Language: English

Original: English

PROJECT: RURAL INCOME AND EMPLOYMENT

ENHANCEMENT PROJECT (RIEEP)

COUNTRY: UGANDA

PROJECT APPRAISAL REPORT

Date: September 2009

Team Leader: : A. Yahie, Socio-economist, OSHD/KEFO

D. Bronselaer, Procurement Specialist, OSHD.0
L. Epie, Financial Management Specialist, ORPF.2
E. Sennoga, Macro-economist, UGFO
Appraisal Team
Sector Manager S. Pitamber, Manager OSHD.1
Sector Director: Tom Hurley, Director, OSHD
Res. Rep P. Kariuki (OIC, i), UGFO
Regional Director: D. Gaye, Director, OREA

Ms. G. Nzau-Muteta, Chief Socio Economist, OSHD.1

Ms. J. Nzeyimana, Microfinance expert, OSHD.1
Peer Reviewers
Ms. G.. Kyokunda, Investment Economist, OPSM.3
Mr. J. Kabyemera, Agricultural Economist, OSAN.1
 TABLE OF CONTENTS

I – STRATEGIC THRUST & RATIONALE............................................................................ 1

1.1. Project linkages with country strategy and objectives .................................................... 1
1.2. Rationale for Bank’s involvement .................................................................................. 1
1.3. Donors coordination........................................................................................................ 3
II – PROJECT DESCRIPTION ................................................................................................. 4
2.1. I Components .................................................................................................................. 4
2.2. Technical solution retained and other alternatives explored........................................... 4
2.3. Project type ..................................................................................................................... 5
2.4 Project cost and financing arrangements ......................................................................... 5
2.5. Project’s target area and population ................................................................................ 6
2.6. Participatory process for project identification, design and implementation ................. 6
2.7. Bank Group experience, lessons reflected in project design .......................................... 7
2.8. Key performance indicators ....................................................................................... 8
III – PROGRAM FEASIBILITY............................................................................................... 8
3.1. Financial Performance ............................................................................................... 8
3.2 Economic Impact ....................................................................................................... 9
3.3 Environmental and Social impacts.......................................................................... 10
IV – IMPLEMENTATION...................................................................................................... 11
4.1. Implementation arrangements ....................................................................................... 11
4.2. Monitoring .................................................................................................................... 14
4.3. Governance ................................................................................................................... 14
4.4. Sustainability................................................................................................................. 15
4.5. Risk management .......................................................................................................... 15
4.6. Knowledge building ...................................................................................................... 15
V – LEGAL INSTRUMENTS AND AUTHORITY............................................................... 16
5.1. Legal instrument ........................................................................................................... 16
5.2. Conditions associated with the Bank’s intervention ..................................................... 16
5.3. Compliance with Bank Policies .................................................................................... 17
VI – RECOMMENDATION ................................................................................................... 17
Appendix I. Country’s comparative socio-economic indicators (March 09) .......................... 18
Appendix II. Table of ADB’s portfolio in the country ............................................................ 19
Appendix III. Key related projects financed by the Bank and other development partners in
the country ............................................................................................................................... 20
Appendix IV. Map of the Program Area ................................................................................. 21
 Currency Equivalents
September 2009

1 UA = Ugandan Shillings (UGX) 3,002.26

1 USD = UGX 2,046.03
1 UA = USD 1.47000
1 UA = EURO 1.1600
1 Euro = UGX 2,587.00

FISCAL YEAR
1st July- 30th June

WEIGHTS AND MEASURES

Metric System

ACRONYMS AND ABBREVIATIONS

ADF African Development Fund
AfDB African Development Bank
AMFIU Association of Microfinance Institution in Uganda
CBO Community Based Organization
CPIA Country Portfolio Implementation Assessment
CSP Country Strategy Paper
EU European Union
FHH Female-Headed Households
GoU Government of Uganda
GDI Gender-related Development Index (UNDP)
HDI Human Development Index (UNDP)
IsDB Islamic Development Bank
MDG Millennium Development Goal
MFI Microfinance Institutions
MIS Management Information System
MoFPED Ministry of Finance, Planning and Economic Development
MSC The Microfinance Support Centre Ltd.
NAADS National Agricultural Advisory Services
NEMA National Environmental Management Authority
NGO Non-Governmental Organization
O&M Operation and Maintenance
PAP Poverty Alleviation Project
PPDA Public Procurement and Disposal of Public Assets Authority
PEAP Poverty Eradication Action Plan
PFA Prosperity for All Policy Program A).
RFSS Rural Financial Services Strategy
RIEEP Rural Income and Employment Enhancement Project
RMSP Rural Microfinance Support Project
RDS Rural Development Strategy
PRSP Poverty Reduction Strategy Paper
SACCOS Savings and Credit Cooperative Societies
UA Unit of Account
UBOS Uganda Bureau of Statistics
UCA Uganda Cooperative Alliance
UCSCU Uganda Cooperative Savings and Credit Union
UGFO Uganda Field Office
UGX Ugandan Shillings
UIRI Uganda Industrial Research Institute
UJAS Uganda Joint Assistance Strategy

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Loan Information

Client’s information

BORROWER: Republic of Uganda

EXECUTING AGENCY: Ministry of Finance, Planning and Economic

Development (MoFPED)

Financing plan

Source Amount (UA) Instrument

ADF 10.21 million Loan

GoU 1.80 million Counterpart Funding
TOTAL COST 12.01 million

ADB’s key financing information

Loan / grant currency US$/ Euro

Interest type N/A
Interest rate spread N/A
Commitment fee 0.5% (5 basis points)
Other fees 0.75% service charge
Tenor 600 Months
Grace period 120 Months

Timeframe - Main Milestones (expected)

Concept Note approval March, 2009

Project approval November, 2009
Effectiveness April , 2010
Completion April , 2015
Last Disbursement April , 2015
Last repayment 50 years, 2059

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 Project Summary
1. Project Overview

Since the 1980s, the Bank Group has accumulated considerable experience in building retail
Microfinance Institution’s (MFI’s) capacity in Regional Member Countries (RMCs), building
inclusive financial systems that work for the poor, as well as ensuring increased access to
micro finance services for women and men. The Bank has been involved in supporting
micro-finance in Uganda since 1994 with the Poverty Alleviation Project (PAP 1994-1998).
Built on the lessons learnt from the implementation of PAP, the Bank responded to a GoU
request to finance the follow-up phase - Rural Microfinance Support Project I (RMSP) (2000-
2008). The lessons learnt from these projects are outlined below and details are further
available in project completion reports.

The Bank’s Microfinance Policy and Strategy (2006) recognizes that the following
constraints continued to erode RMCs’ capacity to ensure sustainable financial services at the
local level: (i) the absence of strong retail capacity in microfinance institutions; (ii) extending
access of financial services to rural areas, where most of the poor are concentrated in a cost-
effective manner; and (iii) weak institutional infrastructure, including service providers such
as training institutes, accountancy services, credit reference bureaus and appropriate
information technologies. Through the lessons learnt from its operations, the Bank has made
a strategic decision to intervene selectively in support of improved access to microfinance
development. The Bank would also build on its extensive experience to support only those
areas which prove to have a direct impact on poverty reduction for women and men in rural
areas. In this regard, the present operation demonstrates clear elements of sustainable poverty
reduction, employment and income generation for the rural poor in Uganda. This will be
achieved through building sustainable rural microfinance infrastructure. The proposed project
shall be implemented in five years at a total cost of UA 12.01 million.

