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“Effects of adapting International Financial Reporting Standards (IFRS) on the Financial Statements and Reporting Quality of the Micro Finance Institutions in Uganda”

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1. Introduction:

Over the years Microfinance has become a diverse and growing industry. There are over hundreds of institutions in Uganda providing micro finance services (check website), ranging from grass roots self-help groups and NGOs to commercial banks that provide financial services to millions of microenterprises and low-income households.

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These Microfinance Institutions (MFIs) receive support and services not only from donor agencies, but also from investors, lenders, network organizations, rating firms, and a host of other specialized businesses.

MFIs must follow an industry-wide standard so that reporting to donors, lenders, and investors are accepted and understood by the recipients. It becomes much easier for the MFIs to prepare its accounts and reports if the recipients of the reports are also in agreement with the standards (pwc paper). For this purpose The SEEP Network in 2005 came up with a framework to provide microfinance practitioners with a means to develop financial statements and reports so that those statements and reports can be used for meaningful analysis and monitoring and are in accordance with International Financial Reporting Standards with (IFRS).

However, even after the establishment of a framework some MFIs find it difficult to abide by, and many financial terms and indicators considered “standard” continue to differ in name and content among MFIs. This leads to confusion among practitioners and analysts and causes considerable distortions when comparing MFIs (SEEP report). For Example: Understanding the difference between arrears and portfolio at risk is important. Arrears measure the sum of all past due payments, whereas portfolio at risk is the total value of loans outstanding that have one or more past due payment. The word delinquency may refer to either, which leads to confusion.

As mentioned above MFIs also find it hard to comply with the International Financial Reporting Standards completely. For Example: MFIs normally follow a mixed accounting system where the accrual method of accounting is used for expenses and the cash method is used for interest earned on loans. Although the cash method of accounting may be acceptable for internal management reports, but according to IFRS and IAS an adjustment for accrued interest is required.

Therefore, the study will be identifying the differences in the financial reports of the MFIs compared to the IFRS.

2. Objective:

The major objective of the study is to gain an extensive understanding of the Micro Finance sector in Uganda and to identify the effects caused by the implementation of IFRS in the financial statements. While analyzing the implementation of IFRS, the focus of the study is also to identify the differences in the financial statements and reports and whether it complies with IFRS.

3. Literature Review:

3.1 Introduction:

Research has been conducted assessing Uganda’s accounting and auditing practices to ensure the quality of corporate financial reporting (Uganda, Accounting & Auditing, ROSC, 2005). Further more literature related to the micro finance industries consists of mainly its impact (USAID, 2001) and effects on poverty reduction (J. Morduch & B. Hale, 2001). Few guidelines and surveys were conducted by the SEEP Network and CGAP to determine the reporting standard of the Micro finance industry.

3.2 What is Micro Finance?

According to Marguerite Robinson the definition of Micro Finance is “Micro Finance refers to small scale financial services for both credits and deposits that are provided to people who performs agricultural activities; operate small and medium enterprises in developing countries, in both rural and urban areas”.

Micro-finance means transactions in small amounts of both credit and saving, involving mainly small-scale and medium-scale businesses and producers. Micro Finance Institution (MFI) set up centers in targeted areas with group members. These group members consists of 25-40 members per groups, this number will vary with different MFIs. The loans are normally disbursed to two or three of the members of self-selected groups (mostly female groups) and the whole group becomes responsible for the repayment by their fellow members. The other members only get their loans when the initial borrowers pay their installments regularly. Members have to attend regular meetings, usually weekly, to repay their loans.

The history of microfinance is often associated with the rise of nongovernmental organizations (NGOs) providing microcredit services to the poor and the development of a handful of microfinance banks. In the early 1990s, standards began to emerge calling for stronger financial management of microcredit providers, particularly in their delinquency management and reporting. At the same time, credit unions and banks involved in micro lending developed stronger monitoring techniques for their microcredit portfolios. As the micro finance industry grew in capacity and outreach the competition also started to increase, therefore, it became important for the industry to introduce a reporting standard which will increase transparency, facilitate comparability, improve decision-making, and increase investment by making it easier to observe and understand an MFI’s financial health.

3.3 Micro finance reporting standard:

Microfinance as an industry does not have a central body or mechanism to address compliance or updates to financial reporting standards. MFIs worldwide do not follow standards, and are only now beginning to use tools like International Financial Reporting Standards (IFRS)(new developments in mfis).

IFRS is a principle based set of 37 accounting standards. As the need for consistent worldwide reporting standards grows, the goal is to provide a general financial reporting guidance for public companies. Within the European Union (EU) companies with securities listed on stock exchange must adopt IFRS for their consolidated financial statements starting in 2005. Many other countries worldwide require IFRS as the leading reporting standard. Over 100 countries are currently using IFRS. There are many reasons for implementing IFRS. Most important is the comparability of financial statements worldwide. For investors and auditors the IFRS provide a cohesive view of the consolidated financial statements.


