium/ The SACCO has a special focus on
longer term loans, the SACCO is only able agricultural loans since the majority of
to meet part of the demand for seasonal its members are farmers. Indeed, it has
advances, i.e. short-term finance. This developed special products to address
leaves a serious gap in the range of financial the financial needs at the three key levels
products available to members. along the agricultural value chain and the
current agriculture loan portfolio (as at 31
December 2010) of UGX 404.64 million to
766 member borrowers is further diversified
Section 4 into three sub-products according to the
The SACCO’s Performance as a core purpose of the loan namely:
Lender Farm Production Loan for enhancing farm

productivity with a total of UGX 317.17
The troubled and tired SACCO is just million constituting 78% of the agricultural
surviving and has continued to muddle loan portfolio. The average loan size is
through with a high Portfolio at Risk (PAR). UGX 700,000 shillings for a period of six
This went as high as 66 percent in 2009 and months with a grace period of three months
just dropped, slightly, to 62 percent at the on principal repayments, though interest
end of December 2010. payments are due during the grace period.
For this article the performance of the Processing Loan for facilitating the value
SACCO as a lender is discussed under three addition process constitutes 3% (UGX
sub-themes namely: Loan Disbursement and 12.13M) of the current agriculture loan
Portfolio Composition, Portfolio Quality and portfolio. The average loan size is UGX
Portfolio Productivity. Table 3 illustrates the 2.5M, for a period of six months with a
performance of the SACCO as a lender. grace period of three months on principal
repayments, though interest payments are
Loan disbursement and portfolio due during the grace period.
composition
Agricultural Marketing Loan for financing
Over the four years from 2007-2010 the the marketing of agricultural products is
amount disbursed in the SACCO has 19% of the agriculture loan portfolio with
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a value of UGX 77.26 million and is used to finance produce buying. It is for a period of
six months with a grace period of three months on principal repayments, though interest
payments are due during the grace period.
Table 3: Performance of the SACCO’s loan portfolio
Year
Details 2007 2008 2009 2010

Number Amount Number Amount Number Amount Number Amount
of UGX ‘000 of UGX ‘000 of UGX ‘000 of UGX ‘000
accounts accounts accounts accounts
Loan disbursements 565,415 997,400 1,325,958 1,210,962
Agric. Loan portfolio 287 129,688 246 131,195 515 272,050 766 404,646
Commercial portfolio (pf) 473 213,357 829 441,289 599 316,167 474 392,236
General purpose pf 167 75,303 45 23,853 278 147,054 363 192,044
Total Loan pf outstanding 927 418,348 1,120 596,337 1,392 735,271 1,603 988,926
Agric. as % of total 31% 22% 37% 40.9%
Comm. as % of total 51% 74% 43% 39.7%
General as % of total 18% 4% 20% 19.4%
Portfolio at Risk 45% 37% 66% 62%
Income from agric. 21,663 24,384 83,680 133,533
Income from comm. pf 42,575 79,264 96,854 113,748
Income from general 14,707 4,223 43,177 39,885
Total income from loans 78,946 107,872 223,711 287,166
Yield of loan portfolio % 19% 18% 30% 29%
Source: SACCO records
Portfolio quality a regular basis, putting itself in a situation

of having no default risk coverage.
Using Portfolio at Risk (PAR) as the measure
of portfolio quality, the performance is Portfolio productivity
alarming, as depicted in Table 3, ranging
from 37 - 66% across the years. This is far We have used yield of the portfolio to
and above the recommended microfinance measure the productivity. Yield of loan
good practice of less that 5% and average of portfolio measures the amount of loan
the SACCO industry in Uganda which is income collected from every UGX 100 of
believed to be in the region of 20%. the average portfolio. The yield of portfolio
of 19% in 2007, 18% in 2008, 30% in 2009
The issue of portfolio quality in the SACCO and 29% of 2010 is very low compared to its
is further made worse by the SACCO failing effective interest rate of 45%. This persistent
to create and update the loan-loss reserve on yield gap is an indication of poor loan
collection.
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Section 5 institution expands its business, develops
new activities or makes substantial changes
Reasons for the High Portfolio in its organisation, especially when this is
at Risk done too quickly. In short, the rapid increase
in the volume and variety of business
The high Portfolio at Risk in the SACCO challenges overwhelms the capacity of the
is attributed to two factors namely, poor Board and management. The resulting
governance and “growing pains”. problems could be so serious as to provoke
the collapse of the institution.

Poor governance relates mainly to Loan
Committee members having insufficient For the troubled SACCO, growing pains
capacity to interpret the loan appraisal relate to rapid expansion of its business in
results. Moreover they tend to have placed form of breadth (numbers and geographical
too much reliance on management. Non- area of coverage) and the range of products,
payment of loans by the Board of Directors as illustrated in Table 3. This growth has
(BoD) and members introduced to the resulted from bringing on board different
Loan Committee by the BoD is another types of clients, such as farmers, and
governance-related factor that impacts increasing the loan amounts but without
negatively on loan portfolio quality. developing appropriate terms of the
loan contract that would match with the
The situation is further worsened by the borrowers’ demands (purpose of the loan)
SACCO developing an organizational or financial needs. This has greatly impacted
culture of accepting late repayment on the value to the SACCO of its outreach
without penalties. Moreover, the failure policy.
of management and BoD to implement
provisions for loan losses is a contributing The result of this unbalanced expansion i.e.
factor to the high PAR in the SACCO. increasing the range of borrowers and loan
sizes without modifying loan structures
Growing pains are defined as temporary is evident in the analysis of the current
difficulties experienced when a financial portfolio in Table 4.
The high PAR and even higher client

Table 4: Loan Portfolio Status as at December 2010
Loan Status Number of accounts Amount Delinquent Portfolio