The proposed project is expected to contribute to MSC’s Strategic Plan 2009-2014. The direct
beneficiaries of the proposed program will be 1.4 million of the rural population in Uganda,
particularly women who do not have access to financial services. The project will also build
rural financial infrastructure and enhance their linkages to mainstream financial institutions such
as commercial banks through linkage banking and sharing client information. It will also
promote savings and credit culture among the target rural population and enhance their business
management skills through training. Overall, the project is expected to enhance the livelihood of
the rural population, therefore contributing to GoU’s efforts to reduce poverty and meet the
MDGs targets.

2. Needs Assessment

In the past two decades, the microfinance industry in Uganda has transformed from infancy
to a sector with a significant contribution to the economy. An assessment of the microfinance
industry in 2007 by FINSCOPE Uganda showed that the cliental base increased from 300,000
in 1997 to 3.5 million in 2007, 60% of whom are women. By 2006 there were 1,271 Tier four
financial institutions in Uganda, of which approximately 70% are Savings and Credit
Cooperatives (SACCOS), NGOs and other microfinance institutions which are not supervised
by the Bank of Uganda. Nevertheless, FINSCOPE study also revealed that: 62% of Ugandans
still have no access to formal financial services; 71% of those who save do not bank; 54%
receive credit from friends and relatives; and approximately 70% of rural populations,

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especially women are without access to financial services. Because of the importance of the
rural economy, the GoUs economic policy and development strategies have identified rural
finance as a vital tool in reducing poverty and enhancing economic growth. In response to
this urgent need to support rural poverty reduction, the Government developed the Rural
Financial Services Strategy (RFSS) as a key pillar of the Prosperity for All Program (PFPF)
which clearly outlines the need to continue to develop financial services for small business
development services as a priority vehicle to support the rural poor in enhancing their
incomes.

3 Bank’s Added Value

The proposed 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 that govern the microfinance
industry in Uganda; 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 supported the creation of the Microfinance Support Centre (MSC) in
2001, which has been designated by the GoU as a linchpin Apex to wholesale credit funds,
develop business services, and coordinate GOU interventions and mobilize resources for the
development of the microfinance industry in Uganda. The Bank’s lead role in the microfinance
industry in Uganda also gives it an added advantage regarding appreciation of sector needs and
issues. Supporting the proposed project, therefore, demonstrates the Bank’s commitment to
engage with GoU in prioritizing and addressing the delivery of microfinance services to the rural
poor in Uganda.

4. Knowledge Management

MSC will conduct beneficiary assessment and outcome and impact tracking studies. To also
enhance industry knowledge and enrich learning processes, the MSC will conduct operational
research including development of new products whose results will be disseminated through
national level forums, including seminars and workshops.

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 RURAL INCOME AND EMPLOYMENT ENHANCEMENT PROJECT (RIEEP)
Hierarchy of Expected Results Reach Performance Indicative Targets Assumptions/Risks
Objectives Indicators Timeframe
Goal Impact Beneficiaries Impact Indicators Progress anticipated in long term By 2014 Assumption statement:
To contribute towards Increased employment and - Rural - Population below the - Population below the poverty line reduced Priority given to rural development
reducing rural poverty in household income Communities poverty line from 31% to 24%; and maintained in medium and long term;
Uganda. in all - per capita income of target clients increased
districts from $490 in 2007 to $550 by 2014
Source: PEAP/NDP Annual Progress Report
Project Purpose Outcome Beneficiaries Outcome Indicators Progress anticipated in medium term By Assumption statement:
To facilitate access to - Enhanced institutional 1.4 million -Growth of loan 2013 Risk (Medium)
and utilization of capacity rural clients portfolio - Growth of loan portfolio from 35% to 75%; - Policy Shift by GOU
affordable financial and - Maximized outreach and -Loan portfolio quality - Enterprises to generate at least 50% average return - Impact of financial crisis on the
business development delivery of financial -Depth of outreach in on capital ; Banking sector
services for 1.4 million services to rural areas, terms of number of - Create 1.4 million employment opportunities Mitigation strategy:- Microfinance
rural poor Ugandans. particularly women rural clients reached; from current rate of 380,000, 50% women policy in place and a regulatory body is
-Clients’ business - Gender parity reached in accessing financial to be established for Tier 4 financial
profitability services. institutions. Sustain capacity building of
MSC staff, management and board to
Source: RIEEP Quarterly Progress Reports enhance efficiency and effectiveness.
Inputs/Activities Outputs Beneficiaries Output Indicators Progress anticipated in short term: By 2012 Assumption statement:
1. Financial Services - Intermediaries and clients 1.4 million - Depth of outreach; - from 380,000 to 1.4 million rural clients Risks: (Low)
(activities) served and loans issued; rural clients - One loan product reached, 50% women -Capacity constraints at the Zonal level
- MSC and intermediaries (50% women) developed annually; - from 989 to 2,934 loans disbursed to financial Mitigation strategies:
2. Institutional and trained - One client tracking intermediaries; - MSC supported to fill staffing gaps
Business Development - Loan products developed; survey conducted per - Capacity of 1000 intermediaries strengthened; with appropriate skills mix;
Services. (Activities) and- tracking survey annually - 3,000 staff of MSC and intermediaries (120 - Increased operational sustainability
conducted. - Improved repayment MSC and 2880 MFIs) acquired business through increased outreach to
Source UAM % rate development skills ; intermediaries;
ADF 10.21 85 - Gender parity maintained in rural clients
GOU 1.80 15 accessing credit ;
Total 12.01 - MSC Maintained 95% repayment rate.
Source: RIEEP Quarterly Progress Reports

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 YEARS 2009 2010 2011 2012 2013 2014
MONTHS A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D ACTION BY
ACTIVITY
ADMINISTRATION
Appraisal: August 2009 ADF/GOU
Board Approval: November 2009 ADF
Loan Signature: Dec 2009 ADF/GOU
Entry into Force ADF
Project launching: ADF/GOU
IMPLEMENTATION
Implementation period GOU
Supervision Missions ADF/GOU
Mid-term Review ADF/GOU
Bank/Borrower PCR: Dec 2014 GOU
FINANCIAL SERVICES
Delivery of financial services MSC
INSTITUTIONAL & BUS. DEVELOPMENT
Procurement of goods MSC GOU
TA recruitment GOU
TA GOU
A S OND J FMAM J J A S OND J FMAM J J A S OND J FMAM J J A S OND J FMAM J J A S OND J F M A M J J A S O N D
2009 2010 2011 2012 2013 2014

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REPORT AND RECOMMENDATION OF THE MANAGEMENT OF THE ADB GROUP
TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN TO UGANDA FOR THE
Uganda Rural Income and Employment Enhancement Project (RIEEP)
Management submits the following Report and Recommendation on a proposed loan for
UA 10.21 million to finance the Uganda Rural Income and Employment Enhancement
Project (RIEEP).

I – STRATEGIC THRUST & RATIONALE

1.1. Project linkages with country strategy and objectives
1.1.1 The GoU’s Poverty Eradication Action Plan (PEAP) includes microfinance under
Pillar 2 - “increasing production, competitiveness of Uganda’s products and household
incomes”. The strategy specifically recognizes that microfinance can act as a catalyst for
enhancing productivity and competitiveness and the incomes and savings of poor households.
To stimulate the implementation of these strategies, the GOU also prepared the Prosperity for
All (PFA) programme. Under PFA, rural financial services features as one of the key
strategic areas that need urgent intervention in order to increase access of financial services
by the rural poor, enhance household income and to stimulate savings and investment. The
program emphasizes the need to enhance production, competitiveness and commercialization
of the economy. This is to be achieved through increased production and productivity,
promoting value addition and marketing, improved access to information and increased
access to affordable financial services. The above mentioned pillar supports pro-poor growth
and poverty reduction and is fully in harmony with the Bank’s Microfinance Policy and
Strategy (2006); Medium Term Strategic Plan 2008-2012 which promotes building inclusive
financial systems that complement the private-sector efforts. The Project also falls within the
UJAS priorities under pillar 2. See Annex A1: Uganda’s development agenda and donor
support.

