UGANDA 2013 FinScope III SURVEY REPORT FINDINGS

Transcription

1 ECONOMIC POLICY RESEARCH CENTRE UGANDA 2013 FinScope III SURVEY REPORT FINDINGS Unlocking Barriers to Financial Inclusion

2 MINISTRY OF FINANCE, PLANNING AND ECONOMIC DEVELOPMENT ECONOMIC POLICY RESEARCH CENTRE REEV CONSULT INTERNATIONAL

3 UGANDA 2013 FinScope III SURVEY REPORT FINDINGS Unlocking Barriers to Financial Inclusion

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5 ACKNOWLEDGEMENTS This report was prepared by the Economic Policy Research Centre (EPRC) as the Implementing Institution for FinScope III based on the 2013 FinScope III survey data collected by REEV Consult International during the period June - July EPRC worked under the guidance of the FinScope III (2013) Steering Committee, which had a Secretariat at the Bank of Uganda. The Steering Committee had a membership drawn from the Ministry of Finance, Planning and Economic Development, Bank of Uganda, Uganda Insurance Commission, Capital Markets Authority, Uganda Bankers Association, Uganda Insurers Association, the Association of Microfinance Institutions of Uganda, Uganda Bureau of Statistics (UBOS), Private Sector Foundation of Uganda and Development Partners notably UKaid from the Department for International Development (DFID). EPRC wishes to extend gratitude to DFID for entirely funding the FinScope III project. Without their financial support this project could not have been implemented as successfully as it was. EPRC acknowledges with thanks the contributions made by all members of the Steering Committee. We particularly wish to single out for mention the role played by the Uganda Bureau of Statistics (UBOS), which went beyond the membership of the Steering Committee to other additional responsibilities. UBOS spearheaded the FinScope III survey design and undertook quality assurance of the work of the Research House. The efforts of UBOS helped FinScope III to collect and analyze high quality data on which this report is based. We also acknowledge the role played by the Capital Markets Authority in chairing and providing the necessary stewardship. Much gratitude is also extended to the Bank of Uganda and in particular the FinScope Secretariat for efficiently organizing meetings and coordinating activities. Ms. Annette Altvater of Development Pioneer Consultants in Dar es Salaam, Tanzania provided guidance on the development of FinScope III questionnaire between December 2012 and January Her significant contribution is very much appreciated. FINMARK Trust of South Africa and Founder of FinScope surveys gave us guidance and insight into the FinScope III study especially with regard to generating comparable results with other African countries undertaking Fin- Scope surveys. Finally, special thanks go to the team of EPRC researchers namely, Musa Mayanja Lwanga, Ezra Munyambonera, Xavier Mugisha, Ibrahim Kasirye and Lawrence Bategeka; and Vicent Fred Sennono, Stephen Baryahirwa and Byron Twesigye of the Uganda Bureau of Statistics who meticulously analysed and compiled the information for this report. SARAH N. SSEWANYANA, PHD EXECUTIVE DIRECTOR, ECONOMIC POLICY RESEARCH CENTRE i

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7 TABLE OF CONTENTS ACKNOWLEDGEMENTS i EXECUTIVE SUMMARY viii 1. INTRODUCTION AND BACKGROUND An overview of the Uganda s financial sector landscape Data Sources Methodology Organisation of the Report 5 2. BACKGROUND CHARACTERISTICS OF THE ADULT POPULATION Demographics Socio-economic characteristics Physical access to financial institutions (supply side) 8 3. FINANCIAL INCLUSION Overall financial usage Financial access strand Comparison with other African countries Concluding remarks FORMAL Products and services PENETRATION Having a bank account with a financial institution Nature of transactions conducted at various banking points Barriers to having a bank account Concluding remarks SAVINGS AND INVESTMENTS Savings and investments strand Knowledge of savings and practice Savings mechanisms Investment activities/products Barriers to saving/investing Concluding remarks CREDIT AND BORROWING Overall credit usage Credit and borrowing strand Types of credit Uses of credit Perceptions on credit and borrowing Loan size and collateral requirements Barriers to credit Concluding remarks 44 iii

8 7. RISK MANAGEMENT AND INSURANCE Risks profile Access to and utilisation of insurance services Risk management profile Barriers to the use of insurance Concluding remarks REMITTANCES AND MONEY TRANSFER Remittances Strand Frequency of use of money transfer services Channels used to send and receive money transfers Frequency of receiving remittances Origin of money transfers Uses of funds received Receiving funds on behalf of others Concluding remarks ACCESS TO AND UTILISATION OF MOBILE MONEY SERVICE Comparison of use of mobile money relative to other financial services Knowledge and use of mobile money services Utilization of different products Utilization of mobile money services by service provider Barriers to mobile money services use Concluding remarks FINANCIAL LITERACY AND CONSUMER PROTECTION Main sources of information Knowledge on the basics of financial literacy Perceptions on loan repayment Consumer Protection Budgeting Concluding remarks CONCLUSIONS AND EMERGING POLICY IMPLICATIONS 79 REFERENCES 83 iv

9 LIST OF TABLES Table 1: Adult population characteristics by location in 2013, % 7 Table 2: Distance to the nearest financial institution by location in 2013, % 8 Table 3: Use of financial services (mutually exclusive) by adult characteristics in 2013, % 13 Table 4: Product and services penetration by adult characteristics in 2013, % 17 Table 5: Nature of transactions by socio-economic characteristics and location in 2013, % 18 Table 6: Reasons for not having a formal bank account in 2013, % 20 Table 7: Savings and investments strand by adult characteristics in 2013, % 24 Table 8: Preference for savings and practice by adult characteristics in 2013, % 26 Table 9: Savings mechanisms by adult characteristics in 2013, % 28 Table 10: Reasons for currently saving/investing by adult characteristics in 2013, % 29 Table 11: Investment mechanisms in 2013, % 31 Table 12: Reasons for never saving or investing by adult characteristics in 2013, % 32 Table 13: Credit and borrowing strand by socio-economic characteristics, % 36 Table 14: Forms of borrowing during the last 12 months in 2013, % 38 Table 15: Main reasons for utilizing credit services in 2013, % 39 Table 16: Form of collateral security required by institution in 2013, % 43 Table 17: Reasons for not taking loans by gender and location in 2013, % 43 Table 18: Risk encountered in the last 12 months in 2013, % 46 Table 19: Overall usage of formal and informal insurance, % 48 Table 20: Reasons why the adults preferred informal insurance in 2013, % 49 Table 21: Risk management mechanisms by adult characteristics in 2013, % 50 Table 22: Barriers to formal insurance products and services in 2013, % 52 Table 23: Remittances and transfers, % 56 Table 24: Knowledge and use of mobile money services in 2013, % 64 Table 25: Transactions done with mobile money in 2013, % 65 Table 26: Utilisation of mobile money services by service provider in 2013, % 66 Table 27: Reasons for not using mobile money services in 2013, % 67 Table 28: The most important sources of financial information in 2013, % 70 Table 29: Areas where further financial information is required in 2013, % 71 Table 30: Testing knowledge of basic financial literacy in 2013, % 73 Table 31: Self-reported perceptions on implications of failure to pay back a loan in 2013, % 74 Table 32: Preferred options for dispute settlement in 2013, % 76 List of Appendix Tables Table A 1: Enumeration areas and households 84 Table A 2: Remittances and transfers - Sent, 2013 (%) 87 Table A 3: Remittances and transfers receipts, 2013 (%) 88 Table A 4: Use of funds received and recipient in 2013, % 89 v

10 LIST OF FIGURES Figure 1: Households most important source of income in 2013, % 8 Figure 2: Overall usage of financial services, % 9 Figure 3: Mutually exclusive use of financial services by institutions, % 10 Figure 4: Financial access strand with mobile money services in 2013, % 11 Figure 5: Financial inclusion by selected African countries , % 15 Figure 6: Operating an account with financial institutions, % 16 Figure 7: Savings and Investments strand, % 22 Figure 8: Private time and savings deposits (UShs billion) 23 Figure 9: Perception on the single most definition of saving in 2013, % 25 Figure 10: Means of planning for retirement/old age (mutually inclusive) in 2013, % 30 Figure 11: Overall credit usage, % 34 Figure 12: Credit and borrowing strand by gender and location, % 35 Figure 13: Main reasons for accessing agricultural credit in 2013, % 40 Figure 14: Perceptions on whether access to financial institutions improved since 2009, retrospectively % 41 Figure 15: Borrowers perception on the affordability of their recent loan in 2013, % 42 Figure 16: Understanding of the terms and conditions of loan/credit in 2013, % 42 Figure 17: Loan size by gender and location in 2013, UShs ( 000), % 42 Figure 18: Barriers to informal services use in 2013, % 51 Figure 19: Use of money transfer services in 2013, % 57 Figure 20: Methods used to send and receive money transfer services in 2013, % 58 Figure 21: Regularity of receiving remittances in 2013, % 59 Figure 22: Receipt of transfers from within and outside Uganda in 2013, % 60 Figure 23: Uses of remittances and transfers by location in 2013, % 61 Figure 24: Transparency and fairness of financial institutions in 2013, % 77 APPENDIX 1: SURVEY DESIGN 84 vi

11 ACRONYMS AND ABBREVIATIONS ACSA ATM BoU CS Pro CV DfID EAs EPRC GDP GoU GPS IRA LCs MDIs MFIs MoFPED MTN NDP NGOs NSSF OPM PPS PSU ROSCAs SACCOs UBoS UIA UDHS UNHS USD UShs VSLAs Accumulating Savings and Credit Associations Automatic Teller Machine Bank of Uganda Census and Survey Processing System Coefficient of Variation Department for International Development Enumeration Areas Economic Policy Research Centre Gross Domestic Product Government of Uganda Geographical Positioning System Insurance Regulatory Authority Local Councils Micro-Deposit taking Institutions Microfinance Institutions Ministry of Finance Planning and Economic Development Mobile Telephone Network National Development Plan Non-governmental Organisations National Social Security Fund Office of the Prime Minister Probability proportion to size Primary Sampling Unit Rotating, Savings and Credit Associations Savings and Credit Cooperative Organizations Uganda Bureau of Statistics Uganda Insurance Association Uganda Demographic and Health Surveys Uganda National Household Surveys United States Dollars Uganda Shillings Village Savings and Lending Associations vii

12 EXECUTIVE SUMMARY I. Introduction Overtime, Uganda s financial sector has continued to record some positive changes such as the level of financial development, increased competition and improved efficiency in the financial system. There have also been deliberate efforts by government to strengthen financial inclusion in Uganda since With these developments in the financial sector, it is important that regular assessments are done to explore the extent to which such developments have translated into improved demand, access to and usage of financial products and services by the Ugandan adult population. As such, regular nationally representative FinScope surveys have been carried out in Uganda and other African countries to provide a basis for monitoring such progress in terms of demand, access to and use of financial products and services. To date, FinScope surveys have been carried out in 18 African countries including Uganda. The main objective of these surveys is to determine the levels of access to and use of financial products and services by the adult population. The 2013 FinScope III survey for Uganda follows two previous surveys FinScope I and II surveys carried out in 2006 and 2009 respectively. Like the earlier surveys, FinScope III sought to establish the level of financial inclusion by looking at access to and usage of financial products and services through four major access strands namely: saving and investment; credit and borrowing; remittances and money transfer; and insurance. Additionally, the survey sought to establish the level of financial literacy amongst the adult population and their perception of consumer protection offered by financial institutions. I.1 Data Sources The analysis in the report is based on the 2013 FinScope III survey conducted by REEV Consult International during June July This survey builds on the previous nationally representative FinScope I and II conducted in 2006 and 2009 respectively. However, unlike the previous surveys, FinScope III survey presents an opportunity to track households in future surveys to monitor progress made by the same individuals over time. The survey was also expanded to include mobile money services and a refinement of some questions. It was based on a two stage stratified random sampling design and covered 3,401 households. The report adopts the financial inclusion framework developed by FinMark Trust, which considers four financial access strands credit and borrowing; remittances and transfer; savings and investments; and insurance. Within each strand, access to and use of the various products and services (formal and informal) by the adult population (16 years and above) is analysed across gender, life cycle (age), educational attainment, employment status, wealth quintile and spatially. Similar analysis is done based on the self-reported barriers to access and usage of the various financial products and services. At the aggregate level, all the four strands are combined to generate a single indicator financial access strand. I.2 Approach In terms of access and use of financial services through institutions, the report constructs the 2013 financial access strand that is in line with the structure and framework of 2009 FinScope II survey as follows: Formal banks (Regulated by Bank of Uganda BoU): commercial banks, microfinance-deposit taking institutions (MDIs) and Credit institutions); Non-bank formal (other formal) other microfinance institutions (MFIs), Savings and credit cooperative organisations (SACCOs), Insurance viii

