Member-owned Financial Institutions: Lessons from Uganda and Tanzania 1997-2004

Member-owned financial institutions face three challenges:

  1. effective internal management of the operations,
  2. monitoring and enforcement of loan contracts, and
  3. building mutual trust and relationships with the community by offering their member owners value propositions that can meaningfully translate into improved lives.

The extent to which they meet these challenges is largely determined by a variety of economic, social, and moral incentives and to a lesser extent by the forms of enforcement and penalties that can be created by such institutions. One major issue is to what extent member ownership by itself can bring about meaningful participation, representation, and sound management. This paper combines theoretical reasoning and field evidence collected by the author during the 1997 – 2004 period. The theoretical framework is based on an analysis of economic and social (including moral) incentives that determine institutional and member behaviour. It combines the concepts of financial intermediaries as delegated investors by their depositors, embeddedness of financial transaction and economic behaviour in social relations, collective action and problems of groups, and contract enforcement.

The field evidence is based on the author’s work in Uganda and Tanzania with a project which aimed to invest in locally owned member-based organizations known as financial service associations (FSAs). An apex organization would mobilize, establish, train, and supervise the FSAs, which would provide local financial services such as savings and individual loans at a low cost with outreach to the underserved markets and remote areas. The FSAs would raise equity/shares from local members, use inexpensive local human resources for their own management and governance, use locally available information about the borrowers and use the social relations and networks (social capital) to generate the needed trust and cooperation for loan recovery.

The paper gives a very good resumé of how the FSAs work and goes on to review the results in terms of operations – shares, savings and loans; loan repayment, contract enforcement and loan recovery; portfolio diversification and product development; human resources, training and governance; and finally supervision and linkage with the financial sector. In conclusion the author lists fourteen lessons learned, which provide a valuable insight for any promoter of member-owned institutions. Three examples are:

  • The most important determinant of performance is the ability of the member-owned financial institution to offer economic incentives first to the majority of its own staff and then to its members for committing to the institution. Social incentives play an important although secondary role in this regard.
  • To offer the needed economic incentives, the institution must generate a minimum volume of business to generate the needed income. In this regard good business locations perform better while remote areas often perform poorly.
  • FSA borrowers were willing to pay a high interest rate on loans. Surveys showed that interest payments usually represented a small percentage of their cash flow. Over time the income from interest payments covered intermediation costs, risk premiums, and the needed financial incentives.

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