The Effect of Microfinance Institutions in Promoting Savings

CHAPTER ONE
INTRODUCTION

1. Overview
The chapter will constitute Background of the study, statement of the problem, objectives of the study, research questions, significance of the study, scope of the study, limitations of the study and conceptual frame-work of the study.

2. Background to the study
The micro finance business embraced today arose in Bangladesh in 1976 with the founding of the Grameen Bank. It became popular in the 1980s s a response to doubts and research findings about a state delivery of subsidized credit to the poor farmers. According to Ledgerwood (2001), prior the 1980s government agencies were the predominant avenue for providing productive credit to those with no previous access to credit facilities. Their services had and still have limited access, because they need collateral as a requirement for getting a loan and the transaction costs are so high.

Governments and international donors assumed that the poor required cheap credit and saw this as a way of promoting agricultural production by small landholders.

Since the 1980s the fields of Micro finance (MF) has grown substantially. Donors actively support and encourage micro finance activities focusing on micro finance institutions (MFIs) that are committed to achieving substantial outreach and financial sustainability.

In Uganda, the health of the financial sector has been impaired by political and social turmoil. It was indicated that the troubles of the 1970s and early 1980s produced a severe contraction of Uganda’s monetary economy, a decline in financial intermediation and a loss of financial depth. In addition to that, the concentration of financial services lay in the hands of a few commercial banks, of which two banks; the then Uganda commercial bank now STANBICK Bank and cooperative bank which controlled 70% of the banking business. During the same year, the two big banks mentioned above became insolvent, and significant risks posed by a weak banking sector began to emerge.

In order to address weaknesses in the economy and the financial sector in particular, the government of Uganda embarked upon the Economic Recovery Program (ERP). It put in place to improve the incentive structure and business climate so as to promote savings, mobilization and investment as well as the rehabilitation of the country’s economic, social and institutional infrastructure.

Despite these efforts, the financial sector remained weak and government sought more funding from the World Bank and international monetary fund (IMF). Bank of Uganda (BOU) also embarked on a number of measures to revamp the entire financial system in the country, which include among others, promoting the growth of micro-finance institutions (MFIs), in this respect, According to Katantazi (2001), indicated that BOU developed a policy on microfinance business in the country, which supports approaches that will increase access to financial services by the majority of the poor but in a state, sound and sustainable way.

Recognizing all these financial sector constraints, and in particular credit constraints, donors and government agencies have sought to make credit available to small borrowers and have committed millions of dollar to micro credit activities. Waterfield and Duval (2006).

3. Statement of the problem

Micro finance as an economic development approach intended to benefit low- income earning people especially women. In Uganda, micro finance has spread across new market areas including rural areas where commercial banks have not reached. They are growing rapidly, some at a rate greater than 100% and stand at over 500 MF outlets. They are serving over 550, 000 active clients with outstanding loans of ug.sh.53 billion but are only reaching about 5.9% of the estimated potential market Duursma, (2001) their services are highly demanded by micro entrepreneurs. Therefore, MF activities cannot be undermined and calls for sustainability to meet the micro entrepreneur’s demand.

Despite their importance and growth the savings culture of their clients is questionable as shown by a high drop out rate, a high delinquency rate that has even forced some micro-finance institutions to jail clients, poor financial management that is prone to risk, continued relevance on donors and minimal operational efficiency below 100%.

This therefore raises concern as to whether micro-finance institutions will fulfill their campaign, and even become sustainable so as to meet the future demands of their clients. Therefore there is need to examine the Effect of Microfinance institutions in promoting savings.

1.4 Objectives of the study:
1.4.1 General objectives
The study is aimed at examining the role of Microfinance institutions in promoting savings.
1.4. 2 Specific Objectives of the study
The study has the following major objectives: 1. To assess the Effect and impact of micro-finance institutions on the livelihood of rural poor. 2. To examine the significance of microfinance institutions to the local poor in providing a way out from poverty 3. To assess factors that hinder the rural poor from participating in Micro finance Institutions 4. To draw conclusion and give some policy recommendations for the successful implementation and development of micro financing programs.
1.5 Research Questions
1. What is the effect and impact of micro-finance institutions on the livelihood of rural poor?
2. What is the significance of microfinance institutions to the local poor?
3. What are the factors that hinder the rural poor from participating in Micro finance Institutions?
4. What are some of the policy recommendations for the successful implementation and development of micro financing programs?

