• Reference: P-UG-IE0-003
• Approval date: 17/11/2009
• Start date: 17/08/2010
• Appraisal Date: 17/03/2009
• Status: OngoingOnGo
• Implementing Agency: MICROFINANCE SUPPORT CENTRE LTD
• Location: NATIONAL

1.1 The proposed Project will support the implementation of the second MSC Strategic Plan (2009-2014) and will finance activities specified in the business plan over the same period. Both documents are built on four main pillars which have been formulated on the basis of an analysis of the strength and weakness of MSC operations in the past. The evaluation of past performance indicated that:

(i) institutional development is necessary to enhance the capacity of MSC to rural financial development services;

(ii) market and product development are important to maximize outreach, increase coverage of clients and continuously develop new products to deliver demand driven services;

(iii) increased collaboration and synergy building are important to expand and deepen financial outreach through pooling and sharing of resources and making use of comparative advantages; and

(iv) business and development services are important to enhance the performance and productivity of rural enterprises.

Project Components and Activities and Estimated Cost per Component are presented bellow:

Financial Services Component (UA7.97 million): - 1.4 million rural clients reached, of which 50% are women; - 2,934 loans disbursed to financial intermediaries; and - Gender parity maintained on rural clients accessing credit .

Institutional and Business Development Services Component (UA2.24 million) - Capacity of 1000 intermediaries strengthened; - 3,000 staff (120 of MSC and 2880 from MFIs) and Intermediaries (50% women) acquired business development skills; - MSC maintained at least 95% Payback Rate; and - Intermediary and end client tracking survey conducted annually.

To facilitate access to and utilization of affordable financial and business development services for 1.2 million rural poor Ugandans ..

1.GoU has developed various strategies aimed at the eradication of poverty, the Poverty Eradication Action Plan (PEAP) and Uganda Joint Assistance Strategy (UJAS). These strategies recognize that microfinance can act as a catalyst for enhancing productivity and competitiveness and the incomes and savings of poor households. The PEAP is the guiding policy framework underpinning poverty reduction and constitutes the overall national development strategy. The 5 pillars of PEAP are:

(i) economic management;

(ii) production, competitiveness and incomes;

(iii) security, conflict resolution and disaster management;

(iv) good governance; and

(v) human development. 2.Interventions under the second pillar aim at the establishment of viable and sustainable rural financial systems which are recognized as key measure of sustained development of the rural economy. This intervention will be implemented through the "Prosperity-for-All (PFA)" initiative, which forms part of the Economic Development Strategy (EDS). Under PFA, Rural Financial Services (RFS) features not only as a financial infrastructure but also as one of the key strategic areas that need urgent intervention in order to increase household income levels and to stimulate savings and investment. 3.There are no credible alternatives to the proposed Project. Conventional commercial banks consistently resist expanding their services to rural areas. Following the privatization of many GoU owned banks in the 90s, most of the rural branches were closed. The Bank of Uganda (BoU) introduced the Micro Deposit taking Institutions (MDIs) in 2003 in an effort to bridge the gap to allow Microfinance Institutions to graduate to formal banks. This was aimed to create an alternative or a new layer of banks servicing rural areas. Since 2003 only three MDIs were licensed. Recently, one of them was taken over by a major Bank while the remaining two are under threat of acquisition. Of the 1,271 financial outlets that existed in 2006, 67% were other financial institutions and associations which are not supervised by the BoU. Such institutions, commonly known as Tier-4 financial institutions, include SACCOS, MFIs, NGOs and Sub-country Development Associations (SDA), whose branch network is to a great extent in rural areas. 4.The proposed Project will therefore contribute to the increased outreach by MFIs to rural clients, thereby establishing market determined interest rates throughout the country. There is also an inherent barrier to access to financial services by the rural poor. Due to perceived high risk and transactions costs, conventional commercial banks have avoided lending to the rural entrepreneurs. Removing this high cost barrier could unleash the potential of the rural economy by enhancing income and employment opportunities and subsequently reduce poverty.

5.The operational focus of the Bank Group's strategy in Uganda is based on the PEAP pillars: "Enhancing Production, Competitiveness and Incomes" (Pillar 2); and "Human Development" (Pillar 5). These pillars support pro-poor growth and poverty reduction, and are fully in harmony with the Bank's Microfinance Policy and Strategy (2006) and Medium Term Strategic Plan 2008-2012, and the spirit of the ADF-XI Replenishment Guidelines. In line with the Bank's strategic orientation in microfinance, the proposed Project will focus on capacity building and expanding outreach of quality and demand-driven financial services to rural areas. 6.The current Bank intervention is guided by the comparative advantage it acquired by building the basic microfinance infrastructure and its long sustained engagement with the GoU in the development of industry policy and a regulatory framework which is built on international best practice principles. Furthermore, the Bank's main areas of strength include: increased understanding and knowledge of microfinance industry in Uganda; its contribution to the design and implementation of legislation and regulations to govern the microfinance industry; and significant experience in the delivery and sequencing of interventions, such as focusing on capacity building before injecting credit. The Bank is also better positioned since it initiated the creation of MSC in 2004, which is designated by the GoU as a linchpin to wholesale credit funds, develop business services, mobilize resources and coordinate GoU interventions in the microfinance industry. MSC is also designated as the focal point for delivery of Uganda's Rural Financial Services Strategy (RFSS) and the Prosperity for All Policy Framework (PFPF). 7.The present proposal aims to consolidate earlier achievements, to enhance the sustainability of MSC and to secure an appropriate exit strategy for the Bank. The proposed exit strategy will constitute the following elements:

(i) leveraging additional GoU resources;

(ii) Developing partnership with other development partners such as the Islamic Development Bank (IsDB) and DANIDA in its "African Entrepreneurship";

(iii) strengthening management, develop systems and instill best practice processes and procedures through Technical Assistance from Bank managed Trust Funds; and

(iv) developing a framework for equity participation in MSC. ..

1 12.1 The project is expected to generate the following benefits:

(i) increased client income as demonstrated by the increased sale of produce and services. This would enable households to pay for essential drugs, school fees and uniforms for children;

(ii) enhanced nutritional status of children and food security. This would be demonstrated by consumption of surplus produce in the form of milk, meat and crops;

(iii) improved living conditions and acquisition of additional assets. This would be demonstrated by the ability of many beneficiaries to renovate existing houses or build new small brick houses with iron sheet roofs, purchase of agricultural tools, bicycles, and acquisition of new plots of agricultural land;

(iv) employment creation by hiring non-family members; and

(v) increased savings, which are estimated at approximately 20 per cent of the loans obtained. In addition, it will contribute to building the capacity of MFIs, NGOs, and CBOs in the project target area. Furthermore, the third phase of this project is expected to contribute to creating an enabling environment for microfinance institutions in the country through developing a policy framework and standard best practices that all MFIs shall follow while undertaking their operations. ..

BUDALI Issahaku - OSHD1

Finance source	Amount
ADF	UAC 10,210,000
Government	UAC 1,800,000
Total	UAC 12,010,000