CHALLENGES OF POLICY MAKING FOR FINANCIAL INCLUSION

1. CHALLENGES OF POLICY MAKING FOR FINANCIAL INCLUSION Kaggwa Moses Commissioner Microfinance Department, Ministry of Finance, Planning and Economic Development 26th April 2010.

2. Introduction “None of us like the idea of apartheid. We object when we hear about such a system in any form, anywhere. We all understand that no one should suffer because he or she happened to be born in a certain race, class or economic condition. But our financial institutions have created a worldwide system of apartheid without anyone being horrified by it. If you don’t have collateral, you are not credit-worthy. To the banks, you are not acceptable on our side of the world. “Imagine if the global economic communications system of the banking world suddenly collapses and every financial institution in the world stopped functioning. Banks everywhere would shut their doors. ATM screens would go blank. Credit and debit would no longer work. And billions of families would be unable even to put groceries on the table. Well, this is exactly the situation that half the world’s population lives with every day–a non-stop horror story. If the poor are to get a chance to life themselves out of poverty, it’s up to us to remove the institutional barriers we’ve created around them. We must remove the absurd rules and laws we have made that treat the poor as minorities. And we must come up with new ways to recognize a person by his or her own worth, not by artificially measuring sticks imposed by a biased system.” Mohammed Yunus, Creating a World Without Poverty,

3. Introduction Cont "Our destiny is strongly linked to the destiny of the poorest," says US Secretary of State Hillary Clinton, "Microcredit is a macro idea. This is a big idea, an idea with vast potential. Whether we are talking about a rural area in South Asia or an inner-city in the US, micro credit is an invaluable tool in alleviating poverty. Microcredit projects can create a ripple effect - not only in lifting individuals out of poverty and moving mothers from welfare to work, but in creating jobs, promoting businesses and building capital in depressed areas." "Microcredit [...] has positive consequences on the entire community and creates a fertile soil for democracy to grow because women and men can hope in the future of the planet again. We must realize that our destiny is strongly linked to the destiny of the poorest on this planet!" Source: Remarks at Microcredit Summit in Washington D.C., 3 February 1997.

4. Some Statistics on Uganda • During the period 2001/02 to 2008/09 fiscal years, GDP growth rate at 2002 constant price of 7.9%. • The agricultural sector employs for 70 per cent of the working population • Most industries and services are dependent on agricultural sector. • The farmers in Uganda's 2.5 million smallholdings and few large commercial farms provide the majority of their own and the rest of the country's staple food requirements.

5. Statistics contd • Agriculture’s contribution to GDP has been declining in the years 2004-2008. • In 2008/09 it contributed 23.7 per cent of GDP. • The Industry sector contributed 24.4 per cent • The services sector’s contribution was 46.4 per cent. • Sustainable economic development remains a challenge for Uganda • Especially among the poorest and most vulnerable members of society

6. Statistics Contd • 31% of the people are living in abject poverty living on less than one dollar a day. • The population growth rate established in 2009 was 2.7%, birth rate 47.8/1000, infant mortality rate 64.8/1000, and life expectancy is 52.7 years. • Literacy rate of 69 per cent among persons aged 10 years and above. • Men more literate (76%) than women (63 percent).

7. The Financial sector • The financial sector has been experiencing a lot of growth in the last few years. • In 2007/08 its growth rate was 24.1 per cent although it declined to 21.1 per cent in 2008/09. • The financial institutions currently operating in Uganda can be classified as TIER 1, Tier 2, Tier 3 and Tier 4, Development banks, Investment banks, insurance companies, Foreign exchange bureaus, Deposit Insurance and Credit Bureau.

8. Tier 1 Financial Institutions • These include 22 commercial banks, with 363 branches, authorized to hold checking, savings, time –deposits accounts for individuals and institutions in local and as well as foreign currencies.

9. Tier 2 Financial Institutions • These include credit and finance companies. • They are not authorized to establish checking accounts or trade in foreign currency. • They are authorized to take in customer deposits and to establish savings account. • Currently they are two; • Opportunity Uganda Limited (A 100% subsidiary of Opportunity International) • Mercantile Bank

10. Tier 3 Financial Institutions • This class includes MFIs which are allowed to take in deposits from customers in the form of savings accounts. • Currently we have three; • Finance Uganda limited • Pride Microfinance Limited • Uganda Finance Trust Limited.

11. Tier 4 Institutions • Not regulated by the central bank • not authorized to take deposits from the public. • They include SACCOs, NGO Non-Deposit Taking MFIs, Rotating Credit and Rotating Associations (ROSCAs), e.t.c

12. Financial Inclusion defined • Process of ensuring access to appropriate financial products and services at an affordable cost to the underprivileged and low income groups • Availability of accessible financial instruments, services and institutions for the poor.

13. Financial Inclusion contd • Access to basic financial services like: • Deposit and Savings Accounts • Savings products • Short, medium and long term credit • Local money transfers • International remittances • Mortgage services • Leasing • Financial advisory services

14. Status of Financial Access • 62% of Ugandans not served by any form of Financial Institution. • Of this figure 65% were rural and 52% urban. • Women with no access to financial services were 66% against men at 58%. Savings • Majority of Ugandans reported saving money and, moreover, those who started saving continued to save.

