A damning audit into the operations of the Microfinance Support Centre Limited (MSCL) reveals a sobering trail of missed targets, poor loan recovery, underutilised funds, and a ballooning portfolio of non-performing loans.
The audit also casts doubt on the institution’s ability to effectively manage government-backed credit programmes and uplift Uganda’s most vulnerable borrowers.
Conducted by the Auditor General, the report for the year ended June 2024 paints a troubling picture of an institution entrusted with delivering affordable credit but faltering under the weight of internal inefficiencies and poor financial discipline.
Outdated collateral, crippling risk
The audit reveals that Microfinance Support Centre relied on collateral valuations as old as nine years in its Expected Credit Loss (ECL) computations — a violation of its loan policy and a critical flaw under International Financial Reporting Standards (IFRS) 9 standards.
“The collateral inputs used in the ECL model do not reflect current market realities,” the report cautions, adding that the resulting impairment calculations may be materially misstated.
While the Microfinance Support Centre reported UGX 23.56 billion in ECL provisions, the application of outdated collateral values raises the specter of underestimated credit risk, threatening the credibility of its entire loan book.
A debt mountain of non-performance
The audit spotlights a deteriorating loan portfolio. Of the UGX 117.8 billion in conventional loans outstanding, a staggering UGX 78.2 billion — or 66.4% — were non-performing. The bulk of these (nearly 87%) were SME loans under agriculture and trade categories.
Over four years, impairment charges have climbed from UGX 20.1 billion to UGX 23.5 billion, signaling deepening financial strain.
Even more alarming is the trend of issuing SME loans against untitled land and unsecured equipment. At least UGX 4.5 billion worth of loans were backed by land sale agreements rather than registered titles, and UGX 1.9 billion was secured with uninsured machinery — a clear violation of the Microfinance Support Centre’s credit policy.
“The loan portfolio quality points to imminent erosion of capital if urgent recovery mechanisms aren’t deployed,” warns the Auditor General.
Emyooga programme funds idling
The government’s flagship Emyooga programme meant to lift communities out of poverty through savings and credit also suffered from underutilisation.
Of the UGX 156.7 billion available, only UGX 102.5 billion (65%) was disbursed, leaving UGX 54.2 billion lying idle.
“This sluggish disbursement denies thousands of potential beneficiaries the means to launch or grow income-generating activities,” the audit notes in part.
Inside Uganda’s Gorilla Permit System: Where Does a Gorilla Permit Shilling Go?MSCL attributed the delays to Saccos’ failure to meet minimum requirements, but the Auditor General urged faster action and stronger monitoring to prevent funds from stalling.
In the area of compliance, the audit found that procurement planning was more theoretical than practical.
Planned procurements worth UGX 5.99 billion — including land, vehicles, and ICT systems – were not implemented, with unrealised projects and stagnated service delivery.
“This points to unrealistic procurement planning and a disconnect between budget formulation and execution,” the report noted.
Revenue misses
While the Microfinance Support Centre managed to collect UGX 38.7 billion (98%) of its projected revenue against a UGX 39.5 billion target, the performance of key revenue streams fell short.
For instance, written-off loan recoveries amounted to UGX 268 million collected versus UGX 1.75 billion projected, and profits from Islamic investments were half achieved.
The audit links this underperformance directly to the Centre’s troubled loan portfolio.
Additionally, government funding underperformed by UGX 10.8 billion, with no effort made to revise the budget or work plan as allowed under the Public Finance Management Act.
Rescheduled Loans
The audit also uncovered that UGX 17.8 billion worth of rescheduled loans failed to show any repayments, casting doubt on the rigour of appraisals before renegotiation.
“These rescheduled loans appear to be a graveyard of failed recoveries,” the Auditor General observes, recommending deeper scrutiny before restructuring is approved.
In response, the Microfinance Support Centre management acknowledged the audit’s findings and committed to tightening controls, reviewing policies, and enhancing client vetting and collateral management.
However, with a growing list of red flags, the question remains: can the Microfinance Support Centre redeem its mandate for an institution pivotal in Uganda’s financial inclusion agenda, particularly among rural and underserved communities?
