UGANDA. Synopsis. Highlights

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1 a Uganda Finance Trust Company Limited by Shares Contacts MicroRate: Craig Kirkwood Tel: Fax: Uganda Finance Trust: Peter Okaulo Tel: Fax: PERFORMANCE RATING* RATING OUTLOOK β Positive Date of visit April 25 Date of previous rating April 24 Previous rating β α β γ α++ α+ α α β+ β β γ+ γ γ U-TRUST Main Performance Indicators Dec '3 Dec '4 Gross Portfolio ( s) $4,43. $6,818.8 Number of active borrowers 24,13 2,6 ROE 1.2% 11.% Portfolio Yield 57.7% 69.7% Portfolio at Risk 6.1% 4.4% Operating Expense Ratio 47.8% 53.1% Average Loan Size $183 $331 Borrowers per staff Note: In 24, ROE has been adjusted for low provisions. Synopsis UGANDA Report as of December 24 Uganda Finance Trust Ltd (which took over the activities of Uganda Women s Finance Trust), a member of the Women's Wold Banking (WWB) network converted to a company limited by shares in 24. U-TRUST has grown its portfolio to almost $7 million making it one of the leading microfinance institutions in Uganda. The MFI makes solidarity and individual loans and offers savings facilities through a network of 21 branches. During 24, the institution underwent an expensive transformation process to be recognized as a formal financial intermediary by the Central Bank. Despite the high costs, U- TRUST remained profitable for a second successive year. Highlights POSITIVE Profitability increased in 24. Good individual lending methodology. Strong top management. Sufficient liquidity to manage future growth. NEGATIVE Deterioration in operating efficiency. Supervision of large branch network needs improvement. The group lending methodology needs to be refined and policies and procedure need to be followed more consistently. U-TRUST is reaching the limit of it borrowing capacity. * The rating is contingent on the institution becoming regulated by the Bank of Uganda during the course of 25. Washington Headquarters 217 Wilson Blvd., Suite 45 Arlington, VA 2221 USA Phone: +1 (73) Fax: +1 (73) MicroRate Latin America Plz. 27 de Noviembre 43, 3B Lima 27 Perú Phone: +51 (1) Fax: +51 (1) MicroRate Africa P.O. Box Sandton, 2146 Johannesburg, South Africa Phone: +27 (11) Fax: +27 (11)

2 Hggkhk Uganda Finance Trust December 24 Uganda Finance Trust UGANDA December 24 Sources of Funding Rating Rationale 13% 38% U-TRUST remains profitable The institution reported a rise in profits for the second consecutive year, despite increased competitition and high transformation costs. Poor Excellent % 2% 4% 6% 8% 44% Operating expense 53.1% 5% Commercial Borrowing Subsidised Borrowing Deposits Equity Borrowers per Employee 17 % 3% 6% 9% 12% 15% Portfolio at Risk 4.4% 5% 4% 3% 2% 1% % -1% -2% -3% -4% -5% Average in MicroRate's African Comparative Sample * ROE Adjusted for discrepancies in accounting policies and subsidies. R OE * 11.% The operating expense ratio and ROE compared to all African MFIs rated by MicroRate with average loans < US$5. Further improvement in margins Despite higher funding costs and lower efficiencies, the higher net operating margin was almost entirely due to the rise in portfolio yield to 69.7%, compared to 57.7% previously. Improvement in portfolio quality Portfolio at risk (over 3 days) improved, from 6.1% to 4.4% in 24. Whilst this remains higher than MicroRate s African average, the trend is encouraging. However, arrears remain concentrated in group loans, which is indicative of the institution s poor loan evaluation techniques Lower efficiencies Despite the increase in individual loans, low staff productivity offset efficiency gains arising from the higher average loan size. To remain competitive efficiencies must be improved. Intermediation of clients savings In 24, around 4% of savings were used to fund the portfolio. For an unlicensed institution, this practice is risky. This being said, the institution has reduced the level of intermediated funds to just 9% of the gross portfolio (as at March 25). With the deadline for transformation just months away, this provides some level of comfort. Ineffective implementation of policies and procedures Although top management demonstrate a high level of competence, there is not enough capacity to ensure branches are properly supervised. With branches being visited infrequently, the issue of non-compliance with policies and procedures is prevalent (ultimately impacting on portfolio quality). High Gearing - U-TRUST has relied heavily on debt to grow its portfolio. Accordingly, the debt to equity ratio rose to 7.5 (23: 3.4). This is extremely high for a non-regulated MFI - the average debt/equity ratio of similar African MFIs rated by MicroRate was 2.7:1. Unless the MFI can increase its equity it would be at the limits of its borrowing capacity which in turn would bring growth to a halt. info@microrate.com peter.okaulo@u-trust.co.ug