UGX ‘000 Client Rate % at Risk%
Current 347 378,647
Past due Loans 1-30 days 104 164,404 25 17
31-60 days 61 48,955 4 5
61-90 days 47 36,789 3 4
91-120 days 61 28,800 4 3
121-180 days 70 33,711 5 3
> 180 days 702 297,620 50 30
Total 1,392 988,926 91 62
Source: SACCO records
139
delinquency rate are threats to the viability Just like in any other financial institution,
of the SACCO. The following steps should for the troubled SACCO, “An informed
be taken as a strategy to improve the quality customer makes for a better bottom
of the SACCO’s loan portfolio and restore line”. Teaching its clients good money
stake holders’ confidence. management practices regarding earning,
spending, saving, and borrowing would
go a long way in improving the PAR of
the SACCO.
Section 6
Recommended Ways Forward E. The Board should recruit a credit or
to Restore Confidence in the operations manager, who would be a
middle-line manager. He/she would
SACCO2 assist in dealing with growing pain
stresses and would assist the General
A. The SACCO should immediately adopt Manager in the daily monitoring of
the philosophy of creating disciplined the loan portfolio at a corporate level,
borrowers. This philosophy implies a permitting the General Manager to
culture where late payments are simply concentrate more on strategic issues.
unacceptable and the consequences
of loan default are serious. For this F. A strong financial cooperative law
philosophy to work the loan recovery detailing the obligations and privileges
efforts should start by mounting stern of the Board of Directors, SACCO
pressure on Board members and on those performance standards; and improved
related to them, to demonstrate to the supervision of SACCOs are critical
rest of member borrowers that default is recipes for ensuring soundness of the
strictly unacceptable in the SACCO. SACCOs and protecting the hard-earned
member savings. This will also go a
B. Maintenance of high standards of long way in reducing the unnecessary
governance and management is pressure by the Board of Directors on the
paramount. For example it is outrageous management.
that a highly-placed civil servant has
apparently been able to bamboozle G. Finally, and of crucial importance for
SACCO officials into granting him the financial health of rural SACCOs,
substantial loans, without security – farming loans must be tailored to the
loans that he has failed to repay. expected farm family cash flow, and
not simply be an echo of trading loans.
C. The SACCO should adopt the Keeping loans impossibly short term is
microfinance financial discipline not being sensibly risk-averse. Rather
practice of maintaining adequate loan- it is the opposite. Through careful loan
loss reserves throughout the year. design the SACCO’s agricultural loan
portfolio can be a sustainable source of
D. Financial literacy training or consumer profit, with maximum customer value.
financial education should be made a
core activity for members of the SACCO.
2 Editors’ Note: This section focuses mainly on actions within the SACCO itself. External initiatives, such as specific
legislation for financial cooperatives and improved supervision, are only mentioned briefly here (under F), but are
clearly relevant. See further suggestions on the last page of Article 5.1 in this Yearbook.
140
References:
Report: Oyam District (2007) “2002 Uganda
Population and Housing Census District
Analytical Report”. Uganda Bureau of
Statistics Kampala
Report: RALNUC (June 2009) “SACU End of

Project Report and Evaluation”. Restoration

of Agricultural Livelihoods in Northern
Uganda Component (RALNUC) Nutrition,
Gender and HIV/AIDS Project implemented
by Send A Cow Uganda (SACU) in Apac,
Lira and Oyam
141
5.3 What Makes a Guarantor Effective in MFI
Lending?1
A Guarantor.
Section 1
Introduction
A vast majority of Tier 4 financial institutions Joint-liability group lending mechanism
in Uganda use individual-based lending is by far the most celebrated microfinance
methodology. A census study conducted innovation. It has also been studied widely,
in 2006 showed that 37 percent of Tier 4 especially how peer pressure and social
institutions rely only on individual lending, sanctions among group members work in
57 percent use both individual and group different types of groups and contexts. A
lending approaches, and 6 percent use widely cited study carried out among FINCA
only group lending methodology. Also group borrowers in Peru showed that
worldwide, different variants of individual- socially close borrowing groups have better
based lending methodology2 are rapidly loan repayment outcomes (see Karlan 2007).
gaining ground among MFIs (see e.g. Giné Also conflicting results can be found from
& Karlan 2009)3. the literature (e.g. Ahlin & Townsend 2007)4.
1 Author: Anni Heikkilä, Aalto University School of Economics, Finland. The author wishes to express her appreciation
for the cooperation of the Board and Management of MAMIDECOT in the research project on which this article is
based.
2 Census of Tier 4 Financial Institutions in Uganda was carried out by the MoFPED.
3 Giné, Xavier and Karlan, Dean (2009) “Group versus Individual Liability: Long Term Evidence from Philippine Microcredit
Lending Groups.” Yale University Economics Department Working Paper No. 61.
4 Karlan, Dean (2007) “Social Connections and Group Banking” Economic Journal, 117(517), pp. 52–84. Ahlin, Christian
and Townsend, Robert (2007) “Using Repayment Data to Test across Models of Joint Liability Lending.” Economic Journal,
117(517), pp. 11–51.
142
Guarantors are an important element of themselves, and bail out the defaulting
individual-based lending systems. It is group members. In the individual-based
surprising how little the effectiveness of the system, the MFI officials like loan officers,
guarantor system has been studied, compared typically have a key role in solving the
to the popularity of individual-based MFI repayment problem situations.
lending in practice. It might be tempting to
generalize the results of the famous joint- This article examines the role and
liability group lending studies to concern the effectiveness of guarantors in the context
individual loans’ guaranteeing system as well. of an interesting case MFI, Masaka

One should not do that, however, as the role Microfinance and Development Cooperative
of the individual loans’ guarantors is likely Trust Ltd. (MAMIDECOT). The empirical
to differ from that of the jointly liable group material utilized in this article is based on
members in many respects, for example: extensive MAMIDECOT Member Survey
data collected in August-September 2009,
• In the individual-based system, there as well as staff interviews carried out during
are typically one or two guarantors per several field visits in 2009 and 2010. The
one individual loan. In joint-liability MAMIDECOT Member Survey had 1596
lending groups, there are typically at least respondents, out of which 1058 respondents
5 members who all cross-guarantee each had taken at least one individual loan from
others’ loans. MAMIDECOT since the beginning of 2007.
• Joint-liability group borrowers meet The rest of this article describes the case
frequently and make their repayment institution and its lending policies in
instalments during these meetings. In detail, and analyses the role played by
the individual-based lending system, guarantors and other repayment incentives
borrowers typically make their repayment in the loan recovery process. The article
instalments privately to the MFI officials. concludes with the recommendation that
guarantors’ effectiveness should be assessed
• Group borrowers are expected to solve and developed hand-in-hand with other
possible repayment problems among repayment incentives.
143
Section 2
Case Institution and Its Lending Policies
MAMIDECOT. Lukaya Branch