1.6 Significance of the study

The study will provide sufficient information for researchers, students conducting their academic researches who have interest in the area of micro-finance institutions. It will also inform the local people in Uganda in particular Kampala who are either clients of the micro-finance or employed within the system.

The research will also contribute some of the following:

1. At the macro level, informed decisions in policy formulations and in the building of the institutional regulatory framework might be made basing on the findings from research.

2. At the macro level, a number of micro-finance institutions may adopt the recommendations put forth, and use the findings to address issues pertaining savings so as to attain sustainability.

3. The study will also open up areas for further research, for example the effect of growth on the sustainability of micro-finance institutions.

4. The government will use the findings to regulate the activities of the Microfinance institutions in order to carry out their activities effectively

5. The study will be used by the public to understand the use of microfinance institution in ensuring that they learn how to make savings.

1.7 Scope of the study

The study will be limited to only register micro-finance institutions in Uganda and will look at Pride Micro Finance Mukwano shopping arcade Branch as the case study.

1.8 Limitations of the Study.

The researcher encountered the followings problems:-

The bureaucracy within some organizations since the study at certain point required review of organizational documents. To minimize this problem, the researcher will seek permission from the authority of the organizations and also explanations to the relevant officers the purpose of the research.
Since top management staff, with busy schedules are part of the respondents, the research will not get as much time from them as anticipating. This challenge will be solved by seeking appointments with them at their convenient places and time.

1.8 The Conceptual Frame work

| |
|Illiteracy |
| |
|Micro-finance |
|Income |
|Investment |
|Savings |

Extraneous Variables (EV)

| |
|Poverty |

Independent

Dependent Variables (DV)
Variables (IV)

| |
|Initial Capital |

Figure 1: conceptual frame-work

In the scheme the independent variables is conceptualized as Micro-finance and Initial capital and dependent variables is as Savings, Investment and Income. Extraneous Variables are conceptualized as Poverty and Illiteracy. It is further hypothesized that the independent variables directly influences the dependent variables but the results may be confounded by Extraneous Variables.

CHAPTER TWO
LITERATURE REVIEW
2.0 Overview
This chapter will constitute the review of theoretical literature about micro-finance, the need for micro-financing, country experience on micro-financing in particular the experience of Bangladesh and some African countries.

2.1 Review of Theoretical Literature about Micro Finance Microfinance institutions rose in the 1976 as a response to doubts and research findings about state delivery of subsided credit to poor people. Traditional credit sources included money lenders and cooperatives, but charge extremely high interest rates, have limited accessibility, high transaction costs and high collateral requirements, which micro-entrepreneurs find hard to cope with.

According to World Bank (2004), on the eve of the third millennium, the world had more accumulated wealth, resources and knew how than ever before, yet more than one billion people live in absolute poverty. They are trapped in a condition of life so degraded by diseases, illiteracy, malnutrition and squalor as to deny its victims basic human necessities.

For lack of other means, the poor and those who can not find jobs are increasingly resorting to self-employment in order to survive. Their small businesses have grown into a huge parallel economy that is altering the social geography of cities, towns and villages in developing countries. The growing role of self employment and the fact that the poor are considered “liquid or cash at hand” has also given rise to new generation of financial intermediaries that are willing to work with poor and self employed, thus Micro Finance Institutions (MFIs).
Ledgerwood (2001) further notes that MFIs can be NGOs ,savings and loan cooperatives, credit unions, Government banks, commercial banks or non banking financial institutions. They are characterized by low coverage loan size, large number of transactions, innovative lending methodologies and character based lending.

