Microfinance in Uganda: Part 2 of 2

As an example of a Tier 3 Micro Desposit-taking Institution (MDI), Uganda Microfinance Limited (UML) has a branch in Mityana. They operate very much like a regular bank, and their clients on the whole are much better off financially than the average Ugandan (see http://www.accion.org/NETCOMMUNITY/Document.Doc?id=118 for the documentation). They are audited by Deloitte in order to gain international trust through fiscal transparency. Indeed, this careful accounting has paid dividends. In March of 2006, UML received a $1 million commercial line of credit from the International Finance Corporation, and Citibank Uganda Limited agreed to provide loans in Ugandan currency for this purpose. Later that autumn, UML received $240 thousand in debt financing from Incofin and another $1.1 million in debt financing from Oikocredit. On April 17 of this year, UML was bought out by Equity Bank, one of Kenya’s largest publicly-traded companies (it has a market cap of over $1B). The transaction put the value of UML at around $30M. In the United States, this is considered a small business, but in Uganda, it was very big news. Uganda’s homegrown financial sector, with more careful central regulation and transparent accounting, is maturing and gaining the attention of outside investors.

Microfinance in Uganda – Part 1 of 2

As the Vice President of the Microfinance Alliance (http://www.microfinancealliance.org), a student group at the University of Minnesota promoting awareness of microfinance, part of what I have come here to do is investigate opportunities for students to get involved in microfinance in Uganda. Prior to coming to Uganda, I took a graduate survey course in microfinance taught by Helzi Noponen, a consultant to MFIs (Microfinance Institutions) in India and adjunct faculty member at the University. Part of my classwork was to research MFIs in Uganda. Briefly, the financial system in Uganda is separated into 4 tiers of institutions. The first is the Central Bank of Uganda, followed by your run-of-the-mill national and international banks. Then there are two classes of microfinance institutions, which have been operating in Uganda for about 10 years.

The largest, most organized, and most carefully regulated microfinance institutions are regulated by the Bank of Uganda as MDIs (Micro Deposit-taking Institutions) and are classified as Tier 3 institutions. There are only 4 of them in operation, and in general, they all have a central office in Kampala with many branches throughout the country. I’ll give more details about this type in my next post.

The second type of MFIs in Uganda are not regulated by the central bank. This type includes most NGO MFIs but it is dominated by for-profit, locally managed institutions called SACCOs (Savings And Credit Cooperative Organizations). I was told when I visited a local USAID economic development officer that these organizations are self-regulated through the Association of Microfinance Institutions in Uganda (AMFIU). There has recently been pressure from the government for increased regulation (a few have collapsed and lost the savings of their members). Generally speaking the SACCOs, which are easy to start up, have a greater presence in rural communities. Towns as big as Mityana (40,000?) have an MDI or two present, but smaller towns only have SACCOs operating. SACCOs are similar to traditional credit unions, only with a specific purpose of providing products affordable to poor clients in an attempt to alleviate poverty locally.

Two weeks ago Maranatha hired a new accountant, John Kasumba. John has a business degree and I have been working with him day and night over the last two weeks to redesign Maranatha’s accounting system. Thanks to the free product GnuCash, Maranatha will now be utilizing computerized accounting and will no longer have to manually create financial statements. As it turns out, John helped found a SACCO two and a half years ago in his hometown of Kassanda, about 30 km northwest of Mityana. It is called Tropical Micro-Enterprise Cooperative Savings and Credit Society and he sits on its board of directors. I was delighted when he invited me to come pay them a visit on Saturday. So, I got my first introduction to an operating MFI in Uganda. I met with the SACCO’s manager, its treasurer, and John, who currently sits as its secretary.

The progress of Tropical is noteworthy. Since its inception, it has grown to 700 members who have purchased at least one share of stock and made a commitment to save at least 10,000 UGX (a little more than $6) per month. These members have a combined savings of over 175 million UGX (the equivalent of more than $100,000). That may only be $150 per member, but it is much more than the required minimum savings per member, which shows Tropical is effectively establishing a culture of financially responsible citizens who understand the value of savings. According to their financial statements (which were audited, but I don’t know by what standards), they also received an impressive margin on their operations.

