There are three key strategies to enabling financial inclusion, says Jacqueline Musiitwa, the Executive Director of Financial Sector Deepening Uganda.
Driving on the road from the area around Kyaka II refugee camp in Kyegegwa District in Western Uganda to Kampala, I was struck by how small towns in Uganda have similar traits. The red dirt used to make bricks, sometimes combined with cement blocks, are used to create fairly similarly sized compact reddish looking structures that line much of Uganda’s rural roadways.
Often the walls are painted with advertising from paint companies, mobile networks, beverages and other corporates eager to entice a growing spending class. This makes for an interesting contrast with the intense greenery surrounding such structures. Another similarity among the small towns is the lack of services the residents have, including access to formal financial services. Changing this is important since financial inclusion can reduce poverty and improve economic growth. How can financial inclusion be achieved? Through these three strategies: adopt a national financial inclusion strategy, improve technology and encourage behaviour change.
National Financial Inclusion Strategy (2017-2022)
About 19.7 per cent of Ugandans live in poverty, even after a concerted government effort to reduce it. According to the World Bank, Uganda ranked as one of the fastest countries in Africa to reduce the share of its population living on $1.90 PPP per day or less, from 53.2 per cent in 2006 to 34.6 per cent in 2013.
As such, the government has devised several action plans to ensure that poverty is reduced. For instance, the government is committed to achieving the Sustainable Development Goals, Vision 2040, EAC Vision 2050, the Africa Vision 2063. Specifically, with respect to financial inclusion, Uganda is now committed to the National Financial Inclusion Strategy (NFIS) 2017-2022. Enactment of a NFIS is a promising trend across many developing countries. The main goal of the NFIS is universal financial inclusion to a broad range of quality and affordable services.
The NFIS prioritises the following:
1. Reduce financial exclusion and barriers to access financial services;
2. Develop the credit infrastructure;
3. Build the digital infrastructure;
4. Deepen and broaden formal savings, investment and insurance usage; and
5. Protect and empower individuals with enhanced financial capability.
Financial inclusion is a critical component of development for several reasons. First and foremost, it reduces a person’s vulnerability to economic shocks. Secondly, increasing domestic savings rates is good for domestic financial markets. Thirdly, a robust financial services sector improves the economy writ large. In 2017, Financial Inclusion Insights found that 46 per cent of Ugandan adults are registered users of a formal financial institution, but only 38 per cent are active users. In the same year, the Uganda Bureau of Statistics notes that 33 per cent of Ugandans still prefer to hide their money in their homes or other secret places. Of the 33 per cent, 36 per cent are in rural areas and 26 per cent in urban areas. Perhaps it is in part because 78.5 per cent of rural Ugandans are required to travel more than five kilometres to access a bank branch. Whilst 81 per cent of Ugandans have access to mobile phones and 61 per cent of those access mobile money, connectivity to mobile networks is weak to non-existent in remote areas.
Due to most rural population’s income generation based on subsistence agriculture, their earnings are infrequent and fluctuate, making it hard to move from living hand to mouth to purchasing financial services. This seeming contradiction lies in the reality that although formal financial services provide an option for people, many people, especially in rural areas, still prefer age old ways. It begs the question of what do financial institutions need to do to increase their reach and usage?
With respect to the race to stay abreast of technological developments, the financial services sector is no exception. The sector continues to grow its reliance on technology and innovative technological solutions to industrywide problems. From improved core banking systems to online banking to alternative credit scoring, the sector is quickly finding ways to improve the user experience and increase usage. Beyond technological adaptations is the growth of digital financial services. Digital financial services are not only speeding up the pace at which poor people access financial services, but it also improves the ease with which people can transact.
The 2016 Financial Inclusion Insights show that there are more active users of digital financial services than the traditional forms of financial services. The data showed that 62 per cent of Ugandans have access to a digital account versus 46 per cent. The year before, the Uganda Communications Commission found that about 70 per cent of people in rural areas use mobile money to receive money, presumably from family in urban areas. Otherwise, people are now able to pay school fees, use pay as you go systems for power, water and other conveniences, and buy financial services. The opportunities will only increase with new innovations.
What does that mean for the financially excluded? All the correct measures are in place so there is hope. Agency banking is now a reality in Uganda and so the distance people travel to financial services providers is being reduced. The decreasing price of mobile phones, improved product development and affordable services will encourage more people to access and use financial services. In 2015, 72 per cent of people asked by the Uganda Communications Commission about why they do not have a phone responded that it is because they do not have access to electricity at home to recharge a phone. With increased access to pay as you go solar electricity, which enables phone recharging, phone ownership will grow. Besides increasing access to electricity, there are efforts as the ‘internet 4 all’ initiative by the World Economic Forum that are aiming to ensure universal access to the internet, which are helping rural populations increase their access to the internet as well. Both electricity and the internet will increase access to formal financial services.
Although the correct measures are in place, the critical element for financial inclusion are the people. People need to understand how financial inclusion can improve their lives. Behavioural change is critical to people’s adoption of formal financial services. This means that product developers must understand their target market and conduct continuous financial and technology literacy. For rural populations, trainings can be linked to agriculture training as well.
Besides tools such as financial diaries and other surveys, human-centred design and financial and technology literacy are important. It is important to increase people’s confidence in their own ability to use financial services, especially digital financial services. Additionally, service providers need to improve customer confidence by abiding by consumer protection laws and protecting customer privacy and data. Using financial inclusion as a means to financial health is a continuum. The graduation, for instance, from not saving to saving in the home, to joining a village and loans association, to using mobile money and financially to creating a bank account allows the customer to also graduate their dreams. As a person accesses better financial services, their opportunities to reduce vulnerability also decrease. Once people are able to see the benefits, their trust in the system will also increase. Financial inclusion is a means by which poor people can reduce their vulnerability. Uganda has taken the right steps to ensure universal access in the coming years. It is now up to a coordinated cross sector effort to ensure the goals in the NFIS are met. If not, Uganda’s population of 77 per cent under the age of 30 is at risk of spending the decades to come continuously graduating and sliding into poverty.