Challenges of Islamic Microfinancing in Uganda

THE CHALLENGES AFFECTING THE DEVELOPMENT OF ISLAMIC MICRO
FINANCING IN UGANDA
A CASE STUDY OF ISLAMIC MICROFINANCE INSTITUTIONS IN KAMPALA
BY
MIKIDAD RATIB
REG No. 216-033031-09200
A RESEARCH REPORT SUBMITTED TO THE DEPARTMENT OF BUSINESS
STUSIES FUCULTY OF MANAGEMENT STUDIES IN FULFILMENT OF THE
REQUIREMENT FOR THE AWARD
OF
A BACHELOR DEGREE OF ISLAMIC BANKING AND FINANCE OF THE
ISLAMIC UNIVERSITY IN UGANDA
MAY 2019

i
Declaration
I declare that this final year research report is my original work and it has never been
submitted to any other University or Institution of higher learning for any award.
NAME: MIKIDAD RATIB
SIGNATURE: ………………………..
DATE: ………………………………...

ii
Approval
I certify that this final year research report has been written by Mikidad Ratib Reg No: 216-
033031-09200 under my supervision and guidance. It is therefore submitted with my
approval
MISS ISANGA HAJARAH
Signature........................................
Date.......................................................
(UNIVERSITY SUPERVISOR)

iii
Dedication
I dedicate this report to my supportive Ratib family, friends and committed lecturers

iv
Acknowledgement.
I thank the management of Uganda Microfinance regulatory Authority, Arrayan Muslim
Youth Development Union, Swidiiq Islamic Finance Association, Biina Imams and Muslims
Association and Kibimba Muslim Development Association for giving me access to their
institutions to carry out this study on Islamic microfinance in Uganda.

v
List of Abbreviations
MFIs - Microfinance institutions
AMFUI - Association of Microfinance Institutions of Uganda
SACCOs - Savings and Credit Cooperative Organizations
BMAU - Budget Monitoring and Accountability Unit BRIEFING PAPER (19/18)
CMF-PRESTO - Rural Microfinance Support Program (formerly PAP)
IPC - International Project Consult
FINCA – Foundation for International Community Assistance.
SMEs – Small and Medium Enterprises

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List of figures
Figure 1 - conceptual framework
Figure 2 – Beneficiaries list
Figure 3 - number of MFIs worldwide (regional scales)

vii
Table of contents
Declaration...............................................................................................................................................i
Approval ................................................................................................................................................. ii
Dedication.............................................................................................................................................. iii
Acknowledgement. ................................................................................................................................ iv
List of Abbreviations .............................................................................................................................. v
List of figures......................................................................................................................................... vi
Table of contents................................................................................................................................... vii
Chapter one.............................................................................................................................................1
Background of the study.....................................................................................................................1
1.0 Introduction...............................................................................................................................1
1.2 Background of the study ...........................................................................................................1
1.3 Statement of the problem..............................................................................................................3
1.4 Research objectives.......................................................................................................................3
1.4.1 General objective ...................................................................................................................3
1.4.2 Specific objectives .................................................................................................................3
1.5 Research questions........................................................................................................................3
1.6 Research hypothesis......................................................................................................................3
1.6.1 Scope......................................................................................................................................3
1.7 Significance.....................................................................................................................4
1.8 Conceptual framework............................................................................................................4
Chapter Two............................................................................................................................................5
Literature review.................................................................................................................................5
2.0 Introduction.............................................................................................................................5
2.1 introduction...............................................................................................................................5
2.2 The operations Islamic MFIs ..................................................................................................10
2.3 Challenges encountered in establishment of Islamic MFIs.....................................................11
2.4 The present initiatives for development of Islamic micro financing in Uganda.....................15
Chapter three.........................................................................................................................................18
Research Methodology .....................................................................................................................18
3.0 Introduction...........................................................................................................................18
3.1 Research design ....................................................................................................................18
3.2 Population of the study .........................................................................................................18
3.3 Sample of the study...............................................................................................................19

viii
3.4 Research instruments ............................................................................................................19
3.5 Methods of data analysis.......................................................................................................20
Chapter 4...........................................................................................................................................21
Presentation discussion and analysis of data.....................................................................................21
4.0 Introduction.................................................................................................................................21
4.1 Personal information of the respondents.....................................................................................21
4.2 Research Objective I...................................................................................................................21
4.3 Research Objective II..................................................................................................................24
4.4 Research objective III .................................................................................................................25
4.5 Limitations of the study ..............................................................................................................26
Chapter Five..........................................................................................................................................28
Conclusion and recommendations ....................................................................................................28
5.0 Introduction...........................................................................................................................28
5.1 Summary of findings.....................................................................................................28
5.2 Conclusion ....................................................................................................................29
5.3 Recommendations.........................................................................................................29
References.............................................................................................................................................31
Appendices............................................................................................................................................32

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Chapter one
Background of the study
1.0 Introduction
Microfinance is the provision of savings accounts, loans, insurance, money transfers and
other banking services to customers that lack access to traditional financial services, usually
because of poverty. Microfinance can also be defined as a type of banking service that is
provided to unemployed or low-income individuals or groups who otherwise would have no
other access to financial services. It is in some instances also called microcredit.
Microfinance plays an important role in creating financial access needs in the undesirable
sections of the economy and society. It helps lift masses out of poverty by providing small
loans to those lacking access to traditional financial services or funding opportunities,
develop small businesses that can then provide regular income, and they provide financial
resources to underserved markets. As such, microfinance is an important tool not just to
minimize the impacts of poverty, but also to promote house hold income and livelihoods.
However micro financing has generally not been well developed and established on the
global, regional and national level. Relating to Islamic micro financing, it too suffers the
same issues in its development and establishment on all levels.
1.2 Background of the study
JULIETTE (2013). On the global scene, from the article, it stated that it is estimated that 72%
of the population living in predominantly Muslim countries do not use financial services,
because they do not follow the precepts of Islam. Muslims use conventional financial
products, but various surveys show that if they had the choice they would use sharia-
compliance financial products.
A survey was made on regional basis to find the number of Islamic Micro financing
institutions in the world and the following distribution was discovered and presented in the
graph below

2
Figure 3
Regardless of the limited numbers of micro financial institutions, hope for its growth has
remained due to the global momentum of Islamic finance in general being estimated to reach
USD6 trillion in assets by the year 2020 with a growing number of new market entrants as
noted from the journal “Islamic finance in Africa: Impetus For Growth journal” by Malaysia
World’s Islamic Finance Marketplace
The same journal went on to identify that globally, Islamic microfinance is concentrated in
three countries: Indonesia, Bangladesh, Pakistan and Sudan and it often develops due to
government support. However in the rest of the world its development and establishment is
slow not growing on the same rate as the Islamic Banking counterpart owing to different
factors.
CGAP (2008). It stated that in all Muslim countries, compared to conventional micro
financing, Islamic micro financing accounts for a small portion of the different country micro
financial outreach ranging from 3 and 2 per cent.
Ibrahim (). On the African scene, from this journal, it stated that Islamic micro financing is
concentrated majorly in the sub Saharan region and has spread to western, south southern and
East African regions and the population demographics show potential for growth and market.
Ibrahim ().On the East African level, from the journal, Kenya and Tanzania have already
incorporated interest-free banking via Islamic windows. In Tanzania, Islamic banking
demand eventually far exceeded supply. This was due to both the large number of Muslims,
and the lucrative services that Islamic banks have offered. All this gave an opportunity to also
Islamic micro financing to be started.
There are many factors in general that affect Islamic micro financing however in this research
we hope to focus on elements under operational factors that affect the Islamic micro
financing establishment and development.

