Overview of Local Microfinance Systems
The microfinance industry worldwide has been recognized as instrumental tool for poverty alleviation and economic growth. Therefore, socio-economic transformation efforts of low-income and poor community have been possible through accessing semi-formal and informal financial products/ services. The pivotal role of the microfinance has helped foster the growth and development of small and medium enterprise in the world by providing start-up and business expansion capital among other financial services. Microfinance institutions target the poor who are considered risky but the repayment rate turns to be positive as compared with the regular commercial banks (Zeller and Sharma, 1998).
Based on this backdrop, ACSA underscores that ensuring farmers have adequate access to financial resources is a key tenet of successful rural development strategies and that without adequate access to financial systems for savings and loans, smallholder farmers who face negative shocks, such as droughts, illness or a significant drop in the prices, can lose some of the few assets they do have. Conversely, smallholder farmers who have access to well-designed credit, savings and insurance services can avail themselves of capital to finance the inputs, labour and equipment they need to generate income; can afford to invest in riskier but more profitable enterprises and asset portfolios; can reach markets more effectively; and can adopt more efficient strategies to stabilize their food consumption. In summary, broader access to financial services provides opportunities for improving the agricultural output, food security and economic vitality of entire communities and nations.
This guide was informed by an exploratory study of local microfinance practices that was conducted in June 2019. In this study, it was found out that Uganda is generally seen as the country with the most vibrant and successful microfinance industry in Africa. Some MFIs have experienced strong growth and are now reaching a considerable number of clients. Since the government introduced a policy to promote SACCOs, as a strategy for increasing financial outreach in rural areas, the number of SACCOs has grown with the cooperative department putting the figures at 2,176 SACCOs registered by 2015. Despite their potential to enhance financial access for the low-income population especially the small-scale farmers, the competitiveness of SACCOs has been greatly affected by poor management and the introduction of other non-formal local microfinance systems like VSLAs and ROSCAs.
The findings from the study conducted to inform this guide showed that many of the members for non-formal local microfinance systems had improved upon their living conditions, particularly the wellbeing of their children. While many members already supplement their income with earnings from small-scale businesses activities, only a few have knowledge of or experience in saving and borrowing money for investing in businesses and other income generating activities. To address this, and to make full use of the VSLAs’ enormous potential as triggers of local economic growth, ACSA has developed this guide for smallholder farmers and local community members to support the process of establishing, accessing and engaging in local microfinance systems.