2.1 Facts about MAMIDECOT
MAMIDECOT was established in 1999 by faces relatively intensive competition from

34 founding members, with the help of the other MFIs, MDIs (Microfinance Deposit-
United Nations Development Programme Taking Institutions) and commercial banks
(UNDP) funded Private Sector Development operating in its catchment area.
Programme. The objective of this programme
was to motivate the creation of community MAMIDECOT offers a variety of micro-
based savings and credit cooperatives credit and savings services, as well as
(SACCOs) in the rural areas. MAMIDECOT training for its members. Its product offering
is also a SACCO by its constitution, and includes: ordinary savings and time deposit
thus owned by its members, whose delegates accounts, school savings accounts, and
gather once a year at the Annual General loans for business investments, agricultural
Meeting. improvements, buying boda bodas or paying
for school fees. Loan interest rate is 2.5
Today MAMIDECOT has approximately percent per month, except for agricultural
12,000 members in four branches: Nyendo loans (2 percent per month). MAMIDECOT
(the headquarters), Lukaya, Kalungu, and has continuously improved its offering to suit
Bukomansimbi. The two largest branches better the needs of its clientele. For example,
of Nyendo and Lukaya have been running it has adjusted the terms of its agricultural
the FAO-GTZ MicroBanking System for loan product to be a better fit with the
Windows (MBWin) software since 20075. farmers’ cash flows.
MAMIDECOT has had an ambitious About 25 percent of MAMIDECOT’s

expansion strategy with the target of opening customers are active borrowers. In 2009,
a new branch every two years. The institution MAMIDECOT issued loans for a total value
5 This was with support from the former USAID Project, Rural SPEED and the BoU/GTZ/Sida/FSD Programme.
144
of approximately 4,000,000,000 UGX. Of loan application form and allocates him to
the total volume, 89 percent was lent to one of the loan officers. If the applicant is a
individuals, 3 percent to groups and the repeat borrower, he goes to the same officer
rest for organizations, institutions and staff as before.
members.
Next the borrower candidate fills in the
In October 2010, the portfolio at risk was 43 application form, indicating the desired loan
percent and portfolio in arrears 12 percent amount, purpose of the loan, collateral and
in the largest branch of Nyendo. Typical guarantors. Physical collateral, such as a land

for loan repayment in MAMIDECOT is plot, motor vehicle log book or household
that several instalments are paid late, even items, is required to back up all individual
if the final repayment outcomes may be on loans. In case the collateral is a property item,
a decent level. In the branch of Nyendo in the local council needs to verify, in writing,
January 2009 – October 2010, 34 percent that the asset really belongs to the applicant
of all loan instalments were paid at least 30 in question.
days late. In the same period, 8 percent of
instalments were paid at least 90 days late. All individual loans need to be guaranteed
by two other members of MAMIDECOT. If
2.2 Lending policies for individual the loan applied for is smaller than 1,000,000
loans UGX, one guarantor may be sufficient. The
guarantors need to be good savers, and
When a borrower candidate is willing to they should not have experienced serious
apply for an individual loan, he first goes repayment problems in the past. However,
to meet the branch manager. The manager no explicit criteria exist for the assessment of
sensitizes him about the lending procedure, the guarantors’ repayment capacity.
requirements and charges, then gives him a
Table 1. Has MAMIDECOT ever required that one or both of the guarantors you proposed in
your loan application should be changed?
Frequency Percentage
Yes, at least once 48 5
No, never 1010 95
Totals 1058 100
Data Source: MAMIDECOT Member Survey 2009
Table 1 indicates that only 5 percent of After the application form is filled, the loan
MAMIDECOT individual borrowers have officer goes to visit the applicant’s business
ever been requested to change one or both premise and place of residence. During
guarantors they proposed in their loan this visit the officer also verifies that the
application form. security is genuine. After this inspection,
the loans officer judges how much money
145
he recommends to be advanced to that much for a certain purpose. Sometimes the
client. Next the application is examined by reason for reduction is that the institution’s
the branch manager, and after that the loan funds are scarce due to a high credit demand
committee will have a final say in the credit season 6.
allocation decision.
Final recommendations for this situation
Only a few percent of loan applications are are included in Section 4.
rejected in MAMIDECOT. The reasons for
complete rejection are usually applicant’s 2.3 Who are the guarantors?
poor repayment history or unreliable
collateral security. On the other hand, it is In the MAMIDECOT Member Survey we
very common to grant the applicants only asked the individual borrowers questions
a proportion of the total amount for which about their guarantors. Table 2 presents
they applied. In 2009, the loans committee information about social connections
granted on average 87 percent of the loan between borrowers and their guarantors for
amount originally applied for. The committee loans taken since the beginning of 2007.
may judge that the amount applied for is too
Table 2. Relationship between the borrower and his/her guarantors
Frequency Percentage
Close relatives 153 7
Other Relatives 178 8
Close Friends 868 39
Other Friends and acquaintancies 917 41
Neighbours 29 1
Workmates 78 3
They dont know each other personally 17 1
No answer 2 0
Total 2,242 100
Survey responses in Table 2 indicate that the MAMIDECOT branch to become his
80 percent of guarantors are borrowers’ guarantor. In such cases, it is questionable
friends, either close friends or more distant whether the guarantor has really understood
acquaintances. Relatives account for 15 his responsibilities.
percent of the guarantors. In only 1 percent
of the cases the borrower does not know his The MAMIDECOT MBWin database
guarantor personally. In these rare cases the includes information about the guarantors’
borrower may have asked a stranger from own membership in the institution.
6 MAMIDECOT management explain that “appraisals of loan applications follow the usual examination, covering:
a) capacity to pay back, b) disposable income, c) value of collateral, d) the actual monetary missing gap as witnessed on
site / ground / on visit and e) character (especially for the 1st borrowers.” The SACCO further states that “usually less
than 10 percent (of applicants) get less than their applications”.
146
According to this data source, 80 percent If none of the previously mentioned
of the guarantors are also borrowers measures helps, next step is sending the
themselves. These guarantors may have borrower a notification that MAMIDECOT
loans outstanding at the same time with the intends to sue him. The last step is taking
borrower or at different times. In addition, the borrower to court and finally seizing the
65 percent of the borrower-guarantor pairs collateral. There are only a few cases every
have cross-guaranteed each others’ loans at year that need to be taken to court, and even
least once. with these cases the collateral very rarely gets
seized. The borrowers usually try their best to