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1.3 Statement of the problem
In Uganda today, the banking sector appeal to the general public has been dwindling due to
its collection, collateral management, interest and charges systems. This gave rise to micro
finance development which used more lenient systems.
After the amendment of the Financial institutions act, the first players to offer Islamic
financial services were SACCOs and one Micro financing institution and no bank as yet. In
comparison to Islamic Banking having robust regulations and requirements, there are no
existing stringent regulations and requirements for the setup of Islamic micro financing but
the rate of entry of players is still low since 2014.
The institutions that are providing these services are actually dwindling in numbers or on the
verge of failure instead of developing further because of many factors however the researcher
intends to use this research to determine the role that challenges relating to Operational
factors play establishment and development.
1.4 Research objectives
1.4.1 General objective
1. To determine the concept of Islamic microfinance
1.4.2 Specific objectives
1. To assess the operations Islamic MFIs
2. To examine the challenges encountered in development of Islamic MFIs in Uganda
3. To analyze the present initiatives for development of Islamic micro financing in Uganda
and make viable suggestions
1.5 Research questions
 What are the operations Islamic MFIs?
 What are the challenges encountered in establishment of Islamic MFIs in Uganda?
 What are present initiatives for development of Islamic micro financing in Uganda?
 What are the suggestions for the development of Islamic microfinance in Uganda?
1.6 Research hypothesis
1.6.1 Scope
Content scope
We are going to use published journals, documents provided by willing research subjects in
the research and findings from the questionnaires.

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Geographical scope
In this research we hope to cover 2 or 3 institutions in the study including either an Islamic
Micro finance or a SACCO or both to create a more all-round study. These institutions shall
be located in Uganda
Time scope.
We hope to do this research in a period of two to three months to be able to carry out
interviews, analyze the data and present the findings.
1.7 Significance
By getting a clear understanding of the current inner workings of Islamic micro financing
institutions, we can draw lessons and suggestions for a unique operational roadmap for the
efficient and effective development of Islamic micro financing in Uganda and the world at
large.
1.8 Conceptual framework
Topic: The Challenges Affecting The Development Of Islamic Micro Financing In
Uganda
Figure 1
Independent variable
Challenges
 Organisational structure
 Operational, Monitoring and control
structures
 Human resource
 Employee proficiency (functional and
Islamic finance knowledge)
 Uses of funds
 key products offered and their structuring
 Governance policies and guidelines
 Microfinance Regulations and guidelines
 Prudential measures
 Financing(sources of funding)
 Funding requirements
Dependent variable
Islamic Micro financing
development
 Growth
 Profitability
 Portfolio quality
 Efficiency and productivity
Extraneous variables
 Government policies
 Faith based resistance
 Competitors

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Chapter Two
Literature review
2.0 Introduction
In this chapter we seek to systematically identify extensive data relating to the topic at hand,
analyse the data to find information relating to the problem the researcher is trying to solve and
focus the study, find facts identified about the problem, the opinions presented on the problem by
the writers from different stake holders and identify the gap in the available data to focus on.
2.1 introduction
There is a great importance in understanding who micro financing is meant for to get a better
insight of its importance and significance in an economy like Uganda.
MIFM (2017). This journal noted that Islamic Microfinance is a sector with a great potential to
expand estimating that 72% of the population living in predominantly Muslim countries do not
use financial services and various surveys have shown that they would opt to use sharia-
compliance financial products if available.
Islamic banks and Islamic micro financial institutions have the same aim which is to provide
financial assistance to people excluded from the conventional banking system however it was
noted that Islamic micro financing had limited products compared to its partner.
It went on to highlight the partnership between SMEs and microfinance having a crucial role in a
country’s economies by fuelling growth, growing the demand for labour and subsequently raise
the living standards. It is estimated that 500 million new jobs will be needed by 2030.
Rhyne,(2001). This journal noted that MFIs reach low income households both in rural and
urban areas. They went on to say that
“The average client is female, married, between 30 and 39 years and sufficiently literate with an
average household of 7 people, many of whom are dependents. Commerce is the main activity of
clients, followed by agriculture, services and manufacturing. Clients of MFIs tend to cluster
around the poverty line.”
It went on to say
“Most users of MFI services appear to be non-poor, but not wealthy: they tend to come largely
from households that can usually meet their daily needs, have access to primary education and
basic health services, and have accumulated some assets. They tend to spend a high proportion of
their earnings on basic needs such as food and education of children.”

6
These clients were referred to as those people in a “comfort zone” by Mutesasira (AIMS 1998;
COWI 2000; MFPED 2000c; Mutesasira et al 1999; Wright et al 1999a).
From these extracts we find that many of MFI clients are females, large households, micro
entrepreneurs and not those significantly below the poverty line. The females are the majority
sex in the population of Uganda. The dominant family setting in Uganda is an extended family
with a very small minority being nuclear family.
This extract highlighted a key shortcoming gap of micro financing today of most clientele being
urban based with the latter being rural hence not reaching the poorest in the society, yet those
focused on can easily turn to the level of the poorest in a blink of an eye.
In the same journal, it highlighted the role capacity builders (like CMF-PRESTO, The Rural
Microfinance Support Program (formerly PAP), MicroSave Africa. International microfinance
organization (IPC), The Microfinance Competence Centre (MCC) to mention but a few) have
played for current state and development of micro financing in Uganda.
They have contributed in areas of funding, skilling of the human resource, functional structuring
and continuous monitoring and evaluation of MFIs in Uganda positioning micro financing as a
major player in the Ugandan financial industry and the economy at large.
In line with operations, MFIs faced a challenge of insurance of clients however they themselves
have had players that have evolved to also extend insurance services like FINCA
As for SACCOs, regardless of their better reach and being the fastest growing sector at a rate of
ten being registered per week, many failed due to governance, management and fraud issues.
Most of these surviving are blessed to have received a technical input in terms of training or
having trained and professional personnel.
In respect to competition among MFIs, there is no intense competition in rural areas though in
urban areas of Uganda it is slightly higher but mostly not media based but by word of mouth by
employees, market research and current clients. Although competition may be good, it only
benefits clients and increases the costs in MFIs.
This has created higher levels of innovation in MFIs creating better products and services
however critics of competition fear that this can cause a loss of focus on the social goals and
participation which is detrimental to alleviation of poverty in society.
AMFUI (2016). It was sighted that the variation between the performances of MFIs was out of
lack of sufficient central bank regulation and supervision, limited use of the credit reference
bureau, lack of management skills and business orientation. Even though some regulated MFIs
enjoyed the benefits of central bank regulation, the numbers and strength of MFIs is still low.

7
With this, the desired impact of MFIs on the economy is not reached in their operations however
the profitability of MFIs is impacted too and it is also rather important because these institutions
need to generate profits for their sustainability in the long run.
From the profitability analysis in the report, with the average Operating Self Sufficiency being
above 100%, the Return on Assets (RoA) ratio was at an average of 5% and the portfolio yield
approximately 30%, this meant that the operational costs created a deficit compared to the
institutional rate of turnover on their investments. This is attributed to the low staff productivity
and efficiency yet having high case loads.
Making matters worse was a practice by clients making other borrowings from other MFIs
before financing their already running facilities hence pilling up of debt and offering collateral
which was already offered to other MFIs.
This entire deficit can be seen to be majorly rotating around operational factors causing dire need
for research in this area.
BMAU (2018). Looking at the beneficiaries section, it stated that from the periodic assessments,
the projects have benefited 15,585 individuals, of which 33% were female and 67% male, as
detailed in the table below.
Figure 2
In the beneficiaries section, this table only managed to identify the key sector of focus and sex
however it could have been more comprehensive enough to also identify the number of people
according to faith which would bring out the objective of financial inclusion regardless of faith.