Since 1990, MFIs have grown in size, type, number, and complexity (BoU report). At the same time, more emphasis has been placed on financial accountability, management, and viability. A growing acceptance of standards for micro finance has emerged since the early 1990s.

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In 1995, The SEEP Network produced a monograph, Financial Ratio Analysis of micro finance Institutions, which became the standard set of 16 ratios that micro finance institutions monitored. Then, in 2002, micro finance institutions, The SEEP Network, rating firms and donor agencies jointly developed Microfinance Financial Definitions Guidelines: Definitions of Selected Financial Terms, Ratios, and Adjustments for microfinance, known as the Financial Definitions Guidelines.

3.4 Overview of Micro Finance Industry in Uganda:

Uganda occupies an area of 241,038 sq km[1] in the heart of East Africa, with a total of over 34.6 million (July 2011 est.)[2]. Approximately 94 percent of the poor live in rural areas where about 75 percent of the population lives (CGAP, 2004) and depend on Agriculture, which contributes about 36.1 percent of the Gross Domestic Product (GDP).

Uganda’s financial system is characterized by the co-existence of formal and informal financial markets. The formal financial markets, which mainly comprise of commercial banks, development banks and credit institutions mainly exist in urban areas and offer a narrow range of financial services. They concentrate on providing working capital mainly to medium and large-scale enterprises. Furthermore, the formal financial institutions are inflexible in their operations, with respect to the needs of the small-scale enterprises and the poor people in the rural areas who may not have collateral or well-written feasibility studies to solicit for loans. As such, the rural areas, where the majority of poor people live, remain either under-banked or served by informal financial institutions.

MFIs in Uganda consist of moneylenders, micro-finance agencies, Non Government Organizations (NGOs), rural farmers’ schemes and savings societies that provide savings and/or credit facilities to micro and small-scale business people who have experienced difficulties obtaining such services from the formal financial institutions. Their range of activities include; deposit taking, savings schemes, small-scale enterprises, agriculture, real estate, group lending, retail financial services, giving advice on financial matters and training in business management.

The Microfinance industry in Uganda is in its advanced stage of evolution. Since the 1990s, Uganda has created a success story by developing the market for microfinance services, which has been considered a role model for Africa and even other regions (Goodwin-Groen et al. 2004). Its growth and development will be a function of the support and effort of practitioners, donors and the Government working together to create an enabling environment for its development. It is readily apparent that the Government is committed to economic and financial reforms. In addition to the other reforms being implemented through its economic policy framework, the Government has shown its commitment to reforming the financial sector. Operationalization of the Microfinance Policy and the legal and regulatory framework indicates renewed efforts and commitment to improving the financial system. The Government is acutely aware of the limitation of the traditional banking sector’s ability to mobilize savings from and extends credit to poor people in rural and urban areas. This population has a weak financial resource base and is in dire need of financial services that cater for its unique circumstances.

3.5 Regulatory Structure for Micro Finance in Uganda:

The current financial sector policy in Uganda aims primarily at systemic safety and soundness as a supporting bedrock for orderly growth. The policy, drafted by the BoU and approved by Government following multiple bank failures of the late 1990s, was significantly informed by the bitter lessons learnt from these failures and by incidences of fraudulent organizations that fleece the public. The role of Bank of Uganda, the financial sector regulator, is to ensure systemic safety, soundness and stability of the whole financial sector, and protection of public deposits in the regulated financial institutions.

Bank of Uganda issued the policy statement in July 1999 that established a tiered regulatory framework for microfinance business within the broader financial sector. The policy established four categories of institutions that can do micro-financing business in Uganda:

Tier 1: Commercial banks.Banks are regulated under the Financial Institutions Act revised in 2004. Since these are already sufficiently capitalized and meet the requirements for taking deposits as provided for in this Act, they are allowed to go into the business of microfinance at their discretion.

Tier 2: Credit Institutions (CIs). These institutions are also regulated under the Financial Institutions Act 2004. A number of them offer both savings and loan products but they can neither operate cheque/ current accounts nor be part of the BoU Clearing House. Like banks, they are permitted to conduct microfinance business since they are already sufficiently capitalized and meet the requirements for taking deposits provided for in the Act.

Tier 3: Micro Finance Deposit Taking Institutions (MDIs). This is the category of financial institutions that was created following the enactment of the MDI Act. Originally doing business as NGOs and companies limited by guarantee, these institutions transformed into shareholding companies, changed their ownership and transformed/ graduated into prudentially regulated financial intermediaries. They are licensed under the MDI Act and are subjected to MDI Regulations by BoU. Like Tier I and II institutions (banks and CIs), the MDIs are required to adhere to prescribed limits and benchmarks on core capital, liquidity ratios, ongoing capital adequacy ratios (in relation to risk weighted assets), asset quality and to strict, regular reporting requirements.

Tier 4: All other financial services providers outside BoU oversight. This category has SACCOs and all microfinance institutions that are not regulated – such as credit-only NGOs, microfinance companies and community-based organizations in the business of microfinance. These institutions have a special role in deepening geographical and poverty outreach, and in other ways extending the frontiers of financial services to poorer, remote rural people.