13 companies, cell phone mobile money, non-banking financial institutions like foreign exchange bureau, money transfer services like Western Union; Informal all other institutions including village savings and rotating groups Rotating, Savings and Credit Associations (ROSCAs), Village Savings and Lending Associations (VSLAs), Accumulating Savings and Credit Associations (ACSA), Non-government organisations (NGOs), investment clubs, savings clubs, services by employers and other village groups like burial societies and welfare funds. Others informal services include shops and investing through property like houses for rent, livestock and crop produce to be sold later or farm inputs to use at a later date. FinScope III also considers borrowing such as credit from a shop, school, health centre and individuals as informal access; and Financially excluded (unserved) are non-users of formal banks, non-bank formal or informal institutions. Products and services under financially excluded include saving in a secret place, shops or with friends/relatives; borrowing from friends or family members; or money transfers using individuals. The analysis is done at individual level for the entire adult population aged 16 years and above, unless stated otherwise. The estimates are weighted to reflect the total adult population. To shed light on financial inclusion of the adult population, the results in 2013 are compared with those based on 2009 FinScope II, where possible. II. Key Findings II.1 Use of Financial Institutions Overall usage of financial products and services: Broadly speaking, the Ugandan adult population financial usage was from diverse financial institutions. The share of the adult population that cited to have accessed formal institutions (banked and non-bank formal) increased by almost two fold from 28 percent in 2009 to 54 percent in The growth was driven by the increase in the non-bank formal from 20 percent in 2009 to 52 percent in On the other hand, the increase in the share of the adult population using informal financial institutions (60 percent in 2009 to 74 percent in 2013) was not as fast as that observed for formal financial institutions. Financial access strand (mutually exclusive): Overall, 85 percent of the adult population had access to and usage of financial services in 2013 while 15 percent were financially excluded. This compares with 70 percent in 2009, with those excluded being 30 percent. The results revealed that in 2013, 20 percent of the adult population (representing 3.4 million adults) were using a formal regulated financial intermediation service, and nearly 34 percent were using only the non-bank formal but not the formal banks, and 31 percent (representing estimated 5.1 million adults) were using only informal institutions but not the formal financial products and services. An estimated 2.6 million adult population were financially excluded in 2013 contributing about 15 percent of the total adult population. This marks a reduction in financially excluded adult population, from 30 percent (4.3 million adults) in In comparison to 2009, use of formal banking institutions remained the same while the share using only non-bank formal institutions but not formal banking institutions increased from 7 percent in 2009 to 34 percent in This increase was mainly driven by the surge in use of mobile money services between 2009 and There were marked variations in access and usage of financial products and services across social groups and spatially. For example, the gender gap observed in financial exclusion in 2009 had diminished in 2013; although ix

14 there was a growing gender gap in terms of those who accessed only informal financial products and services 7 percentage points. While there was a marked decline in the rural/urban divide, use of informal products and services remained higher among adults in rural areas compared to their counterparts in urban areas. The gap declined from 22 percentage points in 2009 to 19 percentage points in Formal employment, wealth status and educational attainment were the biggest differentiators in the use of formal banking institutions. The adults in the top most quintile were five times more likely to access banks compared to those in the bottom wealth quintile (gap growing over time); and there was a marked decline in use of formal banking institution by those in selfemployment. II.2 Formal Product and Service Penetration Usage: One in every 5 adults (representing 3.3 million adults) had a formal account of some nature in formal banks or nonbank formal institutions in This marks a marginal increase from 18 percent (representing 2.5 million) in There was a significant reduction in the share of the population that operated an account with commercial banks from 74 percent in 2009 to 50 percent in It is evident that the SACCOs which were legally constituted, but not controlled by BoU had become an option of choice second to commercial banks the share of the adult population that operated an account increased from 5 percent in 2009 to 21 percent in Barriers to having a bank account: The most cited barriers were income/employment related (lack of income (47 percent) and no job (17 percent) and lack of knowledge on how a bank account works (18 percent); supply side constraints included cost of operating an account (22 percent) and distance to bank (13 percent). While the share was low, some 3 percent did not trust the financial institutions. II.3 Savings and Investments Savings and investments strand: The results from the survey revealed that 68 percent of the adult population was saving (both formally and informally) in 2013 indicating an increase from 54 percent in 2009 and 42 percent recorded in 2006 based on FinScope surveys. By implication, the share of financially excluded but not using home/ secret place adult population declined over time from 29 percent in 2009 to 6 percent by Ugandans were about twice more likely to save exclusively with informal institutions than with formal institutions. At national level, use of informal institutions increased by 15 percentage points but was marked with a growing gender and rural/ urban divide gap. The likelihood to save/ invest with a formal banking institution increased with educational attainment and wealth quintile. The youth were more than three times less likely to save/invest with formal banks compared to the middle aged adult population. Despite the developments in the financial sector, a significant proportion of the adult population used home/secret place for saving the share increased from 18 percent in 2009 to 25 percent in Savings mechanisms: Only focused on the adult population that saved in the past 12 months prior to the FinScope III survey. The most cited mechanisms in order of frequency included: home (51 percent), VSLAs/ROSCAs (29 percent) and buying of livestock/assets (18 percent). The practise of using home/secret place exclusively reduces with increasing educational attainment and wealth quintile status. Saving/investing with the bank/mdi was cited by only 19 percent of the adult population. These were mainly the adults who were males, better educated, formally employed and residing in relatively well developed regions. What drives savings: Those who reported to x

15 have been saving at the time of the survey indicated multiple reasons why they did so. These included, in order of popularity: meeting basic needs (67 percent), emergencies (41 percent), education (33 percent) and livestock (22 percent). Saving for emergencies reduced but savings for business start-up/expansion increased by wealth quintile status and educational attainment. There was a gender gap with females more likely to save for emergencies while their male counterparts were more likely to save for acquisition of land. Investment products/activities: One in every 10 adults invested through formal financial institutions (formal bank and non-bank formal) emphasizing low financial penetration. This share increases with educational attainment, wealth quintile status, level of development of the local economy and employment security. On the other hand, investment in informal financial institutions was cited by 47 percent of the adult population. It is evident that females were more likely to invest in informal institutions whereas their male counterparts were more likely to invest in formal ones. The majority of adult population invested in agriculture and related activities. Specifically, 53 percent of the adult population that indicated to have invested at the time of the survey, most of them cited such investments in farm land (53 percent), 41 percent in livestock, and 39 percent reported investing through an informal group and 24 percent invested in starting up/expanding an existing business. Vulnerable groups i.e. females, the less educated, the unemployed and the poor were more excluded from investment activities compared to their less vulnerable counterparts. Barriers to savings/investments: The cited barriers seem to point to lack of income and lack of knowledge as reasons for exclusions from savings/investment activities. Citing of lack of money to save/invest increases with the life cycle. While only 7 percent of adults resident in Kampala cited lack of information on savings, a significant share (66 percent) reported the same in Eastern region. This is a wide spatial variation that needs to be addressed. II.4 Credit and borrowing Credit and borrowing strand: The results revealed that access to credit and borrowing was very low in Uganda with only 4 percent of the adult population accessing credit from formal bank institutions. A similar rate (4 percent) accessed credit from non-bank formal financial institutions while 20 percent accessed credit from informal sources. What drives borrowing: The majority that borrowed did so to finance education of children (20 percent) and to cater for emergencies (15 percent). Only 10 percent of the borrowers borrowed for agricultural production yet majority of Uganda s population derive their sustenance from agriculture. The biggest proportion of people borrowing to finance agricultural production does so for purchase of inputs (54 percent), followed by hiring farm labour (29 percent). There is a regional dimension with adults in Northern region more likely to borrow for agricultural production and emergencies whereas those adults resident in Kampala were more likely to borrow for business purposes and acquisition of assets compared to their counterparts in other regions. As noted under savings/investments, borrowing for emergencies reduces with wealth quintile status, educational attainment and level of development of the local economy. A significant share of the youth (18-24 years) cited borrowing for business startup/expansion compared to their other counterparts. Terms and conditions, and size of loan: Regarding understanding loan conditions and cost of credit, nearly all the adult borrowers xi

16 understood the terms and conditions before taking a loan. The majority of the borrowers (52 percent) indicated that the loan was affordable against 5 percent that indicated that it was very expensive. The average loan size was relatively small, with 73 percent of borrowers indicating taking small loans that did not exceed UShs 500,000. Male borrowers were almost two times likely to take a loan in excess of UShs1 million (18 percent) compared to their female counterparts (8 percent). Barriers to credit and borrowing: Some 31 percent of the adult population that never accessed a loan during the past 12 months cited fearing debts as a reason for not doing so. The high cost of loans is the second most frequently cited reason for not accessing credit (14 percent) followed by lack of security (13 percent). II.5 Insurance and Risk Management Risk profile: The survey requested the respondents to indicate whether their households experienced shocks in the past 12 months prior to the survey that might have, in turn, negatively impacted on their incomes at individual level. The responses were not mutually exclusive. The most common risks included, in order of frequency: illness of family member (48 percent), drought (26 percent) and death of a family member/ relatives (21 percent), price fluctuations (18 percent) and theft (15 percent). The likelihood of citing drought, crop/livestock diseases and ill-health reduced with wealth quintile status. This is expected since the better-off are less likely to be engaged in agriculture-related activities. Furthermore, the self-employed were more likely to cite drought compared to their counterparts in paid employment, whereas the reverse is true for price fluctuations. Insurance access strand: Use of formal insurance services in Uganda remained low with only 2 percent of adult population reporting use of these services in 2013 marking a reduction from 3 percent in Overall usage of informal insurance groups grew between 2009 and Nearly 44 percent of those using informal groups indicated that it was easier to join such groups; 15 percent said that formal insurance was beyond their means and 11 percent had never heard about formal insurance companies. Risk management profile: The majority of adult Ugandans (45 percent in 2013) dealt with these risks largely through informal means, such as: borrowing from friends and family, asking for donations from neighbours, relatives and friends, and sale of assets such as land (15 percent). Borrowing from friend/ relatives, seeking for donations, reduction in consumption reduces with wealth status. The adult population resident in rural areas was more likely to report sale of assets, borrow from friends/relative and seeking for donations compared to their counterparts in urban areas. A slightly higher share of the youth cited sale of assets compared to their counterparts in other age groups. Barriers to insurance: While there is a growing usage of informal insurance groups by the adult population, these groups have their own weaknesses. These weaknesses are of governance, institutional development and accountability in nature. On the other hand, there remains multiple barriers to accessing formal insurance. Surprisingly, more than half of the adult population that was not currently using formal insurance products and services at the time of the survey, cited lack of knowledge on how formal insurance work. The other common barriers to formal insurance included high cost cited by 50 percent, others were aware of formal insurance services but did not have knowledge on how it works (17 percent) or even never thought of having one (17 percent). xii

17 II.6 Remittances and Money Transfer services The frequency of reporting receiving remittances and transfers by Ugandans increased from 30 percent in 2009 to 55 percent by The above changes were driven by increase in receiving formal (nonbank) transfers whose rate increased from 11 percent to 41 percent during this period. Majority of money transfers in Uganda were informal by way of cash through relatives or friends. In terms of origin of funds, the frequency of receiving remittances from outside Uganda declined from 16 percent in 2009 to 8 percent by In comparison to the previous FinScope (2009) findings, FinScope (2013) shows that mobile money services were increasingly becoming the most popular formal means of transferring money in Uganda. Regarding uses, about 62 percent of remittances were devoted to home consumption. II.7 Use of Mobile Money Services The survey established that 56 percent of adults were currently using mobile services though only 34 percent were formally registered with the service providers. As such, a significant proportion of the mobile money users accessed the services through a third party account. Utilization of mobile money was higher amongst males than females and higher in urban than in rural areas. The survey results revealed that the majority of Ugandans mainly use mobile money services for cash withdraws (56 percent), followed by cash deposits (27 percent). Usage of mobile money services for other services like payment for utilities, school fees, and purchase of airtime remained low. II.8 Financial Literacy and Consumer Protection The level of financial literacy remained low. This was particularly demonstrated when it came to solving simple financial related arithmetic problems. There is therefore, a need to link the development of financial educational products and services to the currently most important sources of financial information. The sources cited included: through radios and TVs, while a small proportion received information through newspapers and informal sources such as friends and relatives especially in rural areas. In terms of consumer protection, of the adults that indicated to have used financial service providers, they were requested to indicate their degree of satisfaction with the services provided. The findings revealed that 11 percent of the adult population remained unsatisfied with their financial providers across all the population groups; with the urban, the more educated and the richer ones being the most dissatisfied with financial service providers. On complaint handling, majority of the adult population preferred that an independent institution be set up. III. Emerging Issues Overall there has been remarkable improvement in financial inclusion in Uganda since However, this improvement was registered mainly in the non-bank formal sector largely driven by the introduction and growth of mobile money services. With the exclusion of mobile money which is largely used for money transfers and not for financial intermediation, formal financial inclusion in Uganda remains low when compared with other countries like South Africa, Namibia, Swaziland and Kenya where similar FinScope studies have been carried out. Financial inclusion through formal banking by the adult population remained unchanged after the four-year period. Yet, Uganda realised growth in the number of commercial banks and commercial bank branches. Access to and use of formal banking services was skewed heavily towards the adult population in the top 20 percent of the wealth distribution, in the more developed regions xiii