8
On the element of sex, this is an indicator of need to involve more female based groups to
increase their number since in the African setting; they play a huge role in the development since
they are also bread winners coupled with being mothers of the nation.
It would also be beneficial to see the level of deposits in the different accounts by members
which would give a good picture of the major objectives of the members and the trust in the
portfolios of investment of the institution.
UNDP (2016).Why is there a need for Islamic Microfinance in Bangladesh?
Islam is the official religion in Bangladesh, and it is the third largest Muslim country in the world
in which 90 per cent of the population belong to the Muslim faith. Islamic finance emerged in
1995, comprising of mostly Islamic commercial banks, a few Islamic NGOs and financial
cooperatives. In 2010, it was estimated that 43.3 per cent of the people living in Bangladesh live
below the poverty line and more than 11 per cent live in absolute poverty. The number of poor
was 78.2 million in 1970 but by 2009 the number increased to 80.46 million. They suffer from
acute rural-urban economic disparity coupled with lack of adequate education and lack of proper
health and sanitation facilities.
Bangladesh’s economy is an agrarian economy with the vast majority of the population living in
rural areas. The agriculture sector has not been able to provide decent employment to all rural
people. The vast human resources have remained underutilized due to lack of education, access
to land and natural capitals, vocational training, but most importantly economic opportunities
especially among women. This vicious cycle the poor are caught in, has resulted in increased
levels of inequality, uneven distribution of income, and geographical growth with major risks to
internal and external economic shocks.
In light of this, poverty alleviation and creation of employment opportunities especially for rural
women and youth were prioritized in the government’s development agendas. The government
of Bangladesh has adopted a broad-based approach to poverty alleviation by putting more
emphasis on macroeconomic stability, economic liberalization, and giving support to
government agencies, NGOs and the private sector. Thus, micro credit or microfinance in its
wider dimension became a much favoured intervention for poverty alleviation and was seen as
an approach to alleviate rural poverty.
As a result, over 20,000 NGOs and MFIs are registered with the Bangladeshi Department of
Social Affairs and have been working in poverty alleviation since the independence of
Bangladesh in 1971. However the degree of success of those NGOs and MFIs in poverty
alleviation through socio-economic means has been somewhat debatable.
The sustainability of microfinance NGOs mainly depends on foreign grants and to some extent
government grants. However due to funding fluctuations, high administrative and operational

9
costs, NGO and MFIs, including Grammen Bank, tend to charge high interest rates, ranging from
20-35 per cent, forcing the poor to dispose any assets they may have in order to repay their loans.
As an alternative, the government tried to introduce microfinance initiatives through its
nationalized commercial banks (NCBs), however, NCBs outreach to the poor, especially the
rural poor, was very low and unsuccessful.
This was mainly due to weaknesses in the design, planning and management of such
programmes combined with political interferences, lack of experience in micro financing,
insufficient accountability and administration of the credit delivery system. One of the most
serious design imperfections, for example, was the lack of a targeting mechanism, such as
landholding and income ceilings, so the truly poor could not qualify for credit under such
programmes. On the other hand, this allowed many non poor borrowers to be attracted to such
credits due to the low interest rates. With their greater socio-economic and political power, the
non-poor were able to gain access to credit in a much easier manner than their poor counterparts,
thus crowding out the latter. For example, the Special Agriculture Credit Programme in
Bangladesh which was introduced and operated by the government fell under this trap.
Government programmes that attempted to make use of conventional banks to provide credit to
the poor, often in the form of directives, have generally been unsuccessful. This is because they
did not provide satisfactory incentives for the banks to make adequate profit from their loans to
the poor.5 Not only were the incentives low, but the costs associated with providing credit to the
poor also proved to be very labour intensive with high transaction costs and risks. Additionally,
the interest ceilings introduced in such programmes were not sufficient to generate enough profit
to sustain the service delivery in comparison with the profits generated through alternative
capital outlets.
Understandably, conventional banks did not find such financial services to be profitable, and
therefore, were discouraged from participating in such programmes. Conventional banks that
took part in the Special Agricultural Credit Programme for the poor for example, channelled the
programme’s loans to the rural elite. Additionally, politicians and influential figures were
influencing the selection of beneficiaries, which in most cases, where not those who need it most,
poor women and men. Even in cases where the poor were targeted, the banks were requesting
collateral which the programme has specifically already waived. The lack of an appropriate and
transparent credit delivery mechanism was a major contributor the programme’s failure.
In addition, staff of conventional banks assigned to implement credit-for-poor programmes were
not provided with financial incentives for making these loans even though these loans required
the same amount of work (or even more) as to commercial loans. As a result, bank officers had
little incentive to work with the poor and concentrated their efforts to work with the non-poor

10
borrowers who were profitable and less difficult to service. This was another factor why such
government programmes were unsuccessful.
Since commercial banks and traditional MFIs (government and non-government) did not offer
Islamic microfinance products to the majority Muslim poor in Bangladesh, a proportion of the
population were further excluded from having access to formal sources of credit. In very few
rural settings in Bangladesh, Islamic leaders, and spontaneous local charities and initiatives were
the only source of Islamic financing available to the very poor.
However, such marginally small initiatives were very limited, insufficient and were not operating
within the country’s financial regulatory authority. This need was later picked up by a private
Islamic bank.
2.2 The operations Islamic MFIs
Obaidullah (2008). On the global scene, there are no standardized procedures for operating of
Islamic micro financing because of the difference in on schools of thought in use and mode of
adoption of Islamic financing in the different jurisdictions. However in one journal in a study on
Islamic microfinance, the four models can be described as follows:
Grameen Bank Model (Group Lending)
This is the leading and most popular model. The model operates on group based lending where
members of the group act as collateral by guaranteeing each other and therefore minimizing the
risk of default .The most successful Shari’a compliant Grameen Bank Model is present in
Bangladesh.
Village Bank Model
The MFI establishes a village bank containing approximately thirty members, and also injects
capital for forward financing. The members of the village bank extend individual loans and
repayment of those loans is mostly on a weekly basis. After four months the village bank pays
back the capital along with profit to the MFI. Subsequent loans are subject to the repayment
ability of the village bank, while loan size is proportional to accumulated savings. Therefore,
peer pressure works to shield default risk as well as to persuade clients to save. The accumulated
savings are also used for credit extension. This may also lead the village bank to become self-
sustaining by accumulating its internal capital.
Credit Union
Credit unions are non-profit co-operatives formed by a group of people who have a common
bond. Members of the group/co-operative control the union by themselves and offer services
ranging from saving mobilization to credit extension and their recoveries. However, credit
unions are generally linked to some apex body that supervises, provides them training, and
monitors their performance.

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Self-Help Groups
As the name indicates, this model is group based where people belonging to similar income
brackets join together and forms a group. These groups are generally self-sustainable implying
that all members pool their savings and then this pool of saving is used to extend credit. These
groups can also seek external funding if they wish to. Members of the group decide among
themselves about terms and conditions of all products/services they have agreed to offer to each
other through this arrangement.
Existing regulatory framework for MFIs in Uganda
From the existing regulations in the financial institutions Act of Uganda relating to Islamic
Micro financing, they only specify the approval authority, personnel requirements and
segregation of businesses but no specifics relating to operations are non-existing and inquiries
from Uganda Microfinance Regulatory Authority about the requirements have yielded no reply
hence no substantial data used to authorize Islamic micro financing in Uganda.
2.3 Challenges encountered in establishment of Islamic MFIs
BMAU (2018). It went on to highlight performance variation causes unique to Islamic MFIs in
Uganda which included:-
Difficulty in using applicable accounting standards. Islamic transactions have uniquely
formulated internationally used accounting standards notably IFSB Malaysian based and
AAOIFI based in Bahrain whose knowledge is lacked by the existing accounting professionals
making applicability difficult.
Human resource and Knowledge gap. The existing staffing is still limited and it also lacks the
necessary numbers and expertise in Islamic finance and sharia laws.
Sharia regulation and oversight implementation. The existing laws are not clear on the power of
the sharia function in financial institutions with micro finance institutions being no exception yet
in principle it is the key and most powerful among the functions in Islamic finance
Myths and sentiments surrounding Islamic finance. The existing myths like an assumption that
Islamic finance only belongs to Muslims and many more have been answered in recent extensive
research which needs to be known by the human resource and management to make unique
marketing strategies for Islamic financial institutions.
UNDP (2012). From this journal, more challenges were noted as listed below;
1. Lack of resources:

12
Many Islamic microfinance institutions in many Muslim majority countries suffer from lack of
funding and in order to extend this service to individuals living in poverty large volume of funds
are needed. There tends to be a lack of knowledge on the concept of Islamic micro financing
among many donors, and due to that, many show no interest in funding such programmes, while
conventional MFIs are heavily funded by them. Commercial Islamic banks, who are much more
familiar with Islamic financial products, such as IBBL, can play an important role in initiating
Islamic microfinance programmes in their countries to bring more awareness to this important
funding channel and the positive socioeconomic impact it has on the poor who are left out of the
mainstream financing models due to religious reasons.
Such banks can also play a pivotal role in informing national governments, national and
international donors along with development agencies on the importance of financing such a
model. However, for programmes to be sustainable in the long-run adequate funding support and
commitment will be required. IBBL was able to provide funding toward RDS however as the
programme expanded its operational costs have increased drastically.
As a private bank it has the resources for its commercial means to fund such a programme,
however for MFIs wanting to emulate this programme, they will require funding for
governments, donors and from the private sector in order to be sustainable.
2. Capacity building:
Capacity building is needed at all levels for Islamic microfinance programmes to be successful.
Currently, many Islamic MFIs and NGOs work in limited areas with limited staff capacities that
tend to lack the expertise and adequate guidelines. As a result, despite their willingness to
provide such a service to the poor, they are unable to expand their activities at a larger scale. At
the macro level, the Islamic Development Bank and Islamic financial standard setters such has
IFSB and AAOIF, should develop global financial reporting standards adapted to microfinance
to build infrastructure for transparency in the global Islamic microfinance sector. This entails
comprehensive disclosure guidelines on Islamic microfinance accounting principles, pricing
methodologies, financial audits, and also rating services. At the institutional levels, more efforts
should be placed to train Islamic MFI staff through the development of operational tools and
manuals. This could be done by seeking knowledge and expertise from Muslim scholars who
specialize in Islamic financing and from Islamic banks that already provide such services and
products through their commercial means.
3. Operational efficiency and risk management:
Operational efficiency is crucial to extending affordable financial services to the poor. Managing
small financial transactions is costly and it is important for Islamic MFIs to innovate to reduce
transaction costs. For example, in murabaha (cost plus mark-up sale contract) or ijara (leasing
contract) transactions, the provider of fund is the one who purchases the commodity and then

13
resells or leases it to the user with a fixed mark-up. Islamic MFIs may have the channels to
purchase commodities at whole price, but usually the costs associated with purchasing,
maintaining, selling or leasing a commodity are usually expensive and are passed on the
beneficiary.
An innovative way to reduce such costs is by allowing the beneficiary to search and identify the
desired commodity. Thus, Islamic MFIs who face funding challenges that desire to expand and
to become sustainable should consider applying such a technique in order to minimize costs and
offer more competitive pricing for their beneficiaries. Risk management which is also another
vital factor to the sustainability of Islamic MFIs. Some conventional MFIs rely on peer pressure
to secure loans without demanding collateral, a method introduced and practiced by Grameen
Bank. This method should be practiced to comply with the risk-sharing no interest principles that
are used in Islamic financing.
4. Unfavourable rules and regulations:
For Islamic microfinance programmes to be successful, governments need to offer a policy
environment that allows for diverse and competitive financial service providers to grow and
flourish. Currently many governments support conventional microfinance programmes and
introduced policies to support their growth but without setting policies to support Islamic micro
financing. Thus, a good policy environment supported by the government should allow a range
of financial service providers to coexist and compete to offer higher-quality and lower-cost
services to large number of poor clients. Conducive policies should also support and provide
incentives for the private sector to introduce innovative funding channels to support the poor.
Furthermore, the government’s role should ensure macroeconomic stability, liberalize interest
rates, and establish banking regulation and supervision to make viable microfinance possible for
both conventional and Islamic microfinance programmes.
From the journal Challenges and solutions in Islamic microfinance by Rashidah Abdul Rahman
and Faisal Dean Accounting Research Institute, Universiti Teknologi MARA, Selangor,
Malaysia it highlighted the following challenges
1. Market penetration
Islamic microfinance has poor market penetration. Brandsma and Hart (2002) state that, in
Egypt, the most expensive and time-consuming part in reaching hundreds or thousands of
microfinance clients is the lack of a branch network. Other obstacles include the lack of internal
procedures regarding performance, protocol and the capacity of managers and staff. The Islamic
MFIs objective of empowering women is rarely achieved (Ahmed, 2002). The ease for women to
get loans causes tension and increases domestic violence. The male members put pressure on
females to obtain a loan. The females are responsible for repayment while they do not use the
funds, which, in turn, put pressure on their male counterparts to repay the loan.

14
2. Sustainability of Islamic MFI
Due to the lack of fund mobilization and high admin costs, most MFIs and Islamic MFIs are not
economically viable. Some critics point out that the Grameen bank would operate at a loss
without grants. The issue of sustainability cannot be solved with voluntary contributions.
Other than the initial start-up capital, usually provided by volunteers, non-governmental
organisations (NGOs) or governments, most funds for Islamic MFIs come from external sources.
The need for funding is greatest during the initial stages of operation. Over time, as the Islamic
MFI grows, savings and profits accumulate, which can be recycled into new loans. The time
needed for a scheme to operate only on generated capital and savings may be very long. There
are extra problems in obtaining funds for IMFIs. The educational content of Islamic MFIs
sometimes deters external High transaction costs.
According to Chowdhury (2006), there is too much uncertainty in profit/loss sharing models for
Islamic MFIs, which leads to higher costs; therefore, Islamic debt and leasing instruments
dominate. Similar to conventional MFIs, Islamic MFIs inescapably experience high transaction
costs due to asymmetric information problems. These costs relate to monitoring and searching
costs and the cost of enforcement, which are all directly associated with the information
problems in the rural financial markets. Small loans are expensive because of high overhead
costs, which usually have a large fixed cost attached. Karim et al. (2008) suggests that Islamic
MFIs must innovate to reduce transaction costs as added costs are often passed onto clients.
Physical barriers of poor infrastructure like lack of markets, roads, power and communications
can make it difficult for Islamic MFIs to gather information on their perspective clients. The
absence of proper market information can be costly. Akhtar and Pearce (2010) report a crisis in
Morocco whereby MFIs were competing for the same clients, which led to clients having
multiple borrowings and over indebtedness.
High monitoring costs are a result of loans being used by other people or purposes than the
original promise. Ahmed (2002) proposes that staff at Islamic MFIs sometimes cut corners with
respect to sharia-compliance due to the rapid expansion of operations. Monitoring each and
every loan by a sub-committee is very expensive and not sustainable. This potentially leads to
the moral hazard problem. The moral hazard problem occurs when one party who is shielded
from risk acts differently to it if it were fully exposed to risk. A micro entrepreneur’s lack of
collateral due to poverty can increase the moral hazard problem. El-Komi and Croson (2005)
advocate that this problem is more severe for the microfinance industry because of the lack of
collateral and the high cost of monitoring with respect to the loan size provided, with the loss
being borne only by the Islamic MFIs. These barriers make assessment of projects and
monitoring the use of loans very costly. Other research shows that when the cost of monitoring is
the same for the peer as it is for the lender, repayment of individual lending is higher than group