get the missing balance from the guarantors
or from their relatives before the process has
Section 3 reached the collateral seizure stage.
Guarantors’ Role and
Importance for Loan Neither the borrower nor the guarantor
will get new loans from MAMIDECOT
Repayment Performance before the missing instalments have been
covered. It will also be hard to get loans from
3.1 Guarantors’ role in the loan competing financial institutions in the area,
recovery process as they unofficially share information about
defaulters.
In MAMIDECOT, the borrower monitoring
and loan recovery process is largely driven by Notable features in the
the loan officers. Guarantors, however, have guarantors’ role are:
their own important role in the process, as
the following description indicates. Loan • Guarantors have no official way of getting
officers’ monitoring and enforcement duties to know about the borrower’s repayment
begin when a borrower’s monthly loan problems before the loan officer informs
instalment is late. After a few days of delay, them. At this stage the repayment
the loan officer calls the borrower by phone problems may already be serious.
to remind him of the payment. If the phone
call does not help, very shortly after that the • The guarantor is expected to act as a
loans officer goes to visit the borrower. If the source of information for the loan officer,
instalment remains unpaid after one month which is very important in cases when the
has passed, a warning letter is sent to the borrower has escaped with the money.
borrower. The guarantor should also liaise with the
borrowers’ relatives when the situation
At this point the officer also contacts the requires action.
guarantors. The guarantors are expected to
put pressure on the borrower, help the loan • The hardest potential punishment for the
officer to track the defaulting borrower, guarantor is that he cannot get future loans
and also give other tips, for instance if the from the institution, unless the borrower
borrower is trying to sell his collateral. has paid back his loan. This might not be
MAMIDECOT can also deduct money from very effective in cases when the guarantor
the guarantor’s savings account to cover is not a borrower and has no interest in
at least part of the missing payments. The borrowing from MAMIDECOT in the
borrower is obliged to pay this money back foreseeable future.
to the guarantor.
147
3.2 Is it guarantors or other incentives that matter for repayment
performance?
Do guarantors actually liaise with the loan officer and put pressure on the borrower the way
they are supposed to? How actively do loan officers carry out their monitoring and enforcement
duties? Borrowers’ responses to repayment problem related questions in the MAMIDECOT
Member Survey shed light on these issues.
Table 3 below tells about the borrowers’ perception of loan officer - guarantor collaboration
and the pressure they have experienced from the guarantors’ side. Table 4 shows loan officers’
actions in case of repayment problems. Total number of respondents is 259 in Tables 3 and 4.
This indicates that 24 percent of all interviewed individual borrowers admitted that they had
had repayment problems.
Table 3. Guarantors’ actions in case of repayment problems

A. Were your quarantors contacted Frequency Percentage B. Did your guarantors put Frequency Percentage
by our MAMIDECOT staff? pressure on you?
Yes 53 20 Yes 42 16
No 197 76 No 217 84
No answer 9 3 Total 259 100
Total 259 100
Table 3 shows that in 20 percent of the Table 4 indicates that in 74 percent of the
repayment problem cases the borrower repayment problem cases the officer has
reports that his guarantors have been contacted the borrower, and in 54 percent of
contacted by a MAMIDECOT staff member. the cases he has also visited the borrower’s
Some 16 percent of defaulting borrowers have home and / or business. Hence, loan officers
experienced pressure from their guarantors. seem to take a relatively active approach
Thus, it seems that after the guarantors have towards the defaulting borrowers.
been informed about the situation by the A highly relevant question is why the officers
loan officer, most of them take action. do not involve guarantors in their guarantees’
repayment problems more often. Possible
An evident challenge seems to be the low reasons may include:
frequency with which the officers liaise with
the guarantors. When portfolio at risk figure • Officers may believe that contacting
is above 40 percent, one would expect closer the guarantors does not help to solve
collaboration between loan officers and the the borrowers’ problems. It is hard to
guarantors. quantify guarantors’ effect on repayment
Table 4. Loan officer’s actions in case of repayment problems
A. Did a loan officer contact you Frequency Percentage B. Did a loan officer visit your home Frequency Percentage
after your repayent difficulties? or business ?
Yes 192 74 Yes 139 54
No 66 25 No 116 45
No answer 1 0 No answer 4 2
Total 259 100 Total 259 100
148
outcomes, and the officers may base their Section 4
belief on some negative experiences they
have had about negligent guarantors. Towards Financial Health and
Sustainable Lending Practices
• Guarantors’ contact details may be
missing from the MFI’s registers or they In this final Section the bold type presents
may be outdated. Recommendations. These are addressed to
SACCOs and other MFIs and are intended
• It may also be that the officers are simply to assist in the process of building financial

