By Micol Pistelli, Senior Financial Inclusion Officer at UNHCR and Philippe Guichandut, General Secretary at Grameen Crédit Agricole Foundation
With over 1.7 million refugees and asylum seekers within its borders, Uganda hosts the largest refugee population in Africa and the fifth largest in the world. While the country has a progressive and supportive regulatory framework for the socioeconomic inclusion of displaced people, refugees still face barriers in accessing loans for enterprise and other financial and non-financial services. A major challenge for financial service providers (FSPs) is their limited understanding of the refugees’ socioeconomic conditions, often leading to perceptions of them as transient, reliant on humanitarian aid and lacking reliable documentation.
To help address these issues, five years ago, Sida, UNHCR and Grameen Credit Agricole Foundation launched a first-of-its-kind blended finance programme in Uganda, building on market research results from a year earlier. The programme’s distinctive approach combined donor contributions and investor capital in refugee settings. It included grant funding from Sida for technical assistance and operational support, technical and logistical support from UNHCR, and debt funding from Grameen Credit Agricole Foundation to meet the liquidity needs of FSPs lending to refugees, along with technical assistance supervision.
A successful programme leads to some key learnings
Despite launching amid challenging conditions—COVID-19 followed by strict lockdowns and food ration cuts that exacerbated refugee vulnerabilities—the programme achieved strong repayment rates, showing that refugees are reliable borrowers. With over 130,000 clients from both refugee and host communities, the portfolio quality (PAR 30) showed no major differences between the two groups. Rates ranged from a high of 11% during difficult times to as low as 3% to date, with refugee rates sometimes even lower. Additionally, branches in the settlements achieved sustainability at the same pace as those in other areas.
These successful results provide some valuable lessons for structuring blended finance programmes in refugee contexts:
1. Loan guarantees are not the solution
In markets with large displaced populations, loan portfolio guarantees – which offer protection against potential losses – are often the go-to mechanism of development finance institutions (DFIs) and donors for encouraging FSPs to lend to refugees, and this was one option we considered before launching our programme in Uganda. However, we decided against this approach for two reasons:
- Initial data from Kiva six years ago showed that forcibly displaced persons were as creditworthy as nationals.
- We were concerned that guarantees might lead FSPs to relax their credit assessments in favor of market expansion, potentially resulting in negative financial consequences for refugees and host community clients.
While appealing to FSPs, guarantees can lead to unintended consequences for clients. If FSPs relax credit assessments, client default rates are at greater risk of increasing. Refugees may take on unaffordable loans, creating cycles of over-indebtedness and financial instability and damaging their credit histories. Higher default rates can also reinforce the narrative that refugees are inherently risky clients, further limiting future access to loans and justifying the need for new guarantee schemes to be structured – creating a vicious cycle. Additionally, loan guarantees may distort the financial landscape by favoring the larger FSPs that tend to be able to access them, rather than fostering a more inclusive environment.
Our programme’s outreach figures and high repayment rates suggest that loan guarantees were unnecessary. Instead, blended finance programmes should focus on market-conducive incentives, which leads us to the next lesson.
2. Set up market-conducive incentives
Market-conducive incentives aim to encourage FSP engagement with refugee clients. They can help FSPs to overcome the logistical challenges of operating in refugee settlements and to explore innovative solutions, such as mobile banking and digital loans, which are particularly valuable for remote areas. In Uganda, training was also important, as the success of the programme hinged on building FSPs’ capacity to serve refugee clients effectively.
The market-conducive incentives in our programme included funding to cover part of the costs of:
- Establishing branches in refugee settlements.
- Developing digital financial products.
- Producing marketing materials, such as brochures and flyers in refugees’ languages.
- Providing training to enhance staff understanding of refugees’ unique challenges.
3. Data on client needs, behaviors and aspirations is crucial
Another critical factor in the programme’s success was the initial market assessment conducted six years ago, along with subsequent studies by the participating FSPs, VisionFund and Ugafode.
VisionFund’s assessment of 6,700 refugee members of existing savings groups found that these communities possessed sufficient financial capacity to be reliable clients, having access to daily and weekly markets in the camps, good network coverage, mobile money agents and entrepreneurial groups. The market assessment also indicated that the perceived “flight risk” of refugees was largely overstated. Most refugees did not intend to return to their home countries or relocate, focusing primarily on achieving economic independence. The programme experience confirmed this finding, as the few instances of relocation did not significantly impact portfolio quality.
These studies offered essential insights into the financial behaviors and aspirations of refugees in Uganda, revealing that developing refugee-specific financial products was unnecessary. Instead, FSPs needed to adjust their existing products and procedures to make them more accessible for refugees.
4. Existing products can be made more accessible for refugees
While the programme found no need for “refugee-specific” products, some tweaks were necessary to make existing products more accessible, including:
- Adjustments to internal policies and procedures to accept refugee IDs for KYC compliance.
- Updates to management information systems (MIS) to track the refugee segment.
- Added flexibility in terms of collateral requirements.
- Training for frontline staff on how to expand services to this new segment.
VisionFund introduced the FAST (Finance Accelerating Savings Groups Transformation) product, which provided loans to savings groups without requiring traditional collateral. Instead, the groups’ collective savings were used as security, making the product more accessible to refugees. Similarly, UGAFODE adapted its loan products, such as the Smart Woman Loan and VSLA Loan, to offer flexible collateral requirements, which helped refugees, particularly women, gain access to financial services.
The initial market study also highlighted the importance of non-financial services, such as training in financial education, digital finance and business development, for refugees with limited experience in formal financial systems. These services were provided in partnership with NGOs and local refugee organizations.
Collaborating to get FSPs “refugee-ready”
Drawing on our experience in Uganda, we argue that guarantees should not be the primary means of incentivizing FSPs to serve refugees. While guarantees can be useful for targeting specific sub-segments, such as SMEs or start-ups in riskier markets, regardless of whether they are refugee-run, a different approach is necessary to make FSPs “refugee-ready.” To this end, donors, DFIs, humanitarian agencies and investors should collaborate to create blended finance schemes that prioritize understanding the socioeconomic conditions of refugees. These schemes should provide market-conducive incentives by supporting market research and covering some of the initial FSPs’ operational costs involved in serving refugees.
As our FSP partners continue to expand their outreach to refugees and host communities, we hope to conduct an impact evaluation on the financial outcomes for the target population beyond the initial outreach and repayment figures shared in this blog.
This article was first published on FinDev Gateway