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Accelerating Financial Inclusion and Development in Uganda

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Bankers’ umbrella body in a drive to promote access to financial services in Uganda

By Tullah Stephen

Uganda’s financial structure was once characterised by stringent government controls and instability. This led to financial repression and stagnation in the development of Uganda’s banking sector. However, a shift in government policy, in the 1990s, saw the industry gain momentum. The government embarked on a mission to liberalise the sector, which saw the number of banks increase tremendously.

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Today, an open playing field for private investors, foreign and local, in Uganda’s banking sector has welcomed 25 commercial banks and one development bank, all keen to participate in the sector’s growth. These reforms specifically provided for liberalization of the sector, strengthening of banks, better regulation and oversight across all tiers of financial institutions, provisions for more products & services, and controls to address risks of money laundering and terrorist financing.

However, despite this impressive progress, Uganda continues to lag behind its east African peers in terms of the banked population. Figures from Bank of Uganda (BoU), the country’s banking sector regulator, indicate that only 20 per cent of the population is banked with about 6.5 million accounts. Evidently, financial inclusion is still extremely low in Uganda, which is why the Uganda Bankers Association (UBA) is turning to financial inclusion to encourage the population to access financial products and services.

UBA’s mandate is to promote a strong and vibrant banking sector, encourage good governance and best practices in banking as well as represent the professional and business interests of its members. According to Fabian Kasi, the chairman of the umbrella body, the goal is to endow the population with wealth creation initiatives to assist them avert poverty. “Our idea is to have the benefits of financial services spread throughout the population to support the country’s economic growth and reduce poverty,” says the chairman of UBA.

UBA, he adds, has for the last two years been championing for financial literacy in Uganda. The ratio of financial saving to GDP, which is an indicator of financial literacy, is one of the lowest at about 13 per cent. UBA’s goal, according to Kasi, is to increase access to financial services and products, their usage and quality of financial services and products.

UBA’s financial literacy programme covers areas such as managing savings, capital mobilisation, funding SMEs and consumer rights among others. “Over UShs 200 million was invested in consumer literacy program that was launched in 2013 and the progress has been very good with the introduction of new products targeting specific population groups spread across the country.”

Kasi who also served as executive director of FINCA Uganda Limited until 2010 argues it is also in the interest of the country’s economy that the population open and manage bank accounts so that banks can get more financial resources needed to finance economically viable projects, which will in turn steer Uganda towards greater economic heights.
“As an association we have been encouraging our members to develop products that will easily attract the larger and excluded consumer market, which comprises of women and youth. This is in addition to being innovative in how we market products,” says Kasi, adding that as they engage with the public through financial literacy campaign, they will be further simplifying banking while sensitising population on how to make money and manage it better.

Promulgation of Financial Institutions Act 2016

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The Government of Uganda has since promulgated the Financial Institutions Act 2016, which provides for Islamic Banking, Banc assurance and Agency Banking among others including the creation of key governance structures such as Sharia advisory board.
Kasi, who is an accountant by profession and also the managing director of Centenary Bank Uganda, says the industry is fortunate to have the Financial Institutions Act in place.
The Act, he adds, also permits the banks to provide insurance products and services.
Agency banking will see banks transact business with people outside the banking system, especially in areas where banks have no presence. About 80 per cent of the population in Uganda live in the rural areas.

Building Confidence

The association is also trying to ensure that Ugandans maintain confidence in their banks. According to Kasi, most people avoid going to the bank as they often think that banks are for the elite.
“We are undertaking initiatives that will help the banks ran efficiently. We are setting up an Asset Reconstruction Company (ARC) also known as Asset Management Company that will manage assets that are not doing well for the banks,” he says.
ARCs have been used across the world and mostly in Asia where they have been used to manage or re-construct stressed assets (viable businesses struggling with debt) The ARC will assist banks manage toxic debt impacting on the loan book, which in-turn affects liquidity and ends up eating up the capital of banks hence reducing their balance sheets. “In a year’s time we should have the ARC in place.” says Kasi.

Mobile money services is also growing in Uganda with mobile operators and banks working together to promote financial inclusions. UBA is encouraging its members to look for ways to reduce high operational expenses that translate into higher cost of doing business making service delivery expensive to clients. Kasi says the association is currently advocating for sharing of costs & other resources among banks, especially in agency banking.

Capping Interest Rates not the way to go

While capping interest rates continue to dominate debates in the country, the umbrella body has continuously advocated against it, arguing that capping interest rates remains counterproductive for the country’s economy.
Interest rates started rising in April 2015 as BoU attempted to wave off any inflationary pressures resulting from the depreciation of the Uganda shilling. As at June this year, commercial banks’ lending rates averaged 23.54 per cent.
“Capping rates stifles free market forces, discourages investment in the financial sector as well credit growth , instead facilitating black credit markets,” which is bad for investment says Kasi.

“Capping rates discourages investors in the financial sector who then turn to other markets. This creates shortage of much needed credit and capital, which not only makes it scarce and expensive but starves the businesses who need to trade and invest. It sends a very wrong signal for investment,” says Kasi.

Uganda’s overall savings are still low and the government’s collection of taxes has also not been effective enough, thus leaving limited sources of capital for financing projects. When commercial banks have to finance longer term projects, the have to secure longer term funding from other sources at a higher rates.

The challenge around cost of credit has not been made any better by the burgeoning non-performing loans (NPLs), which he argues is due to a challenging business environment both in country as well as in key regional markets.
NPLs as the percentage of total loans in the first half of 2016 had gone up to over seven per cent, the highest rate for any quarter since December 2003. The agricultural sector led with the highest level of non-performing loans in Uganda banks with 15.3 per cent.

“What is however important is that the sector has demonstrated resilience in these challenging times and withstood shocks. We remain committed to addressing our challenges and contributing to economic growth.”

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