Can Uganda Reduce Financial Exclusion to 5% in 5 Years?

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Nathan Were, Consultative Group to Assist the Poor (CGAP), a global partnership of more than 30 leading organizations that seek to advance financial inclusion.

A financially excluded smallholder farmer in northern Uganda opens the lock box where he keeps his savings. Credit: Allison Shelley for CGAP

WASHINGTON DC, Jan 10 2018 (IPS) - 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 by ensuring that all Ugandans have access to and use a broad range of quality and affordable financial services.

But what are some of Uganda’s key challenges, and how is the strategy supposed to achieve this ambitious goal?

Uganda has made a lot of progress in financial inclusion as a result of financial sector reforms that started in the 1990s, such as interest rate liberation, reductions in directed credit and legal and regulatory changes. These reforms have improved people’s access to financial services through banks, regulated microfinance institutions and mobile financial services providers (FSPs).

According to FinScope 2013, 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 financial inclusion challenges. Here are a few of those challenges and some thoughts on how the new strategy aims to tackle them.

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 when it comes to mobile money, as 54 percent of the population lives within 1 km of a point of service. Yet even when people make it to a bank branch or mobile money agent, there are other barriers to confront, particularly in rural areas.

These include know-your-customer (KYC) requirements, lack of liquidity at agents, GSM network coverage and high interest rates that can range from 22 to 25 percent per annum. Uganda’s new strategy takes aim at these challenges with an emphasis on making it easier for youth (ages 15 – 17) to open accounts.

KYC is especially difficult in Uganda, so it is nice to see that the strategy calls for an electronic payments gateway to facilitate digital KYC. In 2016, CGAP’s nationally representative smallholder household survey found that only 61 percent of smallholder families had a national ID. Current KYC rules also make it difficult for small businesses, many of which are unregistered, to become merchants, further limiting the growth of the digital financial services ecosystem. Digital KYC will enable FSPs to access businesses’ and individuals’ identity information.

The government’s recognition that a one-size-fits-all KYC requirement doesn’t work is a positive development and a promise that we might see tiered, custom KYC requirements for excluded segments.

Build up the digital infrastructure

Roughly 74 percent of Ugandans live in sparsely populated rural areas where FSPs do not have an incentive to build costly brick-and-mortar branches. The lack of competition in these areas means the rural poor often face limited access to financial services, high transaction fees, poor customer service and loss of money through fake financial institutions.

Uganda plans to address these gaps by supporting companies to provide low-cost, interoperable digital services. Interoperability will make payments easier and produce cost efficiencies for providers. Uganda will also encourage financial-sector players to design customer-friendly interfaces for products and services, such as USSD code menus in local languages.

The strategy’s focus on simple user interfaces and on educating customers throughout the customer journey will be key to increasing the use of digital financial services, especially given the low levels of digital literacy in Uganda. The focus on USSD is especially important given the low smartphone penetration. However, the issue of mobile money transaction fees needs to be addressed, as it remains one of the biggest barriers in mobile money use cases.

Deepen and broaden formal savings, investment and insurance use

According to Uganda’s National Social Security Fund, 11 million Ugandans (26 percent of the population) don’t have any form of social security. Insurance penetration is also low at just under 3 percent, and the ratio of domestic savings to GDP is only 13 percent. These challenges mean that many Ugandans have few ways to deal with financial shocks, such as poor harvests or family illnesses.

The new financial inclusion strategy proposes a host of strategies to tackle these challenges, from adopting a national policy on insurance and pension sector liberalization to strengthening rural financial intermediaries through regulation. SACCOs can become strong delivery mechanisms for reaching people in rural areas, but they face liquidity challenges, governance issues, low skills capacity, fraud and political interference. Limited innovation in products is also a major challenge. FSPs will need support to adopt more human-centered design approaches to design relevant products.

Increase the availability of agricultural credit

In Uganda’s mostly agricultural economy, micro, small and medium enterprises and smallholder families often struggle to get credit, which limits their ability to grow and create jobs. According to the Bank of Uganda’s state of the economy report 2016, credit flow to agriculture stands at a paltry 10 percent of total credit. Uganda’s strategy recognizes that agriculture is the engine for the economy.

To make credit more available in the sector, the strategy addresses a few key barriers such as credit reference bureaus’ limited coverage of smallholders, sparse rural access points, weak public awareness about the importance of credit history and challenges around communal property rights. Beyond addressing these issues, Uganda will need to find a way to tap into the vast amount of informal credit input data available at large agricultural buyers to further strengthen smallholders’ credit histories and position smallholders for easy access to credit and other financial services.

Empower and protect individuals with enhanced financial capability

Issues like low digital literacy and data protection are becoming more urgent as poor people make the leap from traditional to digital financial services. Uganda’s new strategy proposes a review of the national financial literacy strategy and FSPs’ consumer protection practices, as well as routine regulatory checks on providers.

Other measures include periodic demand-side needs studies and data sharing among FSPs to improve product development. Greater consumer literacy will empower customers to understand product terms and conditions and help them to make informed choices about financial products and services.

Will these measures get Uganda to its 5 percent goal?

Overall, Uganda’s new strategy clearly addresses the key financial inclusion challenges it faces. The strategy focuses on the most important financial inclusion enablers, such as progressive regulation, flexible and custom KYC, infrastructure to support scale at low cost and customer centricity. Considering these strengths and the progress Uganda has already made with recent financial sector reforms, cutting financial exclusion to 5 percent by 2022 is achievable.