Many people believe that access to cash is financial inclusion. This is quite a limited view.

According to the World Bank, financial inclusion requires an individual or business to have access to valuable and affordable financial products and services to make payments, have savings, access credit and take out insurance.

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For instance, Mobile money has been a revolution that has driven access to money. However, formal financial inclusion in East Africa, for example, is considered low in terms of coverage and penetration.

This is because full-service financial inclusion products or services must meet an individual or business need and be delivered responsibly and sustainably.

In other words, financially included individuals or businesses are those that have an account in their name with a full-service financial institution- says a World Bank Wave 4 Report Financial Inclusion Insights Tracker Survey.

The true meaning of financial inclusion

A full-service financial institution is engaged in dealing with financial and monetary transactions such as deposits, loans, investments and currency exchange.

Therefore, whereas there has been rapid growth in new money systems such as Mobile Money, there has been slow growth in full-service financial institutions, and these are mostly limited to urban or semi-urban areas.

According to a report by Financial Sector Deepening Uganda, which highlights the status of banking and financial inclusion in Uganda, at least 76 per cent of Ugandans live in rural areas.

Consequently, that population bracket may have limited or no access to formal banking and financial channels such as banks, microfinance and deposit-taking institutions.

The report adds that in 2018, only 11 per cent of Ugandan adults used services from institutions in the above category. Of the 11 per cent, nine had accounts with the institutions while the 2 per cent didn’t.

According to the Bank of Uganda, the data above gives a clear picture of the slow penetration, growing relatively slowly.

As noted earlier, financial inclusion requires that an individual or business have access to financial services and products such as payments, savings, credit, and insurance.

Yet, whereas Mobile Money offers some of the above services, it is not supported by a defined law since the Bank of Uganda is still developing regulations for the National Payments Systems Act to support their operations.

Microfinance as the most viable option 

Compared to the above analysis, microfinance remains the most viable form of formal financial inclusion since its institutions are well spread and reach deeper than mainstream banking systems.

According to a study by Financial Sector Deepening (FSD) Uganda, which reviewed the effectiveness of Uganda’s microfinance sector, it was found that microfinance was impacting the population, especially in increased saving and access to credit.

“While there has not been a big impact on consumptive trends, there is reason to believe that [microfinance] has helped to increase asset holding of low-income people,” the report indicated.

However, the real impact in terms of value is difficult to ascertain. Still, there is evidence to demonstrate that microfinance has been a key driver of financial inclusion in the last 20 years.

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Data sourced by FRED Economic Data from the International Monetary Fund indicates that by November 2020, there had been more than 1.2 million account holders spread among different microfinance institutions.

These have been growing over the years from just 703,925 in 2015, representing an annual growth of at least about 7 per cent.

But beyond the growth in accounts, microfinance has also been expanding in terms of spread penetrating obscure regions, some of which are still struggling with basic needs.

According to data from the Association of Microfinance Institutions of Uganda, by December 2020, the association had 125 member organisations whose objective was to strengthen microfinance institutions’ capacity and deliver appropriate and sustainable financial services.

The growth has been boosted by the government’s commitment to creating a regulatory regime that enables penetration.

According to a donor brief highlighting the Role of Government in Microfinance, after the failure of credit schemes such as Entendikwa in 1997, the authorities had learnt that such government-funded schemes often end up in losses. Recipients may not feel obligated to repay subsidised credits, and the government usually has low human resource capacity to go after defaulters.

Therefore, the government has since focused on building a regulatory framework that would create a sustainable microfinance system run as a business and managed by the private sector.

If East Africa is to increase financial inclusion, which has benefits such as steady saving and investment avenues, credit access, and cash flow management, then Microfinance is the best alternative.

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