Co-operatives turn to external loans as COVID-19 continues to bite

As the aftereffects of the COVID-19 global pandemic continue to rattle businesses even at the local level, a number of cooperatives have resorted to external loans in order to boost their liquidity.

Vincent Nuwagaba, the District Commercial Officer (DCO), Mbarara district, confirmed that four out of 28 cooperatives in Mbarara, have so far applied for loans from external agencies.

“We have forwarded applications from four cooperatives in order to help them keep afloat. Another one applied for a credit facility from Oiko in the Netherlands,” Nuwagaba revealed.

Some of the cooperatives include EBO SACCO, which applied for Shs 8 bn from Oiko and Rwanyamahembe SACCO, Mugarutsya Co-op, and Rutoma Coffee Farmers’ Cooperative Ltd which applied for Shs 2 bn, Shs 50m, and Shs 20m, all from the Microfinance Support Centre (MSC).

Away in Kabale, Erasmus Natumanya, the District Commercial Officer (DCO), reported that as a district they are also connecting cooperatives with external financial institutions to help them continue running the co-operators’ activities.

“We have so far met Lyamujungu Cooperative Ltd’s management, but found they already had a loan from MSC, so we guided them on how to finish its repayment and get more money. Then we went to Hakashenyi and Unique SACCOs and discussed how they can recapitalize through getting low-interest rate loans, and we intend to visit more,” Natumanya explained.

According to Dicky Byamukama, General Manager, Lyamujungu Co-op, they were already settling a loan worth Shs 500m that they acquired from the Microfinance Support Center in 2020 to boost their internal capitalization.

“We acquired a loan from Microfinance Support Center (MDI) and during the year we paid 38 million shillings in interest for the loan,” Byamukama said, adding that the cooperative is currently left with a loan balance of about Shs 350m out of the Shs 500m borrowed.

Robert Waiswa Mpakibi, the Assistant Commissioner, Cooperatives Development at the Ministry of Trade, Industry and Cooperatives, confirmed that cooperative businesses were adversely affected by the COVID-19 pandemic.

“When it came to the savings, there were more withdrawals for survival. Those who wanted loans were putting in applications, yet those who were supposed to pay were unable to. This resulted in financial constraints in many cooperatives,” Mpakibi said.

He adds that cooperatives could not even hold AGMs, which he described as “the most fundamental principle of cooperatives”.

Loans not the answer

However, John Rutakirwa, the Operations Manager at BESANIA SACCO in Mbarara, cautioned cooperatives against focusing on borrowing as a means out of financial distress.

Citing the example of the Microfinance Support Centre, whose 13% interest rate on loans he said is “too high” for most cooperatives, he explained that getting a loan from such bodies may not provide the relief that co-operatives seek. 

“MSC’s interest rate of 13% is still high. Remember that cooperatives are a business, so they will also need to add their own markup before lending to their members. In the end, that will be too expensive for members. Personally, I think this credit [from MSC] should be at zero interest for SACCOs and similar financial institutions if it is to be of help to our communities,” Rutakirwa argued.

He instead advised cooperatives to only look at external borrowing as a last resort.

“For instance, when Commercial Banks run out of liquidity, they run to Bank of Uganda. For us, only our power lies in our members’ savings. We can only go to the Microfinance Support Centre when serious crises attack. Our preference is to boost our internal liquidity,” he added.

Assistant Registrar, Mpakibi, seconded this counsel and urged cooperatives not to rush into getting loans from external financial agencies but, rather, strive to build their own equity that can sustain the SACCOs.

“Many cooperatives are rushing to borrow some money from different financial institutions and, in most cases, it becomes hard for them to pay back,” the assistant Registrar said.

Stimulus package

Mbarara DCO, Nuwagaba, encouraged the Ministry of Trade, Industry, and Cooperatives to consider providing a stimulus package to the cooperatives.

“I call upon the ministry responsible to create a fund that will be given to cooperatives to help them recover from this pandemic, otherwise business is still low and many are closing,” he said.

Nuwagaba pointed out that district commercial offices have not been financially assisted to address cooperatives’ issues during COVID-19.

“As for financial assistance, even our offices have not received any operational money specifically for COVID-19; we have only been using the local revenue,” Nuwagaba said

With no support from the center, Nuwagaba fears that some of the cooperatives will soon collapse.

Responding to the proposal to provide a stimulus package to cooperatives, Mpakibi said the government is not in a position to compensate cooperatives in Uganda for COVID-related losses.

He instead challenged cooperatives to focus on future investments.

“Of course, the recovery is going to be an overhead because you realize most cooperatives have not yet resumed work. They should revise their appetite for investments aimed at bringing in quick cash,” Mpakibi advised.

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