Louis Kasekende: Opportunities and challenges of financial inclusion
Remarks by Dr Louis Kasekende, Deputy Governor of the Bank of Uganda, at the National
Microfinance Conference, organized by the Association of Microfinance Institutions in
Uganda (AMFIU), Jinja, 5 May 2011.
* * *
Hon. Syda Bbumba,
Minister of Finance, Planning and Economic Development,
The CEO of Association of Microfinance Institutions in Uganda (AMFIU)
Distinguished representatives of the various members of AMFIU;
The representatives of the Donor Community;
Distinguished Guests;
Ladies and Gentlemen
I am very pleased to be here this morning to address the National Microfinance Conference
organized by the Association of Microfinance Institutions in Uganda (AMFIU). I am indeed
delighted that the theme for this year's annual conference "Opportunities and Challenges
of Financial Inclusion" is something that is close to our hearts, and is a very topical issue in
the current times.
The importance of this topic is underscored by the high levels of financial exclusion prevailing
especially in the developing countries including Uganda. Although access to an array of
financial services and tools is growing, the Alliance for Financial Inclusion (AFI) estimates
that more than two billion adults around the world do not have access to financial services -
whether formal or informal.
Financial services such as savings products, credit and loans, payment and money transfer
services, insurance, and many others, provide poor people with greater capacity to stabilise
and even increase their incomes, build assets and cope with shocks. These financial
products have proven to be great tools that mitigate the effects of low, irregular and
unreliable incomes which keep many people below the poverty line.
In Uganda, Financial Inclusion remains a challenge in spite of the many gains and successes
we have achieved in the financial sector. The 2009 Finscope study revealed that only 28% of
the adult population above 16 years of age are served by formal institutions such as
Commercial Banks, Credit Institutions and Microfinance Deposit-Taking Institutions (MDIs);
while 42% are served informally by Savings and Credit Cooperatives (SACCOs), Village
Saving and Loan Associations, etc. The remaining of the Ugandan population is not
30%
served by either formal or informal financial service providers. The study also revealed that
the most commonly used source of credit were; shops (54%), friends (25%) and informal
groups Only were found to have borrowed from commercial banks while and
(24%). 7% 3%
2% were borrowing from MDIs and SACCOs respectively.
Financial inclusion is a central theme for all of us because most of those in poverty do not
have access to financial services as already mentioned. Poverty alleviation is a top priority
for the Uganda Government and financial inclusion is an essential component of the
country's poverty alleviation strategy. It is our hope that greater financial inclusion will
ultimately reduce poverty and inequality. This conference is, therefore, timely for AMFIU to
regroup and discuss a contemporary issue of financial inclusion. I, therefore, thank the
management of AMFIU for facilitating this conference.
Ladies and gentlemen, allow me to delve deeper into the pertinent issues which must be
taken into account by all financial service providers in order to foster financial inclusion.

Assuring savers of the safety of their member-savings.
- The lack of such assurance can be a great source of suffering to savers whenever
there is collapse of any service provider. This is mostly pronounced among the
many semi-formal and informal service providers like SACCOs and Community
Groups. Prudential regulation and other safety nets for service providers should
always be in place to reduce on this risk. In that way, the country will be able to
attract more savers into formal institutions.

Reducing lending risk and risk perceptions inherent in lending to key
productive sectors particularly Agriculture and SMEs.
- While agriculture forms the backbone of the Ugandan economy and provides
employment to the majority of Ugandans, there is little evidence that credit is
churned into this sector in adequate proportions. Exclusion of agriculture in lending
is indeed exclusion of many people especially in Uganda.
It is therefore crucial that service providers should design financial products suited
for the agricultural sector, i.e. reasonable priced credit facilities and agriculture
insurance. Innovation allows financial products and services to be customised to
those who need it and it is crucial for creating a diversity of solutions to financial
inclusion.
The Bank of Uganda is currently implementing an Agricultural Credit Facility set up
by the Government of Uganda in partnership with Commercial Banks; Uganda
Development Bank Ltd, Micro Deposit Taking Institutions and Credit Institutions. The
facility is for the purpose of providing medium/long term loans to agricultural loans to
agricultural sector. However, no single MDI has participated in the scheme as the
bulk of their clientele are small scale farmers requiring loans of a short term nature.

