Only 11% of the adult population in Uganda use a commercial bank or microdeposit taking financial institution, according to Bank of Uganda’s deputy governor, Louis Kasekende, who was quoting figures from the Finscope Uganda 2018 report. And for those who borrow money, only 3% do so from a commercial bank.
Why is it important to use formal financial institutions for things like saving or borrowing money, what is termed as financial inclusion, you might ask? The services offered by these institutions are “an important input into business” and “facilitate business enterprises to purchase raw materials and intermediate inputs, to invest in new capital stock, to extend trade credit to customers and to insure against risks to business,” Mr Kasekende said.
In short, they enable businesses to operate efficiently and sustain their operations. These businesses, in turn, support the growth of the economy.
As the deputy governor notes, “if the promotion of financial inclusion can strengthen the access to financial services of the household enterprises in Uganda” – three quarters of the working population is self-employed, according to the 2016/17 Uganda National Household Survey – “it should help those enterprises to flourish and generate more output and boost the incomes of their owners and operators.”
The main reason financial inclusion is low in Uganda is because banks find it too costly and unprofitable to extend their services to rural areas, where most Ugandans live. But even in urban areas, where they are widespread, the cost of bank services is stifling for most people and businesses. The only financial service that has bucked those market trends is mobile money. It “has dramatically reduced the cost of delivering financial services to customers, albeit for a limited range of services.”
Mr Kasekende’s hope is that new business models like agency banking and other innovations will lower the cost of banking, availing a more varied range of financial services to even more Ugandans. Could this be the line of reasoning the government leaned on to introduce its irrational 1% levy on each and every mobile money transaction? At the moment, we are not sure.
What we can say for sure is that the new levy – it went into effect on Sunday, 1 July – is making the cheapest and most popular financial transaction platform expensive and unattractive. So, until the cost-reduction effects of agency banking – which is only being rolled out by a few of Uganda’s 23 commercial banks – filter through to the banks, the average Ugandan will have to contend with the unreasonably high tax on mobile money transactions or find other ways to send and receive money or make payments.
So much for increasing financial inclusion so that, among other benefits, the private sector can “develop business strategies to expand the market for its services,” as Mr Kasekende hopes.
Read the rest of the deputy governor’s speech below.
Keynote Address by Dr. Louis Kasekende, Deputy Governor, Bank of Uganda, At the Launch of the Finscope Uganda 2018 Report, Kampala, 27 June 2018
The Permanent Secretary/Secretary to Treasury
Representatives of Development Partners
Executive Director UBOS
The Board Chair of FSD Uganda
Executive Director Uganda Bankers Association
CEOs of Financial Institutions and all captains of Industry
Chairperson of the Finscope Steering Committee
Ladies and gentlemen,
A prerequisite for sound public policy decisions is accurate information, without which policy makers are effectively working in the dark. The most important benefit of the Finscope Uganda 2018 report, as with its three predecessors, is that it provides accurate and detailed information on access to, and usage of financial services by the population of Uganda, as well as other relevant characteristics of the population. This information is derived from surveys based on a representative sample of the population comprising approximately 3,000 adults. Finscope thus provides information which can help to make public policies designed to promote financial inclusion and broaden access to financial services more effective. It also provides valuable information about the market for financial services to financial service providers in the private sector.
The Finscope survey found that the breadth of access to financial services is quite wide in Uganda, with 78 percent of Ugandan adults having access to some form of financial service from the formal or informal sectors, and that 58 percent of adults have access to some form of formal financial service.
The percentage of the adult population with access to formal financial services has more than doubled since 2006. However, formal sector financial inclusion is dominated by the use of mobile money, which provides only a limited range of financial services, largely payments and the opportunity to save money on the mobile phone. Only 11 percent of the adult population use a commercial bank or micro deposit taking financial institution and only 3 percent of the adult population who borrow money do so from a commercial bank.
These findings suggest that the focus of public policy should be to try and broaden the range of financial services to which the population has access, particularly from formal sector financial institutions which can offer a degree of prudential management and customer protection which is not available from the informal sector.
The promotion of financial inclusion features prominently among the objectives of public policy and I want to take a few minutes to discuss why that is the case and what it means for public policy.
