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New Survey: Only 3% Of Uganda’s Adult Population Borrow From A Bank

The Finscope Uganda 2018 report has revealed that only 3 percent of the Uganda’s adult population borrow money from a commercial bank.

The report was launched Wednesday morning at Kampala Serena Hotel.

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.

In his keynote address at the launch of the report,  Dr. Louis Kasekende, Deputy Governor, Bank of Uganda,  said that 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.

BoU Deputy Governor, Dr. Louis Kasekende

“The main reason why policymakers accord priority to financial inclusion pertains to the contribution which financial services make to business and commerce,” Kasekende said, adding:

“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.” He further explained that 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,” he said, adding: “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.”

He added that 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,” he said.

He revealed that Government cannot simply direct financial institutions to broaden access to their services to the financially excluded.

He noted that 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,” he said.

He said 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,” he said, adding that 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.

With regard to regulation,  he said 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.

“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,” he said.


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Taddewo William Senyonyi
William is a seasoned business and finance journalist. He is also an agripreneur and a coffee enthusiast.

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