3 December 24 Country Overview Macroeconomic Information Jun 1 Dec 2 Dec 3 Dec 4 Annual Inflation 7.4% 2.3% 1.3% 3.3.% Exchange Rate / per US$ Annual Currency Devaluation 9.7% 7.5% 4.5% -1.2% Deposit Rate (Year Average) 8.3% 6.5% 6.9% 7.5% Source: World Bank In terms of legislation, the Ugandan microfinance industry is one of the most progressive in Africa. The industry has changed considerably since the Micro Finance Deposit Taking Institution s Act ( MDI ) was signed into effect in 23. This Act was designed to have the Central Bank regulate many of the larger MFIs and, more importantly to legalise financial intermediation for the first time. This marks a major development, as it allows MFIs to substitute expensive borrowings (which have funded much of the industry growth so far) for relatively low-cost savings deposits. There are a number of strong MFIs in Uganda, but at the moment only one institution (FINCA Uganda - see June 4 MicroRate rating report) has become regulated. There are around 5 others who hope to be formally regulated in the short to medium term. For many MFIs planning to transform, the ownership requirements are the most challenging (the Act stipulates a maximum shareholding of 3% by any one person or entity). As Uganda Finance Trust ( U-TRUST ) has not been exempted from this requirement, it will have to find investors to take up the remaining shareholding. In addition to the difficulties of meeting the ownership requirements, the costs of transformation are high. In U-TRUST s case, they are budgeted at over $2 million, the bulk of which will be funded by DFID and the Microfinance Outreach Plan ( MOP ). Much of this funding (roughly $1 million) has gone towards refurbishing the branch network, with the MIS upgrade and hardware (of $7,) being funded internally. In general, transformation is a massive task and will continue to demand much time and effort from management. Demand for micro-credit in Uganda is high and competition is growing. At the moment, PRIDE, CERUDEB, Uganda Microfinance Union ( UMU ), Commercial Microfinance Limited and Faulu Uganda are the institution s main competitors. As most of these institutions are expected to become regulated, competition is likely to increase. As such, developing demand-driven products will be critical to meeting growth targets and retaining clients. Already the market has seen more sophisticated clients who have an increased understanding of the credit market and the products available to them. In addition, the microfinance industry will have to compete with commercial banks, which have moved downscale. Most notable players are STANBIC and CERUDEB, but at the moment this is limited to salary backed consumer loans. Microfinance Operations Main Indicators 3 Jun-1 3 Jun-2 31 Dec-2* 31 Dec-3 31 Dec-4# Gross Loan Portfolio ( s) $2,25.9 $3,43.3 $3,461.9 $4,43. $6,818.8 Number of Active Borrowers 25,325 21,675 26,635 24,13 2,6 Asset Quality Portfolio at Risk / Gross Loan Portfolio 9.2% 2.1% 3.6% 6.1% 4.4% Write-offs / Average Gross Loan Portfolio 1.1% 4.4%.1%.4% 1.1% Loan Loss Reserves / Portfolio at Risk 62.6% 98.3% 37.2% 76.% 47.3% Loan Loss Provision Expense / Average Gross Portfolio 4.% -2.3% 1.3% 4.4% 2.8% Efficiency and Productivity Operating Expenses / Average Gross Loan Portfolio 59.5% 64.5% 54.1% 47.8% 53.1% Cost per Borrower $5 $72 $68 $74 $133 Average Outstanding Loan Size $87 $14 $13 $183 $331 Number of Borrowers / Credit Officer Number of Borrowers / Staff * 6 month period. All relevant ratios have been annualised. # 8 month period. All relevant ratios have been annualised. info@microrate.com peter.okaulo@u-trust.co.ug

4 December 24 Following the shift towards individual lending in 22, the loan portfolio grew rapidly and in 24 amounted to almost $7 million. $ ' 8, 7, 6, 5, 4, 3, 2, 1, Portfolio Growth Rate Jun '1 Jun '2 Dec '2 Dec '3 Dec '4 Gross Loan Portfolio Annual Change in Gross Loans The increase in the loan portfolio was fuelled by a continued shift towards larger individual loans. As such, they accounted for over 8% of the portfolio in 24. Despite this, the bulk of the institutions 2, clients remain in the group lending scheme. Composition of the Loan Portfolio Dec 23 Dec 24 Individual loans 7% 81% Group loans 3% 13% Salary Loan - 6% Total 1% 1% The aggressive expansion of individual loans has been supported by the flexibility of the loan product. Aside from increasing