1.2. Rationale for Bank’s involvement

1.2.1 Assessment of the microfinance industry in 2007 by FINSCOPE Uganda revealed
that: 62% of Ugandans have no access to financial services; 71% of those who save do not
bank; 54% receive credit from friends and relatives; and approximately 70% of rural
populations and women are without access to financial services. A 2008 study on
“Constraints in Access to and Demand for Rural Credit: Evidence from Uganda,” by Paul
Mpuga, revealed that rural households are at a disadvantage in terms of demand for credit. In
1999, the study found that the average amount of credit applied for was about US$78.4 while
about US$40 was on average received by the applicants. In general loan applications for
individuals from rural areas were found to be 45% smaller than those of their urban
counterparts. In terms of the demand for credit by urban and rural areas, it is estimated that
about 40% and 50% of the credit demand by the urban and rural population respectively have
not been met.

1.2.2 It was also found that: (i) lending to agriculture remains the least covered (the
excluded category) by formal financial institutions compared to lending to trade and
commerce; and (ii) community based financial institutions such as SACCOS are very
important in meeting the credit needs of rural households. The study therefore, concluded

1
that: (a) there is limited supply of credit to the agricultural sector, the mainstay of rural
population which constitutes 80% of the poor and contributes more than 38% of the GDP; (b)
Government targeted credit programs play a critical role in assisting rural households in
accessing credit; and (c) local community savings and credit cooperatives are more
responsive given the absence of formal financial institutions in rural areas.

1.2.3 As a result of the financial crisis, the foreign direct investment in Uganda fell by 5
percent in FY 2008/09 and there was a reversal of portfolio capital inflows, from a net inflow
US$ 66.30 million in FY 2007/08 to a net outflow US$108.95 million in FY 2008/09. Many
of the foreign investors faced liquidity shortages as a result of the global financial crisis and
responded by pulling funds out of emerging markets. Private remittances to Uganda are
estimated to have declined by 24 percent in FY 2008/09 compared to the previous year,
especially as industrialized economies took a hit in terms of reduced GDP growth and market
liquidity. While some of the sectors which are highly dependant on imported inputs have seen
a decline, the services and manufacturing sectors proved resilient to the impact of the global
crisis and, therefore, have helped to support the overall GDP growth rate in the face of the
supply side and demand side shocks. The services sector grew by 9 percent in FY 2008/09,
down from 10 percent in FY 2007/08 while the 7 percent growth rate of manufacturing in FY
2008/09 was also only slightly less than in the previous year. The growth in informal cross
border trade exports to the region, which are dominated by manufactured goods, has provided
an important boost in demand for this sector. The agricultural sector grew by 2.6 percent in
FY 2008/09 which was double the growth rate in FY 2007/08 on account of increased
demand for food in the region. As such the GOU has established a focused policy to target
the support of these sectors which are mainly rural-based.

1.2.4 Based on the GOU proactive policies to support rural based economic growth, all
analysis and projections estimate an increase in demand for rural financial services by at least
35% by 2015, as the GOU rolls out its PFA programme, which focuses on reforms related to
employment generation, increasing food security and increasing regional trade and private
sector investment opportunities. The GOU has estimated that in order to continue on the path
of sustained economic growth, broad-based participation from the small and micro
entrepreneurs will be imperative both for the service and productive industry. As such, the
RIEEP will respond to the GOU plans to meet this emerging need for increased access to
financial services contributing to economic growth in the priority sectors. Annex 1 provides
the demand estimate of at least 2,934 new wholesale loans to be generated by the period
2014. It should be recognized that: (i) the proposed project is the third operation to be
financed by the Bank in Uganda; (ii) MSC was created by GOU in close collaboration with
the Bank with the aim of establishing a viable and sustainable institution with the potential to
expand outreach and increase the access of the rural poor in Uganda to financial services; (iii)
During the implementation of the previous two operations, the Bank learned important
lessons that will enhance the achievement of the project objective (see section 2.7).

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1.3. Donors coordination

Size
Sector or subsector*
GDP Exports Labor Force

Microfinance NA NA NA

Players – Public Annual Expenditure (average)**

Government Donors [Donor 1] [%]

UA m [UA m] [UA m] [Donor 2] [%]

15 41
31% 69% IFAD 31.8%
AfDB 30%

IsDB 20%
GTZ 18%

Level of Donor Coordination

Existence of Thematic Working Groups Yes
Existence of SWAPs or Integrated Sector Approaches Yes

ADB's Involvement in donors coordination*** L

* as most appropriate ** Years [yy1 to yy2] *** for this sector or sub-sector
**** L: leader, M: member but not leader, none: no involvement

1.3.1 Historically, a number of donors and partners on the ground have been engaged in the
support of the microfinance sector. However, since 2006, upon the completion of a number of
donor-supported microfinance projects, partners have not renewed their engagement in this
industry. This has been mainly as a result of changes in partner priority areas of engagement..
More recently, the World Bank has approved a second phase of the Northern Uganda Social
Action Fund for USD 100 million, which aims to improve access of beneficiary households
and communities of Northern Uganda to income earning opportunities and improved basic
socio-economic services. Specifically, the Project will support the poor to mobilize in
livelihood-oriented groups and business organizations for household income enhancement
and support the rehabilitation of public socio-economic infrastructure in underserved
communities. The Islamic Development Bank approved in April 2009 a facility of UA 6.8
million to GoU for MSC. The IsDB project will provide USD9.7 million to support the credit
needs of rural clients and a grant of USD 0.30 million for capacity building of rural financial
intermediaries. DANIDA, together with SIDA and the EU, has recently approved the Agri-
Business Initiative under their U-Growth programme. The total programme amount is EURO
32 million of which about EURO 6.6 million is allocated to increasing access to financial
services to rural financial intermediaries and strengthening local commercial banks. IFAD
continues to implement its existing programme, worth USD 18.34 million, on supporting
capacity building of SACCOs and other rural MFIs. The existing project is ending in 2011 at
which point IFAD will evaluate its achievements under this intervention. A joint GTZ/ SIDA
support project to MOFPED worth EURO 7 million aims to establish a Credit Reference
Bureau.

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1.3.2 Generally, cooperation among microfinance stakeholders, in which donors were
active participants, led to the creation of several highly effective mechanisms for
collaboration. A number of the positive developments from this collaboration include: (i) the
establishment of the Private Sector Donors Group (PSDG), the Microfinance Forum (MFF),
the Association of Microfinance Institutions in Uganda (AMFIU); and (ii) the development
and adoption of the “Donor principles for support to Uganda’s Microfinance Sector”, a
common donor reporting tool – Performance Monitoring Tool (PMT), and the Donor Code of
Best Practices. The Bank through the country office (UGFO) is an active member of the
above mentioned forums.

II – PROJECT DESCRIPTION
2.1 The overall goal of the proposed programme is to contribute towards reducing rural
poverty in Uganda. Its objective is to facilitate access to and utilization of affordable financial
and business development services to 1.4 million rural poor Ugandans, of which 50% are
women. The project which is an input into MSC’s Strategic Plan (2009-2014) will comprise
of the following two components: (i) Financial Services; and (ii) Institutional and Business
Development Services. For details see Annex C1: Project description.

