A major challenge of the Ugandan economy is our low saving rates. While it has grown over the years to about 19 percent of GDP in 2019 according to the World Bank it lags behind neighbours Tanzania at 35 percent, Zambia at 40 percent.
While it is about level with the sub-Saharan average these are still dismal figures that need to be pushed up.
"Low savings rate affects the cost of borrowing, high savings rates lead to lower lending rates and vice versa...
The argument though is that we save, its just not in the financial sector. Our savings are in livestock, crops and real estate.
Saving in these “real’ assets is a hangover from a time when inflation would eat up the value of ones savings faster than one could accumulate them or when banks were not credible, folding at the slightest crisis.
The challenge with continuing to save the way we do is that there cannot be any significant ripple effect. My chicken will lay eggs for me, my cow will produce milk for me and on the occasion that I slaughter it feed a few dozen people in the village.
Saving in a formal financial institution, which will then take your money and lend it to those in need of capital has more far reaching effects, aiding the expansion of businesses, speeding up growth and development.
I was therefore tickled silly when a few weeks ago I “happened” upon Mushanga SACCO in Sheema district, western Uganda.
It was not its new double storey headquarters that caught my eye, but that almost every adult in its surrounding area had an account with the SACCO.
Suppliers and workers accept payment through their accounts at the SACCO, which accounts they can access via their mobile phone.
While the lending rates are rather steep – three percent a month, the SACCO membership have worked out that since this is levied on a reducing balance they can reduce the interest they pay out by accelerating their repayments. No financial literacy class would have taught this better than hard experience.
But even better for me is that the SACCO has incentivised its members to providing it with long term capital in the way of fixed deposit accounts and by selling shares.
The net effect of this is that the SACCO which turned 50 in 2019 has total assets of about sh23b with sh9b of this being member equity. Not bad for a SACCO whose members minimum obligation is to save sh10,000 monthly....
Essentially what Mushanga SACCO and hundreds of others like it are doing, is mopping up the small monies the high street banks can’t be bothered to go out and look for and funnelling them into the formal financial sector.
On a local level the SACCO is spurring the economy of the area by shifting monies from where it is not needed to those who need it. While the lending costs are still high one would like to think that as their cost of funds falls this will be addressed, for now they have an effective mechanism for financial intermediation that will make the difference for the area more than if it were not there.
The lessons for me are many but off the top of my head two stand out particularly.
One, that it is not true that we can not build our own financial institutions to even compete with the high street banks sometime in the future. These SACCOs, most of which are in the rural areas, have shown that even our small monies when aggregated can be leveraged as a force for good and push our own development priorities.
Secondly, that if our big fish in the cities will not put their resources together to create the banks that serve our people, the small people in the villages and in the streets will not wait around but take matters in their own hands to get access to financial services.
The challenge for Mushanga SACCO and others like it is leadership. Bad leadership can scuttle this progress in less than a year with questionable lending practices and reckless spending. These SACCOs just like their bigger brothers the banks, biggest asset is confidence. Bad management can irreparably damage this trust and collapse these institutions.
But barring bad management or averse government policy, these institutions can serve as a real force for rural and national transformation.
Looking to the distant future it’s not inconceivable that these SACCOs with a tradition of prudent management, sensitive to its stakeholders will form the seed of our own local banks
To take them to the next level while keeping them grounded in their rural roots, government needs to handhold these institutions in the way of innovative regulation, capacity building support and eventually fiscal incentives to ensure they grow to take their rightful place at the high table of the financial sector.
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