15. Status of Financial Access Contd • 80% ever saved and 71% were saving - either formally or informally. • 90% save in secret places (under the mattress), with friends, neighbors or relatives • 27% save with informal groups • 22% save with formal institutions; and 4% each save with SACCOS and other MFIs respectively • 33% of the adult population borrowing from financial institutions, informal groups or other informal sources

16. Status of Financial Access Contd Access to Credit • More borrowers in urban than in rural areas (77% v69%) • More men than women. • From friends, relatives, retailers and similar sources (54%) • Financial institutions (7%) • Informal financial groups (11%). • SACCOs 4% • Other Micro Finance Institutions3%

17. Status of Financial Access Contd • Two thirds (66%) of borrowers have taken goods on credit from either institutions or local retails shops • 43% have loans in cash. • High interest rates are major barrier to borrowing from formal and semi-formal institutions

18. Status of Financial Access Contd Informal Groups • One quarter (22%) of Ugandan adults belong to informal financial groups • ROSCAs (38%) and ASCAs (22%) are the most commonly used informal groups • Major purpose for being in such groups is to save money for specific purposes and to be ready for emergencies.

19. Promotion of Financial Inclusion • Promoting financial inclusion for the poor has largely been the role of the State and Non-Governmental Organizations • Financial Institutions have realized potential of the unbanked • Technological solutions like agent banking and mobile banking present new opportunities for commercial players

20. Promotion of Financial Inclusion Issues to address • Go beyond the number of bank accounts as measure of access • Establish the linkage between financial inclusion policies and improvements in the well being of the poor. • Barriers to access emanating from both demand side and supply side factors

21. Promotion of Financial Inclusion • From the demand side, - lack of awareness about financial services and products, - limited literacy, especially financial literacy of the populace -social exclusion. • From the supply side, - the transaction costs that the bankers perceive.

22. Promotion of Financial Inclusion • Lack of communication, • lack of infrastructure, • language barriers, • low literacy levels • poor technology (I) Raise the cost of providing services (ii) Inhibit bankers from taking initiative from the supply side.

23. Policy Design • Principles that must be at the forefront of the design. • The sustainability of financial institutions and the consumers of financial services. • Exploration and promotion of commercially-driven, innovative business models that best suit our economy

24. Policy Design • Third, strong, committed and capable service providers should be encouraged to participate in the market. • Finally, sustainability cannot be achieved without supportive infrastructure. • Combination of these can be eased through cooperation and experience sharing among policy makers in all institutions and borrowing lessons from other countries.

25. Challenges in Policy Design • Financial landscape • Monumental task to design a policy for all players • Banks, NGOs, Limited liability companies, companies limited by guarantee and SACCOs all under one umbrella of regulation. • Quite difficult to have a One-Size-Fits-All financial inclusion policy for the different players

26. Challenges in Policy Design • Jurisdictional Issues • The presence of different and multiple regulators • Poses enormous policy making challenges • Hard to come up with an un biased decision. • The many layers of government, each with its own jurisdiction and responsibilities. • Yet policy developed in one department bound to affect another.

27. Challenges in Policy Design • Availability of Reliable Data • Absence of sufficient data on institutions especially on microfinance institutions about (i)ownership, (ii)share capital, (iii)Savings • Strong inhibitor of designing a financial inclusion policy

28. Challenges in Policy Design • Involvement of the beneficiaries of the financial inclusion policy • The majority of the people that are excluded from the financial sector are the poor and the very poor. • In spite of considerable investment in formal and informal education, a sizeable part of the adult population, especially that that is financially excluded, remains illiterate. • Involving them in a process of policy formulation so that they can provide useful inputs in the process is a very uphill task.

29. Challenges in Policy Design • Perceived Resistance of Communities as a Partner in Policy Development • May stem from the cultural identity of some communities and • Communities reluctance to negotiate any of their beliefs and tradition • Even if the proposed change or policy could lead to improvements • Attitude that it is solely a government’s responsibility to develop policy that benefits them

30. Challenges in Policy Design • Attitudes of Government toward Rural Communities • Among some government policy makers, an “urban bias” may exist whereby the government pays more attention to larger industrial centers. • Policies and programs created with urban centers in mind sometimes are made to fit rural communities • Such policies and programs have a tendency to ignore rural issues and cannot be considered equal in both urban and rural areas.

31. Challenges in Policy Design • Legislative Requirements • The legislative environment may hinder establishment of financial inclusion policies • Capital adequacy requirements, • audited balance sheets, • size of business, • threshold category based on number of members and professional • They aim at financial sustainability but are a constraint to inclusion

32. Challenges in Policy Design • Inadequate information technology • A financial inclusion policy can be effective if it is backed by a strong information technology infrastructure • A weak information technology does not enable financial inclusion. • The prohibitive costs of branch banking which make small tickets transactions unavailable can only be solved by developing information technology • Little or no use of computers, internet and mobile phones.

33. Challenges in Policy Design • Financial literacy • Lack of knowledge required for managing personal finance. • It does not necessarily refer to lack of formal education in finance. • Lack of financial literacy has prohibited people from use of financial services even when they are available and affordable.

34. Challenges in Policy Design • Government intervention • Government intervention may raise controversies in formulation of effective financial inclusion policies. • There could be a misconception by the target group that the inclusion strategy is aiming at selling a specific political party propaganda • Prosperity For All in Uganda construed as Government gimmick to popularize a particular political party • To policy makers it becomes a challenge to close those gaps as a basis for subsequent financial inclusion.

35. Suggestions to overcome Challenges How to address challenges • “Cooperation”. • Through [FIA] program, policy makers can work together in - engineering solutions, - creating a micro finance enabling environment, - designing regulation and infrastructure, - monitoring progress and assessing policy achievement.

36. Suggestions to overcome Challenges • Build bridges and collaborations between Government institutions concerning policy on financial inclusion. • Cooperation across departments within the same level of Government. • Ensure inter-sectoral collaboration for communities are to play an active role in the policy-making process. • Build financial literacy so that people have realistic expectations and understand their rights

37. I thank you for your interest and continued support in financial inclusion.