15
lending. However, when monitoring costs are lower, typical in MF settings, group lending is
more efficient. In Islamic MFIs, subsidies can reduce the sense of obligation to pay the loan as
they are perceived as grants. Likewise, under different Islamic contracts, notably the profit/loss
sharing contract, the borrower may tend to under report profits, which further augments the
problem of moral hazard. Goud (2006) suggests that this problem could be eased under a
musharakah partnership contract as the client also has a financial investment in the company,
however Goud cites the group peer-mentoring methodology as the most important factor.
3. Effectiveness in alleviating poverty
Studies show that one time, one-year credit has been less effective in poverty alleviation than
multiple loans over a longer period of time. In the Grameen bank villages, for instance, 76 per
cent of participants who have taken no loans or only one loan are below the poverty line,
compared with only 57 per cent of those who have taken five or more loans (Farooq, 2009).
Ahmed (2002) discovers that the Grameen bank borrowers often take additional loans from other
sources to pay the instalments due and are trapped in a spiralling debt cycle. Chowdhury (2009)
gives explanation to the fact that if borrowers are more entrepreneurial than those who do not
borrow; such comparisons are likely to grossly overstate the effect of microcredit. Furthermore,
it is found that the rate of return from women borrowers is often less than their male
counterparts, as they tend to engage in activities that involve lower productivity. Microcredit
may not even be the most useful financial service for the majority of poor people (The
Economist, 2009). IMFIs inform that while training on conventional topics, such as accounting
and administration are offered, training on Islamic aspects are lacking.
The Association of Muslim Welfare Associations in Bangladesh (AMWAB) organises a few
Islamic training sessions, but the high cost of attending these events usually results in low
turnouts. Microfinance is often approached idealistically, as it is designed to help the poor. In
reality, there are often social factors rather than financial ones alone that determine poverty.
Socioeconomic factors of clients like low numerical skills due to illiteracy, caste, ethnicity,
gender aspects preventing interaction, differences in language, location of the borrowers and the
client’s unfamiliarity with necessary documentation and accounting conventions all lead to
ineffective operations. Dhumale and Sapcanin (1998) further state that lending instruments are
not adapted to the conditions of small borrowers, and short-, medium-, and long-term
institutional financing is usually not available to the poor. There are also socioeconomic factors
that have nothing to do with the clients. Lack of trained personnel is a major challenge for the
growth, expansion and consolidation of the Islamic microfinance sector. There is an urgent need
to develop resource centres and training material in native languages. However, this is very
expensive.
2.4 The present initiatives for development of Islamic micro financing in Uganda
Education and capacity building

16
Wikipedia (2019). On the global scene, after the start of Islamic finance, it was concentrated in
countries like Iran, Malaysia,, Pakistan, Saudi Arabia, Bahrain to mention but a few. These
created education centers to cater for the newly created human resource gap by Islamic finance.
The leading education centers include:
 Islamic Economic Institute, previously Islamic Economics Research Centre, and before that
International Centre for Research in Islamic Economics, King Abdulaziz University, Jeddah,
(Saudi Arabia)
 Islamic Research and Training Institute (IRTI), Islamic Development Bank (IDB) Jeddah,
(Saudi Arabia)
 School of Islamic Islamic Banking and Finance, previously International Institute of Islamic
Economics, Islamabad, (Pakistan) (IIUI),
 Institute of Islamic Banking and Insurance, London (UK)
 International Centre for Education in Islamic Finance (INCEIF), Malaysia
 Islamic Finance Training, Kuala Lumpur
 Ethica Institute of Islamic Finance, Dubai
 Islamic Finance Academy, Dubai
 Centre for Islamic banking and Finance Training, Kuala Lumpur
 Institute of Islamic Finance, London (UK)
 Islamic Finance Advisory and Assurance Services, Birmingham (UK)
 Islamic Finance Institute of South Africa
 Centre for Islamic Finance of Bahrain, Institute of Banking and Finance (BIBF)
 Centre for Banking and Financial Studies, Qatar
These educational centers were influential in creating the current standards, policies, frameworks
and set precedence for the setup of Islamic banking departments in major and influential
universities around the world like Oxford University, Salford University, Durham University,
Cadmus University
The extensive participation by these centers has been created reference points and an output for
innovation for different Islamic finance products, services, offering sustainable Islamic finance
talent, Islamic finance literature and governance structures which made Islamic finance
comprehensive in solving the global economic issues
On the African scene, most schools are concentrated in the sub Saharan region including
countries like Sudan and Egypt and now new centers are cropping up in East, West and South
African regions.
In East Africa, Uganda so far has significant two universities but in Tanzania and Kenya there
have not been significant education centers setup and in Uganda the leading university is Islamic
university in Uganda

17
Legal and governance policies and guidelines
For standardization, key standard setting institutions have been setup to harmonize the operations
of Islamic finance in the different jurisdictions of the world. The key standard institutions
include: - The Islamic Financial Services Board (IFSB) and Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI)
Source of funding
Globally the key Islamic financing sources are World Bank, Islamic Development Bank, African
Development Bank, West African Development Bank And on the East African scene, also East
African Development Bank (EADB) and the governments of the individual jurisdictions
themselves.
Government support
Most countries with an Islamic finance industry have had government support and initiatives in
the developing governing policies and guidelines for the Islamic institutions. However in unique
cases like Kenya, Tanzania, United Kingdom government support was not substantial compared
to governments of the other adopting countries.
Private sector support
Generally some private institutions and individuals have been at the forefront of establishment of
Islamic finance in most jurisdictions around the world. In support for the government initiatives
the private sector has played a significant role in some cases like Malaysia, Tabung Hajj was a
key driver in the establishment of Islamic finance in Malaysia. The same happened in other
examples like Kenya, United Kingdom and other European countries which have Islamic finance
established by the private sector and the government plays a small role.

18
Chapter three
Research Methodology
3.0 Introduction
In this section, the researcher identifies the methodology with which the research is going to be
conducted, the kind of empirical data to be collected and how the empirical data is going to be
obtained. This gives the research the necessary orientation or direction, maintain validity,
maintain quality and reliability of the research data collected.
3.1 Research design
A research design is a broad plan that states objectives of research project and provides the
guidelines what is to be done to realize those objectives. It is, in other words, a master plan for
executing a research project.
The researcher specifically chose the qualitative research design which is the under non
experimental category of qualitative research orientation. This is because through qualitative
design, a researcher can identify key ideas to create valuable content, allows detailed data
collection, requires a small sample size than other research designs, allows creativity with the
collected data and flexible to use and administer.
The researcher identified the research problem as “The Challenges Affecting The development
Of Islamic Micro Financing In Uganda”. Focusing on operation related challenges the researcher
identified the objectives to be: To assess the operations Islamic MFIs, to examine the challenges
encountered in development of Islamic MFIs in Uganda and to analyse the present initiatives for
development of Islamic micro financing in Uganda and make viable suggestions. With this
research problem and identified objectives, the qualitative research design would be the optimum
design that could work in this respect bearing the existing constraints making a research with the
key characteristics of Neutrality, Reliability, Validity and Generalization
3.2 Population of the study
This is generally a large collection of individuals or objects that is the main focus of a scientific
query.
For this research in the Ugandan setting, there has not been any reliable census information
providing reliable data on the population of employers and employees specifically working with
Islamic microfinance institutions and SACCOs so the researcher will rely on employer’s
information specific to their organisations the researcher can access.

