How Uganda Plans to Cut Financial Exclusion to 5 Percent in 5 Years

In October 2017, Uganda launched a new five-year National Financial Inclusion Strategy. The strategy seeks to reduce financial exclusion from 15 to 5 percent by 2022. How? By ensuring all Ugandans have access to and are able to use a range of quality and affordable financial services.

Uganda has made progress in financial inclusion as a result of financial sector reforms that began in the 1990’s. These include interest rate liberation, reduction in directed credit, and legal and regulatory changes. Such reforms have improved people’s access to financial services through banks, regulated microfinance institutions (MFIs) and mobile financial services. According to the FinScope 2013 report, 54 percent of Ugandans are now formally financially included, while 32 percent use informal financial services like Savings and Credit Cooperative Organizations (SACCOs).

These are important gains, but Uganda still faces significant hurdles to broadening financial inclusion.

Here are several of the key challenges, some thoughts on how the new strategy aims to tackle them, and the role FINCA can play in helping to expand financial inclusion to 95% of Ugandans by 2022.

Reduce access barriers to financial services

According to the 2013 FinScope Survey, only 16 percent of Ugandans live within 1 km of a point of service for a bank. The situation is better for mobile money, as 54 percent live within 1 km of a banking agent or other point of mobile money service.

Yet, even when people make it to a bank branch or mobile money agent, there are other barriers to confront. These include “know your customer” (KYC) requirements that make it difficult for a poor customer to present acceptable forms of identification, lack of liquidity (cash) at banking agents, limited mobile network coverage interrupting digital transactions, and high interest rates that can range from 22 to 25 percent per annum. Uganda’s new strategy takes aim at these challenges. It also emphasizes making it easier for youth (ages 15 – 17) to open and access financial accounts.

Build up the digital infrastructure

74 percent of Ugandans live in rural areas where traditional financial service providers have little incentive to build brick-and-mortar branches. This results in limited access to basic and necessary financial services for bottom of the pyramid (BOP) populations. Even if a point of service can be found, the scarcity of competition means rural poor encounter additional challenges. These include high transaction fees, poor customer service, and even loss of money through illegitimate financial institution scams.

To overcome these hurdles and incentivize financial service providers to meet the needs of the rural poor, the National Financial Inclusion Strategy will require interoperability of systems among financial service providers. This will make it easier for low-income clients and small business owners to make and accept payments. It also produces cost efficiencies for financial service providers.

The strategy also seeks to encourage financial sector players to design customer-friendly and intuitive interfaces for products and services. For example, USSD code menus in local languages. Given limited digital literacy in Uganda, intuitive user interfaces are key to increasing the use of digital financial services. The focus on USSD, which works on any type of mobile phone, is especially important given the low smartphone penetration. However, the issue of burdensome fees on mobile money transactions needs to be addressed. Such fees remain one of the biggest barriers to the widespread adoption of mobile money.

Digital financial services using mobile phones
Using USSD technology so that anyone with a mobile phone can access basic financial services.

FINCA Uganda already offers clients mobile banking, including text message notifications so clients are informed of their banking transactions. Going forward, the intention is to move into robust mobile financial services. Using data, a credit scoring system for low-income people can enable millions to save and borrow conveniently on their phones.

Deepen and broaden formal savings, investment and insurance usage

According to Uganda’s National Social Security Fund, 11 million Ugandans (26 percent of the population) lack social security. Insurance penetration is also low at 3 percent, and the ratio of domestic savings to GDP is only 13 percent. Together, these challenges hinder the ability of Ugandans to cope with financial shocks, such as poor harvests or family illnesses.

The new financial inclusion strategy proposes a host of options to tackle these challenges, from adoption of a national policy on insurance and liberalization of the pension sector, to strengthening rural financial intermediaries through regulation. SACCOs have become a strong delivery mechanism for reaching people in rural areas with savings and credit services. However, liquidity challenges, governance issues, low skills capacity, fraud and political interference limit their effectiveness.

FINCA offers Ugandans a range of savings products. These include a target savings allowing low-income clients to save money for a future goal (e.g., paying a child’s education). Other offerings include fixed deposits and junior savers accounts to meet the unique needs of a range of clients. At present, local law does not allow FINCA to offer insurance products to Ugandans.

Increase the availability of agricultural credit

In Uganda’s agricultural economy, small and medium enterprises and smallholder farmers struggle to access credit. This stifles job creation and economic growth. According to the 2016 State of the Economy Report by Bank of Uganda, credit flow to agriculture stands at a paltry 10 percent. Thankfully, Uganda’s financial inclusion strategy recognizes agriculture as the engine of the economy, and outlines recommendations to bolster the sector.

To make agricultural credit more available, the strategy focuses on addressing key barriers such as limited coverage of smallholder farmers by credit reference bureaus, sparse rural access points, weak public awareness about the importance of building a credit history, and challenges around communal property rights. In addition to these focus areas; however, Uganda will need to find a way of tapping into a vast amount of informal credit input data available to large agricultural buyers. Doing so will strengthen the credit histories of smallholders and position them for easy access to financial services, especially credit.

FINCA client working in agriculture
Margaret Nankonge, a FINCA BrightLife client and farmer in Uganda, working amidst her banana trees.

FINCA Uganda already offers agricultural loans tailored to the needs of smallholder farmers. This type of credit enables families to generate agricultural incomes in a more sustainable manner. For example, through value addition, increased production capacity, and higher quality crop yields. Smallholder farmers in rice, bananas, coffee, livestock, and more are using FINCA agricultural loans to better their families’ living situation.

Empower and protect individuals with enhanced financial capability

Issues like digital literacy and data protection are becoming urgent as poor people leap from traditional to digital financial services. It is reassuring to see Uganda’s new strategy proposes, among other things, a review of the national financial literacy strategy, a review of the consumer protection practices of all financial service providers, and routine regulatory checks on providers. Emphasizing consumer literacy will empower customers to understand product terms and conditions and make informed choices.

FINCA takes client protection seriously, and considers client wellbeing to be at the center of its mission. To ensure responsible banking became an industry norm, FINCA advocated for client-oriented principles and helped to found The Smart Campaign. This is a global initiative promoting the adoption of client protection principles in the microfinance industry.

Will these measures get Uganda to its 5 percent goal?

Uganda’s new strategy addresses key financial inclusion challenges and focuses on important enablers. For example, progressive regulation, flexible and custom KYC, infrastructure to support scale and low cost, and customer centricity through protection, product customization, and empowerment.

FINCA is committed to profitably and responsibly providing innovative and impactful financial services. Such services enable low income-individuals, families, and communities to invest in their future.

FINCA hopes to contribute to Uganda’s ambitious but achievable goal of reducing financial exclusion to 5 percent by 2020.