2.1. I Components
Table 2.1: project components
Nr. Component Budget Description
UA M
1 Financial 7.97 - 1.4 million rural clients reached, of which 50% are women;
Services - 2,934 loans disbursed to financial intermediaries; and
- Gender parity maintained on rural clients accessing credit .
2 Institutional 2.24 - Capacity of 1000 intermediaries strengthened;
and Business - 3,000 staff (120 of MSC and 2880 from MFIs) and Intermediaries (50%
Development women) acquired business development skills;
Services - MSC maintained at least 95% Payback Rate; and
- Intermediary and end client tracking survey conducted annually.

2.2. Technical solution retained and other alternatives explored

2.2.1 The choice of the proposed technical/financial approach in the design of the proposed
project is dictated by the need for a realistic and cost effective solution which takes into
account constraints on the ground.

Table 2.2: Project alternative considered and reason for rejection

Alternatives Brief Description Reasons for Rejection
Conventional Use commercial banks to Limited branches in rural areas and focus on easy to reach
commercial banks channel loan-able funds. urban elite; Commercial Banks are highly risk averse and
high transaction costs due to small financial transactions in
microfinance.
Direct lending to MSC to directly retail loans to This would require large number of outlets.
rural clients rural clients.
Capacity building Focus on building the capacity The IFAD financed project focuses on capacity building
only. of microfinance institutions. which will complement the proposed project which will
focus on credit delivery.

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2.3. Project type
Project loan investment

2.4 Project cost and financing arrangements

2.4.1. The total project cost is estimated at UA 12.01 million. These cost estimates are based
on September 2009 prices. For the purpose of costing, all items have been priced in Uganda
Shilling and converted into UA at the exchange rate applicable for the month of September
2009.

2.4.2 Price escalation has been calculated based on 2.5% annual rate of depreciation of
foreign an local currency throughout the five-year implementation period.

2.4.3 The ADF instrument is a concessionary loan repayable in fifty (50) years, including a
ten (10) year grace period and attracting a service charge of 0.75 percent per annum on the
disbursed and outstanding balances of the loan. Commitment fee of 0.5 per cent per annum
will be applied to the undisbursed portion, beginning to accrue 120 days after the signing of
the loan agreement.

2.4.4 The project will be financed jointly by the ADF at UA 10.21 million (85%) and the
Government at UA 1.8 million (15%) as shown in Table 2.4. The ADF’s contribution will
cover 8% of all foreign exchange costs and 92% of local costs. The Government will finance
16.1% of the local costs. The Fund will contribute to financing the cost of goods, operating
cost and services including training costs. For the List of Goods and Services see Annex B2.
Project Costs.

Table 2.3: Project cost estimates by component [amounts in million UA equivalents]

Components Foreign currency costs Local currency costs Total Costs % foreign
1 Financial Services 0.00 9.06 9.06 0.0%
2 Institutional & Business 0.74 1.25 1.99 37.2%
development Services
Total Base Cost 0.74 10.31 11.05 6.7%
Physical contingency 0.04 0.06 0.10 37.2%
Price Contingency 0.06 0.80 0.86 6.7%
Total project cost 0.83 11.17 12.01 6.9%

Table 2.4: Sources of financing [amounts in million UA equivalents]

Sources of financing Foreign currency costs Local currency costs Total Costs % total
ADF 0.83 9.38 10.21 85.0%
GOU 0.00 1.80 1.80 15.0%
Total Project Cost 0.83 11.17 12.01 100.0%

Table 2.5: Project cost by category of expenditure [amounts in million UA equivalents]

Categories of expenditure Foreign currency costs Local currency costs Total Costs % foreign
A. Goods 0.02 0.01 0.03 77.8%
C. Services 0.72 0.96 1.67 42.8%
D. Operating Costs 0.00 0.28 0.28 0.0%
E. Miscellaneous 0.00 9.06 9.06 0.0%
Total base cost 0.74 10.31 11.05 6.7%
Physical contingency 0.04 0.06 0.10 37.2%
Price Contingency 0.06 0.80 0.86 6.7%
Total project cost 0.83 11.17 12.01 6.9%

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 Table 2.6: Expenditure schedule by component [amounts in million UA equivalents]
Components [Year1] [Year2] [Year3] [Year4] [Year5]
1. Financial Services 3.00 1.95 1.95 1.95 1.95
2. Institutional & Business
0.83 0.93 0.23 0.11 0.14
Development Services
Total Project Cost 2.79 2.88 2.18 2.06 2.10

2.5. Project’s target area and population

2.5.1 The proposed project will cover all the districts in Uganda and is expected to benefit
1.4 million rural clients, of whom 50% are women who currently do not have access to
financial services.

2.6. Participatory process for project identification, design and

implementation
2.6.1 The proposed Project was conceived following a long consultative process which
started in 2006 as RMSP was approaching completion. This included a country-wide
consultation process on the new Rural Development Strategy which covered all sub-counties
in Uganda. The process culminated in the policy workshop on SACCO regulation which took
place from 12-15 October 2008 and was attended by all relevant stakeholders. The key
outcomes of this consultative process were: (i) lack of access of financial services by the rural
poor due to either absence or lack of capacity of MFIs; (ii) need to formulate a policy and
regulatory framework for the 4 MFIs (non BoU supervised financial institutions); and (iii)
enhanced coordination of the microfinance industry. The MSC held its consultative process
to formulate its strategic plan for the period 2009-2014 followed by discussions with Uganda
Cooperative Alliance (UCA), Uganda Cooperative Savings and Credit Union (UCSCU),
National Environment Management Agency (NEMA), Post Bank Uganda; National
Agricultural Advisory and Development Services (NAADS), Association of Microfinance
Institution in Uganda (AMFIU), Uganda Industrial Research Institute (UIRI),
Parliamentarians and selected SACCOs.

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2.7. Bank Group experience, lessons reflected in project design
2.7.1 The Bank has been involved in supporting micro-finance in Uganda since 1994 with
the Poverty Reduction Project (PAP 1994-1998). Built on the lessons learnt from the
implementation of PAP, the Bank responded to a GoU request to finance the follow-up phase
- Rural Microfinance Support Project (RMSP) (2000-2008). At completion RMSP achieved
its development objectives notably: increased incomes of the Partner Organization (PO)
clients by over 10%; deepened outreach of microfinance services to rural areas and serving
70,794 clients of whom 55% were women; achieved loan repayment rate of 95% and
portfolio at risk of less than 6%; realized savings of 12% of the outstanding loan portfolio of
POs; and enhanced skills through training of 2,600 staff of 428 POs, 71,000 clients and 88
MSC staff. This enabled MSC to strengthen the institutional infrastructure to deliver financial
services to the rural poor allowing a number of MFIs and MSC, such as FINCA, UMU and
UWFT, to graduate and transform into Micro Deposit-taking Institutions (MDIs) in 2004/5.

2.7.2 The proposed project builds on the achievements of the previous phases and seeks to
consolidate the capacity and outreach as well as expand access to financial services by the
rural poor. The RIEEP is designed to support the GoU’s second Strategic and Business Plans
for the Microfinance Support Centre (MSC-2009-2014) and is built on the following lessons
summarized below that have been integrated into the new Project.
2.7.3 Policy stability: The experience from RMSP indicated that the implementation of the
project was affected by the GOU policy shift which required that MSC focus on SACCOs
only. This was mainly due to GoU’s genuine concern on the slow progress in expanding
outreach of financial services to rural areas. The GOU has since proposed a new policy for
Tier four financial institutions and is working on a regulatory framework that will enhance
their effectiveness in order to expand outreach and access to financial services in rural areas.

2.7.4 Conflict Resolution: As a result of the aforementioned policy shift, the RMSP had
suffered from a period of suspension of disbursements. However, both the Bank and GOU
remained in a constructive dialogue and engagement at the time which led to a quick
resolution of outstanding issues and better management practices. In addition, an industry
wide Collaboration Secretariat was established at MSC in order to resolve policy and
operational issues.

