Technology has the power to reduce the cost of service delivery for providers.
By Jimmy Ebong
The rural poverty challenge
KAMPALA - According to the latest National Household Survey (NHS, 2016-17), eight out of every ten Ugandans reside in rural areas.
Majority Ugandans in rural areas are engaged in agriculture, with fifty percent rural residents involved in agricultural activity.
On the other hand, the urban residents are majorly involved in trade and service sectors.
The national poverty estimates show that rural areas have a high incidence of poverty in comparison to urban areas.
Three out of every ten Ugandans are below the poverty line in rural areas.
If this rural-urban income inequality is addressed then Uganda should be on a steady path to alleviating poverty.
The question then is, what role can the financial sector play in addressing this challenge?
The financial inclusion divide
Findings from the 2018 Finscope survey show a wide divide between the rural and urban residents in access and usage of formal financial services.
Looking at savings; there are more urban residents accessing formal saving products than rural residents. Three out of every ten urban residents have access to formal savings compared to one out of every ten rural residents.
Rural residents thrive on informal saving mechanisms like the Village Savings and Credit Associations (VSLAs) and self-savings where they manage their own savings.
When it comes to access to formal credit the levels of access nationally are low where just one out of every ten Ugandans have access to formal credit.
Nevertheless, urban residents report higher levels of access to formal credit than rural residents.
Three out of every 100 rural residents have access to formal credit compared to seven out of every 100 residents in urban areas.
However, the predominant use of informal lending mechanisms in rural areas has rural areas registering lower levels of exclusion from the credit markets than urban areas.
Five out of every ten rural residents are excluded from the credit markets compared to six out of every ten residents in urban areas.
Bridging the financial inclusion divide
The financial sector can play a critical role in addressing the poverty challenge by providing the necessary financial resources to drive productivity and growth in the rural areas.
That is why it is critical to design policies and innovative solutions to bridge the financial inclusion divide between the rural and urban areas.
First and foremost, there is need to identify the main drivers of the financial inclusion divide.
The findings from the 2018 FinScope Survey identify the main barriers to access and usage of formal financial services as; low levels of incomes, poor levels of proximity to formal financial institutions and low levels of awareness and understanding of formal financial products.
From a policy and regulatory perspective three things can be done to address these challenges. First, reducing cost of financial service delivery.
For example, the government can facilitate and promote an industry-wide shared cash-in, cash-out networks that not only lower operating costs but also bring financial services closer to the consumers in rural areas.
This could be via policies that incentivize agent density in underserved areas, as well as public-private partnerships that look at increasing agent profitability in rural areas.
Second, utilising technological innovations to effectively address issues of account opening, customer verification, and the delivery of savings, credit and insurance products over digital channels.
Technology has the power to reduce the cost of service delivery for providers while increasing the ubiquity of financial products to customers, at affordable price-points.
Digital financial services therefore not only promise increased access but also usage of formal financial services by the poor.
Third, to increase the introduction of new game changing solutions by financial institutions the government needs to put in place policies, laws and regulations that allow for new business models and approaches to financial delivery.
Innovative regulatory approaches like regulatory sandboxes, where startups are allowed to conduct live experiments in a controlled environment, have demonstrated success in developed markets.
Regulators, can therefore play a big role in being financial inclusion catalysts.
With 80% of the country located in rural areas, the private sector needs to take a proactive role in serving this large addressable market. Urban markets are becoming extremely competitive and private sector players need to develop solutions that speak to the needs of not only the rural populace but the rural poor in particular.
Product development approaches like human-centered design, can help financial institutions develop appropriate, affordable and relevant products targeted to this market.
Financial Sector Deepening Uganda (FSDU) is committed to addressing this urban-rural financial inclusion divide by making financial markets work for the poor.
FSDU works to address financial market inefficiencies with the end goal of increasing access and usage of financial services by the poor.
Jimmy Ebong is a research specialist with the FSD Uganda. The article was co-written by Joseph Lutwama, the Policy, legal and regulatory specialists of FSD Uganda