Tropical recently started a program where they purchase motorcycles at wholesale in Kampala (imported from India and China) and offer them for sale through 8-month loan financing. So far they have sold about 20 motorcycles for between 1.65 and 2.5 million shillings each (or between $1000 and $1500; at least 20% must be paid up front), and are hoping to grow the program. Their primary buyers are farmers who use them to transport their goods to larger markets. Tropical makes an almost-negligible profit on the sale of the motorcycle, but makes much more on the interest from the financing.

I am proud to say that I became a member by paying the 10,000 UGX administrative fee and purchasing one share for 10,000 more. But, the treasurer told me they were having a difficult time trying to get their members to purchase more shares in the SACCO. It became clear while I was there that the board needs much more understanding about the purpose and value of equity ownership. Though Uganda has established its own stock exchange, the majority of the population has no understanding of equity, even those who have established institutions based on equity ownership! As you could imagine, holding shares is very uncommon in Uganda, especially in rural areas. I will be having further conversations with John about this in the future.

Water: Part 5 of 5 – The Business Opportunity

Finally, getting to the part that I can pitch in on! If you only read one post in my entire blog up until this point, read this one (but you may need to read the 4 previous posts for context). I have come to investigate and learn for myself what types of products and services can be offered to the poor to provide value, and I’m trying to put a lot of it together in this post.

One of my favorite economics thinkers, Tyler Cowen, professor at George Mason University and author of the Marginal Revolution blog (http://www.marginalrevolution.com/), wrote an op-ed article last month on Forbes.com entitled “Pay for it” (http://www.forbes.com/technology/2008/06/19/deregulate-water-thirdworld-tech-water08-cx_tc_0619monopoly.html). In it, he argues that there is good understanding across the less developed world that clean water is an economic good that has a price. As such, since governments in these countries have done a mostly terrible job of providing clean water to their citizens, his solution is to completely deregulate water to let private companies build their own systems and charge whatever they think is appropriate.

I think there are problems with this proposal, but as he notes, “Currently, dirty water is killing more people than AIDS. Water policy is not a sexy topic, and it doesn’t receive a lot of attention, but bad water is one of the world’s biggest problems.” He argues for “No price regulation, no rate of return regulation, no government ownership of assets, no political pressure to keep prices low. Water companies should be allowed to maximize their profits, and because supplying water is nearly always a monopoly, they should be allowed to make monopoly profits. I know the idea sounds crazy–to an economist, water supply is a classic ‘natural’ monopoly–but on closer inspection the other alternatives might be worse.”

Whatever you may think about this, it’s clear that there are many ideas being offered in the “clean water for the poor” space, and that many of them involve putting a price on it.

In that vein, Fred and I are exploring the possibility of launching a small business to provide high-quality Biosand filters to local businesses, schools, and eventually households. We are investigating whether he can put a price on the BSFs that provides a great enough margin for him while maintaining affordability for the people in his community. Fred would like to hire a couple of associates that he could train in and work with, gain the support of local health and community workers, and conduct a marketing campaign through radio (a very popular media here in Uganda).

There are a number of things working against us:

• First, Patrick is somewhat skeptical of the business because he says people here are used to getting things for free and may not be willing to pay anything at all. He used the example of electricity – rather than pay a monthly fee, people consistently patch in illegally, and it is very difficult to monitor.
• Second, Fred may have already sabotaged himself out of the business opportunity by providing 30 BSFs for free and contributing to the sentiment Patrick articulated. Fred could conceivably consider them “beta-testers”, but the problem is that Mityanans don’t have a concept of beta testing like we do in the United States. We generally understand that if we get something for free from a company, it’s either because they want us to 1) tell them what’s good and bad about it so that they can improve it and make more money, or 2) like it so much that we will buy more of it (or something else) from them in the future.
• Third, not only is Fred competing with the memory of his own free filters, there are other NGOs that are providing other technologies for free. Not only is self-sabotage possible, but outside sabotage is possible too! Of course it is a good thing that NGOs are out there providing these things, but subsidizing something always has an impact on competing businesses!
• Fourth, Fred’s costs are much higher than indicated by CAWST’s information. CAWST claims that each BSF costs between $15-30 to produce. We calculated about $32 dollars for the necessary materials, which is what CAWST must be using to come up with that number. But when Fred and I included costs of labor and equipment necessary to advertise, deliver materials, construct the filters, deliver the filters, install them, provide end-user training, and provide ongoing servicing and maintenance as necessary, our total costs came to slightly over 100,000 UGX (about $65). Fred was surprised when he saw this. He was thinking he would sell the filters for around 80,000 UGX. I have recommended that he at least double that price to receive a margin that he could reinvest in his business.