2.7.5 Institutional Transformation: It is important to recognize that transforming public

institutions to corporate entities is a long and delicate process requiring a lot of preparedness
and continued support on the part of the Borrower and the Bank. This is aimed to consolidate
the achievements made to date and complete MSC’s transformation to a full-fledged apex
institution which wholesale funding and provide technical service to fourth tier MFIs in
Uganda. This presents a sustainable home-grown model with potential to deepen outreach of
microfinance services to the active poor in rural Uganda.

2.7.6 Institutional sustainability: In order for MSC to continue to provide the nationwide
support as an apex financial institution, it needed to graduate from a project to a fully
functional business entity. This has been achieved through registration of MSC as a limited
liability company with a clear operational and business plan. Annex B1 presents lessons
learned from a sample of ADF financed projects in Uganda.

7
2.8. Key performance indicators
2.8.1 The key performance indicators of the proposed project will follow those highlighted
in the Log frame. These indicators would include: (i) growth of loan portfolio from 35% to
75%; (ii) enterprises to generate at least 50% average return on capital; (iii) create 1.4 million
employment opportunities from current rate of 380,000; and (iv) gender parity reached in
accessing financial services. MSC will monitor progress made towards the achievement of
expected outcomes through the collection and compilation of financial, economic and social
data during the quarterly field supervision missions.

III – PROGRAM FEASIBILITY

3.1. Financial Performance
3.1.1 The Microfinance Support Centre Ltd. (MSC) created as part of RMSP
implementation is a company limited by guarantee and is owned by the Government of
Uganda (GOU). By April 2008 (RMSP completion), MSC had disbursed UGX 24.46 billion,
(UA 6.9 million) the most significant of which were 417 RMSP loans valued at UGX 21.59
billion (UA 6 million). Overall MSC total assets had increased from UGX 24.61 billion (UA
6.8 million) as at June 2007 to UGX 49.47 billion (UA 14.2 million) as at June 30, 2009.
MSC’s vision, mission and objective is tailored to the objectives of the GoU’s Microfinance
Policy Framework of 2007/2008. It has a strong board and committed skilled staff. The
company has been identified as the linchpin of GOU rural financial services with the aim of
increasing access to credit through loan products that, among others, support the agricultural
production value chain. It operates countrywide through 12 Zonal Offices that deliver
diversified loan products in all districts. Following is a summary of financial analysis. For
detailed analysis refer to Annex B7.

3.1.2 Considering the prevailing market interest rates and demand for microfinance
services, it is expected that: (i) the average loan size for the commercial loan product will
increase from UGX 52.00 million (UA 15,000) to UGX 330.00 million (UA 95,400) and
from UGX 50.00 million (UA 14,546) to UGX 370.00 million (UA 106,975) for the
agricultural loan product; (ii) the loan portfolio will grow from UGX 30.72 billion (UA 9
million) in YR 1 to UGX 182.98 billion (Ua 53 million) by YR 5; (iii) loan disbursements are
projected to grow from UGX 25.12 billion (UA 7.2 million) in YR 1to UGX 68.09 billion
(UA 20 million) in YR 3 and UGX 130 billion (UA 38 million) by YR 5; (iv) the number of
Partner Organisations (POs) and POs clients will reach 2,934 and 1,467,000 respectively by
YR 5.

3.1.3 Some key indicators presented in the table below show that the yield on portfolio is
projected to improve from the current 9.1% to 12% in YR 1. MSC is expected to control
costs such that operating cost ratio is projected to improve from 20% in Year 1 to 7% in Year
3 and 4% by Year 5. The staffs in both HQ and Zonal offices is projected to operate
optimally such that the ratio of FSOs to total number of staff will be 60% by Year 5 which is
in accordance with sound practices. The average case load (borrowers per zone) will be 75
loans over the project implementation period.

3.1.4. In order to supply their services on a sustainable basis, it is imperative that MSC
maintain high repayment rates. It is projected that annualised loan write-off ratio will not be
more than 2% per annum. Loan loss provision will not go beyond 5%. Loan repayment will
not go below 95%.

8
 Table 3.1: MSC Key Indicators’ Projections
KEY INDICATOR
Growth and Outreach Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Total Loan Portfolio (UGX billion) 17.04 30.80 56.10 90.15 136.20 182.98
Number of Active Loans 450 936 1,433 1,927 2,431 2,934
Efficiency and Productivity
Yield on Portfolio 9.1% 12% 12% 12% 12% 12%
Operating Cost Ratio 15% 20% 11% 7% 5% 4%
Average Performing Assets (APA) 53.71 64.88 83.69 115.90 163.20
Administrative costs/APA 8% 7% 9% 10% 10%
Personnel costs/ Administrative costs 63% 62% 44% 33% 27%
Credit Officers as a % of total staff 40% 43% 45% 53% 60%
Portfolio Quality
Reserve Ratio 5% 5% 5% 5% 5% 5%
Loan write-off ratio 2% 2% 2% 2% 2% 2%
Profitability
Operational Self-Sufficiency 33% 53% 73% 103% 131% 159%
Financial Self-Sufficiency 29% 43% 59% 70% 78%
Solvency
Equity Multiplier 1.07 1.06 1.04 1.04 1.03 1.02

The equity multiplier will be maintained above 100% (1.06 on the average). The company is
projected to be operationally self-sufficient from YR 3 with an OSS of 103%, 131% in YR 4
and 159% by YR 5 of project implementation. The overall 5-year OSS is projected to 116%.
By YR 5, the company will register cumulative net income before grants of UGX 2.30 billion
(UA 0.7 million).

3.2 Economic Impact

3.2.1 The project will support at least 1.4 million clients and create one full time and an
average of 2 part time jobs in every new micro-enterprise established. Further analysis of
potential businesses to be supported by the MSC partner organisations shows that on the
average the local economy in each Zone is expected to be injected by at least 4.5% new and
renewed local investments. The credit facility would inject 2,934 loans to enable rural poor
households tap financial resources and take advantage of potentially profitable investment
opportunities. This is expected to: (i) generate at least 1.4 million employment opportunities
for rural clients, of whom 50% are women, through the provision of loans and enhanced
skills through training and business development services; (ii) bring about positive changes
on business growth, high return on capital and increase their earnings as the loan size
increased while the loan portfolio will grow by 75%; (iii) significantly increase household
productive assets, earnings and returns on borrowed capital at market rate of interest; and (iv)
increase household savings which will provide incentives to build up funds for investment or
future household consumption. Overall, based on the operational outcomes of PAP and
RMSP, it is estimated that these enterprises will generate at least 50% average return on
capital per enterprise. Annex B7 presents detailed: financial and economic analysis.

9
3.3 Environmental and Social impacts

Environment

3.3.1 The proposed project is category IV. This is justified on grounds that the project
activity is the wholesaling of funds to financial intermediaries and no direct physical
infrastructure investments are envisaged. The proposed project, therefore, will not require
environmental and social mitigation measures. The National Environment Management
Agency (NEMA) is a collaborating partner with MSC, whose main role will be the
development of guidelines and training of clients on project appraisal for funding especially
in fragile environments and ecosystems. Annex B8 presents the Environmental and social
management plan analysis.