the maximum loan size, from $3, to almost $9,, U-TRUST increased the loan term to 12 months, from 9 months previously. Further enhancements include reducing the level of forced savings from 2% to 17.5%, but this was only effective in April 25. $ ' 8, 7, 6, 5, 4, 3, 2, 1, Portfolio and Ave. Out. Loan Size Jun '1 Jun '2 Dec '2 Dec '3 Dec '4 % $ By responding to this demand, not only were growth targets met, but the average outstanding loan size increased significantly, from $13 in 22 to over $33 in 24. This jump is significant and has resulted in an average loan size well above that for similar African MFIs rated by MicroRate ($156). Further changes to these loan criteria are expected and there are plans to expand the individual loan portfolio further (for example school fees loans, low cost housing loans etc). These should complement the existing MTN (a cell phone network) loans which clients can access to finance mobile payphone businesses. Loan Products Individual Group Salary Interest rate 2.5% 2.5% 3% Interest type Flat Flat Flat Term 1-12 months 4-12 months 6-12 months Min loan $29 $14 n.a. Max loan $8,5 $86 5% net salary Deposit 2% 2% Nil Group size Top -up n.a. n.a. After 5% repaid Salary backed loans were introduced to allow U- TRUST to compete more effectively and to enhance efficiencies. However, these loans have not been managed well and hence the quality of the portfolio is poor. This problem is mostly limited to government employers where middle level bureaucrats use salaries to back loans from multiple institutions. Although salary loans account for only 6% of the gross portfolio, these loans are expected to be phased out. In general the individual lending methodology is good with comprehensive cash flow and business assessments demonstrated. The loan approval process is largely decentralised (99% of loans approved at branch level). Only loans in excess of $1,7 are approved at head office. Much emphasis has been placed on improving the loan methodologies by drawing upon the Women s World Banking ( WWB ) expertise in individual loan methodology. To a large extent the training has proven successful, but there is scope for further improvement. At the moment, loan files are too long which lengthens the approval process and allows for much duplication of information. Gross Loan Portfolio Average Outstanding Loan Size per Active Borrow er info@microrate.com peter.okaulo@u-trust.co.ug

5 December 24 Group loans are made to solidarity groups comprising 5-1 individuals. However, larger groups of up 2 members do exist. Unlike individual loans, the approval process for group loans is weak, resulting in poor loan quality. MicroRate found inconsistent or non-existent training before the first loan disbursement and a general lack of focus on this product by management. This has led to reduced solidarity amongst group members and resulted in longer lead times in the recovery effort (mostly due to loan officer apathy). As group loans are unlikely to be phased out altogether (they reach large numbers of women and the rural poor), it is imperative that U-TRUST improve the group lending methodology. Although loan forms allow for business assessments and repayment capacity calculation, these are not being done uniformly. At the moment, there is little adherence to company regulations and it appears that many loan officers adapt the loan methodology to suit the branch s needs (i.e. to meet targets or to suit the environment etc.). As mentioned earlier, over-indebtedness is a major problem (there is no national identification system or credit reference bureau). This is a consequence of the highly competitive microfinance sector. MFIs try to defend themselves against this danger by sharing client information and loan officers often liaise informally with each other. This practice has recently become common in Uganda but it is not comprehensive nor very effective. Overall, credit products are well suited to meet client demand. Currently, U-TRUST offers one voluntary savings product and is in the process of pilot testing another. The success of these products is paramount as they will not only be a source of funding, but a potential source of new credit business as well. Portfolio Quality Following a consistent rise in Portfolio at Risk since June 22, PaR (over 3 days) improved to 4.4% in 24. Whilst this is positive, it remains below MicroRate s African average for similar MFIs of 3.4%. $ ' 8, 7, 6, 5, 4, 3, 2, 1, Portfolio and PaR Jun '1 Jun '2 Dec '2 Dec '3 Dec '4 Gross Loan Portfolio Portfolio at Risk % Although write-offs remain within a comfortable level (1.1%), the true quality