The days of queuing up at the bank for a teller are numbered. More Ugandans are accessing cash at their convenience – at point of sale, and also via automated teller machines, the internet, and the mobile money services.

According to the World Bank’s most recent Uganda Economic Update, “Step by Step: Let’s Solve the Finance Puzzle to Accelerate Growth and Shared Prosperity,” financial services have expanded rapidly in Uganda over the past decade with approximately eight million adults now having access to an account at a formal financial institution.

This is thanks in part to the rising growth of mobile money and opening of a credit reference bureau in 2008. About 8 million adult Ugandans own a bank account. This pushes the share of the adult population with access to financial services to 52 percent, up from 28 percent in 2009. With 7 million active users, mobile money, has greatly increased access to cost effective financial services, such as saving, money transfer, and paying bills. Confidence in the formal financial system however remains low, and the high interest rates make borrowing very expensive for businesses and households.

“Access to financial services is an important step to achieving financial inclusion. Global experience shows that countries that have been able to achieve rapid, equitable economic growth have developed their financial systems to effectively mobilize savings and intermediate resources and channel these into productive activities,” said Rachel Kaggwa Sebudde, World Bank senior economist and lead author of the Update.

According to the report, the puzzle manifests in the mismatch between the low return on savings and the high cost of borrowing. Savings attract 3-6 percent annual return while interest rates on loans range between 22 and 25 percent. Low credit rates support household and business spending, while high returns on deposits encourage more savings. Uganda currently ranks at 120 out of 138 countries in affordability of financial services by the World Economic Forum’s Global Competitiveness Report (2016-2017). The high cost of credit, and other short comings like limited financial market infrastructure, and costly access to physical infrastructure that enables financial services, have made formal regulated services unattractive to many consumers. This is also preventing Uganda’s financial sector from reaching its potential to support economic growth. 

“Increasing access to low cost and safe financial products for firms will spur business investments and economic growth. Similarly, financial products targeted at the informal sector, rural households and women will create jobs and build resilience against shocks,” said Ms Christina Malmberg Calvo, World Bank Country Manager for Uganda.

Uganda’s economy is not performing according to expectations. Growth declined by 0.2 percent in the first quarter of 2016/17. The economy had been anticipated to rebound strongly on the back of planned public spending on infrastructure, and increase in private sector credit to raise productivity. However, the continued weak domestic economic environment, worsened by the low commodity and fuel prices in international markets, the crisis in South Sudan, and severe drought have continued to strain investment and exports, and hence slowed down growth.

According to the Update, Uganda’s economy will need to continue adjusting to these shocks and strengthen the financial system, which remains jittery due to the high level of non-performing assets and the Central Bank’s recent takeover and resolution of Crane Bank, previously the third largest bank. If the economy overcomes these shocks and grows at an average of 2.5 percent per quarter, the overall rate of growth for FY 2016/17 could rise to 4-5 percent. However, this rate of growth is far below the over 10 percent required for the country to outpace the population growth rate and realise its development aspirations to achieve middle income status by 2020.

The report notes that a big percentage of the population remains unserved by credit due to high costs. Interest rates often range between 22 and 25% of the total value of the borrowed amount. Depending on the duration of the loan, consumers can end up paying more than twice the value of the original amount, which prevents many businesses and households from accessing bank loans. On the other hand, the low return on savings – 3 to 6 percent annually – and the high cost of credit have created a mismatch in the financial system which has constrained household and business spending.

Proximity to services also remains a key hindrance to the population, according to the report. Consumers have to travel over long distances to access formal financial institutions, many of them located in urban areas. Another constraint is the difficulty of the rural poor, women and the informal sector to meet the stringent documentation requirements.

Undertaking reforms aimed at stimulating consumers’ access to a wide range of services, and reducing the cost of credit could boost growth and insulate the economy from risks and the impact of negative shocks during an economic downturn like the current one. Continuing efforts to strengthen the legal, regulatory, institutional and supervisory framework of the financial sector to ensure it is safe and sound is equally important in restoring consumer confidence.

The majority of the unbanked rely on personal savings, the report says, or borrow from informal unregulated intermediaries including “loan sharks”. A big proportion of the population keeps their savings in form of cash stored at home, or in livestock, gold, or other similar assets – all of which expose the owner to high risk.

The report notes that greater access and deepening of financial services could help reduce poverty and vulnerability by enabling Ugandan, including the rural poor, to diversify their sources of livelihood, reduce hunger, and increase their resilience from shocks and failing back into poverty. Easier access to financing is also crucial to expanding agricultural production through investing in better technology and agri-input, in order to raise rural incomes, generate jobs and raise productivity across the economy, the report says.

The Government has put policies and strategies in place to leverage the financial system to support economic growth. The National Financial Inclusion Strategy has paved way for agent banking, which will allow financial institutions to contract retail outlets to process financial services. The introduction of Islamic banking, bancassurance, and an increase of commercial bank capital threshold are further important innovations, the report says, while the creation of an independent Deposit Protection Fund will offer greater protection to consumers.

“Strong intermediation structures will build confidence in the financial system, encourage savers, ease access to credit for borrowers and lower the costs of credit, which in turn reduces the overall transaction costs for enterprises, making them more competitive,” said Valeriya Goffe, World Bank senior financial sector specialist and co-author of the report.

The report recommends that these measures are combined with efforts to improve the business environment, promoting financial literacy, introducing valid identification documents, encouraging land registration and titling, and strengthening consumer protection measures.