2017/18 Budget: Tackling the financial inclusion challenge

The 2017/18 budget speech is today and having read through the background, I have a few thoughts on its implications and future economic projections on financial inclusion. Before we go into the details, let’s explain financial inclusion.
Financial inclusion can be looked at in different perspectives; in a narrow sense it can simply be defined as the number of adult Ugandans who have a bank account. The broader aspect includes the degree of usage of that bank account and how many other financial services does this person utilise.

For example, a fully financially included person should have a savings bank account, an insurance policy, a pension plan and an investment account. Each of these serves different purposes that are critical to increasing the social-economic wellbeing of this person and their household. The savings account helps them to budget and plan for their income, insurance protects them from unexpected events, the pension plan helps them to plan for their retirement and the investment account helps them to transform their savings into assets such as a house, land and thriving business.

Financial inclusion challenge
After understanding financial inclusion, how does Uganda measure up to the financial inclusion challenge and how far do the 2017/18 budget and the future government economic plans address this challenge? Let us begin with some figures to give us a clear perspective.
Most of the Ugandan financial inclusion surveys undertaken so far have consistently shown that informal financial services by far dominate formal financial services.

Over the last 10 years, mobile money has leap frogged the traditional formal financial institutions to challenge the dominance of informal financial services. Though the financial services mobile money provides are still very limited.
According to the 2016 Financial Inclusion Insights survey findings, only 11 out of every 100 adults have access to a bank account with only seven active users of these accounts.
Mobile money fares better with 53 out of every 100 adults accessing mobile money and 32 actively using the mobile money service.
Therefore, the numbers who use mobile money are almost five times more than that which uses banking services. The survey findings further show that 16 out of every 100 adults below the poverty line are actively using mobile money services compared to just 2 who are using actively using banking services.

According to the 2013 FinScope survey findings, most adults from the lowest to the highest wealth class keep their savings at home and with informal savings groups. The same goes for investments and insurance. Informality is king.
What is the possible explanation for this state of affairs? In a number of cases financial products of Informal institutions rather than those of formal financial institutions are more aligned to the customers’ needs despite to the high risks usually associated to them.
Secondly, informal financial institutions and mobile money are more accessible to the broader public than the formal financial institutions.
The 2016 Financial Inclusion Insights survey findings show that 51 out of every 100 adults indicated that they were within less than a kilometre from the nearest mobile money agent compared to 9 out for bank branches.

Even Savings and Credit Cooperatives Organisations (Saccos) and Micro-Finance Institutions (MFIs) did not fare any better than banks. It is the informal savings groups that came close to banks with 39 out of every adults indicating that they were within less than a kilometer from the nearest informal savings group meeting place.
The 2015 International Monetary Fund (IMF) Financial Access Survey shows that 1 out of every 2 bank branches in Uganda is located in the 3 largest cities in Uganda.
The 2017/18 budget has scored on two fronts. The first is the commitment of government to prioritise the financial inclusion agenda through the implementation of the National Financial Inclusion Strategy.

This strategy seeks to address five major drivers of financial inclusion; accessibility of financial services, credit infrastructure, digitisation of financial services, appropriate and innovative financial products and consumer financial protection.
An Inter-Institutional Committee on Financial Inclusion (IICFI) established in 2015 is tasked to spearhead the implementation of the National Financial Inclusion Strategy that runs for a four-year period from 2017 to 2021.
However, having in place a strategy is just but the beginning.

Tackling financial inclusion
Addressing the financial inclusion challenge will require an efficient and effective implementation of the National Financial Inclusion Strategy. Government needs to commit adequate financial and operational resources reinforced by efficient coordination of financial inclusion stakeholders in the public and private sectors.
Secondly, the recent resolution of parliament to exempt Saccos from taxation if passed into law will be a welcome development in the right direction.

It will be a first step towards increasing access and usage of financial services by a majority of Ugandans who reside in rural areas which are hardly serviced by formal financial institutions.
A tax exemption is expected to increase the returns on savings and investments of members in these Saccos which ultimately will attract more Ugandans to use formal financial services.
However, for these benefits can only be realised if the capacity of these institutions is enhanced to operate efficiently whilst also protecting their members’ investments. Gradually we should also be able to see more informal savings and loans groups transforming into Saccos to benefit from these incentives.

The opinions expressed in this article do not necessarily reflect the official view of Financial Sector Deepening Uganda.