Our approach to restrengthening the financial sector and microfinance customers with credit rotation funds
Since beginning of 2020, the entire world was facing COVID-19. A pandemic that did not only threaten our health and lives, but that affected numerous aspects of our day-to-day life negatively. Economic activities shrunk, and the financial vulnerability of people increased.
This applied particularly to low-income earners like smallholder farmers, micro and small business enterprises, socially marginalized groups, and others who struggled with a challenging financial situation even before the pandemic.
In a joint effort with our local partners in Burundi, Kenya, Tanzania, and Uganda, we at German Sparkassenstiftung Eastern Africa (DSIK) attempted to add our contribution to the plenty of efforts of governments,other institutions, and stakeholders around the globe to mitigate the negative consequences of the pandemic. One measure agreed on was to create a Credit Rotation Fund (CRF).
The main objective of the CRF was to mitigate the negative impact of the economic downturn on both - the microfinance customers and the microfinance industry. COVID-19 led to a credit crunch, as savers withdrew deposits from MFIs/ SACCOs, debtors failed repaying their loans in due time, and follow-up of defaulters turned out to be difficult as saving and loan groups stopped meeting on a regular basis; to name just some of the challenges MFIs/SACCOs faced during this period. Consequently, MFIs/ SACCOs were reluctant to grant new loans, or even lacked the liquidity to refinance loans in the first place. Due to the lack of access to finance, micro and small businesses had to reduce or even stop operations, lay off staff, etc.
Being a financial instrument that is ultimately targeting the end customer, the CRF has to be distinguished from (rotating) emergency funds aiming at rescuing the MFIs as such, e.g. by bridging liquidity gaps to finance their operational costs or alike.
To attain the highest impact possible with the CRF, the funds were allocated to our partners (MFI/SACCO apex bodies) who then extend loans to their member MFIs / SACCOs. The participating MFIs and SACCOs subsequently provide loans to their customers on a rotating basis, and the loans disbursed once repaid serve to finance new loans.
Loans are disbursed to end user beneficiaries for various purposes but mainly for financing environmentally friendly technologies and solutions (green finance loans) for sustainable development. The positive knock-on effect of the CRF is to strengthen our partners, the national MFI/SACCO apex bodies.
With partner organisations across the region namely Réseau des Institutions de Microfinance (RIM) in Burundi, Association of Microfinance Institutions (AMFI) in Kenya, Savings and Credit Cooperative Union League of Tanzania (SCCULT) in Tanzania, and Uganda Cooperative Savings and Credit Union (UCSCU) in Uganda, the CRF has successfully contributed to sustainable development through providing crucial liquidity and facilitating economic activity among farmers and MSMEs. Since September 2024, the partners have fully taken over the management of the CRF, as a valuable asset, to strengthen their equity basis.
