Rural financial services get boost

By Watuwa Timbiti

The availability and easy access to financial services has a marked influence on individual and institutional development.

Specific to Uganda, the development trends partly have a bearing on the country’s burgeoning financial sector.

For instance, commercial bank lending to the private sector increased from sh681.9b in December 2001 to sh7755.3b in December 2012 observes Bank of Uganda deputy governor Louis Kasekende.

“Other positive developments in the sector include the increase in the number of banks from 20 in 1999 to 24, bank branch network to more than 455 branches compared to 153 in 1999, and ATMs to more than 600, from 430, four years ago,” he says.

The financial sector, Kasekende adds, has not only positively evolved in terms of volumes of cash handled, but equally in terms of investment in human capital accumulation, technology to deliver better services and continued innovation to meet user demands - some new products for small medium enterprises (SMEs), credit cards and points of sale services with major service providers and retailers have been created.

However, 62% of Ugandans have no access to financial services. That is where the Uganda Rural Challenge Fund, which was launched recently comes in.

The 8m euros fund is a result of partnership and development cooperation between Uganda and Germany. It will provide grants to support innovations that will lead to increased access to financial services for rural enterprises in Uganda.

Most rural entreprises are still locked out of the formal financial sector.

Kasekende says the rural population cannot be ignored given its contribution to the GDP through agriculture estimated at about 23%.

“The rural population constitutes a large potential market for savings mobilisation which is yet to be tapped by the financial sector,” he deduces.

The rural population still suffers from the lowest access to financial services.

“The disparity between the urban and rural access to financial services is wide with urban access at 48% compared to rural access at 35%.”

“This fund is also expected to motivate financial institutions to try out new rural-focused approaches that they cannot undertake single-handedly because of the perceived risk,” says Kasekende.

Similarly, developments in new technology, he adds, particularly mobile and Internet banking could be leveraged to provide a notable platform for improving financial inclusion and an opportunity to move towards branchless banking.

This reduces technology costs, thus the impeding costs of opening and running an account, too, reduce, Kasekende argues, .

This would suggest that more than 12 million adults in rural areas do not have access to financial services due to impediments such as high fees, high minimum deposits and physical distance from the banking institutions.

As a result, Uganda’s savings to GDP ratio of about 11.8% as of 2012, is among the worst in sub-Saharan Africa.

It is these gaps between the rural and urban in accessing financial services that the fund, which will be managed by the Agribusiness Initiative Trust (aBi Trust), will bridge to establish a balance in the urban-rural development. The Trust is a multi-donor entity devoted to private sector agribusiness development.

In his remarks, aBi Trust co-chairman and former finance minister Gerald Ssendaula lauded the establishment of the fund, arguing that it will significantly drive the rural population towards economic independence, thus consolidating the country’s political independence.

“We celebrated 50 years of independence a few months ago and that was political independence. But we still have the problem of achieving economic independence,” he said, adding: “So, we are highly indebted to development partners of Uganda so that we consolidate the political independence. Without economic independence, political independence may not be good.”

How the fund will work

The fund will provide matching grants (50%-80%) for the development of new innovative financial products and business approaches for rural financing. The grants will be awarded using pre-determined selection criteria to successful applicants on a competitive basis.

They should be financial institutions with rural-tailored financial innovations, a clientele of not less than 3,000 members and audited books of account dating back three years.

Background of the rural challenge fund

In response to lack of financial services in the rural areas and to the agricultural sector, the governments of Germany and Uganda established the Rural Finance Enhancement Programme worth 14m euros.

The purpose of the programme is to improve access to sustainable and demand-driven financial services for the rural population and small and medium enterprises in Uganda.

The first part of the programme is the rural challenge fund, an initiative of the Germany ministry of economic cooperation and development (BMZ) and implemented by KFW Development Bank.