18 and in urban areas; as well as towards persons who were males, with better educational attainment and middle aged contributing further to inequalities across and within these categories. Although a lot has been done to address the supply side constraints of formal financial services among the adult population, much more needs to be done differently to spur demand and access. Below are some of the key policy actions. III.1 Maintaining macroeconomic stability The results of FinScope 2013 suggest that macroeconomic instability has an effect on the utilisation of financial products and services (as illustrated in section 5.1). High inflation adversely affects the demand for credit and the cost of borrowing. It also adversely affects savings as well as investment decisions of firms and households. There is therefore a need to maintain macroeconomic stability at all times in order to accelerate the growth of the financial sector. III.2 Spatial targeting to promote financial inclusion From the results it is clear that access to and use of financial products and services were skewed toward the urban population and better developed regions. Northern Uganda registered the highest level of exclusion partly due to the lingering effects of the civil war. Hence there is need to consolidate government s efforts to prioritize development of road infrastructure and energy in the region. The private sector should also be encouraged and/or supported to increase its broad-based investment activities to compliment government efforts. III.3 Promote broad-based growth While Uganda has been able to meet the millennium development goals (MDGs) of halving income poverty from 56 percent in 1992 to 22 percent in 2013 (preliminary estimates) not every Ugandan has benefited from this growth. The study findings have revealed that development of the financial sector has not benefited all socio-economic groups. There are notable gender gaps; rural/ urban gaps; and gaps across educational attainment. There is need to promote propoor growth policies that will lift the majority of the population from poverty and reduce income inequality. III.4 Promoting broad-based long-term savings and investment to support sustainable growth The study revealed that most of the financial services available were of a short-term nature, and therefore suitable for supporting short-term consumption. There is a major gap in the provision of long-term savings mobilisation to support long-term investment efforts. Policies aimed at eradicating slack capacity in long-term savings mobilisation and investment remain critical and paramount. III.5 Financial education and information dissemination One of the barriers for financial exclusion especially in the strands of savings/ investments, credit, and insurance was due to lack of knowledge about these services. This is exacerbated by the low levels of literacy and numeracy among the Ugandan population. The results showed that lack of financial knowledge and information was one of the barriers to the use of financial products and services. This calls for intervention from both the private sector and government to design programs that will improve financial literacy as well as increase information of the financial products and services. This is especially important for the insurance sector given the increasing vulnerabilities faced by the adult population. There should be a policy on training in entrepreneurship and financial literacy, which should go hand in hand for sustainability purposes. xiv

19 III.6 Technological innovation and utilisation There is no doubt that the use of technology has led to improvement in access to nonbank formal financial services although this segment is dominated by mobile money transfer services. As such, other strands such as insurance should develop appropriate products in line with Uganda s risk profile. The survey has provided evidence which shows that new financial products like mobile money can improve the access and use of financial services in Uganda. However, the use of this mobile phone technology is still limited to only money transfer services. There is therefore need to adopt and extend this technology to the provision of other products and services like savings mobilisation as well as credit extension through mobile money banking, agent banking and micro banking. This will enable the services to reach the population not only in urban areas but also in rural and hard-to-reach areas. hand, the extent of mobilization of savings has remained very low since 2005 and as such rely heavily on government. As such sustainability is unlikely to be achieved for institutions that receive public support. This calls for a well-thought through exit strategy. Specifically, the government has to put in place mechanisms that will strengthen the institutional infrastructure of the SACCOs and other MFIs to increase their mobilization of savings and deposits in order to sustainably extend loans to members. Likewise, the survey results have demonstrated increasing use of ICT in enhancing financial inclusion. This calls for well-coordinated institutional arrangement among the key stakeholders in the financial sector when refining the existing laws and regulations. III.7 Product differentiation and market segmentation From the survey results it is clear that the supply of formal financial services especially insurance is lower than the demand due to lack of access to and the complexity of the services. There is need for financial institutions to creatively introduce products and services and marketing techniques that are better tailored to the needs and development of individuals in view of the population differences in terms of location, age, gender, and economic status. For example, insurance products required for the urban population are quite different from those needed in rural due to differences in risks encountered. III.8 Legal, Institutional and regulatory framework The results also revealed increased access to and usage of SACCOs and other MFIs (Tier 4 institutions). Some of these institutions are dependent on government through the Microfinance Support Centre. On the other xv

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21 1. INTRODUCTION AND BACKGROUND Uganda s Vision 2040 highlights access to finance as one of the barriers among others that are affecting the competitiveness of the economy. Most individuals and firms access credit from informal sources. One of the reasons for the limited access to credit is the low level of domestic savings which affects the ability by institutions to offer long term finance. As such, the Government of Uganda (GoU) intends to increase gross national savings from the current level of 14.5 percent to about 35 percent of GDP by 2040, as a means to accelerate structural transformation (National Planning Authority, 2013). Uganda has made significant progress in improving the welfare of its citizens. During the past 10 years, the incidence of income poverty has declined from 38 percent in 2002/3 to 22 percent in 2013 (preliminary estimate). On the other hand, GDP grew, on average, over 5 percent during the same period while the agricultural sector performed dismally with annual growth rates of less than 3 percent on average, during 2002/3-2012/ An overview of the Uganda s financial sector landscape After independence in 1962 like many developing countries at the time, Uganda pursued financially repressive policies that allowed government to intervene in the financial/ banking system. Government intervention was in form of setting up state owned banks, interest rate controls, partial nationalisation of foreign banks and the establishment of a variety of administered lending programmes (Brownbridge 1996). This era of financial repression led to the deterioration in the performance of Uganda s financial/banking sector. By the early 1990s Uganda s banking system was among the weakest in Sub-Saharan Africa. Its liabilities comprised less than 10 percent of GDP. Domestic credit to the private sector as a percentage of GDP had fallen from about 9 percent in 1967 to about 4 percent in 1992 (World Bank 2013). The number of commercial bank branches had gradually reduced from 290 in 1970 to only 84 by 1987, of which 70 percent of branches were operated by public sector banks Financial sector reforms After decades of financial repression, the government embarked on a programme to liberalise the financial sector with the intention of improving efficiency in resource allocation, lowering the cost of credit, increasing the access to banking services by the general population, and mobilisation of savings, all geared towards financial and economic development (Kasekende & Atingi-Ego 2003). These reforms that started in the late 1980s, were aimed at removing controls and letting the market forces determine the various prices in the banking/financial sector. The reforms included interest rate liberalisation, reduction in direct credit provided by government, prudent regulation (legal and regulatory reforms), privatisation of financial institutions, capital account liberalisation, and foreign exchange liberalisation, among others (Bategeka & Okumu 2010) Current financial landscape Following the reforms, there has been an improvement in the performance of Uganda s financial sector. For instance, financial deepening as proxied by domestic credit provided by banking sector to GDP increased from 4 percent in 1995 to 17 percent in 2010, lending interest rates fell from 39 percent in 1990 to 20 percent in The level of non-performing loans in respect to total loans has fallen from above 10 percent in 2000 to about 4 percent by June 2013 (Bank of Uganda 2013). The number of commercial bank branches per 100,000 adults increased from about 1.1 in 2004 to about 2.5 in Depositors with commercial banks per 1,000 adults increased from 87.1 in 2004 to in These developments point to some level of financial 1

22 development, increased competition and improved efficiency in the financial system in Uganda (Lwanga et al. 2013). Currently there are 24 commercial banks with a total of over 400 branches, MDIs and credit institutions with over 100 branches. There are three credit institutions and four MDIs, which are complementing commercial banks in the provision of financial products and services to the population. In addition, 20 insurance companies are licensed and regulated by the Insurance Regulatory Authority (IRA). The financial structure also comprises of the microfinance institutions (MFI) which include SACCOs of Tier 4 1 by grading, providing financial services to people in peri-urban and rural areas. Since 2009, there has been a tremendous evolution in mobile money services that has changed Uganda s financial landscape to include a large proportion of the population that was formerly excluded from the financial services sector. Despite the noted improvements, financial deepening in Uganda is still very low and the financial system remains underdeveloped in a number of respects. The banking sector is still highly concentrated with 3 out of 24 commercial banks accounting for approximately 50 percent of the total market share i.e. assets, deposits and number of branches (Lwanga et al. 2013). Most commercial bank branches are concentrated in the capital, Kampala, and other urban centres leaving the rural population with no access to commercial bank services. The cost of credit in Uganda is still very high with prime lending rates averaging 15 percent. Interest rate spreads one of the measures of the efficiency of the banking sector and therefore instrumental in the mobilization of investible resources are large about 11 percent between 1992 and 1 In Uganda, financial institutions are graded in tiers based on the minimum capital requirements. Tier 1 are commercial banks with a minimum capital of UShs 25 billion (about US$ 10 million). Tier 2 are credit institutions with a minimum capital of UShs 1 billion (about US$ 400,000). Tier 3 are MDIs with a minimum capital requirement of UShs 500 million (about US$ 200,000). Tier 4 are un-regulated financial institutions not authorized to receive deposits from the public. 2010, on average. As such, the large interest rate spreads discourage potential savers due to low returns on deposits and thus limits financing for potential borrowers (Lwanga et al. 2013) Strengthening financial inclusion in Uganda In view of the above challenges and weaknesses, on the supply side, the GoU has undertaken a number of initiatives geared towards enhancing financial inclusion. The most recent ones include: Establishment of the Microfinance Support Centre Ltd in The Centre is funded by GoU, African Development Bank and Islamic Development Bank to facilitate access to affordable, sustainable and convenient financial and business development services to active and productive Ugandans through SACCOs, Unions, other MFIs and SMEs; Lifting the moratorium on licensing new banks in July As a result of this, eight new banks have since been licensed. 2. The period has also witnessed an accelerated branch expansion either through mergers and acquisitions or through new branch openings. The mergers resulted in less branches or at the most the same number; and Establishment of a credit reference bureau in 2008, to minimise information asymmetry between lenders and borrowers. With the noted developments in the financial sector, it is imperative that an assessment is done to explore the extent to which such developments have translated into improved financial access to the Ugandan adult population. As such, regular nationally representative FinScope surveys have been carried out in 18 African countries including Uganda; to provide a basis for monitoring progress in terms of demand, access to, and use of finan- 2 The specific commercial banks licensed since 2007 are Kenya Commercial Bank, Equity Bank, Fina Bank, Global Trust Bank, United Bank for Africa, Eco bank, Housing Finance Bank, ABC Bank (Kenya). 2

