Why Financial Inclusion is Important to Bank of Uganda
Financial inclusion broadly refers to universal access to and usage of a broad range of quality financial services. An increase in access to and usage of formal financial services has a positive impact on the soundness of the financial sector and can enable the achievement of the Bank of Uganda's mission "to foster price stability and a sound financial system in support of socioeconomic transformation in Uganda."
Financial inclusion is crucial to the Bank of Uganda (BoU) for several reasons.
- Financial System Stability: A more inclusive financial system can enhance stability. A larger portion of the population being banked reduces the risk of financial instability caused by informal lending and unregulated financial activities. Further, increasing the number of users of financial services such as savings will increase the size and stability of the deposit base. These developments will reduce financial institutions’ dependence on non-core financing that tends to be more volatile and costly.
- Innovation Promotion: Financial inclusion encourages the development of innovative financial products and services tailored to the needs of underserved populations, fostering growth in fintech and enhancing the competitiveness of the financial sector.
- Consumer Protection: As individuals enter the formal financial system, the Bank of Uganda can better enforce regulations to protect consumers from predatory practices, ensuring fair treatment in financial transactions.
- Data Collection and Policy Formulation: A financially inclusive environment allows for better data collection, aiding effective planning and policy formulation by the Bank of Uganda.
- Regulatory Objectives: Financial inclusion aligns with the BoU's broader regulatory goals, fostering efficiency, transparency, and accessibility in the financial sector, thus supporting sustainable economic growth.
- Economic Growth and Poverty Reduction: Promoting financial inclusion stimulates economic growth. When individuals and businesses have access to financial services, they can invest, save, and participate in economic activities, leading to increased productivity and overall economic development. In addition, access to credit, savings accounts, and insurance products by marginalised and low-income individuals enables them to manage financial risks and invest in education, health, and entrepreneurial activities, thus alleviating poverty
By focusing on financial inclusion, the Bank of Uganda aims to create a more resilient economy that benefits all citizens, supports sustainable development, and aligns with global financial inclusion goals established by the United Nations and other international organizations.
Access to formal financial services such as savings, loans, and payment systems can raise the standard of living and welfare of the low-income populations in Uganda.
Increased usage and access to financial services are expected to lead to a better transmission of monetary policy; this also contributes to financial stability.
According to FinScope 2023 survey findings, overall financial inclusion has increased by 4 percentage points, from 77 percent registered in 2018 to 81 percent registered in 2023. The biggest driver of this growth has been formal financial inclusion, which has grown by 10 percentage points from 58 percent in 2018 to 68 percent in 2023. Informal financial inclusion grew slightly from 50 percent registered in 2018 to 52 percent in 2023.
Formal financial inclusion indicates that men are more included (75%) than women (62%), while women are more informally included (54%) as compared to men (50%).
Financial inclusion continues to be driven by mobile money and Village Savings and Loan Associations (VSLAs)/Rotating Savings and Credit Associations (ROSCAs), accounting for 66 percent and 36 percent of the total adult population, respectively.
Mobile money agents are the closest financial services access points to the customers, with close to six (6) out of every ten (10) adults reporting that mobile money agents are within a 1 km radius or less from their home or workplace. Mobile money digital wallets are by far the most popular and widely used payment channel. This has been a result of mobile phone ownership for males increasing from 58% to 72% and for females from 46% to 64% in 2018 and 2023, respectively.
National Financial Inclusion Strategy Uganda
Uganda launched its first National Financial Inclusion Strategy (NFIS I) in 2017. In 2022, at the end of NFIS I, an end-term evaluation (ETE) of the strategy was undertaken to assess the progress made and learnings that could be garnered to design the second national financial inclusion strategy.
The key finding was that the implementation of NFIS I resulted in significant progress in enhancing access to formal financial products. The second NFIS 2023–2028 (NFIS II) was launched in November 2023 after several stakeholders, including banks, fintechs, government bodies, and research groups, were interviewed to understand the implementation, performance, successes, challenges, and lessons learned from NFIS I.
The National Financial Inclusion Strategy II vision is “the universal access and usage of a broad range of quality and affordable formal financial products and services, delivered in a responsible and sustainable manner.”
The vision of NFIS II will be realized through interventions and activities organized under the following five objectives.
- Reduce financial exclusion and access barriers to formal financial services.
The aim is to reduce financial exclusion and access barriers to formal financial services; the Government of Uganda (GoU) and stakeholders will prioritize several actions. These include establishing more physical access points in underserved areas, promoting the uptake of digital financial services, and creating an enabling environment through effective policy and efficient financial infrastructure that supports the growth in formal account ownership.
- Deepen and broaden the usage of quality and affordable formal financial products.
The aim of this objective is to deepen and broaden the usage of quality and affordable formal financial products. The government and stakeholders will prioritize several actions. These include establishing proactive measures to drive electronic and digital payment adoption, removing barriers that limit the usage of financial products and services, availing more affordable financing to micro, small, and medium-sized enterprises (MSMEs) and underserved groups, strengthening digital and information security, deepening and enhancing interoperability among financial services providers, and creating an enabling environment that supports innovation.
- Strengthen financial consumer protection and financial literacy.
The aim is to improve consumer confidence in the financial sector and promote financial inclusion. Financial institutions must be transparent and ensure that they offer high-quality products, disclose fees and terms, and provide access to systems providing customer feedback. Partnerships among government, the private sector, and civil society to raise awareness about consumer rights and promote financial literacy programs to financially excluded individuals will be key.
- Developing an inclusive green finance market.
To enhance inclusive green finance in Uganda, the government and relevant stakeholders will take a multifaceted approach. Financial institutions will be provided with education and training on green finance products. Regulatory reforms will be pursued to establish clear guidelines for green investment and incentivize green bond issuance. Public awareness campaigns will be launched to increase understanding of green finance among the public. Efforts will be made to improve data availability and quality while reducing transaction costs through standardization and scale.
- Promoting inclusive gender finance.
The aim is to enhance inclusive gender finance. The government of Uganda and other stakeholders will prioritize several actions that include developing and implementing gender-sensitive regulations and policies, increasing public awareness of the financial services and products available to women, offering tailored financial training and services to improve women’s financial inclusion, and addressing socio-cultural barriers limiting women’s access to financial resources.
NFIS II’s main enabling pillars that will be instrumental to meeting such objectives are
- Public and private sector commitment and coordination
- Policy, legal, regulatory, and supervisory capacity
- Enabling infrastructure capacity and security