of the portfolio is likely to have been masked by the high portfolio growth in 24 (typically, rapid growth dilutes bad loans). It is also noted that U-TRUST still does not track its group loan repayments at the individual level in the MIS. Whilst this will be possible when the new system is fully installed, at the moment PaR could be higher than its current level. The quality of Group Loans has improved less rapidly than individual loans. With group PaR still at 6.6% in 24, further training and refinement of loan evaluation techniques is required. Whilst poor branch supervision has largely contributed to the problem, the weak group cohesion is cause for greater concern. Portfolio Volume and PaR by Product Dec 23 Dec 24 $ s % $ s % Individual Loans* 3, % 5, % Group Loans 1, % % Total 4, % 6, % Write-offs 17..4% % PaR plus write-offs - 6.5% - 5.5% * Includes Salary Loans Provisioning has fluctuated greatly in recent years and in 24, loan loss reserves covered only 47.3% of portfolio at risk, compared to 76.% in 23. This is low and well below MicroRate s average for African MFIs of 85%. Given that repayments of Group loans are not tracked at the individual level, MicroRate considers it prudent to provide for 1% of PaR, especially during a period of strong growth. info@microrate.com peter.okaulo@u-trust.co.ug

6 December 24 $ ' PaR and Loan Loss Reserve Jun '1 Jun '2 Dec '2 Dec '3 Dec '4 Portfolio at Risk (Actual Amount) Loan Loss Reserve Loan Loss Reserve / Portfolio at Risk % $ ' 8, 7, 6, 5, 4, 3, 2, 1, Portfolio and Staff Numbers Jun '1 Jun '2 Dec '2 Dec '3 Dec '4 Gross Loan Portfolio Total Staff No. of Loan Officers Organization and Management U-TRUST is headquartered in Kampala and operates through its 21 branches. The branch network is very large for an institution of this size, which places heavy demands on staff. Although upper management demonstrate a high level of competence, there is not enough capacity to ensure that branches are adequately supervised. With branches being visited infrequently and given the strain on senior staff, non-compliance of policies and procedures has become an issue and is beginning to be reflected in portfolio quality. At the moment, The Chief Executive Officer is supported by an Operations Manager (also deputy CEO), the Finance Manager, the Human Resources Manager, the MIS Manager and a Chief Internal Auditor. In general, management has the necessary skills to see U-TRUST through the transformation process, but gaps in middle management do exist. The staff has grown in line with the portfolio. At the end of 24, the MFI had 192 staff members, 47% of whom were loan officers. Staff are recruited centrally and are sent to branches based on need. Generally, staff morale is good. There is a loan officer incentive scheme in place, but in MicroRate s opinion it is inadequate. Loan officers were found to have very little knowledge as to how the incentives were calculated and overall bonuses are too small as a percentage of a loan officer s salary (roughly 1%). These factors together can be counterproductive and the impact at branch level is being felt. As there is no overriding parameter (for example PaR level), loan officers see no reason to follow quality guidelines. Portfolio and Loan Officer Productivity $ ' 8, 7, 6, 5, 4, 3, 2, 1, Jun '1 Jun '2 Dec '2 Dec '3 Dec '4 Gross Loan Portfolio Number of Clients / Loan Officer Owing to the movement from group lending and a proportional increase in loan officers, loan officer productivity declined further to 229 clients per loan officer in 24 (23: 39). This is a low level of productivity and well below the average of 36 seen in other African MFIs rated by MicroRate. As a result, the cost per borrower has increased significantly to $133 (23: $74). Furthermore, the operating expense ratio deteriorated to 53.1%, from 47.8% in info@microrate.com peter.okaulo@u-trust.co.ug

7 December 24 $ ' Operating Expense Ratio Jun '1 Jun '2 Dec '2 Dec '3 Dec '4 Average Outstanding Loan Size per Active Borrower Operating Expenses / Average Gross Portfolio Since June 22, U-TRUST has been successful in improving operating efficiencies by increasing the average loan size. However in 24, this was not enough to offset the decline in loan officer productivity. Whilst the increase in the average loan size has been a consequence of the growth in individual loans, there is a limit to improving operating efficiency in this way. MFIs that move rapidly upmarket can easily find themselves in a market niche to which they are not accustomed. In the long run, efficiencies must be achieved through higher staff productivity. U-TRUST