23 cial products and services. This information collected through the surveys provide guidance to the key players (including policy makers, regulators and financial services providers) in the financial sector on the extent of use of different services. More importantly, evidence from such surveys in Uganda can inform the BoU s financial inclusion initiatives as articulated in its Strategic Plan The overall objective of the FinScope III survey was to provide data to be used to measure and to profile the levels of access to and use of financial services by adult Ugandans, rich and poor, whether located in rural or urban areas together with gender considerations. The analysis based on such data allows stakeholders to assess progress in usage patterns across all types of providers in the formal and informal sector, and across the four access strands: credit and borrowing, savings and investments, remittances and transfers, and insurance. Further still, unlike the previous FinScope surveys in Uganda, the current Fin- Scope III survey will act as a baseline to form a panel for the upcoming surveys. More specifically this report, first, explores the extent to which the above developments in the financial sector have translated to improved financial access and use by the Ugandan adult population, i.e. to examine financial access to all forms of financial products and services. Second, it provides evidence that would be used to determine access to and use of financial products and services by the Ugandan adult population on a consolidated basis rather than specific segments. 1.2 Data Sources FinScope III survey builds on the previous nationally representative FinScope I and II conducted in 2006 and 2009 respectively. The three surveys provide cross-sectional data for monitoring financial inclusion in Uganda. However, there is a new development in Fin- Scope III of tracking households that will enable future surveys to monitor progress based on the same individuals over time. These data will provide a richer basis for understanding the dynamics in the financial sector in terms of inclusion. The survey was conducted by REEV Consult International during June-July 2013 with technical support from the Uganda Bureau of Statistics (UBoS), Fin- Mark Trust and the Economic Policy Research Centre (EPRC). Sample design: FinScope III survey was based on a two-stage stratified random sampling design. In the first stage the selection was based on a region and by a stratum (urban/ rural). In each stratum, the primary sample unit (PSU) was the enumeration area (EA) and was selected systematically using the probability proportion to size (PPS) mechanism within each stratum. Prior to the first sampling stage, it was ideal to order the sampling frame of EAs within each stratum geographically in order to provide implicit stratification and obtain a sample that was geographically representative within each region. In order to increase the efficiency of the sample design for the FinScope III survey, the sampling frame was divided into strata which were as homogeneous as possible. The first level of stratification corresponded to the geographic domains of analysis, which are the national, five regions with Kampala as a region of its own - and rural/urban. The second stage of stratification was the EA, which was the ultimate sampling unit. A total of 4,032 households were selected using the 2012 Uganda Population and Housing Census mapping frame. Enumeration areas were allocated into the five regions (rural/urban) alluded above. At EA level, the target was eight households. The households were selected using simple random sampling. Thereafter, one adult person (aged 16 years and above) from a list of all adults in a selected household was selected using KISH grid method. Sample size: In determining the sample size, the degree of precision (reliability) desired for the survey estimates, cost and opera- 3

24 tional limitations, and efficiency of the design were taken into consideration. The actual sampled households with complete information were 3,401, which translates to a completion rate of 84 percent and response rate of 85 percent. The sample for the FinScope III was designed to provide financial indicator estimates for the country as a whole and for urban and rural areas separately; and for the five regions including Kampala. Scope of the survey: Like the previous Fin- Scope I and II surveys, FinScope III gathered detailed demographic information of the adult population (individuals aged 16 years and above), socio-economic characteristics and use and non-use of financial services. Particular information collected included: financial and risk management strategies; financial discipline and knowledge; attitudes and perceptions of, as well as preference for, financial service providers; usage and attitude to mobile money technology; rural and agriculture issues; remittances; and asset accumulation patterns. However, unlike earlier FinScope surveys, FinScope III included a specific section on mobile money as well as additional questions to reflect the new changes in the financial landscape. The details of the sample design are provided in Appendix Methodology Approach The report adopted the financial inclusion framework developed by FinMark Trust, which considers four financial access strands credit and borrowing; remittances and transfer; savings and investments; and insurance. Within each strand, access to and use of the various products and services (formal and informal) was analysed across the adult population segments and spatially. Similar analysis was done based on the self-reported barriers to access and usage of the various products and services. At the aggregate level, all the four strands are combined to generate a single indicator Description of key variables used in the analysis i) Financial access strand: The 2013 financial access strand is constructed in line with the structure and framework of 2009 FinScope II survey as follows: a. Formal banks regulated by the Central Bank Tiers 1-3: This category includes financial institutions that are directly supervised and regulated by BoU. They include: commercial banks, credit institutions and MDIs; b. Non-bank formal other: includes institutions like the SACCOs and other MFIs, insurance companies and the nonbanking financial institutions like foreign exchange bureau, money transfer services like Western Union, and cell phone money services; c. Informal includes money lenders, ROS- CAs, ASCAs, VSLAs, (NGOs), investment clubs, saving clubs, services by employers and other village groups like burial societies and welfare funds. It is important to note that whoever belongs to ROSCAs or Nigiina groups is assumed to be saving informally. Others include shops and investing through property like houses for rent, livestock and crop produce to be sold later or farm inputs to use at a later date. FinScope III also considers borrowing such as credit from a shop, school, health centre and individuals as informal access. However, it is important to note that such kind of borrowing is used as an alternative to borrowing from formal financial institutions and informal institutions or groups; and d. Financially excluded (unserved): these are non-users of either formal banks, non-bank formal or informal institutions. Products and services under financially excluded include saving in secret place, shops or friends/relatives; borrowing from friends or family members; or money transfers using individuals. 4

25 ii) Employment categories: The main employment status is categorised as follows: selfemployed; paid employed (full time, parttime and casuals both in private and public institutions); contributing family workers (unpaid for household work) and not working (including still in school, unemployed, and retired/pensioners). iii) Highest educational attainment: Information was gathered on the respondents highest level of educational attainment. In the analysis, this variable is categorised into five (5): no formal education (never went to school); some primary (completed primary six and below); completed primary education; some secondary (completed senior three and below); and ordinary level education and above (includes all those that completed ordinary secondary level and beyond). iv) Life cycle: The life cycle of the adult population was captured through age in completed years by the time of conducting the survey. Information on age was captured as a continuous variable but as a categorical variable for the analysis. The life cycle is divided into five age groups. This categorisation is done in such a way that the analysis could provide insights into financial inclusion segmentation by youth (16-17; 18-24), middle age (25-39; 40-59) and elderly (60 plus). These distinctions do reveal significant differences in both the adult population demographic roles and extent of financial inclusion. v) Wealth index: The previous poverty studies on Uganda use consumption expenditure as a proxy for measuring the living standards. However, unlike the Uganda National Household Surveys (UNHS), the FinScope surveys do not gather information on consumption expenditure. Instead, the study constructed a wealth index that is similar to that commonly used in the Uganda Demographic and Health Surveys (UDHS) reports. The details of how this indicator was constructed is available upon request. vi) Regional variable: The report uses five regions instead of the usual UBoS statistical administrative regions Central, Northern, Eastern and Western. The analysis treats Kampala as a separate region from the rest of Central region unless stated otherwise. It is worth pointing out that the survey questionnaire included the would-be useful policy categories (e.g employment, income sources, among others), some of these categories were collapsed into broader categories so as to generate statistically useful policy-oriented analysis. This process was guided by the level of the coefficient of variation (CV). The analysis was done at individual level for the adult population aged 16 years and above, unless stated otherwise. The estimates were weighted to reflect the total adult population composition. To shed light on financial inclusion of the adult population, the results in 2013 were compared with those based on FinScope II, where possible. 1.4 Organisation of the Report The subsequent sections present the key findings based on the FinScope III survey data, and where possible comparisons are made with FinScope II of More specifically, Section 2 describes the Ugandan adult population by the most important socioeconomic characteristics and spatially. The section also provides insights into the supply side of the financial sector. Section 3, provides overall insights into the financial access strands and how they relate to key adult population characteristics. In the next sections 4-8, discussion focuses on the different financial strands saving and investment; credit and borrowing; insurance and risk management, and remittances and transfers respectively. Section 9 discusses in-depth findings on access and utilisation of mobile money services prior to the discussion on financial literacy and consumer protection in Section 10. Section 11 concludes with implications and concrete key actions for strengthening financial inclusion for state and non-state actors. 5

26 II RESULTS OF THE SURVEY 2. Background Characteristics of the Adult Population 2.1 Demographics This section presents demographics and socio-economic profile of the target adult population. The results are presented in Table 1. The total adult population is estimated at 16.7 million persons, with nearly 48 percent of the adult population being males. In terms of life cycle, 23 percent were below 25 years and 40 percent of the adult population were aged between years. 2.2 Socio-economic characteristics At the national level, nearly two fifth of the adult population had attained some primary education driven largely by individuals resident in rural areas, and Eastern and Western regions. The adults in urban areas were more likely to have completed secondary education and above compared to their counterparts in rural areas. Nearly 48 percent of Kampala adults had completed secondary education and above, a share well above the national average of 15 percent. Throughout the report, it was not possible to make comparison by educational attainment over time. The variable was not captured in the same way in both previous surveys. Turning to livelihood, the results in Table 1 confirm the importance of agriculture as the main source of employment and income. Nearly 64 percent of the adult population were self-employed. As expected the share of self-employed adults in rural areas was 67 percent, was well above the national average. Residents in Kampala were more likely to be in paid employment relative to their counterparts in other regions. Some 15 percent of the adult population did not work in the past 12 months prior to the survey. In terms of source of income, the results suggest that the majority of the adult population (64 percent) earned less than UShs 500,000 3 in a year. The particular activities engaged in (in order of importance) included: sale of produce from own food crop production; running own business; working on other people s farms; and sale of produce from own cash crop production. Nationally, 19 percent of the adult population fall in the lowest wealth quintile. The corresponding estimate for Northern region was 43 percent followed by Eastern region at 23 percent. In Kampala, 92 percent of the adult population was in the top 20 percent of the wealth distribution compared to about 5 percent in Northern region. The poverty profile based on the wealth quintile by geographic location mirrors similar patterns as those based on the monetary poverty profile (see Ssewanyana & Kasirye, 2012/2013). 3 This income level is equivalent to USD200 at the exchange rate of USD1=Shs2,580. 6

27 Table 1: Adult population characteristics by location in 2013, % Characteristic Place of residence Region Est. pop. Rural Urban Kampala Central Eastern Northern Western All ( 000) Gender: Female ,762 Male ,938 Age in completed years: , , , ,018 Educational attainment: No Formal Education ,103 Some Primary ,755 Completed Primary ,388 Some Secondary ,939 Ordinary Level ,510 Employment status: Self Employed ,618 Paid Employees ,706 Contr. Family Worker Not Working ,442 Wealth Quintile: Lowest ,090 Second ,336 Middle ,539 Fourth ,537 Highest ,198 Income from farming: <500, , ,001-1,000, ,182 1,000,001-5,000, ,000,001-10,000, Not engaged in farming None Income from non-farming: < 500, , ,001-1,000, ,230 1,000,001-5,000, ,322 5,000,001-10,000, Not engaged in non-farm ,884 None ,517 All Information on income is for the past 12 months prior to the FinScope III survey. 7

28 Figure 1: Households most important source of income in 2013, % 2.3 Physical access to financial institutions (supply side) In terms of physical access to financial institutions, Table 2 reveals that access varied by type of institution and location. The adult population resident in urban areas and in particular Kampala had better access to financial institutions relative to their counterparts in other regions. The gap (based on share of the adult population) between rural and urban areas was least with informal institutions 10 percentage points. It is also evident that adults resident in Central and Western regions had better access to commercial banks than Eastern and Northern regions. These findings have implications for financial inclusion as discussed in the subsequent sections. Table 2: Distance to the nearest financial institution by location in 2013, % Location Commercial bank Semi-formal Informal institution <5 km > 5 km <5 km > 5 km <5 km > 5 km Place of residence Rural Urban Region: Kampala Central Eastern Northern Western Uganda

29 3. Financial Inclusion This Section presents the status of Uganda financial inclusion consolidated for all the four access strands as described in Section 1 savings and investment, credit and borrowing, remittance and transfers, and insurance. The Section discusses the overall usage of financial institutions as a first step in understanding the financial access strand. The analysis is done across the socio-economic characteristics of the adult population and spatially. 3.1 Overall financial usage Broadly speaking, the adult population accessed multiple source of diverse financial service institutions. Figure 2 presents the overall usage of financial services by the adult population. The share of the adult population that accessed formal institutions (banked and non-bank formal) increased by almost two fold from 28 percent in 2009 to 54 percent in The growth was driven by the increase in the non-bank formal from 20 percent in 2009 to 52 percent in On the other hand, the increase in the adult population using informal institutions was not as fast as that observed for formal financial institutions. Although not presented in Figure 2, 15 percent of the adult population (representing 2.6 million adults) accessed both formal and informal financial institutions. 3.2 Financial access strand As noted in section 3.1, there are overlaps in the financial products and services usage. In this section, these overlaps are removed. Figure 3 ranks the adult population s financial access strands based on financial tiers by BoU - mutually exclusive use of financial services. Nearly 85 percent of the adult population had access to financial institutions in 2013 compared to 70 percent in The results reveal that in 2013, 20 percent of the adult population (translates into an estimated 3.4 million adults) were using formal regulated financial intermediation service, and nearly 34 percent were using only non-bank formal institutions, and 31 percent (translates into an estimated 5.1 million adults) were using only informal institutions financial products and services. About 2.6 million adults were financially excluded in 2013 contributing about 15 percent of the total adult population. This marks a reduction from 30 percent (4.3 million adults) in Figure 3 further presents a comparison with estimates based on the previous FinScope II survey. Clearly, there are no significant differences between the proportion of the adult population accessing formal bank institutions between 2009 and Yet, in absolute terms, there was an increase of 400,000 adults over a four-year period. This finding Figure 2: Overall usage of financial services, % 9