19
The researcher will try to access as many respondents as possible and present the accessed data
from the reached respondents.
3.3 Sample of the study
A sample is a group of people, objects, or items that are taken from a larger population for
measurement.
The researcher intends to use a mixture of two non-probability sampling strategies namely
convenience and purposive sampling strategies. Convenience sampling which is perhaps the
easiest method of sampling, because participants are selected based on availability and
willingness to take part. Judgement (or Purposive) Sampling also known as selective, or
subjective, sampling, through which the researcher chooses who to ask to participate and thus
become a “representative” sample to suit the needs of the researcher, or specifically approach
individuals with certain characteristics..
3.4 Research instruments
The researcher intends to design a simple Self-administered surveys paper for the intended study
which will facilitate efficient data collection from subjects.
In the survey questionnaire, the researcher features questions to analyse the respondent’s
opinions on the research objectives internal elements. The questionnaire consists of four parts
noted below in detail:
Part A: Personal information
In this part, the researcher sought to obtain key qualities of the respondents like age gender
education and many others.
Part B: Assessment of the operational procedures of Islamic Microfinance institutions or
regulator
In this part, the researcher intended to identify the key characteristics of the Islamic MFI in case
the respondent is an affiliate of an Islamic MFI or the perspective of a regulating institution itself
and regarding to the Islamic MFIs encountered.
Part C: Examining the challenges encountered in development of Islamic MFIs
With this section, the researcher intended to analyse the opinion of the respondents on the
challenges identified by the researcher and rating their degree of influence on the development of
microfinance in Uganda

20
Part D: Analyse present initiatives for the development of Islamic microfinance in Uganda
In this section the researcher intended to assess opinion of the respondents on the existing
initiatives in light of their ability to positively impact the challenges to the development of
Islamic microfinance in Uganda.
3.5 Methods of data analysis
After the collection of the data, the researcher will process the data by editing to eliminate errors/
omissions / inappropriate answers and then presenting it in an understandable form for easy
analysis.
The researcher intends to use content and discourse data analysis. Content analysis is one of the
most common methods to analyse qualitative data. It is going to be used to analyse documented
information in the form of texts, media, or even physical items depending on the research
questions. Discourse analysis like narrative analysis, discourse analysis is going to be used to
analyse interactions with people focusing on analysing the social context in which the
communication between the researcher and the respondent occurred. It is going to look at the
respondent’s day-to-day environment for use by the researcher during analysis.

21
Chapter 4
Presentation discussion and analysis of data
4.0 Introduction
This chapter presents the analysis and interpretations bore in the findings aimed at solving the
problem identified by the researcher. Tables of frequencies and percentage rates were used to
present and interpret the findings from the questionnaires administered to the respondents in
different organisations and population demographics and draw useful conclusions and
recommendations for the research problem.
4.1 Personal information of the respondents
Most of the respondents were aged between 26-35 years (youth) which showed great interest by
youth to get involved in the sector. They included 8 ladies and 19 gents which showed the level
of involvement of females in the Islamic Microfinance sector workforce being substantial hence
some degree of gender inclusion in the sector. Most of them were Muslim and none of other
religious denominations which created dire need for involvement of more non-Muslim sections
of faith.
Most members of management who were in the survey were not highly educated creating a need
for more involvement of more educated individuals to exert a more professional touch to Islamic
micro financing. This was highlighted in the area of study of the respondents as mostly being in
accounting and administration which further showed a gap in marketing and banking and finance
yet they are crucial in the development in the Islamic microfinance sector. Regardless of having
knowledge of Islamic finance or Microfinance some obtained it from trainings with a very small
number having bachelor or master or diploma certificates and most had nothing at all.
The above findings were found to correspond to the literature in the journal Rhyne,(2001) which
noted “The average client is female, married, between 30 and 39 years and sufficiently literate
with an average household of 7 people, many of whom are dependents” it went on to say, “ they
have access to primary education and basic health services, and have accumulated some assets.
They tend to spend a high proportion of their earnings on basic needs such as food and education
of children.”
4.2 Research Objective I
Assessment of the operational procedures of Islamic Microfinance institutions Islamic
microfinance personnel
In this section the researcher intended to collect respondent knowledge and opinions on matters
relating to Islamic Microfinance operations as viewed by the regulator and the Islamic MFI
personnel and the findings were as follows.

22
After reaching with the regulator it was found that they did not have any structures, personnel
and systems for Islamic microfinance regulation and all the Islamic MFIs in the survey denied
having a sharia board the efficiency could not be rated on a non-existent item.
It was found that all of the Islamic MFI based respondents knew nothing about the models and
none were being used and linking to the findings at the regulator, this was a big flaw because
these models create a basis for operation and regulation framework setup and establishment. This
posed a challenge to effective regulation if any by the regulator who should base regulation on
the models for creating a regulating criteria or format to be followed for effective regulation.
The Ranking of the efficiency of Islamic microfinance operations by Islamic MFI personnel was
as follows (1 means high ranking- 5 means low ranking)
Rank Frequency
1 0
2 0
3 0
4 2
5 25
Islamic MFI based respondents greatly ranked the efficiency of the existing Islamic
Microfinance Institutions operations averagely at 5. This ranking showed the need for regulators
to choose key efficient models among which any can be required to be chosen by an Islamic MFI
and ease the regulation process. It also showed dire need by the Islamic MFIs to select efficient
and standard models which have specific operational systems in the respective model chosen.
The Quality of the different key operational aspects of the Islamic MFIs was rated as follows
with the reason behind the rating coupled with solutions for each.
The requirements for fund acquisition. This aspect was rated as fair by the Islamic MFI
respondent which was due to the securitisation used in processing facility acquisition by the
clients all of which can be improved by using a guarantor system and slackness of security
requirements.
The timeliness in processing of funds. It was rated as fair arising from the level of proficiency
of employees, inefficient systems/processes which can be improved by training of personnel,
benchmarking from successful Islamic MFI processes and systems.
There institution’s loan monitoring systems were rated as fair due to use of manual and
limited use of computerised or digital systems which can be improved by creating strategic
partnerships with other MFIs , credit reference bureau and banks to obtain comprehensive data
about client financial data.

23
The institutions’ fund Security Controls in storage, withdrawals and deposits. These were
rated as good because of outsourcing fund storage to banks and use of specially tailored banking
solutions for ease of deposits, withdrawals and storage.
The Collection / recovery procedures like loan repayments, penalties, restructuring etc. this
was rated as good owing to use of more lenient recovery procedures like debt writing off, use of
penalty funds in charity.
The Regulation and governance implementation. It was rated as poor due to minimal
management and regulator commitment and effort in ensuring the actual implementation. This
can be changed by both parties obtaining the necessary personnel and setting up the necessary
structures for regulatory and governance implementation.
The Islamic finance proficiency of the workforce. It was greatly rated as poor due to the
human resource and education gap in the country however Islamic University in Uganda has
made the first step to produce the first batch of home grown Islamic banking professionals in
2019 and modifications have been made to other course curriculums like accounting, marketing,
law, public administration to mention but a few in which an element of Islamic banking has been
incorporated.
The impact on and access to the poor and poorest of the poor. The impact was rated to be
good but this was due to access issues which were rated as poor because of limited financing,
few branches and remoteness of locations of the impoverished people in the country.
The product (loans) attractiveness. It was rated by most to be very good owing to the general
perception that there is no interest charged and no collateral required however there is need to do
extensive sensitisation to give the general public the right perception that goes beyond no
collateral to also include partnership, lease and trade based Islamic finance products.
Restrictions for access to funding. It was rated as poor due to the restrictions set by funders, the
strictness appended to the funds being offered by donor institutions as also observed in most
literature relating to this factor as seen by the researcher however this can be changed by
government initiatives to provide funding with limited restrictions to Islamic MFIs.
Dependability of the current operations of Islamic Micro Finance institutions on
achievement of the core objectives of Microfinance
The researcher assessed the dependability of Economic development, Poverty alleviation and
Islamic Microfinance development on the current operations and the findings were as follows:
Most respondents ranked the operations as Not Very Dependable in achieving economic
development, Moderately Dependable in achieving Poverty alleviation and Not Very
Dependable in achieving Islamic Microfinance development