So, why would we pursue this?

• 36% of people in the district own bikes, which are about the same price I recommended that Fred charge for a BSF. In other words, there is evidence that if people here think something will provide value, no matter how poor they are, they find a way to save and pay for it. In other words, I think people here have a different approach to savings. They choose to save when they know what they are saving for, rather than “saving for a rainy day.”
• It is an entirely local solution, implemented by local individuals who can carry this forward without any aid from the West. Local construction and operation minimizes transport, energy, training, and servicing costs and maximizes value creation in the local community.
• There is the possibility of setting up a payment plan schedule so that people could pay as little as 60 cents (900 UGX) per day for up to a year. At the end of a year (or shorter, depending on the plan that is chosen), the individual would own the BSF. This seems to fit into the value system here in Mityana – people are much more willing to pay small amounts over a long period of time rather than a relatively large lump sum. (I could write at great length about how the way people act in Mityana corresponds to an enormously high discount rate – that is, that money now is immensely more valuable to them than money a year from now. I think this is generally true about low-income populations but don’t have anything to back me up.)
• Fred is a part of the local community. My professor of strategy, Aks Zaheer, would tell me this is critical in establishing TRUST with business associates and customers.
• This technology is best suited when access to water is not a problem, and when the access is not necessarily clean. With untreated piped water, this is now true in Mityana.
• Payment plans fit into the competitive advantage of having a local person with established relationships – since Fred will be selling and installing them, he will personally meet and train every single buyer. As Fred comes back on a weekly or monthly basis to collect from each buyer, they are not only paying for the product, but also the related services Fred can perform by answering any questions they have while he is there with them. He can also collect valuable data for himself and for CAWST.
• There is already “downstream” economic activity. One woman who received a free BSF from Fred is selling her filtered water in the main market in Mityana! (Would you call that trickle-down economics?)

Another thing that I’ve noticed is that consumers in Mityana are extremely price sensitive. Maybe that’s obvious, because they’re poor. At any rate, it is the single biggest factor in purchasing decisions. Here is a price comparison on some other drinking water alternatives:

• A PUR water purifing pouch that disinfects 10 liters costs 200 UGX at any shop in Mityana. Quality differences aside, to get the same amount of improved water as you’d get from the BSF in one day, you’d need to purchase 8, for a total of 1600 UGX (about $1).
• A single 500 ml bottle of water at any store in Mityana costs 500 UGX, or about 30 cents. A box of 24 costs 6500, or about $4 for 12 liters of purified water.
• A 20-liter container of drinking water (think of the style seen in office breakrooms) in Kampala costs 5000 UGX ($3).
• Fred says that some people pay more than 60 cents per day for enough wood or charcoal to boil their water.

With all of the above methods, the outflow of money is continuous. It never stops. If individuals purchased a BSF, these expenses would cease. We’ll see if this value proposition sticks!

(For more info on “Base Of the Pyramid,” or BOP, water markets, there is a document available through the World Resources Institute on that topic. Uganda is one of 4 studied countries where over 50% of all recorded national water spending comes from those making less than $1000 per year, and it is the prime example of the few countries with a viable rural water market.)

Water: Part 4 of 5 – One HWTS Model – the Biosand Filter (Warning: long post)

One type of household water treatment product that I’ve encountered here is the Biosand Filter (BSF). It was developed by Dr. David Manz of the University of Calgary nearly 20 years ago, and it is the primary technology promoted by the Center for Affordable Water and Sanitation Technology (CAWST, http://www.cawst.org). It is a modified slow-sand filter, which means it has two mechanisms to treat the water. The first is a layer of micro-organisms that live in 2 inches of stagnant water right above the surface of the sand. These micro-organisms prey on the micro-organisms that are in each batch of untreated water that is poured into the top. The second mechanism is the sand itself – the grains of sand are small enough to trap many of the remaining micro-organisms, and deplete them of the oxygen they need to stay alive since the layer is so densely packed. Water passes through the layers of sand and comes out a spout (see the diagram below; courtesy CAWST). The BSF is not perfect, and its designers do not guarantee that the water coming out the “clean” end is completely pathogen-free. Instead, they claim that it can remove 97% of bacteria and about 90% of viruses. It can not remove chemicals (but there is not a high degree of chemical pollution in rural areas like Mityana).

