The month of June 2018 begun and ended with two events that are critical to policy and practical efforts to increase financial deepening in Uganda and its impact on the economy.
Financial deepening increases the range of financial services and offers better access, which is critical for the low income and vulnerable communities in the economy.
Financial inclusion refer to the process of ensuring access to appropriate financial products and services at an affordable cost in a fair and in transparent manner.
Both deepening and inclusion are major requirements for inclusive economic growth and transformation as they provide an environment that enable all households and businesses, regardless of income level, to access and effectively use appropriate financial services to improve their conditions. This is critical in Uganda where millions live in an informal economy and often have to contend with limited or costly financial products and services.
June started with the introduction of disruptive taxes on Mobile Money and social media. Secondly, June saw the release of the fourth Finscope Report that provides information on progress made towards realisation of key objective of deepening and financial inclusion.
The report shows progress on four financial access strands: Credit/borrowing, remittances/transfers, savings and investments, and insurance.
Taxes on Mobile Money, which is simply a payment mechanism and social media – a vital source of information – will undermine both financial deepening and inclusion.
The Finscope confirmed that more than 75 per cent of Ugandans live in the rural areas where they can best be served using financial technologies that cut costs of outreach, are able to handle small amounts more frequently and can be adapted to the various needs of low income people.
For example, poor people across the country, can easily handle emergencies by broadening the social and financial network to gather funds from far and wide as well as getting such funds in a short time.
The findings also show that about 70 per cent of the population had no secondary education, and technologies such as Mobile Money, which easily integrate local contexts through village agents, can build trust among those with limited confidence in traditional formal banking systems.
Growth in savings on Mobile Money platforms, which was at 23 per cent, was more than double the 11 per cent for the banks.
Going forward, this kind of savings will be more effective in reducing the traditional practice of those who were saving through village group (47 per cent) and those who kept money at home (27 per cent).
Tapping into such savings via the Mobile Money platform is critical for enhancing financial mobilisation and intermediation for economic growth. The fact that a bigger population (37 per cent) felt that commercial banks were a safer way to keep savings, compared to only 22 per cent who used savings groups, and yet more saved on Mobile Money platforms, seems to indicate that the decision of where to save was largely influenced by ease of accessing the savings.
The low levels of income and increasing poverty were a major hindrance to savings as more than 40 per cent of the population across all strands of male, female, rural and urban indicated this as the major reason for not saving.
Thus, low incomes are negating the potential gains from technological progress. Policies are needed to enhance greater integration of technology-driven innovations in the financial sector (products and services) into the broader realm of economic development. After all, the financial sector is largely a facilitator of investments and consumption that eventually drive the economy.
In this regard, the Finscope not only provides credible benchmarks and indicators of financial inclusion, but it also gives an insight into obstacles to growth of the financial sector and the entire economy.
Dr Muhumuza is an economist and
lecturer at Makerere University.