too busy to contact the guarantors and health and sustainability through improved
liaise with them, even if they believed management of lending, with particular
that it would be useful and they have focus on the management of guarantors.
guarantors’ contact details readily
available. The analysis of MAMIDECOT’s guarantor
system shows an important learning point
The empirical evidence presented above both for MAMIDECOT and also for other
indicates that the guarantors’ effectiveness MFIs that use guarantors. Guarantors’
should be assessed together with other effectiveness may be conditional on loan
repayment incentives, especially loan officers’ officers’ abilities and resources to inform
monitoring and loan recovery actions. In guarantors about repayment problems.
the context of MAMIDECOT, it seems that Loan officers’ actions are naturally less of
the best way to improve the effectiveness a concern in a guaranteeing system where
of guarantors’ actions is first of all, to make guarantors have another official channel to
them aware, more frequently and earlier, of inform them about repayment problems
their guarantees’ problems. In the current (like public repayments). However, such
system, the loan officers act as information systems are likely to be rare in the context of
gatekeepers and a lot depends on their ability individual based lending.
and resources to liaise with guarantors.
While a lot may depend on loan officers’
When it comes to other repayment effectiveness, the analysis of this article
incentives, such as collateral and promises highlights a few ways how MAMIDECOT
of increasing loan amounts in the future, it and other MFIs may sharpen up the
is hard to assess the effectiveness of these guarantor selection process. First, the loan
measures compared to the effectiveness of the officer should make sure that the proposed
guarantor system. If MAMIDECOT changed guarantors understand what guaranteeing
its policy regarding one of the repayment means, especially that they risk losing their
incentives and kept the others same as own money and ability to borrow from
before, under certain conditions it would be the institution, if repayment problems get
possible to statistically evaluate the impact of serious. Second, the officers should critically
this change on repayment outcomes. assess the guarantors’ repayment capacity.
149
It is unlikely that a guarantor, who is paying MFIs, like MAMIDECOT, should use their
back a large loan himself, would have information system as the main repository of
significant savings in the institution. updated contact information.
MAMIDECOT and other MFIs should Finally, also the loan acceptance policy
also reflect on whether current sanctions could be critically reviewed in MFIs like
for guarantors in the case of default are MAMIDECOT, where the granted loan
effective enough to motivate guarantors to do amounts are typically reduced. Loan officers
their job well. In the case of MAMIDECOT, and guarantors will have limited means to
for example, the threat of losing savings may enforce loan payments in cases when the
not be a very strong incentive, because the borrower has loans outstanding also from
guarantor may empty his savings account at other MFIs or moneylenders. The need to
any time. top up the loan from other sources is evident
when the original loan amount is not large
MFIs should pay attention that both enough for borrower’s investment needs.
borrowers’ and guarantors’ contact details Hence, MFIs should make sure that granted
are checked and updated if needed, every loans are large enough for borrowers’
time they come to do banking. People investment purposes, and perhaps accept
may change their mobile numbers rather a slightly smaller share of applications to
frequently, and it is important to have the ensure the borrower has adequate funds
latest information available. Computerized for the investment.
Data cleaning of MAMIDECOT SACCO records
150
5.4 Area Cooperative Enterprises:
Are these an Effective Tool for Agricultural
Transformation in Uganda?1
Kisiita ACE Warehouse in Western Uganda
Introduction
Smallholder agriculture in Uganda is exposed inputs and marketing their output, where
to pervasive market failures, translating potential for economies of scale exist3. This
into missed opportunities and sub-optimal paper presents explanatory arguments for
economic behavior. The lack of credit, for recognising Area Cooperative Enterprises
instance, severely constrains investment (ACEs) as effective tools for agricultural
capacity. This is coupled with market failures2 transformation and as a key innovation to
that are often rooted in high transaction costs. correct market failures among small-holder
Although often more efficient in production, farmers. The ACE model was devised by the
smallholders tend to face a comparative Uganda Cooperative Alliance (UCA).
disadvantage when it comes to accessing
1 Author: Nathan Were, The Microfinance Support Centre Limited. The author acknowledges with thanks the very useful
comments and suggestions made on an earlier draft by the leadership of UCA.
2 Markets fail when the expected costs of transacting are greater than expected gains from transaction.
3 Ruth Vargas Hill, Tanguy Bernard, & Reno Dewina (2005); Cooperative behavior in rural Uganda: Evidence from the
Uganda National Household Survey. IFPRI Uganda Strategy Support Program (USSP) Background Paper No. 2.
151
Section 1 Driven, naturally, by profit maximization,
the private sector tends to exploit farmers.
The Gap Examples observed include: low prices are
offered at farm level, use of shrewd weighing
The National Development Plan (NDP) of systems and provision of distorted market
2010 recognizes the need for better access information. Supplier credit for input
to agricultural credit by smallholders as purchase is both limited and carries high
a key catalyst for enhancing production, costs. There is also evidence that tractor hire
competitiveness and incomes. Uganda’s rural services are unduly expensive4.
economy is based on subsistence agriculture
and with poorly developed financial
services in subsistence farming areas it is
difficult to effectively mobilise savings for Section 2
sustainable investment. Moreover, none of Description of the Area
the recent poverty eradication programs
have directly supported cooperative farming
Cooperative Enterprise Model
and marketing to address the bottlenecks of
technology acquisition, crop finance, storage 2.1 Structural relationship
and value addition. between the farmer, RPO, ACE
and the SACCO
It is against this background that the Area
Cooperative Enterprises (ACE) model was Rural Production Organizations (RPOs)
conceived. Created in 1998 the model seeks are primary level cooperatives, while Area
to address three critical areas: 1) Production Cooperative Enterprises are secondary level
2) Productivity, 3) Value Addition and cooperatives, formed typically by 5-10 RPOs
Marketing and access to Rural Finance. (at times jointly with farmers’ associations)
This approach envisions creating order in within a given geographical area. Each
the entire agricultural value chain. This it level involves members coming together to
achieves by bringing together supportive achieve certain economies of scale. Whilst it
and collaborative linkages that include; is absolutely important that the number of
a rural production organization (RPO), primaries coming together is large enough
for production; a Savings and Credit for the purposes of forming a critical mass,
Cooperative Society (SACCO) for finance they must neither be too many nor too far
and an Area Cooperative Enterprise (ACE) from each other in order to achieve the
to handle value addition and marketing. necessary efficiency on the one hand, and
cohesion on the other.
The ACE model seeks to address the critical
challenges faced by an everyday farmer. These Individual smallholder and large scale
include: post harvest losses, lack of access to farmers belong to an RPO and each RPO
affordable equipment for production, limited usually has 30 to 200 farmers. The model is
access to irrigation systems and to high value organized in such a way that there is only
inputs, and exploitation by middlemen one ACE covering a sub-county, supported
through low farm-gate prices. In the absence by RPOs from different villages that make up
of strong cooperative institutions the private that sub-county.
sector has picked up the resulting business
opportunities.
4 For example, in Kisiita, the ACE tractor hire service costs UGX 65,000 per acre, while private contractors charge
UGX 80,000 per acre.
152
At an RPO there are mini storage facilities The ultimate objective of the ACE is to
to handle bulking at that level. The ACE enhance farmers’ bargaining power and
has a central storage facility for all produce ability to off-load their products onto the
collected by RPOs from farmers. The market, when the price is favourable to the
produce is usually moved from RPO stores seller. Once the produce is sold, the farmers
to the central storage facility at the ACE, who acquired inputs on credit, or had loans
ready for cleaning, sorting, value addition for tractor hire services or drying facilities
and, eventually, marketing. through or from the ACE, are paid net of the
due repayments. The net amount is deposited

The ACE is also linked to a Savings and Credit on the farmer’s account in the SACCO.
Cooperative Society. The main function of
the SACCO is to provide financial services This implies that money revolves within the
to the ACE, RPO and individual farmers, community. Collectively the farmers are not
using a quasi ware-house receipt system. All only developing their productive capacity,
three (ACE, RPO and individual farmers) but also strengthening the local institution
are members of the SACCO. After harvest, through which marketing and value addition
farmers deposit their produce with their are carried out. Equally they are strengthening
RPO. This is then transferred to the ACE their financial services institution, the local
stores and the farmer is provided with a SACCO. Fig. 1 illustrates the linkages and
receipt. It is this receipt that acts as collateral relationships between the actors in the ACE
security to access loans from the SACCO of model.
up to 60% of the total value of bulked produce
at the prevailing / current market prices.
Figure 1 : Structural relationship between farmers, RPOs, ACEs and SACCOs
Shares plus ideas Shares plus ideas Area Cooperative