Expanding outreach
- The cost of locating a financial institution branch in a rural set up where the road
network is poor, electricity is non-existent, and the population is so dispersed is
enormous. It is also expensive for savers who travel long distances to go and
deposit small savings in their accounts. The cost of credit administration and
borrowing becomes very dire in such situations. It is therefore important to explore
the use of agents and the new technology such as mobile phone banking and points
of sale as tools for financial inclusion.

Harnessing the advantages that new technology offers may reduce the cost of
opening outlets especially in hard-to-bank areas that may initially not be profitable
for financial service providers. Technology will continue to offer low-cost solutions
and opportunities that were never thought about in the past. Service providers need
to harness these opportunities.

Promoting alternative banking methodologies
Methodologies such as group lending in microfinance and Islamic Banking &
Finance which use collateral substitutes and other risk-sharing mechanisms that
are not used by conventional bankers provide viable alternatives that should be
critically assessed. This opportunity should be supported by a flexible (different laws
and regulations for different sectors) and strong regulatory and supervisory
framework that guarantees safety and soundness of institutions. Innovative financial
inclusion works better when a strong legitimate framework balances International
Standards and national conditions.

Financial literacy and the improved financial capability within the majority of
the population
- One of the issues limiting financial inclusion is paucity of information provided to
clients and the lack of a good understanding or interpretation of that information. We
need a national framework to address financial literacy and financial consumer
protection. This framework should assign roles to different stakeholders within the
financial sector plus providing for coordination among financial service regulators.
- We should design and enhance twinning and financing arrangements with the
Ministry of Education and Sports, the National Curriculum Development Centre and
financial service providers to roll out a Financial Literacy and Financial Consumer
Protection program to schools, colleges and universities, building on the recent
launch of the publication on "Towards an Effective Framework for Financial
Literacy and Financial Consumer protection in Uganda by Bank of Uganda".
For our part, the BOU has been actively involved in exchanges with the Ministry of Finance
planning and Economic Development on the regulation of Tier 4 institutions. In addition, the
Bank has reviewed the Financial Institutions Act (2004) and the Microfinance Deposit-taking
Institutions Act (2003) to accommodate alternative banking methodologies (Bank assurance,
and Islamic Banking and Finance). The Bank has also drafted Consumer Protection
Guidelines for all licensed institutions and has, with support from GIZ, commissioned a
consultancy to undertake a Regulatory Diagnostic to establish the suitability of Uganda's
financial sector legal framework to branchless banking. The results of this study should result
into roll out of branchless banking under a suitable regulatory framework and consequent
reduction of cost of opening outlets in hard-to-bank areas. The Bank has also licensed three
Mobile money network operators (MNOs), MTN, Airtel and UTL in partnership with Stanbic
Bank, Standard Chartered Bank and DFCU bank respectively. By end March, the operators
had 1,968,125 registered customers and in the period January to March 2011, the total
number of transactions were 13,220,674 with a total value of Shs.551,010 million. It is our
belief that a combination of the above initiatives will open new opportunities for financial
intermediation and Inclusion in a safe and sound system.
In conclusion, the quest for Financial Inclusion should be complemented by safety and
soundness to ensure that gains made in inclusion are not eroded by loss of savings or loss of
confidence in financial institutions. The BOU will continue to support formalisation of
innovative approaches through improvements in regulatory framework as well as working
with other stakeholders. However, unlicensed institutions that take deposits from the general
public under the guise of member-savings and those intermediating compulsory savings are
doing so illegally and must stop.
I also wish to state, as I conclude, that new technology especially in the area of electronic
money transfer and agency banking are destined to drive most of the future efforts aimed at
financial inclusion. A lot of care must therefore be taken to build sufficient risk-mitigation and
regulatory mechanisms that ensure safety of savers' funds but at the same time promoting
further advances to avoid stifling technological development.
With these remarks I once again thank AMFIU for the foresight which led to the
establishment of the AMFIU calendar at which very useful topical issues are discussed. It is
my ardent hope that the conference will achieve its objectives as set out in the Agenda.
I thank you.