Hossain (2001),gives the characteristics of MF clients as; having tiny businesses usually employing 1-10 people, informal usually women operated, do not keep formal books, do not separate business income and house hold income, lack access to bank loans, source credit from family suppliers or informal money lenders and are able and willing to pay cost covering interests.
2.2. The Need for Micro-Financing
The alleviation of poverty requires diverse measures. The most important being those, which expand the income and employment opportunities of the poor, enabling them to enhance their living standards providing the poor with access to financial services is one of the many ways to increase their income and productivity.
Binswanger and Ashomby (2003), states that constraints in relation to suppliers .i.e. Private Banks excludes the poor because small transactions are unprofitable. Providing financial services to the poor and women is not easy. Many borrowers are not credit worthy and don't have profitable projectors. Thus, that the need for micro financing is an undeniable fact.
According to Hatman (2001), the issue that should be raised in this context is the importance of the informal sector in LDCs economy and its constraint to develop by lack of credit. On top of that, Salad vine and checkering (1991) confirmed this fact by noting that, “the informal sector” which contributed about 35% to 65% and 20% to 40% to employment and GDP in most LDCs respectively, is constrained by lack of credit.
Micro financing programs are developed to fill this gap. The rural poor in LDCs are in desperate needs of credits, microfinance programs are supposed to make available this credit needs and keep the poor to increase their living standard. Lack of saving and capital make it difficult for many poor people who want jobs in the formal and informal sectors to become self employed and to undertake productive employment generating activities, providing credit seems to be a way to generate self-employment opportunities for the poor.
In this regard, MFIs in relation to other financial intermediaries has special role and distinguishing features which are given as follows: 1. The primary objective of MFIs is to address the credit needs of those who are willing and ready to reduce their chronic poverty by engaging in farming and small scale production and service activities (Barry, 2003). 2. Besides provisions of credit facilities, MFIs render managerial, marketing technical and administrative advise to borrowers by reaching borrowers at there place of work.(ibid) 3. MFIs do not require collateral to extend credit in cash or kind to peasant farmers and small entrepreneurs. Instead peer group-leading scheme, character based loans and the promise of subsequent loans is main motivations for repayment (Ditcher, 2000). 4. Saving requirement is introduced as a compulsory feature of lending activity and this saving requirement seems to serve as a motivator for repayment of loan since borrowers choose to repay the loan than losing the amount they saved (Katantazi, 2001)
2.3 Country Experiences on Micro-financing
2.3.1 Experience of Bangladesh
Why it is that micro-finance becomes a great concern for the whole world as an instrument for poverty reduction in rural areas? It seems because it has recorded success in countries where it has been implemented (World Bank, 2000). A brief look at this success stories is as follows.
One of the most successful countries often mentioned in the development of microfinance is Bangladesh. Micro finance organizations like Grameen Bank, Bangladesh Rural Advancement Committee (BRAC), Proshika (PK), Association for Social Advancement (ASA), largest 20 credit NGOs (not including Grameen Bank), and Bangladesh Rural Development Board (BRDB) are operating in the country mentioned
For instance, the Grameen Bank, which was established in 1983 as a challenge to existing collateral-based financial system, has had a promising result. It operates exclusively for the poor on the promise that rural people, who won too little land, support themselves as farmers, can never the less make productive use of small loans and repays them on time. The bank also promotes social development by making the poor accountable to individually and socially. Such intermediation improves productivity and income of the poor. This, in turn, also improves their loan payment rate and hence contributes to the Grameen Bank’s financial Viability. As the result it is the most successful credit program for poor and this may be seen from the outreach status and loan recovery so that the bank’s loan recovery rate has consistently remained above 90 percent.
2.3.2 Experience of some African Countries
Formalized micro finance institutions’ in Africa is a more recent phenomenon. The 1950s and 1960s led to a proliferation of rural leading programs that focused on the provision of subsidized credit by government development banks. After this period in 1980s, the replication of Bangladesh’s Grameen Bank began to be tested using primary donor funds to provide credit to a wide number of solidarity group members, (Hossain, 2001).
For our purpose, however, we will look only two countries Kenya and Burkina Faso- the former representing relatively densely populated region and the latter is less densely populated.
For example, in Kenya KREB (Kenya Rural Enterprise Bank) is a micro finance institution serving the poor in rural and urban areas of Kenya. It was established as an intermediary NGO to provide financial and technical assistance to NGOs in Kenya that are involved in developing or promoting the development of micro and small enterprises.
Since 1990, KREB has successfully transformed grants from its development partners into loan capital for nearly 30,000 businessmen and women. It has been able to do so at a positive return since 1994. KREB has distributed over Kenyan shilling 300 million each year since 1995 and has never run short of new customers.
The PPPCR (Le project de promotion du petit credit rural) has been particularly innovative in adopting the Grameen style of group lending to the conditions in Burkina Faso. Certainly the sahelian region represents one of the most challenging environment for micro finance due to the combinations of failed prevails efforts low population density, poverty and illiteracy. To overcome some of these obstacles, PPPCR has departed from a pure Grameen replication and has adapted its own financial services and organization.
Like the Grameen Bank, PPPCR has grown quickly, but cannot be compared in member of clients. By the end of 1994, PPPCR had served 10,000 clients, and two years later it had reached about 25,000 clients. Despite all of the careful modifications of the Grameen model to the Burkina Faso context, the provision of micro finance services has proved to be quite costly in the Sahel. The reasons for these high costs are more related to the environment (low population density, poor infrastructure, poverty, illiteracy etc.) than to the methodology of group lending itself. The PPPCR has experienced greater efficiency in the past couple of years as it continues to learn from its early experience & achieves economies of scale.
Generally, the results in this study have shown that none of the institutions have been able to cover the cost of subsidies despite in roads towards financial viability. Most of micro finance institutions limit their ability to achieve high volumes of loan advances and savings. In sum, the most important lesson is that a wide variety of market niches exist in the field of micro finance.