Members Primary Society
Enterprise
(Individual farmers) Farmers’ Advisory Services, (RPO) Marketing Services
Marketing Services Value Addition (ACE)
Shares & savings

Financial Shares & savings + ideas + ideas Savings facility, loans Shares & savings + ideas
Services
Financial + other financial services
Services
Savings & Credit Cooperative

(SACCO)
5 Figure 1 illustrates the integration and functioning of critical institutional arrangements in order to maximize service
delivery to the farmers.
153
2.2 Legal and management 2.3 Cost implications for
structure starting and supporting an ACE
over a 3-year period
Unlike the heavy organizational structure
typical of many cooperative unions, ACEs Table 1.0 indicates the required resources
have a very lean, small and flexible structure, for setting up one Area Cooperative
with 2 -5 staff and a Board composition Enterprise supported by 5 RPOs. The
of between 5 – 11 members. The Board Uganda Cooperative Alliance (UCA), as
members of an ACE are elected from the the champion of the model, has worked
constituent primary societies. The Board in tirelessly to popularize it among the already
turn appoints management and continues to existing cooperatives and farmer groupings.
maintain an oversight role over the business. Initial support can thus be harnessed from
Ideally, each ACE has a manager well UCA. The Microfinance Support Centre Ltd.
qualified in Agribusiness or Agricultural (MSC) has also designed financial and non-
Marketing, an accountant, and an input shop financial products and services dedicated to
attendant. Other possible posts include: an meeting ACEs’ short and long-term needs.
extension worker, a store manager and a
security guard. Note:
Area Cooperative Enterprises are member a) The training and monitoring for which
managed, member used, member controlled budgetary provision is made above
and exist to provide benefits to members. is carried out by UCA, with some
This implies that farmers through their RPOs assistance from MSC.
have full control and ownership over these
b) UCA expects the ACEs and their
enterprises. Decisions are taken collectively
member RPOs to gain self-sufficiency
through their annual general meetings
within a reasonable period, with the
(AGMs).
target being three years.
Drying maize outside Kisiita ACE warehouse
154
Table 1: Cost Estimates for Establishing one ACE with five RPOs (UGX ‘000)
Activity RPOs ACEs Unit Cost 1st year 2nd year 3rd year Total for
No. No. UGX UGX UGX UGX 3 years
Mobilise members 5 1 1,000 6,000 0 0
Mobilise membership fees and share 5 1 1,000 6,000 3,000 3,000
capital 5
Registration of primary societies 1 100 500 0 0
Train leaders & members in governance 1 10,000 10,000 6,000 6,000

Train leaders & managers in basic financial 1 10,000 10,000 5,000 5,000
management
Registration of the ACE 1 150 150 0 0
Monitoring 4,000 4,000 4,000 4,000
SUB-TOTALS 36,650 18,000 18,000 72,650
Office rent for RPOs 5 600 600 600
Basic furniture for RPOs 5 50 pcm6 1,750
Basic stationery for RPOs 5 350 500 500 250
Management support to RPOs (salaries) 5 1 100 6,000 6,000 6,000
Management support to ACE (salary) 1 100 pcm 2,400 2,400 2,400
Training ACE leaders 1 200 pcm 12,000 6,000 6,000
ACE office rent 1 12,000 2,400 2,400 2,400
Basic furniture for ACE 1 200 pcm 500
Basic stationery & supplies for ACE 1 500 1,200 1,200 600
Vehicle maintenance & running cost (UCA 5 100 3,600 4,000 4,000
expense)
Monitoring 600 pa 2,000 2,000 2,000
Contingency 2,000 7,500 3,250
SUB-TOTALS 40,450 28,350 24,250 93,050
GRAND TOTALS 77,100 46,350 42,250 165,700
Source: Adapted from Uganda Cooperative Alliance, Monthly Reports 2010.
Note: (a) The training and monitoring for which budgetary provision is made above is carried
out by UCA with some assistance from MSC.
(b) UCA expects the ACEs and their member RPOs to gain self-sufficiency within a
reasonable period, with the target being three years.
6 pcm = per calendar month
155
Section 3 others, in addition to the traditional export
commodities i.e. coffee and cotton.
ACE Products, Services and
Operations
3.3 Services provided by ACEs
3.1 The ACE business model • Provision of market information. In
collaboration with firms and organizations
Area Cooperative Enterprises act as
such as FIT-Uganda and the Uganda
commission agents. They neither buy nor
Commodities Exchange (UCE) ACEs
hold title to members’ commodities. Unlike
provide information on prevailing market
traditional Unions, members under the ACE
prices to their members via cellphone
model have full control and ownership of
messages. They also have a public notice
their produce throughout the value chain
board where commodity prices are posted
until a buyer is identified. As commission
and updated daily.
agents, ACEs charge a percentage of the
sold commodity on behalf of its members. • Input delivery. ACEs play an important
This varies from ACE to ACE but ranges role in the delivery of agricultural inputs.
between 5 – 10 percent and is agreed upon They form a link between farmers and
collectively by the members in the AGM. input dealers. Each ACE has an input
They also charge for other services rendered shop, where individual farmers can access
to farmers. These might include: tractor improved inputs at favourable prices.
hire, input supplies, sorting and cleaning
farmers’ produce, drying and transportation. • Commodity bulking. Bulking is very
This commission is shared with the RPOs on essential considering that small-scale
an agreed sharing arrangement. producers are scattered, making it
difficult for them to access markets and
3.2 ACE products also undermining their bargaining power
in the market. ACEs come in as a second
Individual ACEs handle three commodities
tier to further consolidate quantities
at any one time. The limit of three is selected
which have already been mobilized by the
since it gives enough spread to manage risk
members of primary societies. The aim
(including ensuring food security), while
of bulking (or assembly) is to attract good
still permitting advantages of scale and
buyers.
specialization.
• Linking farmers to markets. There are
Because of their flexibility, ACEs can drop
four ways in which ACEs link farmers
non-performing enterprises and replace
to markets. i) Bulking and selling to
them with profitable ones. For each of these
competing buyers ii) Negotiating contract
enterprises, the ACE provides extension
farming arrangements with buyers
services and inputs to farmers to ensure
iii) Bulking and arranging warehouse
standardization in output quality.
receipts, thus enabling farmers to borrow
Within Uganda, ACEs are found marketing while stocks are held and buyers are sought
a whole range of commodities/products such iv) Bulking and selling through the Uganda
as grains, fish (from ponds), livestock, milk, Commodity Exchange (UCE).
horticultural products, apiary products, and
156
• Quality assurance. ACEs ensure quality then becomes the collateral held by the
and standards enforcement for trade lending SACCO.
enterprises. A farmer whose produce
does not meet the standards may have • Farmer training. Farmer empowerment
it rejected. ACEs thus undertake post- is greatly assisted through training. The
harvest handling activities such as drying training goes beyond farming to include
grain to the required moisture level. HIV/AIDS awareness, environmental
protection and water collection
• Value addition. ACEs add value to techniques. Farmers are trained in
farmers’ produce, giving them a better agronomic aspects, enterprise selection,

