Transcript CHALLENGES OF POLICY MAKING FOR FINANCIAL INCLUSION

Kaggwa Moses
Commissioner Microfinance
Department,
Ministry of Finance, Planning and
Economic Development
26th April 2010.
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Introduction
“None of us like the idea of apartheid. We object when we hear about such a system in any form,
anywhere. We all understand that no one should suffer because he or she happened to be born in a
certain race, class or economic condition. But our financial institutions have created a worldwide system
of apartheid without anyone being horrified by it. If you don’t have collateral, you are not credit-worthy.
To the banks, you are not acceptable on our side of the world.
“Imagine if the global economic communications system of the banking world suddenly collapses and
every financial institution in the world stopped functioning. Banks everywhere would shut their doors.
ATM screens would go blank. Credit and debit would no longer work. And billions of families would be
unable even to put groceries on the table. Well, this is exactly the situation that half the world’s
population lives with every day–a non-stop horror story.
If the poor are to get a chance to life themselves out of poverty, it’s up to us to remove the institutional
barriers we’ve created around them. We must remove the absurd rules and laws we have made that treat
the poor as minorities. And we must come up with new ways to recognize a person by his or her own
worth, not by artificially measuring sticks imposed by a biased system.”
Mohammed Yunus, Creating a World Without Poverty,
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Introduction Cont
"Our destiny is strongly linked to the destiny of the poorest," says
US Secretary of State Hillary Clinton,
"Microcredit is a macro idea. This is a big idea, an idea with vast potential.
Whether we are talking about a rural area in South Asia or an inner-city in the US,
micro credit is an invaluable tool in alleviating poverty. Microcredit projects can
create a ripple effect - not only in lifting individuals out of poverty and moving
mothers from welfare to work, but in creating jobs, promoting businesses and
building capital in depressed areas."
"Microcredit [...] has positive consequences on the entire community and creates a
fertile soil for democracy to grow because women and men can hope in the future
of the planet again. We must realize that our destiny is strongly linked to the
destiny of the poorest on this planet!"
Source: Remarks at Microcredit Summit in Washington D.C., 3 February 1997.
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Some Statistics on Uganda
 During the period 2001/02 to 2008/09 fiscal years,
GDP growth rate at 2002 constant price of 7.9%.
 The agricultural sector employs for 70 per cent of the
working population
 Most industries and services are dependent on
agricultural sector.
 The farmers in Uganda's 2.5 million smallholdings
and few large commercial farms provide the majority
of their own and the rest of the country's staple food
requirements.
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Statistics contd
 Agriculture’s contribution to GDP has been declining
in the years 2004-2008.
 In 2008/09 it contributed 23.7 per cent of GDP.
 The Industry sector contributed 24.4 per cent
 The services sector’s contribution was 46.4 per cent.
 Sustainable economic development remains a
challenge for Uganda
 Especially among the poorest and most vulnerable
members of society
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Statistics Contd
 31% of the people are living in abject poverty living on
less than one dollar a day.
 The population growth rate established in 2009 was
2.7%, birth rate 47.8/1000, infant mortality rate
64.8/1000, and life expectancy is 52.7 years.
 Literacy rate of 69 per cent among persons aged 10
years and above.
 Men more literate (76%) than women (63 percent).
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The Financial sector
• The financial sector has been experiencing a lot of
growth in the last few years.
• In 2007/08 its growth rate was 24.1 per cent although it
declined to 21.1 per cent in 2008/09.
• The financial institutions currently operating in
Uganda can be classified as TIER 1, Tier 2, Tier 3 and
Tier 4, Development banks, Investment banks,
insurance companies, Foreign exchange bureaus,
Deposit Insurance and Credit Bureau.
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Tier 1 Financial Institutions
 These include 22 commercial banks, with 363
branches, authorized to hold checking, savings, time –
deposits accounts for individuals and institutions in
local and as well as foreign currencies.
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Tier 2 Financial Institutions
• These include credit and finance companies.
• They are not authorized to establish checking
accounts or trade in foreign currency.