s internal auditor reports quarterly to the Board. Although internal controls are satisfactory, MicroRate is concerned by the small size of the internal audit department (particularly given the number of branches). At the moment, the internal audit plan is difficult to implement given the lack of capacity. As mentioned earlier, this has lead to inconsistencies in the following of policies and procedures (for example, some branches use different loan forms) and ultimately to fraud. Although incidences of fraud have decreased, the problem still exists. It is critical that U-TRUST move to document a clear set of procedures for all products and ensure that they are correctly followed. Management Information and Accounting System U-TRUST is in the process of changing its MIS. However, the old system (Loan Performer) is still widely used. Although it is versatile and capable of performing a number of functions, the level of reporting is inadequate. In order to meet regulatory requirements, the institution is implementing a banking system, EQUINOX % -2 So far only 9 branches have been converted but once completed, it will allow for real time reporting. Although this is costly, the improved efficiencies (group repayments can be tracked at the individual level) and strengthened internal controls (as well as liquidity management) are likely to outweigh the costs in the long run. EQUINOX integrates accounting, teller, banking and savings modules. Generally security is good, with adequate password protection in place. On the whole, the system is flexible and can be easily modified. As the transformation deadline of September 25 is fast approaching, converting the remaining branches will be a massive task. Not only will this be expensive, but it will also be disruptive to normal operations. Although staff are being trained on the new system, as yet they have not fully grasped its potential (in terms of reporting capabilities etc). Furthermore, given the extensive branch network, the process is likely to be extended beyond the target date. At the moment, offline branches send data to head office monthly where it is captured and consolidated. Reports are generated monthly. Governance and Strategic Positioning U-TRUST was incorporated as a company limited by shares in 24 and is majority owned by Uganda Women s Finance Trust (the NGO from which U- TRUST emerged). However, MDI requirements stipulate that no single shareholder can own more than 3%. Additional investors must be found. This has been tough as the pool of potential investors is limited and a number of Ugandan MFIs are competing for them. To date, the MFI has secured around $8, in equity and convertible notes (25% of shares). The remaining 35% ($1.3 million) is expected to be taken by a further two investors, but this is subject to the outcome of an evaluation of U-TRUST by those investors. The ultimate plan is that UWFT and its Founders will remain with a 3% and 1% share respectively. The institution is headed by a Board consisting of six Ugandans, but as new investors are found, the mix is expected to change. At the moment the composition of the board is not optimal and once regulated, the Board will need a greater diversification of skills. U-TRUST know this and plan to make available three Board seats to new investors. info@microrate.com peter.okaulo@u-trust.co.ug

8 December 24 To ensure a smooth transition, a Board Policy Committee is planned, which should provide a suitable entry and exit mechanism for members. At the Board level there is an Executive, an Audit and an Asset/Liability committee, all of which meet quarterly. Whilst this systematic approach to risk management is desirable, as the MFI transforms, managing credit, interest rate and covenant risks will become increasingly important. One of the institution s greatest challenges will be transforming into a regulated entity by the September deadline set by the Bank of Uganda. The institution has staked large financial resources on receiving its license. However this is threatened by the fact that U-TRUST still intermediates its clients savings. The institution has curbed this practice by March 25 client savings funded 9% of the gross portfolio compared to 4% at the end of 24. But the fact that client savings are intermediated at all could prompt the Central Bank to withhold a license. With competition in Uganda expected to intensify, U- TRUST will find itself at an increasing competitive disadvantage, unless operating expenses are drastically reduced. Operating expenses should ideally be at less than half their present level. This being said, U-TRUST has successfully