Uganda's Experience With the Regulatory and Supervisory Framework for Microfinance Institutions

This paper reflects on the process of regulating and supervising microfinance in Uganda. It states that The Bank of Uganda (BoU) was a key player in formulating a regulatory framework for microfinance. The process went through three stages, formulating:

• The BoU policy on microfinance;
• The MDI Act 2003;
• The "Implementing regulations on capital adequacy, liquidity, asset quality, reporting and licensing".

The paper discusses in detail the initial situation for microfinance in Uganda, and the the regulatory design process:

• Dialogue between the Central Bank and microfinance institutions (MFIs);
• Major issues raised such as:
  • Adequate start-up capital;
  • Transformation form "donorship" to ownership;
  • Forced savings as part of the credit technology.
• Milestones for developing the legal framework for "Microfinance Deposit- Taking Institution (MDIs)":
  • BoU policy on microfinance;
  • The tiered approach;
  • The Micro Deposit Taking Institutions Act 2003 (MDI Act 2003).

The paper then discusses future challenges such as:

• Cost constraints and capacity limitations in supervision;
• The supervisory challenge in dealing with the unique characteristics of microfinance organizations.

The paper concludes that microfinance is an engine in the development of efficient rural financial institutions and the BoU:

• Is committed to ensuring that MFIs function efficiently and offer efficient financial services to their clients;
• Has designed an effective policy framework, which takes into account Uganda's circumstances and level of development in the financial sector;
• Is committed to creating an enabling environment for the growth of the rural financial system.