• They are authorized to take in customer deposits and
to establish savings account.
• Currently they are two;
– Opportunity Uganda Limited (A 100% subsidiary of
Opportunity International)
– Mercantile Bank
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Tier 3 Financial Institutions
 This class includes MFIs which are allowed to take in
deposits from customers in the form of savings
accounts.
 Currently we have three;
 Finance Uganda limited
 Pride Microfinance Limited
 Uganda Finance Trust Limited.
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Tier 4 Institutions
 Not regulated by the central bank
 not authorized to take deposits from the public.
 They include SACCOs, NGO Non-Deposit Taking
MFIs, Rotating Credit and Rotating Associations
(ROSCAs), e.t.c
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Financial Inclusion defined
 Process of ensuring access to appropriate financial
products and services at an affordable cost to the
underprivileged and low income groups
 Availability of accessible financial instruments,
services and institutions for the poor.
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Financial Inclusion contd
 Access to basic financial services like:
 Deposit and Savings Accounts
 Savings products
 Short, medium and long term credit
 Local money transfers
 International remittances
 Mortgage services
 Leasing
 Financial advisory services
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Status of Financial Access
 62% of Ugandans not served by any form of Financial
Institution.
 Of this figure 65% were rural and 52% urban.
 Women with no access to financial services were 66%
against men at 58%.
Savings
 Majority of Ugandans reported saving money and,
moreover, those who started saving continued to save.
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Status of Financial Access Contd
 80% ever saved and 71% were saving - either formally
or informally.
 90% save in secret places (under the mattress), with
friends, neighbors or relatives
 27% save with informal groups
 22% save with formal institutions; and 4% each save
with SACCOS and other MFIs respectively
 33% of the adult population borrowing from financial
institutions, informal groups or other informal sources
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Status of Financial Access Contd
Access to Credit
• More borrowers in urban than in rural areas (77% v69%)
• More men than women.
• From friends, relatives, retailers and similar sources
(54%)
• Financial institutions (7%)
• Informal financial groups (11%).
• SACCOs 4%
• Other Micro Finance Institutions3%
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Status of Financial Access Contd
 Two thirds (66%) of borrowers have taken goods on
credit from either institutions or local retails shops
 43% have loans in cash.
 High interest rates are major barrier to borrowing from
formal and semi-formal institutions
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Status of Financial Access Contd
Informal Groups
 One quarter (22%) of Ugandan adults belong to
informal financial groups
 ROSCAs (38%) and ASCAs (22%) are the most
commonly used informal groups
 Major purpose for being in such groups is to save
money for specific purposes and to be ready for
emergencies.
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Promotion of Financial Inclusion
 Promoting financial inclusion for the poor has largely
been the role of the State and Non-Governmental
Organizations
 Financial Institutions have realized potential of the
unbanked
 Technological solutions like agent banking and mobile
banking present new opportunities for commercial
players
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Promotion of Financial Inclusion
Issues to address
 Go beyond the number of bank accounts as measure of
access
 Establish the linkage between financial inclusion
policies and improvements in the well being of the
poor.
 Barriers to access emanating from both demand side
and supply side factors
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Promotion of Financial Inclusion
 From the demand side,
- lack of awareness about financial services and
products,
- limited literacy, especially financial literacy of the
populace
-social exclusion.
 From the supply side,
- the transaction costs that the bankers perceive.
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Promotion of Financial Inclusion
 Lack of communication,
 lack of infrastructure,
 language barriers,
 low literacy levels
 poor technology
(I) Raise the cost of providing services
(ii) Inhibit bankers from taking initiative from the
supply side.
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Policy Design
 Principles that must be at the forefront of the design.
 The sustainability of financial institutions and the
consumers of financial services.
 Exploration and promotion of commercially-driven,
innovative business models that best suit our economy
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Policy Design
 Third, strong, committed and capable service providers
should be encouraged to participate in the market.
 Finally, sustainability cannot be achieved without
supportive infrastructure.