30 suggests a rather slow improvement in the usage of products and services from formal bank institutions. This raises policy concerns of the slow demand for formal bank financial services given the reforms and developments in the financial sector as articulated in Section 1. There was a significant reduction in informal inclusion from 42 percent in 2009 to 31 percent in 2013 whereas only non-bank formal inclusion increased by 27 percentage points. This could be explained by the movement of a proportion of the population from usage of the informal to non-bank formal products and services especially mobile money services. The rather high incidence of access to informal services by the adult population is partly explained by the emerging rural and community based savings groups such as VSLAs and ASCAs as channels saving and borrowing. Of special interest was the significant increase in non-bank formal inclusion to 34 percent in 2013 from 7 percent in 2009 (Figure 3). This drastic change was driven mainly by provision of mobile money services (see Figure 4). Indepth analysis reveals that 5.1 million adults used mobile money services, accounting for more than 90 percent of the non-bank formal services. The usage of mobile money services was three times that of the other non-bank services. As such the non-bank formal services excluding mobile money accounted for about 3 percent whereas the mobile money services accounted for 31 percent. These findings imply that the contribution of nonbank institutions excluding mobile money services to the provision of financial services remained very low. This finding seem to suggest a faster uptake of mobile money services relative to SACCOs and other forms of MFIs. The share of the urban adult population using mobile money services (38 percent) was well Figure 3: Mutually exclusive use of financial services by institutions, % Source: Author s calculations based on FinScope II and III. 10

31 above the national average, and there were observed rural/urban and gender differences. The financial inclusion through mobile money is attributed to the product innovation of mobile money introduced by the mobile telephone networks in This phenomenon is discussed in detail in Section 9. the demand for financial services depends on the level of development of the local economies. It is anticipated that the current focus by GoU on infrastructure notably roads and energy will partly encourage the financial service providers to move to underserved regions. Figure 4: Financial access strand with mobile money services in 2013, % Next the report explores how the above national estimates relate to financial access strands by socio-economic characteristics. Table 3 shows that the patterns and trends observed at national level were similar to those observed by disaggregated characteristics. Specifically, the Western region had the least proportion of the financially excluded, whereas the adult population resident in Northern region was more likely to be informally included compared to counterparts in other regions. The very low formal financial inclusion in Northern region is partly explained by the high income poverty levels and the low bank concentration as a result of the 20-year civil war experienced in this part of the country. This finding seems to corroborate the low physical access to financial institutions as illustrated in Table 2 in section 2.3. As expected, residents of Kampala had the highest proportion of the adult population using formal banking institutions 49 percent. This is explained by the high concentration of financial institutions in Kampala. At least 28 percent of residents in Western region used formal banking institutions, followed by those in the Central region at 21 percent. Overall, these findings suggest that Compared to FinScope II in 2009, There was a decline in the use of formal banks in eastern region, there was a significant increase in Western region in the share of the adult population with access to formal banking from 18 percent to 28 percent in While adults resident in Northern and Eastern regions registered 10 percentage points reduction in the use of informal services over a four year period, the incidence of usage of informal services remained well above the national average with four in every 10 adults using informal services. Turning to the rural/urban divide, there are marked differences as shown in Figure 4. The results reveal that 2.2 million adults resident in rural areas had access to formal banking institutions whereas 2.2 million adults were financially excluded in The rather high incidence of formal banking in urban areas (36 percent) is partly due to the fact that formal banking institutions target where there is good customer catchment to transact profitable businesses with banks. On the other hand, the adult population in rural areas registered high accessibility to financial services through only informal institutions. The ease 11

32 of access to such informal financial services in terms of cost and flexible terms of payment of the loans advanced, partly explains this finding. There was a marginal decrease in access to formal banking from 39 percent in 2009 to 36 percent in 2013 among the adult population in urban areas. This decrease, although, marginal needs policy attention in line with the reforms and developments in the financial sector. Noteworthy, is the seemingly widening rural/urban gap in the share of the adult population accessing non-bank formal financial services and the high incidence of financial exclusion. On the other hand, there are no noticeable gaps in the level of informal and formal banking. Considering gender, it is clear that access through the formal banking system was more pronounced in males than in females (Figure 4), but the gender gap remained almost the same after a four-year period. The gender gap in formal banking could be indicative of the fact that formal financial institutions terms and conditions favour males over females, although this should not be interpreted as deliberate discrimination. While females were more likely to report use of only informal financial services, their male counterparts were more likely to report use of only formal banking services. Whether the higher likelihood to access and usage of informal financial institutions among the adult females was due to easy access and flexible terms is debatable. More importantly, there is a growing gender gap in use of informal financial services. The financial exclusion by gender declined between 2009 and 2013 as well as the gender gap. Financial inclusion depicts a life cycle dimension (Table 3). In terms of formal banking services, there are noticeable differences between the youth population (18-24 years) with their middle aged (25-39 and those aged years) counterparts. Among the youth population only 15 percent were formally included in the formal banking, well below the national average. The rather high access to non-bank formal services is partly driven by the mobile money services. Both the youth and elderly persons were more likely to be financially excluded at about 19 percent and 23 percent respectively. The levels of exclusion were well above the national average. 12

33 Table 3: Use of financial services (mutually exclusive) by adult population characteristics in 2013, % Characteristics Formal Bank Non-bank formal Informal Excluded Formal Bank Non-bank formal Informal Excluded All Uganda Age group, years: Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Region: Kampala Central Eastern Northern Western

34 With regard to wealth status, Table 3 shows that access to formal bank institutions remained the same for the wealthiest individuals at 46 percent in both 2009 and However, individuals in the top 20 percent quintile were still about five times more likely to access banks compared to those in the lowest quintile. This sustained gap suggests no improvement in financial inclusion for the worst deprived. The level of formal banking inclusion increased with wealth quintile ranging from about 10 percent for the adult population in the lowest quintile to nearly 46 percent in the wealthiest quintile in Worth noting is the finding that shows a shift from informality to formality with improving wealthiest quintile status. Turning to educational attainment level, it is evident that use of formal banking services was positively related to level of education. Whereas the likelihood of exclusion reduces with education level, inclusion increases. Table 3 further reveals that nearly 24 percent of the adult population with no formal education were financially excluded, which was well above the national average of 15 percent. Similarly, between 2009 and 2013, there were no changes in the rates of access to formal banks for paid employees remained about 35 percent. However, for the self-employed, the rate of access to formal banks declined from 21 percent in 2009 to 18 percent in This suggests that this particular group moved away from banks to other nonbank formal and informal service providers. As expected the adult population engaged in paid employment was more likely to use formal banking institutions, whereas the selfemployed were more likely to use informal financial services. The latter could partly be explained by the lesser complexity of these institutions and lower costs of transactions involved. Yet these services might not provide the type of products that are required for their day-to-day business that would have required financing from the formal banking institutions. The difference based on the nonbank formal services was negligible. The not working population and contributing family workers were more likely to be financially excluded. Lack of source of income partly explains this finding. 3.3 Comparison with other African countries How does the current financial inclusion in Uganda compare with that of its counterparts in other African countries? Figure 5 shows a comparison of financial inclusion by access strands (institutions) across selected African countries since Overall, the incidence of financial exclusion is very low in Uganda (at 15 percent) and compares favourably with Kenya s (12 percent) and South Africa s (16 percent). At country-specific levels, the results show that South Africa, Swaziland and Botswana, rank highest in access to formal financial institutions with access above 40 percent. These are followed by Lesotho, Kenya, Ghana and Nigeria in the second category with access rates ranging between percent. In the third category are Zimbabwe, Rwanda, and Uganda with rates ranging between percent. Finally, Zambia and Tanzania are in the fourth category with access rates below 20 percent. Improvement in access to formal bank institutions seems to be partly related to economic status and the level of financial sector liberalization in a given country. For instance, countries with a higher adult population using formal banks have high level of development. Further examination of the financial systems of these countries shows that, they are fully liberalized with heavy presence of foreign based investors. Moving down the category, countries decrease in the levels of economic performance as well as in the efficiency of the banking system due to low economic activities that are important to spur growth. The non-bank and informal institutions seem to be dominating in the third category, while a larger proportion of the adult population in 14

35 the fourth category countries is financially excluded ranging between 55 to 65 percent. Figure 5: Financial inclusion by selected African countries , % Source: Author s calculations based on FinScope III 2013 (for Uganda); the rest is from various FinScope surveys from other African countries. 3.4 Concluding remarks Overall, between FinScope II and III, financial inclusion improved markedly in Uganda and was driven mainly by non-bank formal services and in particular mobile money services. The formal banking services was tilted heavily towards the adults in the wealthiest quintile, more developed regions and urban areas; persons who were males, with better educational attainment and in the middle ages. Financial inclusion to formal banking services remained at 20 percent with variations within different socio-economic groups and spatially. The rather unchanged access in formal banking services since 2009 raises questions around government s recent reforms aimed at improving Ugandans financial inclusion through the formal banking system. Yet, access to only non-bank financial services such as mobile money services revealed noticeable differences both spatially and across socio-economic groupings. That said, mobile money services have to a greater extent addressed connectivity to the geographically hard-to-reach constraints, originally suffered by formal banking institutions. Despite this finding, the share of financially excluded persons declined significantly to 2.6 million adults in 2013 from 4.3 million in This could be explained by a larger number of the unserved population being mobilized in rural areas to join village savings and other voluntary groups to save money for sustenance and small businesses. 15

36 4. FORMAL Products and services PENETRATION This Section seeks to explore the extent of penetration of financial products and services through Uganda s financial institutions including commercial banks, MDIs, SACCOs and other forms of MFIs and how differentiated these products and services are across gender, life cycle, educational attainment, employment status and spatially. Such products and services include: operating a savings account, fixed deposit account, joint account, current account, ATM card/debit card, credit card, investment account (e.g. shares account), personal loan, overdraft, mortgage or Lease, home improvement loan, commercial loan, money transfer services (Western union, money gram), mobile banking, cell phone banking (with a bank account) and online banking. 4.1 Having a bank account with a financial institution One of the critical measurements of financial inclusion in an economy is the proportion of 6 ) reveals a significant reduction in the share of the adults banked with commercial banks and MDIs, and a significant increase in those using SACCOs from 5 percent in 2009 to 21 percent in Indeed, the estimated adult population using SACCOs increased by five fold in a period of four years from 128,000 to 520,,000 adults in 2009 and 2013 respectively. Furthermore, about 60.6 percent of the total users of SACCOs were females and 87 in every 100 adults were in rural areas in This demonstrates that the adult population is starting to understand the importance of micro-finance institutions - Tier 4 (that are not regulated by BoU). Government could leverage on this positive development to address the problem of regulation through the establishment of the proposed Micro Finance Regulatory Authority (MRA). This will build confidence and trust in these institution in terms of providing financial services. Figure 6: Operating an account with financial institutions, % the population that operate an account of any form with a financial institution. Of the adult population, only 20 percent (representing an estimated 3.1 million adults) operated an account with financial institutions in While this marks an increase from 18 percent (an estimated 2.5 million adults) in 2009, the increase was not statistically significant (Table 4). In-depth analysis based on those adults with a bank account in both years (see Figure Within each socio-economic grouping and location, there are marked variations in the population with an account (Table 4). The adults resident in urban areas and in particular Kampala and with well to do households, and who were male, in paid employment and with higher education had a higher likelihood to operate an account. In-depth analysis reveals that the main accounts operated were savings followed by ATM card/debit, which 16

37 were operated by more than 10 percent of the urban population. This could be due to more economic activity that takes place in urban relative to rural areas. It is worth noting that the more educated, the more transactions with the formal financial institutions. Put differently, as the population gets more learned, it is more likely to be employed and better paid thus needing the services of a bank. Regionally, account penetration ranged from 9 percent in Northern region to 42 percent in Kampala. The adults in the wealthiest quintile were almost six times likely to operate an account with a formal banking institution as those in the poorest quintile. Account penetration for adults with ordinary secondary education and above was almost two times that of those with some education and no formal education combined. Table 4: Product and services penetration by adult characteristics in 2013, % Characteristic Operates an account Loan service % ( 000) % ( 000) Uganda , ,395.7 Gender Female , Male , Age group: Below , Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O Level , Employment status: Self Employed , Paid Employees Contr. Family worker Not Working Wealth quintile: Lowest Second Third Fourth Fifth , Place of residence: Rural , ,038.1 Urban , Region: Kampala Central Eastern Northern Western , In terms of overall contribution to total account penetration, the contribution from males (56 percent), adults aged years (48 percent); ordinary secondary education plus (37 percent); richest quintile (42 percent) and Western region (35 percent) were well above their respective shares in the total adult population (see Table 1). On the other hands, the total contribution of the rural areas stood at 67 percent well below its overall population share of about 80 percent. Use of loan products and services remained very low as shown in Table 4. Indeed, the 17