CHAPTER THREE
METHODOLOGY
3.0 Over view

The chapter will constitute research design, sampling procedure, population and sampling, instruments, procedure and data analysis. It will also explain the methods that the researcher will use to select the geographical areas, from which research will be carried out and methods of selection of desired respondents.

3.1 Research design

This study will be conducted through a case study research design. Case study research design is a logical sequence that connects the empirical data to stud’s initial research questions and ultimately, to its conclusions. The researcher conducting a case study attempts to analyze the variables relevant to the subject under study (Polit and Hungler, 1983). Case study research design is a study focusing on one organization selected from the total population of other organizations in the same industry, (Emory, 1995). This is raising the external validity of the study.

3.2 Sampling procedure

This study will employ stratified sampling. Stratified sampling technique is a technique that identifies sub-groups in the population and their proportions and select from each group to form a sample (Oso and Onen, 2008). It groups a population into separate homogenous sub-sets that share similar characteristics so as to ensure equitable representation of the population in the sample. It aims at proportionate representation with a view of accounting for the difference in sub-group characteristics.

3.3 Population and Sampling
3.3.1 Target Population

The target population will consist of 146 and they are as the following categories top management, staff and clients.

3.3 .2 Sample size
A total of 30 respondents will be drawn from the all staff of pride micro finance and their clients in the Mukwano shopping arcade branch. The respondents will fall in the categories of top management, direct-service providers (staff) and service beneficiaries (clients), further more 20% respondents will be selected from each group, as illustrated by the table 1 below;
Table1: Categories of Sample
|Categories of expected Respondents |Population |Sample |
|Top management |08 |2 |
|Staff |18 |4 |
|Clients |120 |24 |
|Total |146 |30 |

3.4 Instruments

This research will use the following techniques in collecting data;

1. Observation method: the researcher will go to the area of the study and observe how loans are distributed to clients

2. Questionnaire method: Open and close ended questions will be administered to the staff to answer questions.

3. Interview method: Interviews will be held with the people who are clients in the Microfinance institution at the Mukwano shopping arcade branch.

5. Procedure

The research activity of this study will begin immediately when an introductory letter is secured from Kampala International University. Thereafter, copies of the letter will be used to introduce the researcher to the respondents and interviewers. The researcher will introduce himself to the management and employees of Pride-Microfinance in Mukwano arcade in Kampala and due their acceptance, he/she begin collecting for research.

3.6 Data Analysis

This will involve three sets of activities which include editing, coding and frequency tabulations. Editing will be done by looking through each of the field questionnaire ascertaining that every applicable question has an answer and all errors eliminated for the completeness, accuracy and uniformity.

The researcher will then proceed and code various responses given to particular questions that lack coding frames, she will then establish how many times each alternative response category will be given an answer using tally marks which will later be added up. Data will then be presented in frequency tabulations rendering it ready for interpretation. Quotations and field notes made from interviews will also be included.

REFERENCES

Ashornby (2003): Oxford Advanced Learners’ Dictionary of current English; Revised and updated. Oxford University press.

Bank of Uganda, (2007). Policy statement on Micro Finance Regulations. July

Barry (2003), In Women’s World Banking WWB, Best practice manual on Building Strong Credit and Savings Operations. Vol. 1, New York.