return on their commodities. The ACE value addition and commodity marketing.
only charges a small fee to the farmer for
the value added. For example, instead of
selling grain maize, farmers collectively
grind the maize and sell flour to big
institutions such as schools within the
Section 4
locality. Through ACEs, some farmers Current Spread of ACEs as at
are also making wine and other products June 2010
from bananas and other fruits.
To date, there are over 66 active ACEs
• Linkage to financial services. ACEs, linked to SACCOs with a total membership
just like primary societies, are linked of 64,346, annual sales of UGX 16 billion
to SACCOs. Although farmers directly and earned commissions of over UGX 1.5
affiliate to SACCOs, when they borrow billion per year7.
using the quasi warehouse receipt
model, they need the assistance of their According to the Uganda Cooperative
ACE. Once produce is deposited under Alliance the 66 Area Cooperative Enterprises
the care of the ACE, the latter makes are located across the country. The Country
a recommendation to the SACCO for has been zoned into five regions. Table 2
those farmers considered to be suitable below highlights the regions and the number
borrowers. Indeed, it is the ACE itself of ACEs per region, while Table 3 provides
that issues the Warehouse Receipt, which some performance information.
Table 2: Current spread of ACEs by region, total membership and annual turnover
No. ACE District Total Membership8 Turnover (UGX)
1. Jinja
9 8 9,273 2,027,636,800
2. Kyenjojo
10 9 6,151 1,746,607,800
3. Mbale
11 14 14,856 2,001,224,698
4. Mbarara
12 14 11,133 5,977,205,040
5. Mukono
13 9 8,806 2,041,238,150
6. Other regions
14 12 14,127 2,950,409,951
Total 66 64,346 16,744,322,439
Source: Uganda Cooperative Alliance monthly reports, June 2010
Notes Cooperative Alliance monthly reports, June 2010

7 Uganda
8
The total membership here represents the total individual farmers
9
The ACEs are located in Kaliro, Iganga, Kamuli and Jinja
10 157
The institution are located in Mubende, Kamwenge, Kibaale and Kasese
11
Mbarara
5. Mukono
13 9 8,806 2,041,238,150
6. Other regions
14 12 14,127 2,950,409,951
Total 66 64,346 16,744,322,439
Source: Uganda Cooperative Alliance monthly reports, June 2010
Notes
8
The total membership here represents the total individual farmers
9
The ACEs are located in Kaliro, Iganga, Kamuli and Jinja
10
The institution are located in Mubende, Kamwenge, Kibaale and Kasese
11
ACEs are located in Sironko, Manafwa, Kapchorwa, Kumi and Bududa
12
The districts include: Ntungamo, Masaka, Kanungu, Bushenyi and Rukungiri
13
The districts include: Kayunga, Mukono and Nakasongola
14
These districts include: Nebbi, Arua, Apach, Lira and Masindi
Table 3: Top 10 performing ACEs accross the different regions (July 09 - June 2010)
No. ACE District Turnover (UGX) Net Income15
1. Kisiita Kibaale 1,118,000,000 133,594,528
2. Nyakyera Ntungamo 1,224,050,000 117,582,000
3. Nama Mukono 403,292,000 113,054,886
4. Bugaya Kamuli 992,853,000 67,065,000
5. Kangulumira Kayunga 133,663,400 66,249,750
6. Bukanga Iganga 300,915,000 61,297,000
7. Manyakabi Mbarara 197,000,000 53,729,000
8 Kayunga Kayunga 1,676,923,805 32,345,648
9 Abategenda Ntungamo 154,651,650 22,577,800
10 Nazigo Kayunga 1,224,050,000 20,011,680
Total 7,425,398,855 687,507,292
Source: Uganda Cooperative Alliance Monthly reports, June 2010.
Note
15
This income is generated from the different services the ACE extends to its members and
individual farmers.
Section 5 handling challenges. Today, it boasts 30

registered RPOs and total membership of
Kisiita ACE’s Success Story16 3,011 of which 31.5 percent are women.
The ACE incorporates small scale farming
Kisiita Area Cooperative Enterprise is
with commodity trading and agricultural
located 76 kilometers from Hoima town in
processing of maize, sorghum, beans and
Kibaale district. It was established in 2004 as
rice. It currently works with a number of
a Secondary Cooperative Society bringing
partners. These include; WFP, MSC, Kilimo
together 14 RPOs at the time. The farmers
Trust, FICA seeds, UNADA and Balton, all
came together to eliminate middlemen
complementing the functions of the society.
and address marketing and post-harvest
16 The success story findings are based on the field findings and the ACE 2010 performance reports.
158
Kisiita has 7,000 acres of beans, 1,000 acres of sorghum, 1,500 acres of maize and 500 acres of
rice. On an annual basis its bulking capacity far exceeds 1,000 metric tonnes. It has acquired
a tractor to be hired by its members for cultivation; established an input shop for provision of
improved but affordable inputs to farmers on credit and built a 1000 metric tonnes warehouse
to handle storage of members’ produce.
Table 4: Financial Performance of the ACE (2008-2009)17 in UGX
No. Item 2009 2008

