Uganda’s microfinance regulator encourages lenders to embrace credit ratings – The Kampala Report

The Uganda Microfinance Regulatory Authority (UMRA) has urged Tier 4 financial institutions to embrace credit ratings based on international standards, enabling them to access global funding.

UMRA is optimistic that the introduction of the international credit rating system will strengthen Tier 4 financial institutions and help them attract cheaper credit facilities globally. The targeted institutions include SACCOs, Non-Deposit Taking Institutions (NDTs), Microfinance Institutions (MFIs), as well as individual money-lending companies.

A credit rating is an assessment of the creditworthiness of an individual, corporation, or government. It reflects the ability of the borrower to repay the borrowed money and the likelihood of defaulting on the loan. A good credit rating report is a globally accepted guarantee to access credit, similar to copyright instruments, bonds, and other non-physical securities.

While introducing the inaugural credit rating assessor for the Tier 4 sector, the Investment Information and Credit Rating Agency (ICRA), Edith Tusuubira, the UMRA Executive Director, noted that as the sector regulator, it is important to look after the health of the licensees, especially those struggling with capital.

She said that rating is an opportunity for institutions to improve working standards as well as capital. She revealed that ICRA comes with a funder, Morning Way, to provide readily available credit facilities to institutions with good credit rating reports.

According to Tusuubira, up to 76 percent of Uganda’s credit market is delivered by Tier 4 institutions, making their improvement a priority. “We are forced to improve systems. We now even have the loan shop where we shall be trying to control interest rates as we create competition, and the borrower will have a choice of knowing who to borrow from and at what percentage rate. We are also operationalizing the credit information-sharing mechanism, which is under the law, to help eliminate multiple borrowing under which lenders lose their money due to failure to repay,” she said.

Rachel Vanessa Muhwezi, the UMRA Manager for MFIs, said the credit market in Uganda is suffering from high interest rates on credit facilities, primarily caused by the high cost of capital. She noted that this could be solved by the new initiative.

According to UMRA, several Tier 4 financial institutions are gradually going out of business, mainly due to a lack of liquidity as capital to operate.

Sanil Bansal, the CEO of ICRA, noted that for an institution to get rated, it must have a full documentation process, full corporate governance policies and operational guidelines, as well as maintaining proper records.