24
With the above regard to operations by the respondents, this showed dire need to improve the
operations to have substantial impact on these three core objectives of Microfinance thus
dependability also becoming higher achieving successes that were achieved by other successful
countries in Islamic microfinance.
All the above findings corresponded to the following items in the literature review.
Rhyne (2001), noted that many Islamic MFIs failed due to governance, management and fraud
issues. Most of these surviving are blessed to have received a technical input in terms of training
or having trained and professional personnel.
It went on to also note that in respect to competition among MFIs, it caused a loss of focus on the
social goals and participation which is detrimental to alleviation of poverty in society.
From the AMFUI (2016), it was sighted that the variation between the performances of MFIs
was out of lack of sufficient central bank regulation and supervision, limited use of the credit
reference bureau, lack of management skills and business orientation. Even though some
regulated MFIs enjoyed the benefits of central bank regulation, the numbers and strength of
MFIs is still low
It went on to note that From the profitability analysis in the report, the Return on Assets (RoA)
ratio was at an average of 5% and the portfolio yield approximately 30%, this meant that the
operational costs created a deficit compared to the institutional rate of turnover on their
investments. This is attributed to the low staff productivity and efficiency yet having high case
loads.
UNDP (2012). This is highlighted in the part of the journal titled “the potential Challenges to the
Growth of Islamic Microfinance” like capacity building which relates to issues relating to human
resource, operational efficiency and risk management which is specific to the processes and
procedures used in Islamic finance implementation.
4.3 Research Objective II
Examining the challenges encountered in development of Islamic MFIs
The Operational factors level of effect on the development of Islamic Microfinance in Uganda
was rated as follows (1 means high ranking- 5 means low ranking)
Frequency
Item 1 2 3 4 5
Operational structure 0 0 0 0 27
Human resource 27 0 0 0 0
Uses of funds (products or loans) 0 3 24 0 0

25
Human resource ranked highest at 1, Governance policies and guidelines was ranked at 2, Uses
of funds (products or loans) was ranked at 3, and Sources of funding was ranked at 4 and
Operational structure was ranked lowest at 5. This showed how important human resource and
governance is in the development of Islamic microfinance hence creating dire need to greatly
focus on if this goal is to be reached. In this respect, sector contributions were assessed and
respondents greatly ranked the international sector as the greatest and the private sector as the
least contributor to the development of Islamic finance in Uganda. When asked for their opinion
on the impact of changes in operational factors and sector commitments, the respondents
Strongly Agree that changes in these factors can affect the development and sustainability of
Islamic microfinance in Uganda.
From chapter 2 of the literature review titled “The present initiatives for development of Islamic
micro financing in Uganda”, the findings correspond to Education and capacity building
initiatives on the global scene, with creation of education centers to cater for the newly created
human resource gap by Islamic finance and became influential in creating the current standards,
policies, frameworks and set precedence for the setup of Islamic banking departments in major
and influential universities around the world like Oxford University, Salford University, Durham
University, Cadmus University creating reference points and an output for innovation for
different Islamic finance products, services, offering sustainable Islamic finance talent, Islamic
finance literature and governance structures which made Islamic finance comprehensive in
solving the global economic issues
Globally the key Islamic financing sources are World Bank, Islamic Development Bank, African
Development Bank, West African Development Bank And on the East African scene, also East
African Development Bank (EADB) and the governments of the individual jurisdictions
themselves.
Most countries with an Islamic finance industry have had government support and initiatives in
the developing governing policies and guidelines for the Islamic institutions. However in unique
cases like Kenya, Tanzania, United Kingdom government support was not substantial compared
to governments of the other adopting countries.
4.4 Research objective III
Analysis of present initiatives for the development of Islamic microfinance in Uganda.
Governance policies and guidelines 2 22 2 0 0
Sources of funding 0 0 2 25 0
Item 1 2 3 4 5
Education / capacity building 24 3 0 0 0

26
The ranking of the individual initiatives impact on their capacity to impact Islamic
microfinance development in Uganda (1 means high ranking- 5 means low ranking)
The respondents ranked educational / capacity building and government support as the initiatives
with greatest capacity to positively impact in Islamic Microfinance in Uganda.
Among the respondents 24 moderately disagree to the statement that the current state of the
initiatives is suitable for the development and sustainability of Islamic micro finance in Uganda
and 27 moderately agree to the statement that Changes in these initiatives can influence the
development and sustainability of Islamic micro finance in Uganda. This was an indicator for
greater need for changes and reforms if we desire for Islamic Microfinance development in
Uganda.
4.5 Limitations of the study
This section looks at the factors that may hinder the research process. These could lie in the
collection, access to data, access to respondents, time and geographical scope.
In this research, the researcher observed limitations in time of conducting the research and access
restrictions to the respondents which needed to be first sanctioned by the heads of the institutions
at which the research was to be conducted.
The researcher sighted deadlines for submission of research work but believes that if this
limitation was changed by giving more time, this research would have been more comprehensive
and had a better presentation of more data on the problem.
The researcher also noted a limitation of use of one research instrument but would have desired
to use many more research instruments to obtain more comprehensive data on the topic.
The researcher faces a limitation of Data Collection Process. The presence of the researcher
during interviews could influence the responses when the topic is sensitive and private to the
organisation or the respondent. The schedule of the respondent may be a limitation to collect data
from him or her.
The researcher faces the limitation of timing of Study. The period that was not exactly suitable
for of the research study due to limited institutions to act as sources of data to an Islamic finance
industry that is just 4 years old in the country hence becoming a limitation.
Legal and governance policies and
guidelines
21 2 4 0 0
Sourcing of funding 3 22 2 0 0
Government support 24 3 0 0 0
Private sector support 2 20 3 2

27
The researcher faces a financial resource limitation. To conduct, compile, analyse and present the
research requires funding which is limited by the funding at the disposal to the researcher to
conduct the research.
The researcher faces the limitation of Access to Literature. The literature helps researches
identify gaps in the existing literature relating to a problem and with his or her research tries to
address them. Islamic Micro financing literature in Uganda and the world at large is limited with
this being an industry in its infancy.

28
Chapter Five
Conclusion and recommendations
5.0 Introduction
This chapter aims at giving a summary of the researcher’s findings, conclusions and
recommendations as derived from the research problem study at key institutions in development
of Islamic microfinance in Uganda.
5.1 Summary of findings
The respondents were mostly youth with substantial involvement of ladies but minimal
participation by non-Muslims. There was low participation by specialists in different business
professions like accounting, administration, marketing to mention but a few and this was made
worse by few Islamic finance professionals.
The governance and regulatory structures needed to be established using Islamic microfinance
models as a basis for creation of the best polices and guidelines for effective regulation and
governance.
The efficiency of the existing Islamic Microfinance Institutions operations averagely as too low
which showed the need for regulators to choose key efficient models among which any can be
required to be chosen by an Islamic MFI and ease the regulation process. It also showed dire
need by the Islamic MFIs to select efficient and standard models which have specific operational
systems in the respective model chosen.
Changes in the operational factors were viewed to have potential to develop Islamic
Microfinance however their Dependability in their current state was low
The dependability of Economic development, Poverty alleviation and Islamic Microfinance
development on the current operations was Not Very Dependable, Moderately Dependable and
Not Very Dependable respectively.
While examining the challenges encountered in development of Islamic MFIs, the Operational
factors level of effect on the development of Islamic Microfinance in Uganda ranked Human
resource and Governance policies and guidelines were best ranked with more influence hence
showing how important they are in the development of Islamic microfinance. In this respect,
sector contributions the international sector was observed as the greatest contributor and the
private sector as the least contributor to the development of Islamic finance in Uganda.
In the Analysis of present initiatives for the development of Islamic microfinance in Uganda, the
ranking of the individual initiatives impact on their impact capacity was found to have

