Loans to people who are unable to repay is bad financial inclusion - expert

By Faridhah Kulabako

Financial inclusion is the ability to enable people to have access to financial products and services that meet their needs.

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While the Government and private sector institutions recognise that access to financial services can play a pivotal role in poverty reduction and reducing the vulnerability of poor people, poorly designed financial products may force them into poverty, destroying their lives.
 
And while credit is part of services that people have to access for financial inclusion, ModusBox's vice-president Warren Carew says loans should be given only to those who can afford to repay them without difficulty. Carew, who is also Bill and Melinda Gates Foundation's Level One Project representative, spoke to New Vision's Faridah Kulabako. Below are the excerpts.
 
What is financial inclusion?
 
Financial inclusion is the ability to enable people to have access to financial products and services that meet their needs. But also, people should be able to access it conveniently and at an affordable cost.
 
In financial inclusion, there is a need to ensure that people are not just getting a service, but they are getting it at a cost; this should be fair and empowering them, not oppressing them.
 
For instance, do not give people loans that they cannot afford to pay back. That is a form of trapping them that is bad financial inclusion. When the margins are smaller, people have less money to live on.
 
Sometimes people think of financial inclusion as the ability to get a loan. That is a good thing because that is how the economic system works; you need to borrow money and invest it and get a profit on it. However, you cannot put a person, country or organization in a situation where you give them a loan that is too difficult for them to repay. That is literally evil; you are destroying people's lives by extracting a high fee.
 
Unfortunately, that is what is happening. Financial service providers are deducting money from customers' accounts, only to check their accounts when they do not have enough finances. It should not be like that. These are predatory practices.
 
With good financial services, the fees charged should be clear to the borrower. You should apply responsible lending or access to financial services. Someone should be in control; they do not have to give up their identity.
 
What should a country like Uganda do to achieve meaningful financial inclusion?
 
Achieving meaningful financial inclusion means the products and services must be affordable; nearly free. It should be an honest and open transaction. The service has to be simple and ubiquitous enough. It has to be inclusive of everyone.
 
We need to provide financial services in an equitable way that includes everyone. Financial inclusion is one of the many forms of empowerment that we want in our society. It does not fix all the evils but is part of that solution.
 
It was believed that technology would lower transaction costs but it is yet to deliver on that. The cost of transferring money from one network to another is still too high.
 
What explains this? This is what the Mojaloop software is trying to fix. It seeks to minimize the risks involved in cross-network transactions so as to lower costs. Banks and the financial industry as a whole are trying to manage the risks associated with transfers; there are compliance issues, such as how do you Know-Your-Customer (KYC) as required in the banking industry.
 
There are costs associated with taking the risk between one organisation and another. The problem gets even harder to solve when dealing with different entities to have a transaction completed. Things can go wrong technically, so we need more technical resources, such as firewalls, to ensure the safety of your system.
 
There is, therefore, an infrastructure cost to that; there are operational costs because you have more things to check. There is also a business cost of running the floats in different places, such as bank accounts and this drives up the cost.
 
So running a business is a complicated thing for a financial service business. We are currently trying to simplify some of these things and one of the ways is by having an innovation like Mojaloop, a switch with a centralised service.
 
This means that if a service provider signs unto it, there is only one connection to make, not three or seven with the different service providers. This also means that the service provider does not need to have seven parts of liquidity to manage.
 
One is enough. This will simplify everything once all financial service providers, such as banks and mobile money providers, start using it.
 
The unit cost per transaction will drop once they start using that pool infrastructure.
 
Who are your target customers?
 
We are targeting mobile money service providers, banks, microfinance institutions, and SACCOS, among others. Mojaloop means one loop. We are trying to introduce one switching platform that will bring together banks, SACCOS, microfinance institutions, and mobile money; one solution for all.
 
The interface will support not only one class of financial service providers but everyone. I once went to a restaurant in Kenya and the cashier had six mobile phones and three-card payment devices. She then asked me to choose which service I wanted to use; it was a very complicated experience.
 
Also, the restaurant had to pay to have all those phones and card payment devices, which increases the overhead costs of making a payment. This high cost is always transferred to the customer in the form of high prices because they have to recover their money. 
 
But with mojaloop, you will only need to have one terminal and be able to service all customers. So this will address the interoperability challenges in the country.
 
How many clients have you signed so far?
 
We have been talking to different service providers and so far, the response is positive. We are hopeful that two or three firms will sign up soon. This will provide ubiquitous access to financial services in Uganda and firms will make more revenue because of the traffic coming through as a result of lower transaction costs.