Ditchter, T.(2000). Case studies in Micro Finance; Past, Present and Future- An assy. Retrieved on March, 12, 2010 from http:// www esd.worldbank.org/html/esd/agr/spb/end/ngo.htm

Emory Campbell, 1995: Supervision Guide. South Africa. Bellville.

Duursma M. (2001), The Micro Finance Industry in Uganda: status, prospects, challenges and Audit implications. Kampala

Hartman F. (2001), Micro Loans in crisis in Bolivia from D+C Development and cooperation. ISSN 0721-2178 NO. 4 Frankfurt, Germany.

Hossain I. (2001), Capacity Development of External Audit of Micro Finance Institutions, Kampala Institute of Bankers,(2000). Micro Enterprises Best Practices. Uganda Banker Vol.8. NO. 3. Kampala, Uganda.

Katantazi D, (2000). Micro Finance: Changing needs, Futuure Prospects and Challenges for the Uganda Micro Finance Industry. In Wamatsembe 2000, Summary of issues and Conclusions from the Technical Micro Finance Best Practices Seminor held on March 3-4, 2000.

Ledgerwood, (2001).Microfinance Handbook: An Institutional and Financial Perspective (sustainable Banking with the Poor)

Oso and Onen, (2008): A General Guide to Writing Research Proposal and Report (2nd edition): Kampala. Makere University Printery.

Polit and Hungler, (1983): Qualitative Researching. London: Sage

Waterfield C and Duval, (2006), Care Savings and Credit source Book.

Women’s World Banking (2007). WWB Best practice Manual on Building Strong Credit and Saving Operations. Vol. 1, New York.

APPENDICES

APPENDIX A: TIME FRAME

|Activity |Duration in days |Responsibility |
| | | |
|Preparation of the first draft |20-Aprilth May-16th |Researcher |
| | | |
|Data collection in the field |20th May-30th May |Researcher |
| | | |
|Organization of the data |31st May- 20th June |Researcher |
| | | |
|Data analysis |21st June- 5th July |Researcher |
| | | |
|Writing up the final draft |6th July- 10th July |Researcher |
| | | |
|Review |11th July-15th August |Researcher |
| | | |
|Submission |25th August |Researcher |

APPENDIX B: BUDGET OF THE STUDY

|Item |Amount (U.shs) |
|Stationery – Papers |4,000/= |
|- Pens | |
|Transport |10,000/= |
|Phone calls |10,000 |
|Internet Usage |5,000/= |
|Typing and printing |5,000/= |
|Miscellaneous | 2,000/= |
|Total |36,000/= |

APPENDIX C: QUESTIONNAIRES

Dear respondent,
My name is Mustafe Ali Farah a student of Kampala International University carrying out an academic research on the Effect of Microfinance institutions in promoting saving. You have been randomly selected to participate in the study and are therefore kindly requested to provide an appropriate answer by either ticking the best option or give explanation where applicable. The answers provided will only be used for academic purposes and will be treated with utmost confidentiality.
NB: do not write your name anywhere on this paper.

A) Personal Information

1. GENDER
Male Female

2. AGE
Below 30 years 31- 40

41-50 51 and above

3. How long have you been in this organization?
1 – 2 Years
3 - 5 years
6 – 7 years
8 – 10 years
11 and above

Evaluate the following statements using the following;
|Agree |Not sure |Disagree |
|1 |2 |3 |

The effect and impact of micro-finance institutions on the livelihood of rural poor

| | | |
|1 |Microfinance institutions help people make some savings | |
| | | |
|2 |Microfinance institutions help people to expand their businesses by offering them loans | |
| | | |
|3 |Microfinance institutions help clients learn the best possible way to make money | |
| | | |
|4 |Microfinance institutions help people purchase some household items that they would otherwise not afford | |
| | | |
|5 |Microfinance institutions help people to pay school fees for their children’s in time when its needed | |

Factors that hinder the rural poor from participating in Micro finance Institutions
| | | |
|1 |People are ignorant of the activities of microfinance institutions | |
| | | |
|2 |People are afraid that if they fail to pay the microfinance loans they might be taken to prison | |
| | | |
|3 |People are misinformed of the role of microfinance institutions in development | |
| | | |
|4 |Some people just do not trust banks and do not want to take their money in any place closely related to a bank| |
| | | |
|5 |Some of the microfinance institutions are not licensed by government to carry out the duties and so people | |
| |fear they might close down and still their money | |

THANK YOU