38 adult population that was male, with ordinary secondary education, in paid employment, resident in Kampala and Western region and richest quintile was more likely to use such services compared to their counterparts. 4.2 Nature of transactions conducted at various banking points The nature of transactions done at various banking points are presented in Table 5. There were overlaps in the transactions. It is evident that regardless of the transaction, there is a very clear gender dimension, with males more likely to transact such business compared to their female counterparts given the fact that males were more likely to operate a bank account. Likewise, the level of transactions seems to be higher among the urban residents compared to their rural counterparts. The incidence of making transactions at banking points is positively associated with education level and wealth status. In terms of importance going by the proportion (perhaps deposits are seldomly done while withdrawals are done in bits), the adult population transacts more in withdrawals followed by deposits. This is true regardless of adult characteristics and geographical location. Table 5: Nature of transactions by adults characteristics in 2013, % Characteristic Withdrawals Deposits Bank transfers Other services Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western

39 4.3 Barriers to having a bank account The analysis in the preceding section revealed that the majority of adults were non-banked. As such this section explores the self-reported barriers to bank account use with the aim of providing insights on the potential areas that need further policy refinement. These barriers are discussed in relation to the adult population characteristics and those of their households where they reside. Spatial dimension are also considered. The results are presented in Table 6. Across the socio-economic segmentation, the most common barriers to having a formal bank account in order of popularity - were having no income, costs related to opening an account, having no job and lack of knowledge of opening an account, and distance to the bank, in that order. Distance from bank was cited by only 13 percent of the adult population. However, there are some notable variations in incidence of a given barrier. For instance, the lack of knowledge on how a bank account works reduced with increases in educational attainment and wealth status. Similar patterns are observed for the distance to the bank by wealth status. This finding confirms the bank concentration seems to follow more developed regions and more affluent persons who were more likely to utilise such services. Income related barriers seem to mirror the poverty profile as reported in the various studies on Uganda. There is a clear gender dimension with females (52 percent) more likely to report this as a barrier compared to their male counterparts (43 percent); and urban areas (33 percent) compared to their rural counterparts (51 percent). The only exception in citing this barrier by regional ranking were the adult population resident in Eastern region (62 percent) followed by those in Northern region at 48 percent. These findings have implications for consumer education in Uganda on access to financial services. As emphasised in Section 10, financial institutions need to have a new and innovative approach of outreach whereby banks should reach out to communities and market their services. Financial institutions should reach out and clearly explain the financial products available, the costs of financial services such as: operating bank accounts of various types; costs of services such as ATM services; cost of borrowing i.e. interest rates and why such interest rates fluctuate over time. Because of limited official consumer education, clients depend on either informal sources or just on perceptions as discussed later in Section10. These shortcomings altogether greatly constrain efforts to attract new clients to the various financial institutions. 19

40 Table 6: Reasons for not having a formal bank account in 2013, % Characteristic Do not trust financial institutions Use mobile money Costs of operating an account Not Educated Do not have income Do not have a Job Do not Qualify Do not understand how it works Distance from the bank Others Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth Quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Regions: Kampala Central Eastern Northern Western

41 4.4 Concluding remarks In terms of formal bank products and services, two in every ten adults have an account of some form with financial institutions dominated by commercial banks. Use of SACCOs seems to be growing. This could be linked to the improvement in the outreach services by the microfinance programmes. On the other hand, there are barriers that have kept the adult population away from having a bank account. The most cited barriers include: low income-related; supply side constraints in terms of physical access and costs of operating an account; and finally, lack of knowledge which is discussed in detail in Section 10. The lack of knowledge points to general lack of consumer education, which could be leading to misconceptions about the costs and procedures of operating a bank account. These results suggest that banks are not investing adequately in consumer education thereby leaving most of the population unaware of their financial products and services. The subsequent sections provide a detailed analysis of each of the four financial access strand. 21

42 5. SAVINGS AND INVESTMENTS In this Section the demand for access and use of saving and investment products (both formal and informal) is discussed. The analysis focuses on how the different segments of the adult population saves and invests by comparing the utilization of the different products and services. The barriers to access and use of various formal saving and investment products are also discussed. 5.1 Savings and investments strand Figure 7 reveals that 68 percent (representing 11.4 million adults) of the adult population had savings (both formally and informally) in This indicates an increase from 54 percent recorded during the 2009 FinScope II Survey and 42 percent recorded in 2006 FinScope I Survey. By implication, the share of the adult population that does not save at all declined over time with unserved population being about 1 million adults, in absolute terms. Notwithstanding this finding, the share of the adult population that saves exclusively at home/secret place was high (25 percent 4.2 million adults) driven largely by the adult population resident in Central region. The adult population was five times more likely to save only with informal institutions than with formal institutions. As expected the incidence of saving with formal institutions seems to mirror the spatial level of development and extent of bank concentration. Kampala leads (30 percent) followed by the Central region at 11 percent and Western region at 10 percent. Figure 7: Savings and investments strand, % 22

43 Compared with FinScope 2009, there is no significant change in the proportion of the adult population saving through formal (formal bank & non-bank formal) channels. The decreased use of formal saving products (from 21 percent in 2009 to 19 percent in 2013 respectively) and increase in use of nonbank formal products (6 percent in 2013 from 4 percent in 2009) was marginal. This stagnation in use of formal products and services coincides with a reduction in growth of private saving and time deposits in the financial sector following the macroeconomic instabilities that started in Private savings in the country, for example, dropped from UShs 3,330 billion in August 2011 to UShs 3,320 billion by January 2013 (Figure 8). Therefore, ensuring macroeconomic stability is necessary for promoting savings/investment. On the other hand, saving through only informal channels increased by 15 percentage points from 28 percent in 2009 to 43 percent in Figure 8: Private time and savings deposits (ushs billion) Source: Bank of Uganda, 2013 The picture by socio-economic group does not seem to change with informal channels dominating formal ones (Table 7). Adult males were 1.4 times more likely to save with formal institutions compared to their female counterparts (Figure 7); and informal savings are higher among females. The results further reveal that the likelihood to save with formal channels increased with wealth status and education levels. This also applies for non-bank formal. There were no systematic patterns observed by employment status and wealth status as regards the use of informal channels. It is evident that the highly educated adults, resident in households in the richest quintile and in paid employment were least likely to utilise non-bank formal services. Access to knowledge and information on formal products partly explains this finding. 23

44 Table 7: Savings and investments strand by adult characteristics in 2013, % Characteristic Formal Bank Formal Other Informal Home/Secret Place Excluded Formal Bank Formal Other Informal Home/Secret Place Excluded All Uganda Age in years: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level and more Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Region: Kampala Central Eastern Northern Western

45 5.2 Knowledge of savings and practice The survey sought the adult population s perceptions of it understanding of the definition of saving and how they save. Figure 9 illustrates the understanding of saving by the adult population in Putting money in a special place/account for the money to be safe dominated (41 percent) followed by such money being put in an activity/where to earn profits/returns (35 percent). Similar patterns were observed across gender and rural/ urban. Most important, the understanding was not characterised be gender or rural/urban gaps. and investment. Analysis of saving decisions across different segments of the population reveals that females mainly saved by putting money in a special place or account for the money to be safe compared to male counterparts who largely put money in an activity that can yield profits. The adults with no formal education (45 percent) mainly saved by putting money in a special place or account for the money to be safe while their educated counterparts with some secondary education (51 percent) mainly saved by investing money in an activity or somewhere so that it can yield profits or returns. Similar observations Figure 9: Perception on the single most definition of saving in 2013, % The respondents were further asked to select the options that fit well with what they were doing in terms of saving. The results are presented in Table 8. The most cited mechanism was putting money in a special place or account for the money to be safe (48 percent representing 8.1 million adults) followed by investing it in an activity or somewhere so that it can yield profits or returns (42 percent representing about 7 million adults). were noted for rural and urban adult populations. The differences observed in the mode of saving across the different population segments, relate with levels of vulnerability i.e. the most vulnerable save mainly for safe keeping of money than for profit. This trend is also observed across the income groups and location. This implies that Ugandans saving decisions are mainly motivated by profit and by ensuring the safety of their money which emphasizes the close relationship between saving 25

46 Table 8: Preference for savings and practice by adult characteristics in 2013, % Characteristic Putting money in a special place or account for the money to be safe Putting money aside to stop it being spent immediately Planning spending so that money lasts through the week or month Putting money in an activity or somewhere so that it can yield profits or returns Est. pop ( 000) Uganda ,153.8 Gender: Female ,389.6 Male ,764.2 Age group: Below , , , ,890.9 Educational attainment: No Formal Education ,942.9 Some Primary ,532.7 Completed Primary ,336.7 Some Secondary ,878.4 O-Level ,457.9 Employment status: Self Employed ,349.0 Paid Employees ,623.5 Contr. Family Worker Not Working ,275.7 Wealth quintile: Lowest ,002.2 Second ,187.3 Middle ,420,5 Fourth ,452.4 Highest ,091.4 Place of residence: Rural ,050.1 Urban ,103.7 Region: Kampala Central ,984.2 Eastern ,945.2 Northern ,416.2 Western ,956.9 Notes: Analysis based on a sample of 3,270 adults 26

47 5.3 Savings Mechanisms This section looks at the mechanisms used to save by the adult population. The results in Table 9 show that the majority of adults that save do so mainly using informal means. The most reported mechanisms were home (51 percent), followed by VSLAs/ROSCAs at 29 percent and buying of animals/other assets at 18 percent. The patterns are similar regardless of adult characteristics. Nonetheless, it is evident that adults that were males, better educated and residing in better off households and more developed regions were more likely to save in commercial banks relative to their counterparts. Those in paid employment were more likely to save with formal institutions relative to their counterparts in self-employment. This could be partly explained by the fact that it is a requirement from the employers to have a bank account through which the salaries are paid. Clearly, saving with formal banking institutions remains low at about 9 percent, nationally. Savings through formal banks and mobile money services increases with educational attainment level and with wealth status. Those using SACCOs/other forms of MFIs were almost four times more than those using ROSCAs/VSLAs; and the latter were more prevalent in rural areas than in urban areas. Notably, there is a wider gender gap in the use of ROSCAs/VSLAs (7 percentage points) compared to use of SACCOs and other MFIs (of 2 percentage points). Saving in a secret place was a common practise among the adult population. The practise reduces with increasing education levels and with wealth status. The finding on education could partly reflect the level of awareness and knowledge. The rather high incidence of saving in a secret place is greatly explained by the low financial literacy and limited access to formal financial institutions as elaborated in section 10. The alternative explanation could be low earning capacities of the majority of the adult population as presented in Table 1. The results in Table 9 further reveal that use of mobile money services as a channel of saving remains limited at 3 percent. Indeed, the practice increases with educational attainment, and is more prevalent in urban areas especially Kampala. While 68 percent of the adult population indicated some form of saving/investing (formal/informal), much of the savings are earmarked for consumption as presented in Table 10. The most cited reasons for saving included basic needs (67 percent) followed by emergencies (41 percent), education (33 percent) and livestock/poultry (22 percent). These patterns do not seem to vary across adult characteristics and the ranking are similar to those reported in 2009 (see FinScope II, 2009). The incidence of saving is similar between female and male population. Broadly, incidence of saving for emergencies reduced from 58 percent in 2009 to 41 percent in There are no changes across gender and education between FinScope II and III. The respondents were further requested to indicate what they were doing in terms of retirement/old age planning. The results are presented in Figure 10 (a & b) and responses are not mutually exclusive. Nearly 43 percent of the adult population (representing 6.7 million adults) indicated that they are doing nothing about their retirement age. On the other hand, those that reported to be doing something, the majority cited educating their children (23 percent), investment in livestock (19 percent) and financial investment and/ or saving (15 percent), in that order of frequency. The very low percentages in terms of contribution to National Social Security Fund (NSSF) or non-contributory pension funds is due to that fact that the latter targets employees in paid private sector employment and the latter government employees who remain a small proportion of the adult population. 27