Fred (the aforementioned director of the chicken project) is a very busy guy – he’s implementing the BSFs in Mityana through the support of a local NGO called Connect Africa. Fred was trained by a retired American named Tex, who lives in Kampala, swears by the filters, constructs them in his backyard, and has one in his own home. In the last year, Fred has distributed 30 of them, free of charge, to schools (including Maranatha), health clinics, churches, and hotels (see the picture below, where Fred helped install 2 filters at the Good Shepherd home for physically handicapped, homeless, and orphaned children in Kampala). This isn’t exactly at the “household” level yet, but Fred hopes to get there soon. During installation, he teaches people about proper sanitation techniques, and he is on-call to receive any service and maintenance requests as they arise. So far, the requests have been very few. CAWST claims that some filters have been in operation in the field without any trouble for over 10 years. Fred recently completed his first follow-up survey with the users of the filter throughout Mityana and the results were overwhelmingly positive in every regard. The only complaint is that the filter can only provide 80 liters of improved water per day, according to Fred’s recommendations of use.

A couple of University of North Carolina studies (the first in Dominican Republic in 2005 and the second in Cambodia in 2007) showed that these filters reduced incidence of diarrhea (often the easiest outcome that can be tracked in regard to effectiveness of sanitation interventions) by 40%. I will issue a disclaimer that I have not evaluated the rigor of these studies, but if they are to be believed and the results applied universally (which is not a small leap of faith), that makes the BSF as effective as any other intervention, including chlorine (according to the 2002 WHO study mentioned in the last post). That may surprise some people, but assuming we take the leap of faith, I think it can be attributed to a number of factors. Here are a few:

• Because the water is treated at the point of use, it reduces the risk of contamination during transport.

• Even if a purification technology is lab-tested as more effective, it does not guarantee that it is more effective in its field implementation. The easier a technology is to use, the more likely it will be implemented as it is intended to be, and the BSF is about as easy as you can get. You pour water in the top, and it pushes out water that has passed through the sand layers. There’s almost no waiting, no moving parts, no energy required, and nothing for the user to do but make sure they have a clean container for the improved water (Fred trains people on this, as well).

• Even though the BSF does not filter out every pathogen, it requires no additional operating costs, so people use it every time they drink water. In contrast, household chlorination use can be intermittent depending on the variability a household’s disposable income (sometimes a head of household will forego purchasing a chlorine tablet when they are short on cash)

• There are other reasons to use the filter besides health benefits – after filtering, the water tastes better, has less sedimentation, and it cools as it passes through the sand. No other technology has these three quality improvements, and at least in Mityana, this was often stated as one of the finest attributes of the filter.

I don’t think this last point can be stressed enough. People in Mityana are not necessarily educated about health and disease, and even after education, sometimes all that information can seem removed from their normal daily activities. People may not internalize the fact that they have had less disease or illness unless they are asked about it, and may not attribute a reduction in any disease or illness to anything in particular. Others might think they don’t have the resources to implement appropriate sanitation in their home. Aesthetic benefits like the ones described above provide an instant rationale for using the BSF above and beyond the less immediate or less-easily associated health benefits. Boiled water takes a long time to cool down, and even then, it’s not really all that cool.

The BSFs are currently being rolled out in two ways across many countries. First, through a subsidized NGO approach, where the filters are provided for free like Fred has done. Second, through a micro-enterprise model where local people construct the filters themselves (the filters can be constructed entirely of locally-available materials) and sell them and provide related services in their communities.

I’m no public health specialist, so someone please drill me if I’m out of line. I’m of the opinion that the best intervention is one that works within people’s own rationale to move a step in the right (read: healthy, economically beneficial, socially beneficial) direction. I think we all need to be wary of the “something is better than nothing” mentality, because sometimes it’s not. But I think in this case, the BSF is better than nothing, especially if it means people will be introduced to sanitation and hygiene methods for the first time. What do you think? I’m happy to have someone argue with me on this one.

Of course, the best thing that people can do is use the BSF in combination with a disinfectant such as chlorine. But isn’t this a good place to start? Below is a picture of the filtered water from Tex’s house – it looked beautiful and tasted great.