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 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 The actual problem was bigger than Economic Development and the DFID- Os and MFIs funded FSDU project conducted a SACCO anecdotal discussions and the MoFPED CC census to ascertain the true number of census had revealed. While reconciling SA 2 SACCOs operating in Uganda. The results of SACCO lists 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 Chapter 5 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

127 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.

128 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 Os and MFIs ready market and relatively clear marketing business of production and marketing CC channels despite weakness of cooperatives), cooperatives ineffective SA 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 Chapter 5 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.

129 • 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

130 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% Os and MFIs CC SA Source: Missing SACCOs Study Report

Section 3 The financial sector needs to care because Chapter 5 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.

131 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 Solutions prudence can be demanded of both 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

132 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 Section 2 production, fish farming, livestock and 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

134 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 Os and MFIs Total 1,083 1,504 2,245 4,221 4,631 CC Farming % 100 98 95 95 95 SA 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 Chapter 5 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)

135 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 Section 3 transforming from subsistence and rain-fed 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 Related Investments and home consumption. 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

136 • 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 Os and MFIs

members is for both seasonal and medium/ The SACCO has a special focus on CC

longer term loans, the SACCO is only able agricultural loans since the majority of SA 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 Chapter 5 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

137 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.

138 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 Os and MFIs

too much reliance on management. Non- area of coverage) and the range of products, CC

payment of loans by the Board of Directors as illustrated in Table 3. This growth has SA (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 Chapter 5 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 Section 6 the SACCO. Recommended Ways Forward E. The Board should recruit a credit or to Restore Confidence in the operations manager, who would be a 2 middle-line manager. He/she would SACCO 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, Os and MFIs

Lira and Oyam CC SA Chapter 5

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 Os and MFIs

data collected in August-September 2009, CC

• In the individual-based system, there as well as staff interviews carried out during SA 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 Chapter 5 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, Os and MFIs

January 2009 – October 2010, 34 percent that the asset really belongs to the applicant CC

of all loan instalments were paid at least 30 in question. SA 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 Chapter 5 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

Data Source: MAMIDECOT Member Survey 2009 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 Section 3 or from their relatives before the process has reached the collateral seizure stage. Guarantors’ Role and Os and MFIs

Importance for Loan Neither the borrower nor the guarantor CC

will get new loans from MAMIDECOT SA 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 Chapter 5 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

Data Source: MAMIDECOT Member Survey 2009 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

Data Source: MAMIDECOT Member Survey 2009

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 Os and MFIs

available. The analysis of MAMIDECOT’s guarantor CC

system shows an important learning point SA 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 Chapter 5 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 Cooperative Enterprise Model have directly supported cooperative farming 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 Os and MFIs

using a quasi ware-house receipt system. All only developing their productive capacity, CC

three (ACE, RPO and individual farmers) but also strengthening the local institution SA 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 Chapter 5 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

Area Cooperative Members Shares plus ideas Primary Society Shares plus ideas 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 Os and MFIs

Monitoring 4,000 4,000 4,000 4,000 CC

SUB-TOTALS 36,650 18,000 18,000 72,650 SA

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 Chapter 5

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 ACE Products, Services and commodities i.e. coffee and cotton. 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 Os and MFIs grind the maize and sell flour to big CC Section 4 SA institutions such as schools within the 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. Chapter 5 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. Jinja9 8 9,273 2,027,636,800

2. Kyenjojo10 9 6,151 1,746,607,800

3. Mbale11 14 14,856 2,001,224,698

4. Mbarara12 14 11,133 5,977,205,040

5. Mukono13 9 8,806 2,041,238,150

6. Other regions14 12 14,127 2,950,409,951 Total 66 64,346 16,744,322,439

Source: Uganda Cooperative Alliance monthly reports, June 2010

7 UgandaNotes Cooperative Alliance monthly reports, June 2010 8The total membership here represents the total individual farmers 9The ACEs are located in Kaliro, Iganga, Kamuli and Jinja 10The institution are located in Mubende, Kamwenge,157 Kibaale and Kasese 11ACEs are located in Sironko, Manafwa, Kapchorwa, Kumi and Bududa 12The districts include: Ntungamo, Masaka, Kanungu, Bushenyi and Rukungiri 13The districts include: Kayunga, Mukono and Nakasongola 14These districts include: Nebbi, Arua, Apach, Lira and Masindi Table 2: Current spread of ACEs by region, total membership and annual turnover

No. ACE District Total Membership8 Turnover (UGX)

1. Jinja9 8 9,273 2,027,636,800

2. Kyenjojo10 9 6,151 1,746,607,800

3. Mbale11 14 14,856 2,001,224,698

4. Mbarara12 14 11,133 5,977,205,040

5. Mukono13 9 8,806 2,041,238,150

6. Other regions14 12 14,127 2,950,409,951 Total 66 64,346 16,744,322,439

Source: Uganda Cooperative Alliance monthly reports, June 2010

Notes 8The total membership here represents the total individual farmers 9The ACEs are located in Kaliro, Iganga, Kamuli and Jinja 10The institution are located in Mubende, Kamwenge, Kibaale and Kasese 11ACEs are located in Sironko, Manafwa, Kapchorwa, Kumi and Bududa 12The districts include: Ntungamo, Masaka, Kanungu, Bushenyi and Rukungiri 13The districts include: Kayunga, Mukono and Nakasongola 14These 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 15This income is generated from the different services the ACE extends to its members and individual farmers.

Section 5 handling challenges. Today, it boasts 30 Kisiita ACE’s Success Story16 registered RPOs and total membership of 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 Os and MFIs 3. Turn over 1,180,000,000 1,121,000,000 CC

4. Commission income 20,000,000 19,000,000 SA

5. Pre-tax profit 190,000,000 177,804,756

6. Retained earnings 363,645,119 230,050,591 Chapter 5 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 Os and MFIs CC SA Chapter 5

161 162