Gender

3.3.2 The vast majority of clients of Ugandan MFIs are women: loans to female clients
constitute around 75% of the loan portfolio and 80% of the savings portfolio (MFPED 2000).
Some microfinance providers like FINCA, FOCCAS or UWFT only target female clients.
Most MFIs focus on women for two reasons. First, lending to women is thought to benefit the
whole family and strengthen the role of women in society. The second reason is that women,
like in most other parts of the world, have proven to be better in repaying loans compared to
their male counterparts. In some cases, female-only MFIs accept men if they replace their
deceased wives. CERUDEB, a commercial microfinance provider with slightly larger
average loans than most other MFIs, pursues an equal access policy and asks for collateral.
This sometimes excludes women. However, it is not uncommon that a loan is in the
husband’s name but the woman is running the business. In most microfinance institutions,
especially in those only targeting women, at least half of the workforce is female. While
MFIs increasingly recruit female credit officers and women constitute approximately half of
senior management (varying from organization to organization), board members are still
mainly men. Although most MFIs in Uganda specifically target women, only a few have
altered their methodology in significant ways for this reason. Most microfinance providers
feel that women’s empowerment is an important aspect of financial service provision, but that
they are first of all obliged to seek efficiency and sustainability in order to guarantee durable
access to financial services to as large a number of poor clients as possible.

3.3.3 The Project will reach at least 50% female beneficiaries in all regions. Based on
analysis of a sample of enterprises, it is envisaged that the income of female headed
households will increase at least by USD 320 per month as a result of the injection of new
access to finance. The project will also support gender sensitization training in all its capacity
building activities as well as require that all financial intermediaries provide a report to MSC
on the gender balanced outreach of their clientele. Further gender responsive monitoring
mechanisms will also be built into the new MIS at the MSC, and periodic reports to the Board
and Bank will report gender disaggregated data as relates to the project impact.

Social

3.3.4 The Project will contribute to the empowerment of more than 1.4 million poor and
low income rural households in Uganda, of which 50% are women. Access to financial
services will enable the rural poor to improve their well-being both at the individual and
household level. The average income of borrowers among MSC partner organizations is

10
expected to increase by at least between 10%, and 50%, with projections that by the end of
the project about 3% of the targeted population will graduate to above the poverty line.
Increased propensity to save will enhance local investment and the socio-economic livelihood
of the clients, as well as further rendering them within the bankable client group. Increased
access to agriculture loans is also expected to contribute to increasing food security and
reduce child malnutrition in some communities. The impact of these achievements will
reduce vulnerability of the clients, particularly female-headed households. Benefits from the
loans will supplement households’ expenditures in education and health, which usually
account for more than one third of Ugandan household expenditures. The daily caloric intake
of children will improve due to additional spending on food resulting from additional sources
of income. The multiplier effects will be higher as the healthy children and educated future
generation will be able to contribute effectively in the economic development process of their
country.

IV – IMPLEMENTATION
4.1. Implementation arrangements

4.1.1 The project shall be implemented using existing structures namely the MSC (Annex
B3 for an institutional assessment of MSC and its organizational structure). The Ministry of
Finance, Planning and Economic Development (MoFPED) will be designated as the Project
Executing Agency. The Microfinance Department in the MoFPED will oversee the
implementation of the Project. MSC, which was established in 2001 as a company limited by
guarantee, is designated as the Project implementation entity and will be responsible for the
day to day management of Project activities. MSC is headed by a 7 member Board of
Directors. MSC will wholesale loan funds to intermediaries such as SACCOs and MFIs at a
competitive interest rates depending on the nature of the relevant loan product. MSC’s
strategic plan stipulated different rates of market determined interest for each loan product.
These intermediaries will on-lend credit funds to enterprises in rural areas at a rate of interest
that will enable them to recover the cost of capital plus a margin of profit. The processing of
loans to intermediaries will be done through the MSC Zonal Offices and governed by the
eligibility criteria which are stipulated in the Credit Operations Manual. In addition, MSC
will outsource institutional and business development services from viable service providers
in the private and public sector.

4.1.2 The Board of Directors established the Finance, Audit, and Human Resources
committees. It also oversees a management structure which comprise of the Executive
Director and 6 Heads of Departments, namely Financial Services, Business Development,
Marketing and Communication, Company Secretariat and Administration, Internal Audit and
Finance and Accounting. In order to decentralize its operations and remain responsive to
intermediaries and end target client’s needs, MSC established 12 fully-staffed Zonal Offices,
each with catchments of 5-7 districts. In total, MSC has a staff complement of 83.

4.1.3. The project implementation will be supported by the Uganda Field Office (UGFO).
UGFO is also expected to assist in all disbursement and procurement issues. Annex B3
presents the Implémentation Arrangements.

4.1.4 Procurement Arrangements: Procurement of goods and works and acquisition of

consulting services financed by the Bank will be in accordance with the Bank's Rules and
Procedures for Procurement of Goods and Works or, as appropriate, Rules and Procedures for

11
the Use of Consultants, using the relevant Bank Standard Bidding Documents. Procurement of
individual training contracts and delivery of on-lend services will be in accordance with MSC
procedures. The MSC will be responsible for the procurement of goods and service contracts,
consulting services and training. Annex B5 presents detailed project Procurement
Arrangements.

Table 4.1: Summary Procurement Arrangements in UA millions

Project Categories Other Short list Non-Bank Total
Funded
1 Goods
1.1 Furniture MF Resource Centre 0.008 (0.008) 0.008 (0.008)
1.2 Equipment MF Resource Centre 0.008 (0.008) 0.008 (0.008)
1.3 Books MF Resource Centre 0.019 (0.019) 0.019 (0.019)
Sub-total 0.034 (0.034) 0.000 0.034 (0.034)
2 Service Contracts
2.1 Subscriptions MF Resource Centre 0.019 (0.019) 0.019 (0.019)
Sub-total 0.019 (0.019) 0.019 (0.019)
3 Consulting Services
3.1 Client tracking surveys 0.169 (0.169) 0.169 (0.169)
3.2 MTR Services 0.022 (0.022) 0.022 (0.022)
3.3 PCR Services 0.022 (0.022) 0.022 (0.022)
3.4 Tech. Assistance 0.345 (0.345) 0.345 (0.345)
3.5 External audit services 0.150 (0.150) 0.150 (0.150)
3.6 Innovation & Product develop. 0.376 (0.376) 0.376 (0.376)
Sub-total 0.169 (0.169) 0.914 (0.914) 0.000 1.083 (1.083)
4 Training
4.1 POs/ Clients training 0.507 (0.507) 0.507 (0.507)
4.3 MSC staff training international 0.098 (0.098) 0.098 (0.098)
4.4 MSC staff training national 0.181 (0.181) 0.181 (0.181)
Sub-total 0.279 (0.279) 0.507 (0.507) 0.000 0.786 (0.786)
5 Miscellaneous
5.1 Loan Funds 9.766 (7.969) 9.766 (7.969)
5.2 M&E 0.225 (0.225) 0.225 (0.225)
5.3 Testing & Roll out of new products 0.094 (0.094) 0.094 (0.094)
Sub-total 10.085 (8.288) 10.085 (8.288)
Total Cost 10.585 (8.789) 1.421 (1.421) 0.000 12.007 (10.210)

4.1.5 Disbursement Arrangements: ADF loan resources will be deposited into two
accounts. The two accounts are described below:

(i) An Account for the tranches associated with the Financial Services component at the
Bank of Uganda. The Account will be replenished in two tranches upon satisfaction of
the conditions associated with Bank’s intervention as stipulated in section 5.2 of this
report; and

(ii) A Special Account (SA) specifically earmarked for the Institutional and Business
Development Services component at the Bank of Uganda (BoU) will be opened.
Upon request by the Borrower, Direct Payment method will be used to make
payments directly to third parties in respect of goods or services already delivered to
the Borrower or goods expected to be delivered, and for external audit services. In
addition, the Borrower will open one Local Currency Account (LCA). Funds will be
withdrawn from the SA to be deposited in the LCA to meet project expenditures.
Expenditures should be committed to the items eligible under the loan and should

12
 cover a previously approved program of work and activities for a period of 4 months.
Funds advanced under the Special Account shall be fully justified within a maximum
of 12 months. The Special Account will be replenished as per Bank disbursement
rules and procedures.

