Many Ugandans still excluded because they lack money – study

By Christine Kasemiire

In October last year, government released the ambitious five year National Financial Inclusion Strategy (NFIS) 2017-2022, which set a target of reducing the financially excluded to only 5 per cent. The strategy was premised on five pillars namely; reducing financial exclusion and barriers to access financial services, developing credit infrastructure, building digital infrastructure, deepening and broadening formal savings and investments, insurance usage as well as empowering individuals with enhanced financial capability. 

In the same plan, key solutions were highlighted to bridge some gaps inhibiting financial inclusion. At the time, only 54 per cent of adults were financially included.

Today, figures from the Finscope Survey indicate a 24 per cent jump to 78 per cent of adults being financially included. The inclusion, according to Ms Rashmi Pillai, Director of Programmes Financial Sector Deepening Uganda (FSDU) was propelled by mobile money penetration.

This indicates that Uganda is making strides in its plans to reduce financial exclusion to only 5 per cent by 2022.
The NFIS also highlights the need to increase financial services usage in the 90-day period. However, while access to financial services proliferates, there is a protracted gap between accessibility and usage.

“If you had to compare the 90-day activity rate between mobile money users and banks account owners, the activity from mobile money is five times higher than that of banks,” Ms Pillai explained during the Financial Inclusion Dialogue marking the financial inclusion week.

However, most of the bank users use the financial institutions for savings and credit while more than 90 per cent of the mobile money users utilise it for payments.

Consequently, ignoring other services such as credit and insurance provided on mobile money leaves a gap to be filled by the informal systems.

According to the Finscope survey, 49 per cent of borrowers use informal lenders such as community based money lenders while only 10 per cent borrow from formal lenders such as commercial banks and SACCOS.

“The informal sector has stepped up and is serving this need. Most of the people who are actively using informal services are banked, or using mobile money, 90 per cent of them use informal insurance while formal insurance only stands at single digits,” she says.

Low usage of services 
The low uptake of formal services is cost-associated. The World Bank’s report titled, “Making it Easier to apply for a bank account,” indicates that the average cost of onboarding direct and indirect costs of a bank account is $20 (Shs75,200) while mobile services is $5 (Shs18,750).

Ms Pillai says this signifies that the banking sector has spent $200m (Shs747.6b) in costs of managing a bank account for the 10 million bank accounts and $55m (Shs205.6b) for the 11m mobile money customers.

Deputy Governor Bank of Uganda, Mr Louis Kasekende reiterated Ms Pillai acknowledging challenges with widening access to formal credit because of the costs associated with credit risk such as surveys, and cost of loan defaults, among others.

For Uganda to get financial inclusion right, which relates to usage of financial services and not only access, Ms Pillai advised financial sector players to build products and services that have compelling value propositions that leverage digital identification and data.

“We are one of the countries that managed to put up a national identification infrastructure in a short time. We need to figure out how to leverage on that for real time electronic know your customer. This will create better credit scoring systems,” she expounded.

For instance, information gathered from people making payment utilities, agricultural payments, tax payments is instrumental in creating products and services.

She said the products should put in mind user needs, experience and protection among others. 
Interoperability with different providers who will bolster the growth of business and increase in services uptake through what Ms Pillai dubbed as strategic partnerships.

For instance, banks and telecommunication providers can cooperate instead of competing to include the excluded population. 
Citi Bank Research titled, “Future of money is mobile,” reveals that Kenya leads in consumer borrowing in emerging markets with 17 per cent from formal institutions and non- formal institutions because of the prevalence of mobile loans and informal cooperatives.

The report says, “Mobile Money providers are looking at expanding into consumer and Small and Medium Enterprises (SMEs) lending. This serves to cater to traditionally underserved by larger corporate focused banks in frontier markets by leveraging on wealth of consumer data to facilitate loans through partnership or in competition with financial institutions.”