 Combination of these can be eased through cooperation
and experience sharing among policy makers in all
institutions and borrowing lessons from other countries.
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Challenges in Policy Design
 Financial landscape
 Monumental task to design a policy for all players
 Banks, NGOs, Limited liability companies, companies
limited by guarantee and SACCOs all under one
umbrella of regulation.
 Quite difficult to have a One-Size-Fits-All financial
inclusion policy for the different players
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Challenges in Policy Design
 Jurisdictional Issues
 The presence of different and multiple regulators
 Poses enormous policy making challenges
 Hard to come up with an un biased decision.
 The many layers of government, each with its own
jurisdiction and responsibilities.
 Yet policy developed in one department bound to affect
another.
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Challenges in Policy Design
 Availability of Reliable Data
 Absence of sufficient data on institutions especially on
microfinance institutions about
(i)ownership,
(ii)share capital,
(iii)Savings

Strong inhibitor of designing a financial
inclusion policy
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Challenges in Policy Design
• Involvement of the beneficiaries of the financial
inclusion policy
– The majority of the people that are excluded from the
financial sector are the poor and the very poor.
– In spite of considerable investment in formal and
informal education, a sizeable part of the adult
population, especially that that is financially excluded,
remains illiterate.
– Involving them in a process of policy formulation so that
they can provide useful inputs in the process is a very
uphill task.
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Challenges in Policy Design
 Perceived Resistance of Communities as a Partner in
Policy Development
 May stem from the cultural identity of some
communities and
 Communities reluctance to negotiate any of their beliefs
and tradition
 Even if the proposed change or policy could lead to
improvements
 Attitude that it is solely a government’s responsibility to
develop policy that benefits them
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Challenges in Policy Design
• Attitudes of Government toward Rural Communities
– Among some government policy makers, an “urban
bias” may exist whereby the government pays more
attention to larger industrial centers.
– Policies and programs created with urban centers in
mind sometimes are made to fit rural communities
– Such policies and programs have a tendency to ignore
rural issues and cannot be considered equal in both
urban and rural areas.
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Challenges in Policy Design
• Legislative Requirements
– The legislative environment may hinder establishment
of financial inclusion policies
 Capital adequacy requirements,
 audited balance sheets,
 size of business,
 threshold category based on number of members and
professional
– They aim at financial sustainability but are a constraint
to inclusion
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Challenges in Policy Design
• Inadequate information technology
– A financial inclusion policy can be effective if it is
backed by a strong information technology
infrastructure
– A weak information technology does not enable
financial inclusion.
– The prohibitive costs of branch banking which make
small tickets transactions unavailable can only be solved
by developing information technology
– Little or no use of computers, internet and mobile
phones.
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Challenges in Policy Design
 Financial literacy
 Lack of knowledge required for managing personal
finance.
 It does not necessarily refer to lack of formal education
in finance.
 Lack of financial literacy has prohibited people from use
of financial services even when they are available and
affordable.
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Challenges in Policy Design
• Government intervention
– Government intervention may raise controversies in
formulation of effective financial inclusion policies.
– There could be a misconception by the target group that
the inclusion strategy is aiming at selling a specific
political party propaganda
– Prosperity For All in Uganda construed as Government
gimmick to popularize a particular political party
– To policy makers it becomes a challenge to close those
gaps as a basis for subsequent financial inclusion.
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Suggestions to overcome
Challenges
How to address challenges
 “Cooperation”.
 Through [FIA] program, policy makers can work
together in
- engineering solutions,
- creating a micro finance enabling environment,
- designing regulation and infrastructure,
- monitoring progress and assessing policy
achievement.
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Suggestions to overcome
Challenges
• Build bridges and collaborations between Government
institutions concerning policy on financial inclusion.
• Cooperation across departments within the same level
of Government.
• Ensure inter-sectoral collaboration for communities
are to play an active role in the policy-making process.
• Build financial literacy so that people have realistic
expectations and understand their rights
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I thank you for your interest and
continued support in financial inclusion.
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