The Competitive Environment in Uganda: Implications for Microfinance Institutions and their Clients

The paper assesses the Ugandan microfinance sector and the effect of competition therein on microfinance institutions (MFIs) and clients.

The authors draw on MicroSave's extensive demand-side analysis of the Ugandan microfinance market to focus specifically and explicitly on areas of intense competition. It provides quantitative and qualitative measures on:

• Determinants of clients' choice of financial service providers;
• Trends in multiple usage of MFIs;
• Group versus individual lending practices;
• Clients' access to savings services after entry of commercial players in the sector.

The paper presents evidences on the presence of a strong microfinance sector in Uganda:

• Strong commercial orientation among MFIs;
• Positive regulatory environment encouraging the transition of larger MFIs to deposit taking institutions;
• Cooperation and coordination among practitioners, donors and government;
• Existence of several innovative practices (e.g. performance monitoring system for all MFIs).

The paper also identifies the challenges faced by the microfinance industry:

• Large number of MFIs leading to low availability of human resources;
• Complicated cost structures of MFIs' products leading to information asymmetry for clients;
• Need for increased capacity building;
• Need for expanding MFI operations in rural areas and developing new products, delivery systems and business models for the same;
• Small MFIs facing regulatory constraints.

In conclusion, the authors maintain that competition in the microfinance sector shall positively affect MFIs to improve their products/services and outreach.