4.1.6 Financial Management Reporting and Auditing: A detailed review of the financial
management systems at MSC by the Bank appraisal mission (Annex B4) has concluded that
the financial management and reporting systems in place are adequate. The budgeting
processes are reasonable; they include all project activities and the realism and consistency of
the assumptions is improving. The audit committee and the internal audit department are
active and performing as required by the respective Terms of References. Internal control
procedures over payroll, cash, movable assets and procurement and payments, etc., are
equally adequate. There is segregation of functions, particularly the following: authorization
of transactions, recording the transaction, maintaining the assets register and the specification
of authority limits on personnel. The staffing arrangements in the accounts departments are
adequate for the company’s activities. The current fund flow arrangements that are assumed
to be maintained are secure, efficient and helpful to the GoU. The current system of external
audit arrangement for the project is acceptable; it provides reasonable assurance on auditor
independence and quality of work.

4.1.7 The financial management arrangements for the project have been designed in
consideration to AfDB Guidelines for Financial Management and Financial Analysis of
Projects, January 2007, which describe the overall Bank policies and procedures related to
financial management. Following the installation of the Management Information system, the
project will (i) correctly and completely record all transactions and balances relating to its
financial transactions; (ii) facilitate the preparation of regular, timely and reliable financial
statements; (iii) safeguard the project’s assets; and (iv) can be subject to external auditing
acceptable to the Bank. To this end, overall project’s financial management aspects will be
under the responsibility of the Finance Department of MSC established since 2001. The
department is headed by the current Financial Manager supported by an experienced team of
accountants whose qualifications have been assessed to be satisfactory. Key accounting
policies and procedures will be the same as those in force at MSC.

4.1.8 For the purpose of this project, it is expected that the budget of the MSC will include
the estimated ADF and the GoU resources. The Finance Department team will prepare an
annual work plan and budget for implementing project activities, taking into account the
project’s components. The work plan and budgets will identify the activities to be undertaken
and the role of respective MSC departments. Annual work plans and budgets will be
consolidated into a single document by the Finance Department, which will be submitted to
the Board of Directors for approval no later than June 30th of the year preceding the year the
work plan should be implemented.

4.1.9 The internal audit function of the project will be under the responsibility of the
Internal Audit Unit within MSC. The Unit will carry out regular internal audit controls, aimed
to ensure that internal control system is sustainably performing in a satisfactory manner.

4.1.10 Interim financial reports will be designed to provide quality and timely information on
project performance to MSC management and Board, ADF and the MOFPED. The project
will use the same format as the one in use by MSC with the following additional features:
The reports will be issued on a quarterly basis and will include sources and uses of funds;

13
expenditures by project activities (sub-components) with comparative actual and budgeted
amounts for the period under review and cumulatively for the project life; opening and
closing balance of advances received from the ADF and other donors; projected expenditures
and cash forecast for the next reporting period; and explanatory notes as needed. The
consolidated quarterly interim financial reports will be prepared and submitted to ADF within
45 days after the end of each calendar quarter.
.
4.1.11 The National Office of the Auditor General (OAG) or an external auditing firm
appointed by the OAG and acceptable to the Fund will undertake annual audit of the project
accounts. Certified copies of audited financial statements including the management letter
will be submitted to the Fund by the MOFPED not later than six months after the end of each
fiscal year. The external audit will be carried out according to either International Standards
on Auditing (IFAC) or INTOSAI Auditing Standards and will cover all aspects of project
activities implemented at central and decentralized levels. The project will be supervised at
least twice a year. Financial management supervision will focus on the status of financial
management system to assess whether the system continues to operate well and provide
support where needed.

4.2. Monitoring
Timeframe Milestone Monitoring process / feedback loop
November 2009 Loan approval Bank
April 2010 Loan effectiveness Launching Mission & close follow-up by UGFO
May 2010 Commencement of MSC and Bank to closely monitor project implementation
implementation through quarterly field visits and collection of socio-
economic data to asses progress towards targets set in the
logframe. Quarterly progress reports will also be prepared
by MSC.
30 June in 2010, Audit Report Annual audit of project accounts will be prepared by the
2011, 2012, 2013, Office of the Auditor General. In addition, MSC’s Internal
2014 and 2015. Audit Unit will close monitor and control utilization of
loan resources.
April 2015 Project completion Bank and MSC to prepare a joint Project Completion
Report (PCR).

4.3. Governance
4.3.1 GoU, supported by development partners, conducts periodic fiduciary reviews. The
reviews show that Uganda’s public finance management system is improving and is becoming
more reliable given the mitigation measures put in place. It should be noted that existing
weaknesses/challenges are currently being addressed by the GoU with assistance from
development partners in order to further enhance the efficiency of the system, mainly through
control of public expenditure. In this connection, GoU is implementing public administration
reform with the assistance of donors, including the WB, ADB, DfID and the EU. In addition,
the Local Government Development Program supported by the WB and the Institutional
Support for Good Governance supported by ADB has enhanced provision of services and
accountability by local governments. These activities are aimed at mitigating the identified
governance risks.

4.3.2 As a result, the Bank support to microfinance in Uganda will help ensure transparency
at all levels and by all intermediary institutions. These will be facilitated by using the standard
Bank procedures and guidelines in addition to the Government’s systemized financial
management procedure, which has been successfully applied under other on-going Bank

14
operations. Provision has also been made under the project for an annual audit to be carried
out covering all aspects of project implementation.

4.4. Sustainability
4.4.1 The Project has been designed taking into consideration the financial and operational
sustainability of MSC at the end of the Project life. As outlined in Annex B7, the financial
projections indicate that the MSC will be operationally sustainable by year 2014. The interest
income and fee structure is expected, therefore, to generate additional income to cover
operating costs and accelerate the Project’s financial self-sufficiency and sustainability in the
3 years of the Project life. As such, in the first two and half years, the company is building a
rural financial infrastructure which will start yielding results in the 3rd year. The company is
projected to be operationally self-sufficient from YR 3 with an OSS of 103%, 131% in YR 4
and 159% by YR 5 of project implementation. The overall 5-year OSS is projected to 116%.
This is in line with Microfinance best practices. By YR 5, the company will absorb any past
losses and register cumulative net income before grants of UGX 2.30 billion (UA 0.7
million). Financial self-sufficiency (FSS) will gradually increase from 20% in 2009 to 78% in
2014. The project will break – even and make a net operating income of UGX 0.23 billion
(UA 0.07 million) in the third year, UGX 3.15 billion (UA 0.9 million) in the forth year and
UGX 7.07 billion (UA 2.1 million) in the fifth year of the projections. In addition, the
training program, technical assistance and support in systems development are expected to
enhance the operational capacity and efficiency of partner organizations, while improving
their performance and sustainability.

4.4.2 As an exit strategy, the Bank’s disbursement structure is aligned with the time period
during which MSC strengthens its capacity and outreach. The final disbursement under the
credit facility will be at the same time when the MSC is at full capacity. The MSC strategic
plan has also clearly outlined a sustainability path which includes the capacity to further
mobilize from the market for new loans at the end of RIEEP. The GOU, through its Board
Members, will continue to maintain a supervisory and guiding role with MSC Management
taking the day-to-day actions further strengthening Management oversight and accountability
responsibilities.

4.5. Risk management

Table 5: Potential Risk and Mitigating Measures
Potential Risks Risk Mitigation
Policy Shift by GOU Strengthen institutional and financial governance by establishing rules, procedures
and processes that are built on industry best practices
Impact of the Financial All recent analysis has shown the Uganda financial and Banking sector has
Crisis on the Banking withstood the effects of the recent crises. Nevertheless GOU continues to strengthen
Sector Banking practices as well as monitoring roles.
Capacity constraints at The recent recruitment drive by MSC is based on a much more stronger
the Zonal and institutional drive. Further capacity building support to MSC is provided under
Headquarters level RIEEP.