3.6 Overview of Accounting System in Uganda:

The Institute of Certified Public Accountants of Uganda (ICPAU) is the only statutory licensing body of professional accountants in Uganda. It was established by the Accountants Statute, 1992, but did not commence operations until 1995. The ICPAU is empowered by the statute to establish accounting standards and to act as a self-regulatory organization for professional accountants, which includes requirements for practicing as a professional accountant in Uganda.

The functions of the Institute, as prescribed by the Act, are:

To regulate and maintain the standard of accountancy in Uganda;
To prescribe or regulate the conduct of accountants in Uganda.

The objectives, of the institute included the regulation of accounting practice and the provision of guidance on standards to be used in the preparation of financial statements. As with most developing countries, and in cognizance with developments in the area of accounting at a global level, the ICPAU in 1999 adopted International Accounting Standards (IAS) without any amendments (Dumontier and Raffournier, 1998).

Prior to the adoption of IAS, there had been a proliferation of approaches to the preparation and presentation of financial statements in Uganda. One of the more obvious approaches to the presentation of financial statements was based on references to Generally Accepted Accounting Standards (GAAS) and firm law (Samuel Sejjaak, 2003).

3.7 Adaptation of IFRS in Uganda:

Since 1998, the Council of ICPAU has adopted International Financial Reporting Standards (IFRSs, IASs, SIC and IFRIC Interpretations) as issued by the International Accounting Standards Board (IASB), without amendment, for application in Uganda (IFRS for SMEs). International Financial Reporting Standards set out recognition, measurement, presentation and disclosure requirements dealing with transactions and other events and conditions that are important in general purpose financial statements.

The adoption of IFRS in Uganda to a larger extent is influenced by external factors such as foreign investors, international accounting firms, and international financial organizations among others. However, unless a country opens its doors to these institutions, there is little they can do to politicize the adoption process. The implication is that – the more a country is opened to the international environment, the higher the possibility that the country would be coaxed into adopting International Financial Reporting Standards.

4. Methodology:

The research will be conducted in an attempt to analyse the index and the quality of the accounting statements of the micro finance industry. Due to this reason the target of this study is the collection of empirical observations concerned to the effect of the adaptation of International Accounting Standards to the quality and quantity of the accounting information that are published.

The work of this study will be based on desk research only. A desk-based research will be initiated to make the essential link between theoretical frameworks and empirical observation. Mainly the study will focus on the comparative examination of the annual Financial Statements of Micro Finance Institutions in Uganda registered by the Bank of Uganda (BoU).

To examine and analyse the content of those Financial Statements so as to meet the objectives of the project and derive conclusions, the following methods will be taken into consideration.

Content analysis has been defined as a systematic, replicable technique for compressing many words of text into fewer content categories based on explicit rules of coding (Berelson, 1952; GAO, 1996; Krippendorff, 1980; and Weber, 1990). Content analysis enables researchers to sift through large volumes of data with relative ease in a systematic fashion (GAO, 1996). It can be a useful technique for allowing us to discover and describe the focus of individual, group, institutional, or social attention (Weber, 1990).

There are two general categories of content analysis: conceptual analysis and relational analysis. Conceptual analysis can be thought of as establishing the existence and frequency of concepts – most often represented by words of phrases – in a text. In contrast, relational analysis goes one step further by examining the relationships among concepts in a text.

(Writing Guides, http://writing.colostate.edu/guides/research/content/com2d3.cfm)

Another method that can be very significant to the study is the Comparative analysis. Comparative research, simply put, is the act of comparing two or more things with a view to discovering something about one or all of the things being compared. This method may also be appropriate for the study, as it will provide a comparison between the financial accounts of the MFIs with the IFRS.

Both content analysis and comparative analysis can be used for the determination of the study. Although there are some limitations with both methods it is thought as the most appropriate methods/tools for the purpose of the study. [TC1]

5. Conclusion:

Over the last two decade micro finance has transformed itself to a multi million-dollar industry. To continue its work in poverty reduction MFIs requires support from the international investors and donors. For this they would require to provide evidence of success, sustainability and transparency through the financial statements and reports. MFIs would require presenting the reports in a standardized format, which can be understood by the interest groups. Hence, the implementation of the IFRS became very important in this sector. However, it became quite difficult for the micro finance industry to totally comply with IFRS. Therefore, it is important to understand the effects of IFRS in the micro finance industry and what are differences that arise as the result of the implementation.[TC3]

6. References:

[1] Source: CIA – The World Fact book Website: https://www.cia.gov/library/publications/the-world-factbook/geos/ug.html

[2] Source: CIA – The World Fact book Website: https://www.cia.gov/library/publications/the-world-factbook/geos/ug.html

[TC1]Not clear what will you use for the study.

[TC2] [TC2]Maybe you can elaborate more on each method, and then discuss which method you are choosing and why?

[TC3]End with a statement on how this research is going to achieve this goal…

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