Increasing dormant accounts an obstacle to financial inclusion

As of May this year, the number of banked Ugandans had reached 11 million. This means that Ugandans owning or who opened up bank accounts in the different financial institutions in the country had increased.
However, according to experts, almost a third of the 11 million accounts opened are dormant and this number is sadly on the increase.
If this is not handled by the financial institutions, it will impact efforts so far made to see that more Ugandans are financially included.
Ideally, a dormant account is an account which has had no activity for a long period of time, other than posting interest.
Or, they let the account go to a very low or zero balance instead of closing the account. If you do not formally close the account, fees may continue which you will be responsible for paying to your bank.
At that point, bankers declare such accounts dormant. After a specified period the, banks in Uganda like in other places, publish dormant account lists in the newspapers for owners to act on them.
Mr Joseph Lutwama, the head business environment at Financial Sector Deepening Uganda (FSDU), says: “Increase in account dormancy means that there is a decline in usage of financial services and financial inclusion comprises of three dimensions; access to financial services, usage of financial services and quality of financial services.”

Root cause
According to Mr Lutwama, the cause for growing dormant accounts in commercial banks in Uganda, is the mis-selling or selling bank accounts to customers who do not need them.
“You know these days most institutions when paying their service providers require that one has a bank account in which they will pay into. Therefore, even when a service provider does not have the volume of business to sustain an account, they open up an account to receive the payment,” he shared.
Once they have received the payment, that’s it. They take a long time to visit the bank and thus their account becomes dormant.
Lutwama adds that the other reason why we are seeing more dormant bank accounts is the increased levels of poverty.
“This means that some of the customers who previously had income streams to service their bank accounts are no longer in position to do so,” Lutwama added.
Opening a bank account is one thing and being able to manage it is another as experts think the exorbitant charges are forcing many Ugandans to abandon their accounts which eventually turn dormant.
“It could even be increase in the cost of banking that has made it expensive for some of the bank customers to maintain their bank accounts,” Lutwama urged.
Most banks classify savings, current accounts and other types of deposit accounts as dormant where those accounts have no activity other than transactions initiated by the bank (such as interest and charges) after a specified period of time. In Uganda, it is two years.
Supplementing on the causes of the so many dormant bank accounts, Bank of Uganda’s director communications, Ms Charity Mugumya in an earlier interview with this newspaper said death of an account holder and their next of kin do not follow up to collect the money.
“Disappearance, relocation, migration or immigration to another country, economic down turns and cycles leading to the closure of business and business owners leaving some residual balances on accounts are the other cause for account dormancy,” Mugumya shared.
Employees losing jobs, some accounts belong to loan defaulters who sever relationships with the bank.
“They could be as a result of family wrangles and protracted legal battles over the death of the estate of the account holder(s),” She added.
Stanbic Bank Uganda’s chief finance officer at, Mr Samuel Fredrick Mwogeza, earlier told this newspaper that closure of government-funded projects is the other reason why some banks have dormant accounts.
“When there is slow economic activity, there is always a problem of low cash flow which makes people’s accounts to become dormant,” he stated.
Financial institutions are required by state laws to transfer resources held at dormant accounts to the state’s treasury after the accounts have been dormant for a certain period of time.

Dangers
One of the most worrying kinds of fraud that financial institutions face today worldwide is related to dormant accounts.
This is because the dormant accounts are almost unreachable by outside hackers. Fraud in dormant accounts normally involves someone inside the financial institutions, and often a large sum of money.
Experts say this kind of insider fraud is particularly disturbing.
Financial institutions are wary of holding dormant accounts for a number of reasons.
While the costs of servicing these accounts can be less given the lack of account activity, there can be higher costs for holding accounts with lower balances.
Bank profitability is associated with assets under management, so maintaining a large number of accounts with few resources is not an attractive business proposition.
Makerere University lecturer and economist Dr Fred Muhumuza, believes the financial sector is a reflection of the state of the economy.
“Money is, as taught in class, a medium of exchange that facilitates transactions in the rest of the economy. Thus, if the economy is not doing well, the accounts are bound to dry up and close,” he shares.
Dr Muhumuza blames the poor state of the economy as partly responsible for dormant accounts.
He adds: “You might have people who lost jobs or their businesses collapsed, or were running more than one account and decided to consolidate. It is also possible that others have preferred mobile money.”

Others could be people who simply opened an account to do a one-off transaction like receiving NSSF payment or other pension.

Impact on economy
Analysing the impact this has on the economy, the banking industry’s growth and financial inclusion in Uganda, Dr Muhumuza said, “It will affect the sector as functioning accounts are needed to enable banks to mobilise resources for lending.”
To the extent that the situation is related to economic weaknesses, the accounts should be a worry for banks as they reflect possibility of Non-Performing Assets (NPAs).
“We should not just seek to have people open accounts but go beyond to use those accounts for business and other aspects of economic life. We cannot sustain financial inclusion without economic inclusion,” Dr Muhumuza concluded.

Way forward
Uganda Bankers Association (UBA)’s executive director Wilbrod Owor says the increasing number of dormant accounts affect financial inclusion.
He said though there are several reasons for dormancy, most people open up accounts to get mobile loans and once the transaction is done they abandon the accounts.
“Fundamentally this means either as an industry we should look at structuring products that keep accounts active for low end users,” He said.
He said understanding the needs of the low end users is one aspect the industry players beginning to work on.
He said through the World Bank-IFC project they are working out to structure the mass market accounts to understand their cycles and the flows.