4.6. Knowledge building

4.6.1 MSC will conduct beneficiary assessment and outcome and impact tracking studies.
To enhance industry knowledge and enrich learning processes, the MSC will conduct
operational research including development of new products whose results will be
disseminated through national level forums, including seminars and workshops.

15
 V – LEGAL INSTRUMENTS AND AUTHORITY

5.1. Legal instrument

An ADF loan to the Republic of Uganda will be used to finance this project.

5.2. Conditions associated with the Bank’s intervention

A. Conditions Precedent to Entry into Force of the Loan Agreement

(i) The entry into force of the Loan Agreement shall be subject to the fulfilment by the
Borrower of the applicable provisions of section 12.01 of the General Conditions Applicable
to Loan Agreements and Guarantee Agreements of the African Development Fund.

B. Conditions Precedent to First Disbursement

Section 5.01. Conditions Precedent to First Disbursement relating to the Institutional and
Business Development Services Component. The obligations of the Fund to make the first
disbursement of the portion of the Loan relating to the Institutional and Business Development
Services Component of the Project as described in Annex I of this Agreement (the "IBD
Component") shall be conditional upon the entry into force of the Agreement in accordance with
Section 4.01 above and the fulfilment by the Borrower of the following conditions:

(i) The Borrower shall provide evidence, in form and substance satisfactory to the Fund, of
having opened a foreign currency special account with the Bank of Uganda for the
deposit of proceeds of the portion of the Loan required for the IBD Component (the
"IBD Account"); and

(ii) The Borrower shall provide evidence, in form and substance satisfactory to the Fund, of
having opened a local currency account with the Bank of Uganda for the transfer of
funds from the IBD Account.

Section 5.02. Conditions Precedent to First Disbursement relating to the Financial Services
Component. The obligations of the Fund to make the first disbursement of the portion of the
Loan relating to the Financial Services Component of the Project as described in Annex I of this
Agreement (the "FS Component") in an amount of Four Million Five Hundred Thousand Units
of Account (UA 4,500,000) shall be conditional upon the entry into force of the Agreement in
accordance with Section 4.01 above and the fulfilment by the Borrower of the following
condition:

(i) The Borrower shall provide evidence, in form and substance satisfactory to the Fund, of
having opened a foreign currency account with the Bank of Uganda for the deposit of
proceeds of the portion of the Loan required for the FS Component (the "FS Account").

Section 5.03. Conditions Precedent to Second Disbursement relating to the Financial Services
Component. The obligation of the Fund to make the second disbursement of the portion of
the Loan relating to the FS Component in an amount of Three Million Four Hundred and
Seventy Thousand Units of Account (UA 3,470,000) shall be conditional upon the fulfilment
by the Borrower of the following condition:

16
(i) The Borrower shall provide evidence, in form and substance satisfactory to the Fund,
that at least 80% of amounts previously disbursed has been on-lent to borrowing
institutions.

C. Other Conditions

Section 6.01. Under this Agreement, the Borrower undertakes:

(i) to transfer to MSC all amounts disbursed to the Borrower under this Agreement and
to ensure that all such transferred amounts are utilized by MSC for the purposes set
forth in this Agreement; and

(ii) provide evidence, in form and substance satisfactory to the Fund, that MSC’s
Management Information System is installed and fully operational and is linked to all
MSC zonal offices by December 2009.

5.3. Compliance with Bank Policies

(i) This project complies with Bank’s microfinance policy..

VI – RECOMMENDATION
Management recommends that the Board of Directors approve the proposed ADF loan of UA
10.21 million to the Republic of Uganda for the purposes and subject to the conditions
stipulated in this report.

17
Appendix I. Country’s comparative socio-economic indicators (March 09)

18
 Appendix II. Table of ADB’s portfolio in the country
List of active projects (loans and grants) by Sector:

Summary of Bank Group Operations and newly approved projects /Programs/Studies

Country: Uganda
Date: 30 July 2009

Sector Project Name Approval Signature Effective Net Disb. Disb. Closing
Date Date Date Commit. Amt. Ratio Date
(UAm) (UAm) (%)
Agriculture National Livestock Productivity 4/12/02 02/06/03 12/04/04 26.54 22.75 85.72 31/12/09
Improvement Project
Farm Income Enhancement And 29/09/04 18/06/05 16/02/06 41.42 14.15 34.16 31/12/10
Forest Conservation Project
Fisheries Development Project 12/06/02 14/11/02 09/05/03 22.00 13.56 61.64 30/01/10
Community Agricultural 31/01/07 17/05/07 21/09/07 30.00 3.45 11.50 31/12/13
Infrastructure Improvement
Program
Creation of Sustainable Tsetse 08/12/04 19/05/05 30/12/05 6.55 0.63 9.62 31/12/11
and Trypanosomiasis Free Areas
Sub Total 126.51 54.54 40.53
IMQ Mineral Resources Management 29/09/04 18/05/05 18/01/05 5.35 2.30 42.99 31/12/10
and Capacity Building Project
Sub Total 5.35 2.30 42.99
Multi- Institutional Support for Good 17/11/04 18/01/05 14/03/05 9.00 6.85 76.11 30/12/09
Sector Governance
Sub Total 9.00 6.85 76.11
Power Bujagali Interconnection Project 28/06/07 26/10/07 14/02/08 19.21 5.04 26.24 31/12/11
Bujagali Hydropower Project 02/05/07 21/12/07 21/12/07 72.72 22.87 31.45 31/12/12
Sub Total 91.93 27.91 28.84
Social Support to Post-Primary 19/12/05 23/01/06 23/01/06 20.00 9.25 46.25 31/12/11
Education
Support To Health Sector 08/11/06 22/05/07 4/06/07 20.00 5.85 29.25 31/12/12
Strategic Plan
Sub Total 40.00 15.10 37.75
Transport Road Sector Support Project 27/04/05 19/05/05 15/09/05 28.50 27.36 96.00 31/12/10
Road Sector Support Project 2 17/12/07 15/-5/08 29/07/08 58.00 0.00 0.00 31/12/13
Road Sector Support Project 20/12/06 22/01/07 27/07/07 32.99 0.00 0.00 31/12/10
(Sup.)
Sub-Total 119.49 27.36 32.00
Water/Sanit Rural Water Supply & Sanitation 19/12/05 23/01/06 23/01/06 40.00 40.00 100.00 31/12/10
Sub Total 40.00 40.00 100.00
Grand 431.97 169.02 39.13
Total

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 Appendix III. Key related projects financed by the Bank and other
development partners in the country

Some of the ongoing microfinance operations are given in the table below. Most of the project are
completed.

No Name of Project Description Financier Total Cost Status,

. Performance
1. Poverty Alleviation Income and employment AfDB UA 9.2 m Completed, S
Project (PAP) generating project targeted to rural
areas
2. Rural Microfinance A microfinance project aimed at AfDB UA19.4 m. Completed, S
Support Project increasing access of the rural poor
(RMSP) to financial services.
S = Satisfactory

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 Appendix IV. Map of the Program Area
This map was provided by the African Development Bank exclusively for the use of the readers of the report to
which it is attached. The names used and the borders shown do not imply on the part of the Bank and its
members any judgement concerning the legal status of a territory nor any approval or acceptance of these
borders.

REPUBLIC OF
UGANDA
The Microfinance Support Centre Ltd.
MSC Clients by Location as at 30th June 2008

# #
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