48 Table 9: Savings mechanisms by adult characteristics in 2013, % Bank & MDIs Animal & other assets MFI & SACCOS ROSCA & VSLA Mobile Home Est. pop ( 000) Uganda ,398.5 Gender: Female ,003.7 Male ,394.8 Age group: Below , , , ,711.1 Educational attainment: No Formal Education ,744.8 Some Primary ,207.2 Completed Primary ,275,3 Some Secondary ,771.5 O-Level ,394,5 Employment status: Self Employed ,922.1 Paid Employees ,524.1 Contr. Family Worker Not Working ,066.0 Wealth quintile: Lowest ,882.7 Second ,053.4 Middle ,231.7 Fourth ,284,7 Highest ,946.3 Place of residence: Rural ,427.4 Urban ,971.1 Region: Kampala Central ,802.9 Eastern ,730.2 Northern ,336.8 Western ,

49 Table 10: Reasons for currently saving/investing by adult characteristics in 2013, % Characteristic Basic needs Emergency Land Livestock/poultry Agric. Input Business Education Safety Others Pop ( 000) Uganda ,632.7 Gender: Female ,141.3 Male ,491.5 Age group: Below , , , ,795.9 Educational attainment: No Formal Education ,848.5 Some Primary ,282.7 Completed Primary ,289.4 Some Secondary ,789.2 O-Level ,417.7 Employment status: Self Employed ,116.4 Paid Employees ,504.3 Contr. Family Worker Not Working ,127.7 Wealth quintile: Lowest ,953.5 Second ,065.7 Middle ,256.6 Fourth ,354.3 Highest ,002.7 Place of residence: Rural ,622.8 Urban ,009.9 Region: Kampala Central ,870.4 Eastern ,873.4 Northern ,335.4 Western ,

50 Figure 10: Means of planning for retirement/old age (mutually inclusive) in 2013, % 5.4 Investment Activities/Products There are multiple options through which people can make investments. Broadly speaking, one in every 10 adults invested through formal financial institutions (Table 11). This finding could be explained by the low financial penetration as discussed in Section 3. The level of perceived risk partly determines whether one goes for formal or informal institutions for investment. The Survey results show that the majority of Ugandans invest in agriculture and agricultural related activities (Table 11) activities which are prone to risks as highlighted in section 6. Of all the respondents that were involved in investing, they cited investment in farm land (53 percent), 41 percent in livestock, 39 percent invested through an informal group and 24 percent invested in an existing business. Investment through formal products and services increases with educational attainment and wealth status. The richest were more than 10 times likely to invest in formal products compared to their poorest counterparts. There is also a noticeable gender and rural/ urban gap. In addition, it is worth noting the very low incidence of formal investment in Eastern and Northern regions. On the other hand, while there were significant differences regarding formal investment mechanisms, there were limited differences with regard to informal investment mechanisms. The survey reveals that investment options varied across gender, educational attainment, living standards and spatially. Overall, adult males were more likely to invest formally (especially in financial institutions) compared to their female counterparts. The plausible explanation of the observed gender gap is that, males were more likely to access information on investment options compared to their female counterparts. It is also true that females were more risk averse, exacerbated by low literacy levels. The likelihood to invest in agriculture was more prevalent among those adults with no education compared to their more educated counterparts. Furthermore, the likelihood to invest in livestock and formal financial institutions increased with education and wealth status. Looking at wealth status, the poorer adults were more concentrated in agriculture compared to the richer counterparts. This suggests that the vulnerable group by comparison have less choice in terms of investment activity due to their lower levels of education and limited resources. 30

51 Table 11: Investment mechanisms in 2013, % Formal Informal Institution Mechanisms Investment account in a financial institution Investing through informal institutions House/room/ property Farm land Livestock Produce to sell later Buying farm inputs Investing in personal business Uganda Gender: Female Male Age group: Below Educational attainment: Others No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western Est. pop. ( 000) 31

52 5.5 Barriers to saving/investing Nearly 5 million adults had never saved or invested before and the reasons for not doing so are presented in Table 12. The majority of the adult population cited lack of adequate information on saving (47 percent) and lack of adequate money to invest (44 percent). While the richer had access to information this did not translate into higher investments/ savings due to low earnings (59 percent). By implication, financial literacy is necessary but not sufficient to spur investment/saving. The adult population in paid employment (males) lacked adequate money to invest whereas those in self-employment (female) lacked adequate information. The gender dimension seems to suggest that there is need to address the information gap across gender in an effort to increase formal financial inclusion. Table 12: Reasons for never saving or investing by adult characteristics in 2013, % Characteristic Lost Money In Investment Before Do Not Have Adequate Info On Savings Do Not Have Money To Invest Others Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western All 32

53 5.6 Concluding remarks The demand for, and use of formal saving and investment products and services is low. However, the majority of the population that saved and invested used informal means. Vulnerable groups i.e. females, the less educated, the unemployed and the poor were more likely to be formally excluded compared to their less vulnerable counterparts. The survey results also revealed that formal products were mostly used by the urban population than their rural counterparts. There were significant gender, education and spatial gaps that need to be addressed, if one is to increase formal mechanisms of investment. While the incidence of female nonformal (combined) savings was high, much of the savings were earmarked for consumption. Finally, the cited barriers seem to point to the low financial literacy levels and low incomes. 33

54 6. CREDIT AND BORROWING This Section looks at demand for, and access to credit both in monetary terms and also in kind. It assesses the trends in access to credit during the past 12 months prior to the Fin- Scope III survey in terms of total credit and forms of credit. The study also investigated access to credit over time disaggregated on the basis of socio-economic characteristics such as gender, region, and employment status. The Section also looks at other key credit issues including sources, use and affordability of credit. There is a sub-section devoted to agricultural credit mainly on account of the structure of the Uganda economy, which is about 70 percent agrarian. The barriers to credit and emerging issues around increasing credit access are also discussed. 6.1 Overall credit usage Figure 11 illustrates the overall credit usage among the adult population there are overlaps in usage. It is evident that the proportion of the adults that used credit declined from 44 percent in 2009 to 35 percent in As such, in absolute terms, there was a marginal decrease from 6.3 million to 5.9 million adults respectively. While the use of formal institutions (formal bank and non-bank formal) increased from 5 percent in 2009 to 12 percent in 2013, there was a marked decline in informal institutions from 34 percent to 23 percent respectively. 6.2 Credit and borrowing strand Figure 12 reveals that there has not been a significant change in the proportion of adults accessing credit only through formal bank institutions after a four-year period. The share of the adult population accessing credit through only non-bank formal institutions but not formal bank institutions increased by 5 percentage points from 2 in 2009 to 7 percent in A reduction in the national average for exclusively informal institutions declined from 32 percent in 2009 to 18 percent in Formal bank sources of credit are almost exclusively commercial banks. When broken down by gender, a higher proportion of males (5 percent) access credit from formal banks compared to 4 percent for females. Access to formal banks increased faster among adults in urban areas compared to their counterparts in rural areas more notable the rural/urban gap seem to have increased since The level of education also matters for access to credit from formal bank institutions; the higher the educational attainment, the greater the prospects for obtaining credit from formal bank institutions. Regardless of socio-economic grouping, exclusion seems to have increased between 2009 and 2013 with a widening gender gap. The level of exclusion noted for the credit and borrowing strand is well above that of the saving/investment strand. Figure 11: Overall credit usage, % 34

55 Figure 12: Credit and borrowing strand by gender and location, % Table 13 shows access to credit by other socio-economic characteristics in 2009 and Employment status is a determinant of access to credit from formal bank institutions. Paid employees were more likely to obtain credit from formal bank institutions (8 percent) compared to their counterparts in other employment status. This finding could be explained by the fact that the individuals in paid employment have a regular salary and in most cases are more likely to be guaranteed by their employers. That said, there was a marked decline in the share of adult population accessing credit through formal institutions from 10 percent in 2009 to 8 percent in The level of education also matters for access to credit from formal bank institutions; the higher the educational attainment, the greater the prospects for obtaining credit from formal bank institutions. The adult population with O-level and above was six times more likely to receive credit compared to its counterparts with no formal education in Access to credit through formal institutions improved marginally for the two top most wealth quintiles. Spatially, there was a marked decline in the share of the adult population resident in Eastern region and a significant increase for their counterparts in Western region. 35

56 Table 13: Credit and borrowing strand by socio-economic characteristics, % Characteristics Formal Bank Formal Other Informal Family /Friends Excluded Formal Bank Formal Other Informal Family/ Friends Excluded All Uganda Age in years: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O Level Employment status: Self Employed Paid Employees Contr. Family worker Not Working Wealth quintile: Lowest Second Third Fourth Fifth Region: Kampala Central Eastern Northern Western

57 Turning to non-bank formal credit some observations do emerge. There are notable increases in the proportion of adults accessing credit through these institutions compared to the trends observed for formal financial institutions. The gender gap and gap between the paid and self-employed narrowed whereas the gap between the poorest and richest increased over the four-year period. Furthermore, the rural/urban gap is widening with the rural adult population more likely to access credit through non-bank formal institutions compared to their counterparts in urban areas. This phenomenon is partly explained by the spread of SACCOS in rural areas (see Figure 6). The Western region also leads in terms of access to credit from nonbank formal financial institutions with 14 percent of the adult population accessing credit compared to only 3 percent for Northern region. Central region follows with 5 percent. Like other sources of credit, the proportion of adults accessing credit from informal sources though higher compared to other sources still remains small and does not exceed 30 percent for any of the categories of borrowers. However, there are no gender gaps in the reported use of informal sources of credit. There is an inverse relationship between educational achievement and access to credit from informal sources in Adults with some primary education had the highest proportion of the adult population obtaining credit from informal sources (22 percent). The adults with O-level and above qualification had the lowest proportion of borrowing from informal sources (12 percent). A bigger proportion of adults residing in rural areas borrow from informal sources (21 percent) compared to their counterparts in urban areas (18 percent). The proximity to formal and non-bank formal institutions presents great opportunities for residents in urban areas and Kampala in particular. It is therefore not surprising to note the low incidence in accessing and using informal institutions. 6.3 Types of credit Table 14 presents the type of credit accessed by borrowers. Forms of credit include the following: i) money only; ii) goods only; and iii) goods and money. The table also gives the proportion of adults not accessing credit (no goods nor money). Overall, 45 percent of the adults have no access to credit in form of money or goods. The proportion of the adult population that accessed credit in form of money only was the lowest (14 percent) compared to other categories. As much as 17 percent of the adult population accessed credit in kind (goods only) while 24 percent accessed credit in form of goods and money. In 2013, there were no discernible gender differences with regards to accessing credit in form of goods and money; the proportion of males (25 percent) accessing credit in this form was not very different from that for females (23 percent). The same is true with regards to different age brackets, although the years age bracket had higher access at 29 percent followed by the years age bracket (28 percent). Senior citizens (60 years and above) had the least access at 13 percent. Turning to educational attainment, the category of adults with O-level and above had the highest proportion who borrow in a combination of goods and money (31 percent) compared to (20-24 percent) for each of the remaining education categories. With regard to employment status, a bigger proportion of adults in paid employment category borrowed in a form of goods and money (34 percent) compared to only 13 percent for the unemployed, and 24 percent for the self-employed. Turning to wealth status, there were hardly any observable differences in the proportion of borrowers for the different income quintiles ranging from 19 percent and 27 percent (see Table 14). 37

58 Table 14: Forms of borrowing during the past 12 months in 2013, % Characteristic Goods & Money Money Only Goods Only No goods/ No All money Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western The proportion of adults borrowing in form of money and goods is slightly higher for rural areas (24 percent) compared to urban areas (22 percent). Western region had the highest proportion of its adults accessing credit in form of a combination of money and goods (37 percent). Credit in form of money only follows a similar pattern like that of a combination of money and goods. In terms of gender the proportions were equal (about 14 percent). The proportions were generally not significantly different for the other categories of borrowers i.e. age, education achievement, employment status, wealth status, residence, and region. Borrowing in form of goods only, accounted for 17 percent nationally, and was slightly more prevalent among females (18 percent) compared to males (16 percent). However, there was no significant difference in terms of proportions based on other population characteristics (see Table 14 for details). 38