managed to increase yields, which is tough in a market as competitive as Uganda. This indicates a strong market presence and the ability to dominate in areas where many of the other MFIs have not yet reached. As they cover a wide area, monitoring individual branches has become more difficult. Whilst it is hoped that the institution will grow into its shoes, it is imperative that U-TRUST bed-down its existing branches and refrain from expanding too fast. The high number of branches has increased the cost of transformation (most other MFIs only have to convert 5-6 branches) and accordingly, this is likely to reduce U-TRUST s ability to make them fully compliant by the set deadline. Overall, U-TRUST plan to continue focussing on individual lending. As this segment is becoming increasingly competitive, the ultimate success of the MFI will depend on the quality of its loan products. It is critical that loan products are demand driven, for if not, growth could be jeopardised. Ultimately, the institution could risk losing the cross selling opportunities for its new savings products which will provide vital funds for financial intermediation. Financial Profile In 24, U-TRUST remained profitable recording a net income of $174, (23: $136,) and a return on equity of 19.3% (23: 1.2%). However, it should be noted that adjusting for U-TRUST s low provisions, this reduces ROE to 11.%. Financial Ratios 3 Jun- 3 Jun-1 31 Dec-2** 31 Dec-3 31 Dec-4# Capital Adequacy Debt / Equity Asset Quality Portfolio at Risk / Gross Loan Portfolio 9.2% 2.1% 3.6% 6.1% 4.4% Write-offs / Average Gross Loan Portfolio 1.1% 4.4%.1%.4% 1.1% Loan Loss Reserves / Portfolio at Risk 62.6% 98.3% 37.2% 76.% 47.3% Loan Loss Provision Expense / Average Gross Portfolio 4.% -2.3% 1.5% 4.4% 2.8% Management Operating Expenses / Average Gross Loan Portfolio 59.5% 64.5% 54.1% 47.8% 53.1% Number of Borrowers / Credit Officer Number of Borrowers / Staff Earnings Net income / Average Equity (ROE) 3.1% -14.7% -1.8% 1.2% 19.3% Net income / Average Assets (ROA) 1.2% -4.7% -4.3% 2.4% 3.1% Portfolio Yield 63.5% 54.6% 47.7% 57.7% 69.7% Interest and Fee expenses / Average Gross Loan Portfolio 3.9% 4.5% 2.1% 4.5% 1.5% Interest and Fee expenses / Average Funding Liabilities 6.% 5.9% 3.2% 6.8% 12.2% Liquidity Cash & Liquid Assets / Total Deposits 16.6% 56.1% 32.1% 49.6% 68.3% * 6 month period. All relevant ratios have been annualised. # 8 month period. All relevant ratios have been annualised. info@microrate.com peter.okaulo@u-trust.co.ug

9 December 24 $ ' Financial Performance Jun '1 Jun '2 Dec '2 Dec '3 Dec '4 Net Income % Net Income / Average Equity Given higher funding costs and reduced efficiencies, the improved net operating margins were almost entirely due to the rise in portfolio yield to 69.7% (23: 57.7%). This increase in portfolio yield followed the rapid growth of individual loans in 24, offering significantly higher loan sizes compared to group loans. However, it is unlikely that these margins can be sustained. Already margin growth has slowed and this is likely to be compounded by the increasingly competitive environment. Accordingly, using savings which are a cheaper source of funding will become all the more important. % Financial Performance Jun '1 Jun '2 Dec '2 Dec '3 Dec '4 Net Operating Margin Portfolio Yield Operating Expenses / Average Gross Loans Although a portion of savings were being used to fund the loan portfolio, the liquidity position improved in 24. During the year, cash and liquid assets increased to 25.6% of total assets (23: 21.4%) and covered total deposits.7 times, compared to.5 times previously. As a result, commercial borrowings increased significantly to over $3.5 million 1 in 24. This is sizeable and equivalent to over 5% of the loan portfolio and 38% of the institution s capital structure. Accordingly, the debt to equity ratio rose to 7.5 (23: 3.4). However, if the subordinated loan from UWFT is excluded, the debt/equity ratio falls to 5:1. This is extremely high for a non-regulated MFI - the average debt/equity ratio of similar African MFIs rated by MicroRate was 2.7:1. Unless U-TRUST can increase its equity it would be at the limits of its borrowing capacity which in turn would bring growth to a halt. Owing to the good performance in 23, U-TRUST was able to secure funding from a variety of sources in 24. By year end, there were no significant concentrations, with 26% of total borrowings owed to a local bank (DFCU). The loan is a long term facility and is fully secured by a fixed deposit of $44, ($19, raised internally and the balance from SUFFICE 2 ) and the loan portfolio. U-TRUST also