Telecoms in Uganda have given out more than Shs100b in loans since they launched the mobile loan products. 
FSDU also believes that enabling regulation would play a key role in ensuring growth and usage of financial services. Regulators need to understand the new channels, risks associated with them and how sand boxes can ease regulation.

However, as highlighted by many reports, poverty in Uganda is increasing. Yet financial inclusion in itself requires an economy that has money for it to take root.

Ms Gertrude Karugaba, board chair FSDU, says the reason for the dismal use of formal services is the lack of money. 
“If Uganda is to attain the 5 per cent financial exclusion rate, we need to look at involuntary exclusion caused by the lack of money,” she says adding, “With money in the pocket, I have the ability to invest in businesses and grow and can borrow money from the bank for personal and business use.”

With little or no money, she says, financial inclusion is almost impossible. That is why the masses should be economically empowered with a livelihood.

The solution, Ms Karugaba believes lies in supporting businesses which provide employment and incomes to people which will increase usage of financial services.

Financial sector players also need to quench the appetite for the need for paper money if financial inclusion is to go forward.

According to a Citi Bank report, Uganda has a high cash dependency which Bank of Uganda puts at 85 per cent especially in retail transactions.

Minister of Finance Matia Kasaija revealed that the National Payments Policy is expected to be finalised this year. 
The policy will regulate digital payments in Uganda by licensing all the different players.

Financial Inclusion is also pulled back by taxes imposed on mobile money. The usage of the platforms has dropped tremendously over the months, increasing the dominance of cash.

Nonetheless, Mr Kasaija said a tax reduction of 0.5 per cent is expected to restore the inclusion path to normalcy.

To reduce the 25 per cent exclusion in rural areas, technology has been incorporated. 
Agent banking with over 4,500 agents now, is expected to further boost financial inclusion in rural areas.

How other countries are boosting financial inclusion
According to the Citi Bank’s Research, money market funds can be used to boost financial inclusion. In Kenya, Safaricom launched M-Abika in partnership with the government in 2017. M-Abika is a tax free three-year bond sold in small denominations between $30 and $500 (Shs112,000 to Shs1.9m) to fund infrastructure programmes targeting unbanked Kenyans through its Mpesa Platform, While the partnership failed to raise its $50m (Shs186.9b) target, because of the complication of the product, it has opened the door to a new avenue for government fundraising globally. It is also a new source of money for mobile money users.

In Somalia where hyperinflation has rendered the dollar as the preferred choice of currency, mobile money provider ZAAD introduced mobile money exchange service this year. The service allows users to easily exchange dollars with local currency directly on their mobile phone without the need to visit an exchange bureau. The service also works as an aggregator allowing users to see the conversion rates offered by various money exchange companies and choose the best rates.

Financial inclusion
Financial inclusion strategy
Launched in October last year, the National Financial Inclusion Strategy prioritised areas in the financial sector that would boost the population’s inclusion from 54 per cent of the adults in 2013 to 95 per cent by 2022. With only a year under its belt, to address the risk of access to finance, government has promoted the uptake of the agricultural insurance facility. 
To address the gap of high cost of financial services, government amended the Microfinance Deposit Taking Institutions Act to allow for agent banking which currently has more than 4,500 agents.

Future of financial services
Ms Pillai explains the future of business in 3D. Disaggregation, Disintermediation, Decentralisation of financial services. 
Disaggregation, she explained, is the breaking up of financial chain services starting with payments which have been taken up by social media companies such as Facebook and WhatsApp among others. 
The technology giants have now taken up retail payments which further cuts costs on infrastructure. 
“These companies will be 100 per cent greater in accuracy and consumer information where Facebook saves 500 terabytes of data from their 2 billion users,” she explains. 
Lending will not be a bank only domain. As Ms Pillai explains, crowd funding platforms are giving individuals with extra liquidity an opportunity to lend businesses money after a risk assessment has been conducted by the platform. 
‘’ a crowd funding website, has given out $2b in loans since 2012, she reveals.