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When I became minister of finance in 2005, the first instruction I received from President Museveni was to prepare a cabinet paper on microfinance . I quickly established that I had an uphill task since the Ministry of Finance had previously submitted two papers to the cabinet on the subject and both had been rejected. So I reviewed what the ministry had submitted and decided that there appeared to be little or no clear strategy behind the previous proposals. Indeed, the general strategy appeared to be to wait for the private sector banks to eventually open branches in the rural areas whenever they might find it profitable to do so. In the twenty years since the NRM assumed power, the private banks had opened virtually no new branches in the rural areas. The strategy of waiting for market forces to bring financial services to the rural areas was clearly a failure . An alternative had to be found. In the attempt to formulate a new microfinance strategy, I was greatly assisted by a member of parliament from the southwest, Ephraim Kamuntu, and the secretary general of the Uganda Cooperative Alliance, Leonard Musemakweli. Both of them were nurturing a number of microfinance institutions, which were operating successfully. They took me on a tour of savings and credit cooperative institutions in the west and central regions, which had thousands of members and billions of shillings in deposits. I attended some of the annual general meetings and talked with members to learn their attitudes toward these institutions, and concluded that they were a good model to follow to increase both savings and credit in the rural areas. However, when I later presented my proposals to the cabinet, I received a mixed reaction. Soon after the cabinet meeting, former minister of finance 11 The Issue of Rural Banking and Microfinance Institutions 76 11-2589-3 CH 11:Cels 2262-5 3/20/14 8:48 PM Page 76 Crispus Kiyonga warned me that my understanding of microfinance may be substantially different from what many cabinet members had in mind. Events in the coming months confirmed that he was indeed right. There were two concepts of microfinance circulating. One regarded microfinance as the channeling of funds from government to the rural areas for development. These funds would take various forms, particularly credit to farmers at below-market interest rates and grants for agricultural inputs such as seedlings, pesticides, and fertilizers. However, my concept of microfinance primarily entailed the creation of institutions in which people in rural areas could accumulate savings deposits, and the latter would be the main source of credit for the rural areas. Government funds could be channeled through these institutions, with the purpose of supplementing rural savings instead of replacing them. Thus my understanding of microfinance was that this institution would serve the same intermediation function that commercial banks were currently performing in the urban centers throughout Uganda. In September 2005 the cabinet approved the policy of encouraging rural populations to form savings and credit cooperative organizations (SACCOs). It resolved to have at least one such cooperative in every subcounty. Since the country was divided into roughly 1,000 subcounties, the cabinet expected at least 1,000 SACCOs to be created. Where a SACCO did not exist, the government —working through the Ministry of Finance, the Microfinance Center within that ministry, and the Ministry of Cooperatives—would assist the people there to create one; where one already existed, the government would endeavour to strengthen it; where a SACCO existed and was strong, the government would increase the supply of loan funds to it for on-lending to the farmers and other microenterprises. The policy was clear, and the concerned government agencies proceeded to implement it through “mobilization,” training, subsidies, and loans. The Ministry of Finance trained thousands of rural leaders in microfinance management, rural development, code of conduct, and discipline at the National Leadership Institute in Kyankwanzi, and after three weeks of instruction , they were sent back to the rural areas to“mobilize”the masses to join the cooperatives. In addition, the Ministry of Finance’s microfinance division was strengthened so that it could oversee the creation of these institutions. With the implementation of this policy, I was apprehensive that there would certainly be instances of fraud or attempted fraud in these institutions. Given my experience in the Uganda Commercial Bank, the central bank, and the banking sector in general, I was fully aware that fraud was a major threat to banking in Uganda...

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