29
educational / capacity building and government support as the initiatives with greatest capacity
to positively impact in Islamic Microfinance in Uganda with the current state of the initiatives
not being suitable for the development and sustainability of Islamic micro finance in Uganda and
Changes in these initiatives have influence on the development and sustainability of Islamic
micro finance in Uganda.
5.2 Conclusion
In conclusion, the researcher has determined that regardless of the multiple challenges that have
delayed Islamic microfinance development, the operational challenges have a significant role to
play in its development and if the right changes, commitments and initiatives are made in this
respect, Islamic microfinance in Uganda can develop faster. However if not done in a timely
maner, there will be an influx of wrong cheracters under the guise of Islamic finance who will
tarnish this new finance system even before it fully takes flight.
With this research a clearer and better Islamic microfinance setup and development roadmap can
be drawn to build sustainable Islamic MFIs in the future in Uganda and the world at large.
5.3 Recommendations
The researcher made the following recommendations regarding the challenges affecting the
development of Islamic microfinance in Uganda.
There is need for setup of a sharia supervisory board to fill the missing gap in the Islamic MFIs
that have no funds to employ their own sharia board.
The public, private and international sectors need to create Islamic finance sensitisation
initiatives to positively alter the population’s idea and opinion on the system.
There is need to come up with initiatives to create a sharia function at the regulator and support
the Islamic MFIs to protect Islamic values starting from the grass roots.
There is need to increase participation by more universities to adopt an Islamic finance
curriculum in their courses to decrease the human and knowledge resource gap in the country.
Different institutions need to formulate training programs to adequately skill the existing
workforce in the finance sector and other related sectors to enable effective synergy with Islamic
finance institutions.
The regulatory authorities need to come up with comprehensive guiding literature to aid those in
need of setting up of Islamic microfinance institutions
The regulatory authority needs to plan for a sharia committee or find a way to obtain the services
from that of the central bank.

30
There is need also for more Muslims to join the sector to protect the sanctity of the Islamic
principles held in this finance system from corruption by those with ill motives.
There in need for encouragement of people of other faith to study Islamic finance to better
educate those of similar faith and eliminate misconceptions held on faith grounds.
Employment of Islamic banking and finance professionals by these institutions to build a
proficient workforce in this field.
Encouraging research in marketing strategies for Islamic microfinance products and services to
the different market segments.
There is need for research in new sources of funding like inheritance, zakat and cash waqf
instruments which have great potential as indicated in the caliphate periods.
There is need for bench marking the common Islamic MFI models to create an effective and
comprehensive regulatory framework for Islamic MFIs.
More effort from the different economic sectors and in current initiatives and creating /
innovating better or improved initiatives for Islamic microfinance development.

31
References
 AMFUI (2016). THE STATE OF MICROFINANCE IN UGANDA 2014/2015 report by
AMFUI
 BMAU (2018). Budget Monitoring and Accountability Unit (BMAU) BRIEFING PAPER
(19/18)
 CGAP (2008). Islamic Microfinance: An Emerging Market Niche from CGAP focus note,
 Ibrahim (). “The case for Islamic microfinance in Africa” by Professor Badr El Din A.
Ibrahim
 JULIETTE (2013) www.microworld.org
 MIFM (2017). Islamic finance in Africa: Impetus For Growth journal by Malaysia World’s
Islamic Finance Marketplace.
 Obaidullah (2008). ISLAMIC FINANCE FOR MICRO AND MEDIUM ENTERPRISES
Edited by Mohammed Obaidullah Hajah Salma Haji Abdul Latiff,
http://www.gifr.net/gifr2013/ch_11.PDF
 Rhyne (2001) Microfinance in Uganda 2001 by Andy Carlton, Hannes Manndorff, Andrew
Obara, Walter Reiter and Elisabeth Rhyne,
 UNDP (2012)Scaling up Islamic Microfinance in Bangladesh through the Private Sector:
Experience of Islami Bank Bangladesh Limited (IBBL) by UNDP
Other references
 https://www.healthknowledge.org.uk
 https://www.questionpro.com
 https://www.quora.com
 https://blog.socialcops.com
 www.yourarticle.com
 www.qualtrics.com
 www.thh.nhs.uk
 https://support.minitab.com
 www.wikipedia.com

32
Appendices
A SURVEY ON THE CHALLENGES AFFECTING THE DEVELOPMENT OF
ISLAMIC MICRO FINANCING IN UGANDA (FOR ISLAMIC MFI)
Purpose
I am a student of Islamic University in Uganda Kampala Campus completing my final year in
pursuit of a Bachelor’s Degree in Islamic Banking and finance. This research is a requirement as
partial fulfilment for the award of a Bachelor’s Degree in Islamic Banking and finance of Islamic
University in Uganda
This survey is aimed at identifying, collecting and assessing different factors which have
challenged the development and establishment of Islamic micro finance in Uganda as observed
by the different stakeholders with whom the researcher hopes to create conclusions on viable
solutions for works on a good roadmap to effective and efficient development and establishment
of Islamic Microfinance in Uganda.
Thank you in advance for your willingness to participate in this research
Part A: Personal information
1. Age: 18-25 26-35 36-45 46-above
2. Gender: Male Female
3. Religion
Christian Muslim other (specify)
4. Level of education
Primary level O-level A-level Diploma
Bachelors Masters PhD

33
5. Area of study
Banking and finance Accounting Marketing Administration
Other(specify) ………………
6. Position in the organization
Manager Employee
7. Do you have knowledge about Islamic finance or microfinance?
Yes No
8. What is your level of education in Islamic finance or Microfinance?
Training Certificate Diploma Degree
Masters PhD None
Part B: Assessment of the operational procedures of Islamic Microfinance institutions
1. Does your institution have its own sharia supervisory board?
Yes No No idea
2. If yes, how would you rate its efficiency in effective sharia oversight
3. Do you have any idea of the existing Islamic Micro finance models?
Yes No
4. What model of Islamic microfinance is your institution using?
Group Lending Village Bank Credit Union
Self-Help Groups none other (specify)…………………..
5. How do you rank the efficiency of Islamic microfinance operations?
6. How would you in your view rate the quality of the following aspects of the Islamic
microfinance operations?
1 2 3 4 5
1 2 3 4 5
Item Poor Fair Good Very
Good
Excellent
The requirements for fund acquisition
The timeliness in processing funds
There institution’s loan monitoring
systems
The institution’s fund Security
Controls in storage, withdrawals and
deposits
The Collection / recovery strategies in
loan repayments, penalties,

34
7. How would you rate the dependability of the current operations of Islamic Micro Finance
institutions on achievement of the core objectives of Microfinance?
Part C: Examining the challenges encountered in development of Islamic MFIs
1. How would you rank these operational factors level of effect on the development of Islamic
Micro Finance in your institution?
2. How would you rank these sectors of the economy on their contribution to the development
of Islamic micro finance in Uganda
restructuring etc.
The Regulatory and governance
implementation
The Islamic finance proficiency of the
workforce
The impact on the poor and poorest of
the poor
The access to the poor and poorest of
the poor
The products (loans) attractiveness and
benefit.
Comprehensiveness of governance
policies and guidelines
Access to sources funding
Restrictions for access to funding
Objective Completely
Dependable
Somewhat
Dependable
Moderately
Dependable
Not Very
Dependable
Not
Dependable
Economic
development
Poverty
alleviation
Islamic
Microfinance
development
Item 1 2 3 4 5
Operational structure
Human resource
Uses of funds (products or loans)
Governance policies and guidelines
Sources of funding
Item 1 2 3 4 5
Public sector

35
3. To what degree do you agree to the statement “Changes in operational factors and sector
commitments can affect the development and sustainability of Islamic microfinance in
Uganda”
Part D: Analyse present initiatives for the development of Islamic microfinance in Uganda
1. Rank the following initiatives on their capacity for making a positive impact on Islamic
micro finance development in Uganda
2. What is your degree of agreement to the following statements?
Private sector
International sector
Strongly Moderately Agree Moderately
Disagree
Strongly
Disagree
Item 1 2 3 4 5
Education / capacity building
Legal and governance policies and
guidelines
Sourcing of funding
Government support
Private sector support
Item Strongly
Agree
Moderately
Agree
Agree Moderately
Disagree
Strongly
Disagree
The current state of the initiatives
is suitable for the development
and sustainability of Islamic
micro finance in Uganda
Changes in these initiatives can
influence the development and
sustainability of Islamic micro
finance in Uganda

Challenges of Islamic Microfinancing in Uganda

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