1. Total assets 682,645,119 500,578,019
2. Net worth / equity 672,645,119 539,050,591
3. Turn over 1,180,000,000 1,121,000,000
4. Commission income 20,000,000 19,000,000
5. Pre-tax profit 190,000,000 177,804,756
6. Retained earnings 363,645,119 230,050,591
Source: Kisiita ACE audited accounts, 2009
Key achievements to-date due to high levels of production and low

liquidity levels at the SACCO.
• The society has secured supply contracts
with the World Food Program (Maize) • Storage challenges at RPO level. This is
and Nile breweries (Sorghum) for 600 and attributed to the growing productive
1000 metric tonnes annually, respectively. capacity of individual farmers.
• Completed construction of a 1000 metric • Delayed payments by WFP, coupled with

tonnes warehouse to bulk farmers’ its complicated tendering process.
produce.
The ACE plans to embark on full scale
• Acquired a cleaner for maize and sorghum processing of maize into maize flour, together
valued at 8600 USD. with animal feed formulation for sale directly
to consumers and farmers. In future, it hopes
• Acquired 2 acres of prime land in Kisiita to follow the principle of agricultural zoning,
trading centre valued at 30 million UGX. in which each RPO will concentrate on those
enterprises in which their agro-climatic
• Membership has grown from 200 in 2004
conditions and geographical position give
to 3011 in 2010.
them a competitive advantage. Finally, it will
Challenges continue to strengthen its marketing linkages
through horizontal cooperation with other
• Poor road network affecting marketability Cooperatives.
of the society’s produce
• Inadequate funding to advance to

farmers during the bulking period. This
is attributed to the substantial demand
17 These figures are an extract from the audited accounts for the society for the period ending 2009.
159
Section 6 model has largely succeeded since it:
The Future Outlook for ACEs a) Provides a holistic approach in the
provision of services needed by farmers.
The future potential for ACEs is promising.
With just slightly over 10 years in operation, b) Empowers the farmer to have control of
the model has proved that it can address many the value chain.
of the challenges that affect small-holder
c) Is flexible and gives a chance to farmers to
farmers. With the existence of SACCOs
adjust to new situations.
and farmers’ associations in many parts of
the country, these structures can support d) Puts the farmers at the centre and heart of
replication of the model. The farmers’ their business.
associations will need to be supported
to formalize their grouping into primary e) Is member managed, member used,
societies. Then a number of these will be member controlled and exists to benefit
encouraged to come together to create an members.
apex organization (ACE). This will be linked
to an already existing SACCO. f) Works with the farmer and not for the
farmer.
The strength of an ACE will depend on
the strength of the Savings and Credit The challenges that have been encountered
Cooperative Society. It is therefore vital to in the 12 years experience to date revolve
note that an ACE and its link SACCO must mainly around instances when governance
grow in tandem. Other factors for success and management standards have slipped,
include strong and honest leadership, and where member mobilization has been
coupled with appropriate supervision and feeble. These remain as ongoing areas of
oversight, adequate management capability, concern for UCA, which has a policy of
sufficient volume and value of production, taking firm remedial action in the face of this
suitable bulking capacity and strategic type of difficulty. A further problem, shared
market linkages18. In summary, the ACE with the sector as a whole, is commodity
price instability.
18 Editors’ Note: These prerequisites for success of the model are not readily achieved. All concerned at the grass-roots
level are aware that the majority of SACCOs that finance these ACE’s currently have very weak liquidity positions that
cannot realistically meet farmers’ needs - hence the tendency for the farmers’ to revert to middlemen. There may well
be scope for regulated financial institutions to identify an opportunity here, through linkage programmes with the
SACCOs and/or by directly financing ACE’s on the security of the contracts signed with crop buyers such as WFP and
the brewery companies.
160
161
162

SACCOs and MFIs

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A SACCO Annual General Meeting in Lango, Northern Uganda

Visiting a member of MAMIDECOT, a successfully managed SACCO in Masaka.

1 Author: Andrew Obara, FRIENDS Consult

Therefore, SACCO failures have overall iv. An unknown number of institutions

Chapter 5 SACCOs and MFIs

Table 1: Reasons for Missing SACCOs according to hypotheses

No ﬁxed No Difﬁcult Collapsed3 Never Total

Proportion (%) 4.3% 1.4% 30% 57.1% 7.1% 100%

3 But not de-registered.

Chapter 5 SACCOs and MFIs

• Over-indebtedness of SACCOs resulting from poor financial management. Coupled with

• Retrenchment and/or closure of mother institutions (for employee-based SACCOs).

• Fraud and mismanagement by board executives and management.

Key Reasons for the Collapse of SACCOs.

Restructuring / closure of other Institution 25%

Bad governance / mismanagement 23%

Default by members 16%

Chapter 5 SACCOs and MFIs

Other reasons 20%

Source: Missing SACCOs Study Report

Section 3 The financial sector needs to care because

iv. Place the SACCO supervisory

ii. Re-examine and if necessary revamp,

The dominant agricultural activities in

Table 1: Membership, Savings and Loan Portfolio at the SACCO

Chapter 5 SACCOs and MFIs

Source: SACCO Management Accounts and Reports

The SACCO pursues a vision of becoming a leading, self–reliant microfinance institution,

Table 2: Quantified Capacity Building by Development Partners

Development Partner Period and Nature of Intervention Value in

SACCO banking hall and loan revolving fund (2005-2007)

product development, ﬁnancial information management

Source: SACCO records. (This support spans several years)

Chapter 5 SACCOs and MFIs

Lender Farm Production Loan for enhancing farm

Table 3: Performance of the SACCO’s loan portfolio

Details 2007 2008 2009 2010

Loan disbursements 565,415 997,400 1,325,958 1,210,962

General purpose pf 167 75,303 45 23,853 278 147,054 363 192,044

Agric. as % of total 31% 22% 37% 40.9%

Comm. as % of total 51% 74% 43% 39.7%

General as % of total 18% 4% 20% 19.4%

Portfolio at Risk 45% 37% 66% 62%

Income from agric. 21,663 24,384 83,680 133,533

Income from comm. pf 42,575 79,264 96,854 113,748

Income from general 14,707 4,223 43,177 39,885

Total income from loans 78,946 107,872 223,711 287,166

Yield of loan portfolio % 19% 18% 30% 29%

Source: SACCO records

Portfolio quality a regular basis, putting itself in a situation

Chapter 5 SACCOs and MFIs

The high PAR and even higher client

Loan Status Number of accounts Amount Delinquent Portfolio

Source: SACCO records

Report: RALNUC (June 2009) “SACU End of

Chapter 5 SACCOs and MFIs

Chapter 5 SACCOs and MFIs

MAMIDECOT. Lukaya Branch

MAMIDECOT was established in 1999 by faces relatively intensive competition from

MAMIDECOT has had an ambitious About 25 percent of MAMIDECOT’s