manages two 7 year loans and a 3 year loan from NOVIB, a Dutch foundation. These loans are unsecured. To mitigate foreign currency risk, a $2, loan from Blue Orchard (a Swiss based Microfinance Fund) and a $15, loan from Deutsche Bank were deposited with a commercial bank (Allied Bank) which extended a $92, equiv. local currency credit line to U- TRUST. To date only 38% or $345, has been drawn down. In addition, the MFI secured $575, and $125, equiv. in local currency from the Triodos International Fund and the Microfinance Support Centre respectively. To ensure sufficient liquidity in 25, U-TRUST has already negotiated to borrow around $1.6 million from a number of sources. All new loans are denominated in local currency. Overall, U-TRUST has no uncovered foreign exchange positions nor is there any material risk associated with the mismatching of assets and liabilities. In general, the MFI has secured adequate funding to manage growth in the short term. However, given that funding costs are high at 1.5% of the average gross portfolio, U- TRUST must improve efficiencies. Over the past year, U-TRUST has relied heavily on debt to grow its portfolio. 1 This excludes a $5, subordinated loan from UWFT priced at 12% over 1 years. This is shown as quasi-capital accounts on the balance sheet. 2 A joint EU and Government of Uganda programme to develop the Ugandan financial sector. info@microrate.com peter.okaulo@u-trust.co.ug

10 December 24 Future Prospects There are a number of challenges that U-TRUST will face if it is to successfully compete in the Ugandan microfinance industry. First and foremost, the MFI needs to replace the balance of savings it has used to fund the portfolio. Whilst the institution has been able to operate in a legal vacuum, the central bank will not tolerate this practice after the September 25 deadline. Secondly, developing savings products which suit demand will be critical once U-TRUST becomes a licensed intermediary. At the moment, much of the focus is on credit. To ensure a suitable source of funding, attention must be placed on rolling out additional savings products sooner rather than later. Moreover, as the institution is broadening its target market, there is scope to expand the range of credit products as well. This will not only boost growth in the already competitive urban markets, but will be an important tool by which to grow portfolios in rural areas. Finally, U-TRUST needs to monitor its branches more effectively. It is felt that the size of the branch network has contributed significantly to the poor supervision. As mentioned in previous sections, there are a number of discrepancies in loan methodologies, reporting etc, which over time could become a threat to the sustainability of the organisation. Transformation into a supervised financial intermediary is a traumatic process which further stresses the institution. Thus, developing effective communication channels with staff and implementing forward looking risk management procedures are important to ensure healthy growth and transformation. Overall, once the transformation hurdle has been crossed, U-TRUST should be able to retain its place as one of the leading MFIs in the Ugandan market. info@microrate.com peter.okaulo@u-trust.co.ug

11 December 24 Financial Adjustments The financial statements presented in this analysis have been reclassified according to a common format, but they are not adjusted for discrepancies in accounting policies, inflation or subsidies. Adjustments are concentrated in three areas: interest income is recognized only on a cash basis; loan loss provisioning and write-offs are recalculated according to a formula generally accepted as prudent for portfolios with the characteristics typical of MFIs 3 ; funding subsidy is eliminated 4. In the case of U-TRUST, MicroRate made a provision adjustment of US$112, lowering net profit from US$261, to US$149, and return on equity from 19.3 % to 11.%. 3 MicroRate writes off loans past due more than 18 days and recalculates provisions according to the following formula, unless the MFI s provisioning policy is more conservative: For Non-Refinanced Loans: 1 3 days 1% 31 6 days 3% 61 9 days 6% > 9 days 1% For Refinanced Loans: days 5% >1 days 1% 4 MicroRate takes the deposit rate from the International Financial Statistics of the IMF as the minimum market rate for loans in local currency. For dollar denominated loans one-year LIBOR +2% and Prime Rate are taken for short and long term loans, respectively. The difference between the minimum market rate and the rate charged by the fund are then applied to the simple annual average of the fund. This is the adjustment to the cost of funds. info@microrate.com peter.okaulo@u-trust.co.ug