The main reason why policymakers accord priority to financial inclusion pertains to the contribution which financial services make to business and commerce. In most sectors of the economy, financial services are an important input into business, which facilitate business enterprises to purchase raw materials and intermediate inputs, to invest in new capital stock, to extend trade credit to customers and to insure against risks to the business. By facilitating trade in a wide range of markets, financial services also enable scarce resources in the economy to be allocated more efficiently, which in turn raises productivity and returns to factors of production, including labour.
The structure of the Ugandan economy is such that it is dominated by household enterprises, with approximately three quarters of the working population being self-employed, according to the 2016/17 Uganda National Household Survey.
If the people who own and work in the household enterprises have no access to financial services, their capacities to engage in business will be stifled.
Hence if the promotion of financial inclusion can strengthen the access to financial services of the household enterprises in Uganda, it should help these enterprises to flourish and generate more output and boost the incomes of their owners and operators.
Financial services can also be of benefit to consumers, enabling them to smooth consumption in the face of shocks to their income and to meet unanticipated requirements for spending, such as to pay medical bills, as is noted in the Finscope Report. However, we also need to sound a note of caution because there are dangers that consumers may contract debts which exceed their capacity to repay. Hence it is essential that efforts to promote financial inclusion are accompanied by programmes to enhance financial literacy and consumer protection.
How can public policy promote financial inclusion? Uganda has a market oriented economy and almost all financial institutions are owned by the private sector and run along strictly commercial lines. In a market economy, Government cannot simply direct financial institutions to broaden access to their services to the financially excluded. The “command economy” approach that ignores commercial realities such as directing extension of credit to priority sectors was attempted in the 1970s, with disastrous consequences for the banking sector and the economy as a whole.
The main reason why formal sector financial institutions have only a limited reach among the population, with the exception of mobile money, is that the costs of serving low income customers in rural areas outweighs the very limited income streams that can be generated through the provision of financial services to them. Consequently, broadening access to financial services is only likely to take place if financial institutions can develop innovative ways to reduce the cost of delivering financial services to low income customers or if the incomes of the financially excluded increase, so that they can afford to purchase more services. Mobile money is an example of a technological innovation which has dramatically reduced the cost of delivering financial services to customers, albeit for a rather limited range of services.
The cost of credit from formal sector financial institutions frequently attracts criticism in Uganda. While it is true that small scale borrowers often pay high rates of interest for loans from banks or microfinance institutions, these lending rates reflect the real costs incurred by the financial institutions, especially the transactions costs of serving small scale borrowers.
Administrative ceilings on lending rates of interest are counterproductive because they will make lending to small scale borrowers financially unviable for the lenders, which will reduce the volume of loans extended to these borrowers, as has been the experience in Kenya.
In a market economy, the main channel through which public policy can influence economic decisions by the private sector is through the incentive structure emanating from regulation and taxation as well as the provision of public services which are complementary to private sector business.
With regard to regulation, the amendments to the Financial Institutions Act, passed in 2016, which allow banks to engage in agent banking, are intended to facilitate banks to deliver services in locations where it is not commercially viable to establish a conventional bank branch. Financial literacy campaigns, such as those provided by the Bank of Uganda, are an example of a public service which can strengthen the capacities of the population to better utilise financial services. The provision of information, such as that contained in the Finscope Report, is also a public service which can help the private sector to develop business strategies to expand the market for its services.
I also want to inject a note of realism into the debate about financial inclusion. People are financially excluded mainly because they are poor, have insecure and irregular cash incomes and live in sparsely populated areas. Whatever innovations financial institutions can develop to lower the cost of delivering services to such customers, this segment of the market will remain of marginal viability until there is major structural change in the real sectors of the economy, such as the modernisation of agriculture, which can provide the population with higher and more secure sources of income. Therefore the solution to the problem of financial exclusion does not lie with the financial sector alone.
Let me conclude by thanking everyone who participated in the Finscope survey and the preparation of the Finscope Report, in particular the Finscope Secretariat and Steering Committee, Ipsos Uganda and Yakini Development Consulting which respectively carried out the survey and drafted the report, the Uganda Bureau of Statistics and the Financial Sector Deepening Uganda project which funded the exercise. I am confident that all of your efforts will prove very valuable for our country and its economic development.
Thank you for listening.