12 (All amounts in US$' except as noted) Income Statement for the year ended: 3-Jun-1 3-Jun-2 31-Dec-2 * 31-Dec-3 31-Dec-4 # Interest and Fee Income 1, , ,27. 2,68.5 Interest and Fee Expense (85.2) (117.) (33.2) (175.8) (392.4) Net Interest Income 1, , ,94.3 2,216.1 Provision for Loan Loss (85.7) 6. (19.8) (172.6) (14.) Net Interest Income After Provisions 1,21.4 1, , ,112.1 Operating Expense (1,285.6) (1,693.7) (852.2) (1,878.5) (1,986.8) Net Operating Income (84.2) (318.7) (153.6) Other Income Other Expenses - (7.7)..3 (191.2) Extraordinary Items Net Income Before Taxes 53.9 (223.6) (13.6) Taxes Net Income 53.9 (223.6) (13.6) Balance Sheet as at: Cash and Banks 1, ,52.1 Temporary Investments ,211.1 Net Loans 2,79.4 2,982. 3, , ,677.2 Gross Loans 2,25.9 3,43.3 3, ,43. 6,818.8 Performing Loans 2,3.7 2,98.9 3, , ,519.6 Portfolio at Risk Loan Loss Reserve Other Current Assets Current Assets 3, , , ,98. 9,968. Long Term Investments Property and Equipment Other Long Term Assets Long Term Assets Total Assets 4,63.1 4, , , ,595.7 Demand Deposits 1,55.8 1, ,375. 1, ,227.1 Short Term Time Deposits ,68.7 1, ,746.7 Short Term Funding Liabilities ,648.9 Other Short Term Liabilities ,313.1 Current Liabilities 2, ,88.6 3,17.7 3, ,935.8 Long Term Time Deposits Long Term Funding Liabilities ,79.1 1,95. Quasi - Capital Accounts Other Long Term Liabilities Long Term Liabilities ,79.1 2,414.4 Capital 1,27.7 1,238. 1, , ,4.4 Retained Earnings (17.1) Other Capital Accounts Equity 1, , ,22.1 1, ,245.5 Total Liabilities & Equity 4,63.1 4, , , ,595.7 Key ratios: Asset Quality Portfolio at Risk / Gross Loan Portfolio (%) Loan Loss Provision exp. / Average Gross Portfolio (%) 4. (2.3) Loan Loss Reserves / Portfolio at Risk (%) Write-offs / Average gross portfolio (%) Efficiency and Productivity Operating Expenses / Average Gross Loan Portfolio (%) Cost per borrower Average outstanding loan size Number of Borrowers per Staff (no.) Number of Borrowers / Credit Officer (no.) Operating Expenses / Net Interest and Other Income (%) Profitability Net Income / Average Equity (%) (ROE) 3.1 (14.7) (1.8) Net Income / Average Assets (%) (ROA) 1.2 (4.7) (4.3) Portfolio Yield (%) Net Interest Income / Average Gross Loan Portfolio (%) Non Interest Income / Total Operating Income (%) Financial Management Interest and Fee Expenses / Average Gross Portfolio (%) Interest and Fee Expenses / Average Funding Liabilities (%) n.a. n.a Debt / Equity (:1) Total Capital / Risk Weighted Assets (%) Tier One Capital / Risk Weighted Assets (%) Tier Two Capital / Risk Weighted Assets (%) Cash and Liquid Assets / Total Deposits (%) Cash and Liquid Assets / Liabilities to the Public (%) Nominal Growth indicators Assets (%) 5.5 (1.7) Loan Portfolio (%) Shareholders Equity (%) (17.4) (12.7) 21.3 (14.6) Deposits (%) Net income (%) n.a. n.a. n.a * Represents a 6 month period. All relevant ratios have been annualised # Represents an 8 month period. All relevant ratios have been annualised

13 Annex A Page 1 1. Excellence in Microfinance Rating Definitions Grade α++ α+ α α β+ β β γ+ γ γ Definitions Those MFIs consistently exhibiting a clear, rational and balanced relationship among the social, financial and operational considerations of sound microfinance practice as compared to an international set of similar companies and emerging standards of the microfinance industry. Optimal efficiency and effectiveness. Very low risk. Excellent future prospects. Those MFIs striving to balance a clear and rational relationship among the social, financial and operational considerations of sound microfinance practice as compared to an international set of similar companies and emerging standards of the microfinance industry. Good efficiency and effectiveness. Low risk. Good future prospects. Those MFIs working to define a clear and rational relationship among the social, financial and operational considerations of sound microfinance practice as compared to an international set of similar companies and emerging standards of the microfinance industry. Satisfactory efficiency and effectiveness. Acceptable risk. Satisfactory future prospects Those MFIs without a clear and rational relationship among the social, financial and operational considerations of sound microfinance practice as compared to an international set of similar companies and emerging standards of the microfinance industry. Poor efficiency and effectiveness. Very risky. Poor future prospects. 1 Optimal 2 Good 3 Satisfactory 4 Poor Scoring key: ++ Optimal 1 α Good 2 β Satisfactory 3 γ Poor 4