59 6.4 Uses of credit For 6.6 million adults who reported having received credit, the FinScope III survey inquired about the main uses of the funds received. Specifically, respondents were requested to indicate what drives them to borrow or the intended use of the credit. Several multiple reasons were advanced as presented in Table 15. Table 15: Main reasons for utilizing credit services in 2013, % Characteristic Agricultural Daily expenses Emergency Assets Education Business Others Est. pop production 000 Uganda ,619.9 Gender: Female ,318.8 Male ,301.1 Age group: Below , , Educational attainment: No Formal Education ,127.8 Some Primary ,799.5 Completed Primary Some Secondary O-Level Employment status: Self Employed ,550.4 Paid Employees ,187.4 Contr. Family Worker Not Working Wealth quintile: Lowest ,084.3 Second ,421.8 Middle ,570.1 Fourth ,439.6 Highest ,104.1 Place of residence: Rural ,445.2 Urban ,174.7 Region: Kampala Central ,290.2 Eastern ,521.0 Northern ,327.9 Western ,281.2 Overall, the most cited reason for borrowing was financing education for children followed by emergences such as illness. In third position was the need to meet daily expenses. Borrowing to finance business came in fourth place. Thus the main reasons given for borrowing by majority of the adult population were for investment, 50 percent (being for education, business, agricultural production and asset acquisition) compared to consumption 34 percent (being for daily expenses, emergencies and others). Indeed, as much as spending on education of children is a long time investment, it could be treated as consumption expenditure because it hardly benefits the person making the expenditure. Thus, the top three reasons given for borrowing by majority of the people are for consumption purposes. There is extensive literature on agricultural financing in developing countries and Uganda in particular (see, for example, Munyambonera et al 2013). Few formal financial institu- 39

60 tions are willing to extend credit to the agricultural sector regarded as a risky sector. Against this, the report explores the extent to which the adult population was borrowing for agricultural production purposes. The results in Table 15 reveal that only 10 percent of the borrowers borrowed for agriculture production. Yet, majority of Uganda s population (an estimated 70 percent) derive their livelihoods from agriculture. Regarding credit to agriculture production on the basis of gender, the proportion of females borrowing for agriculture production (8 percent) was lower compared to that of males (12 percent). Table 15 further reveals a marked life cycle dimension, with the youth (18-24 years) more likely to borrow for agricultural purposes compared to their counterparts in the middle ages (25-39 years) at 9 percent. No significant differences are noted across employment status. A higher proportion (15 percent) of the adults with O-level qualifications and above borrowed for agriculture production compared to their counterparts with other levels of education. This scenario suggests that education is important for investment in agriculture probably education increases one s ability to evaluate and manage the risks involved in the agricultural sector. Regarding wealth status, the results suggests that in terms of lending for agriculture production, policy makers should target middle income quintiles. The place of residence too matters when it comes to borrowing for agriculture production. The adults residing in Northern region were more likely to borrow for agricultural production compared to their counterparts in other regions. As expected, the rural adult population is more likely to borrow for agricultural purposes relative to their urban counterparts. The credit pattern, which does not give priority to agriculture production does not auger well for Uganda s economic development prospects. Figure 13: Main reasons for accessing agricultural credit in 2013, % The biggest proportion of the adult population borrowing to finance agriculture production does so for purchase of inputs (54 percent), followed by hiring farm labour (29 percent) - Figure 13. Other uses of agriculture credit include purchase of livestock (15 percent); purchase of agricultural land (8 percent); and purchase of farm equipment (6 percent). Turning to borrowing to finance start-up/expansion of an existing business, 13 percent of the adult population borrow for this purpose with variations across socio-economic characteristics. The likelihood for this purpose increases with the level of education and wealth status. This is also true for the level of local economic development in urban and particular Kampala, the prevalence of borrowing is relatively higher. As expected, individuals in self-employment are more likely to borrow for business compared to their counterparts in paid employment. A slightly higher proportion of males (14 percent) borrow to finance their businesses compared to 12 percent for females. Compared to senior citizens, the middle aged (25-39 years) are more likely to borrow for business and less likely to borrow for agricultural production. Similar patterns are observed for the youth. Borrowing to finance daily expenses for consumption purposes featured high among the uses of credit with 14 percent of borrowers stating it as one of the reasons for borrowing. However, there were variations among different categories of borrowers. The likeli- 40

61 hood reduces with education, age and wealth status. Females were more likely to borrow (16 percent) for consumption relative to their male counterparts (12 percent). Similarly, being a rural resident increased the likelihood to borrow for basic needs. These findings suggest that the more vulnerable ones were more likely to borrow to meet basic needs. 6.5 Perceptions on credit and borrowing Whether from formal or informal sources, credit is given to people on different terms and conditions. Formal financial institutions terms of credit include: interest rates, repayment terms, grace period, processing fees, legal procedures, and other conditions. These terms and conditions, which partly constitute loan costs, are normally dictated by the lender; and the borrower will either accept or reject them. Small-value borrowers do not have market power to reduce borrowing costs compared to large corporate borrowers who have the necessary market power to do so. If Uganda is to reduce the cost of borrowing a special policy aimed at growing the population and size of the corporate sector remains paramount. In most cases, because the borrowers are in urgent need of the money or goods and services, they do not take time to study and understand the terms and conditions. The analysis in this sub-section is based on 3.7 million adults that received a loan/ credit in the most recent past. The respondents were requested to provide their perception on whether it was easier to borrow from various financial institutions now (2013) compared to The results are presented in Figure 15 and there are variations. It is worth noting that the don t know category was sizeable. However, the discussion here focuses on those who responded with Yes or No, it is evident that a greater percentage of the adult population cited improvements in VSLAs (53 percent) followed by SACCOs (27 percent), ROSCAs (21 percent), in that order. The likelihood to cite non-improvement was more prevalent for formal bank institutions relative to the nonbank formal. Figure 14: Perceptions on whether access to financial institutions improved since 2009, retrospectively % 41

62 The respondents were asked to indicate on a five-tier Likert scale the affordability of the most recent loan (Figure 15). The majority of the adult population borrowers (52 percent) indicated that the loan was affordable against 5 percent that indicated that it was very expensive. Figure 15: Borrowers perception on the affordability of their recent loan in 2013, % residence. A larger proportion of borrowers (73 percent) took up small loans that did not exceed UShs 500,000. Loans that ranged between UShs 500,000 and UShs 1,000,000 were 14 percent of total loans, while those in excess of one million were only 13 percent (Figure 17). Figure 17: Loan size by gender and location in 2013, UShs ( 000), % Furthermore, the study investigated the level of understanding of the terms and conditions of obtaining credit among the borrowers. The results are presented in Figure 16. It is surprising to note that 16 percent did not read the terms (Figure 16 a). Yet, nearly all the adult borrowers indicated that they understood the terms and conditions before taking on a given loan (Figure 16 b). Figure 16: Understanding of the terms and conditions of loan/credit in 2013, % 6.6 Loan size and collateral requirements Figure 17 shows loan sizes starting with the broad national picture and then analysed separately for various categories of borrowers characteristics including gender and When disaggregated by rural/urban distribution, borrowers in urban areas were more than two times likely to access loans of more than UShs 1 million and above compared to their counterparts in rural areas. This partly reflects the level of high income and business in these areas. On the other hand, male borrowers were almost three times more likely to borrow a loan of UShs 1million and above (18 percent), compared to their female counterparts (8 percent). Put differently, being female and resident in rural areas was associated with smaller loans. The small size of loans implies that most people are microfinance clients. This also provides an explanation as to why most people prefer SACCOs and informal sources of credit compared to commercial banks. The basis for determining the size of loan from formal bank institutions includes size of business cash flows, assets that provide collateral for the credit, as well as the financial needs of the project to be financed, for which majority of borrowers may not have. As a consequence the informal and semi-formal financial institutions are claiming a bigger market share of the credit services market. 42

63 About 47 percent of the borrowers reported that a collateral security was required in order to obtain a loan/credit. The borrowers, further, provided information on the form of security by financial institution when the most recent loan/credit was obtained. The results are presented in Table 16. Land title dominates the list with the exception of the ROSCAs/VSLAs and employer. tion of the adults feared debts (31 percent) this suggests a certain degree of risk averseness among the Ugandan population. The high cost of loans was the second most frequently cited reason for not accessing credit (14 percent) followed by lack of security (further discussed below). In addition to these three main reasons, there were other reasons for not taking up loans and they included: nowhere to get a loan (5 percent); lack of Table 16: Form of collateral security required by institution in 2013, % Institutions Land title Household assets Livestock Car/motorcycle with logbook Machinery, tools Shares Insurance policy Others Est. pop ( 000) Commercial banks MDI Other MFIs SACCO ROSCAs/VSLAs , Money lender Employer Barriers to credit For persons who have never accessed credit (from any source), the survey inquired the reasons for never having taken a loan. Table 17 profiles the reasons based on gender and spatial location. Overall the largest propor- knowledge (8 percent); never needed a loan (9 percent); no financial institutions nearby (4 percent); I do not think I am credit worthy (9 percent); and I do not think I need to borrow (6 percent). Table 17: Reasons for not taking loans by gender and location in 2013, % Gender Place of residence Reason Female Male Rural Urban All Have nowhere to get loan Have no knowledge Fear debts Have never needed a loan Loan are too expensive There are no financial institution nearby I do not think I am credit worthy Lack security to offer I do not think I need to borrow Others

64 On the basis of gender, a higher proportion of females (34 percent) feared debts compared to males (27 percent). However, fear of loans was equally cited by both urban and rural dwellers (about 32 percent). Regarding the high cost of loans, it was considered a constraint for both male and female borrowers (14 percent). As can be seen from Table 17, lack of security to offer to secure a loan featured as the third most frequently stated reason for not borrowing. Surprisingly, a slightly larger proportion of males (13.5 percent) did not access credit because of lack of security compared to females (12.6 percent). This could be because of the sources of credit for each of the genders; with females borrowing more from informal sources where collateral is not always a requirement. It is similarly surprising that a bigger proportion of urban dwellers (15.4 percent) lacked security to access credit compared to 12.5 percent for rural dwellers. This could be because of collateral requirements were more pronounced in urban areas where sources of credit are largely formal. Rural people tend to borrow more from informal sources and collateral is not always a requirement. 6.8 Concluding remarks The proportion of the population accessing credit from formal bank institutions increased marginally from 5 percent in 2009 to 6 percent in On the other hand, the proportion of the population accessing credit from informal sources fell from 32 percent in 2009 to 18 percent in The increasing number of SACCOs explains the increase in access to credit from non-bank formal sources from 2 percent in 2009 to 7 percent in However, the proportion of the population excluded from the credit market increased from 55 percent in 2009 to 65 percent in of the adults in the lower wealth quintile, females, rural dwellers, and the relatively less educated. Of those that access credit from informal sources, majority of them borrow little money hardly exceeding Ushs 500,000, for which borrowing collateral is often not a requirement. The credit accessed by majority of borrowers was mainly for consumptions purposes (such as emergencies, and meeting daily expenses) and for financing education of their children, which activities hardly translate into higher economic growth in the short run. Credit to agricultural production was accessed by only 10 percent of the population, with 54 percent of credit to agriculture going to the purchase of inputs and 29 percent going to hiring of labour. Broadly, the credit system is weakly supportive of investment and economic growth. This is because liquidity available is of shortterm nature and there is lack of sufficient long-term liquidity suitable for the long-end of the market spectrum. The system favours urban dwellers and the relatively rich, yet Uganda remains largely an agrarian economy with about 70 percent or the population employed in agriculture, and having low levels of income. To enable those excluded from the credit market to benefit from credit, it will be necessary for government policy to focus on mobilising long-term savings, entrepreneurship mobilisation, and encourage productivity as a means to increasing households incomes, particularly targeting the vulnerable including females, the rural poor, and the relatively less educated. The category of those excluded from the credit market comprises higher proportions 44

65 7. RISK MANAGEMENT AND INSURANCE This Section analyses the risks that Ugandans have encountered in the past 12 months prior to the FinScope III survey and the risk management mechanisms that were adopted to ensure business continuity. It also covers formal and informal insurance as means to mitigate risk. 7.1 Risks profile In the recent past, several research works have alluded to the growing vulnerabilities of the Ugandans (see, Ssewanyana & Kasirye 2012; MoFPED 2012). In the same manner, FinScope III survey requested the respondents to identify whether their households experienced any shock that might have negatively impacted on his/her income. Table 18 illustrates the different risks faced by adult Ugandans (nearly 16.4 million that responded), disaggregated by gender, regional location and urban/rural location. In all regions including Kampala, the most common form of risk that impacted on individual income, was illness of family members (48 percent of the adult population). While there is no gender gap in risks due to illness, rural individuals had a higher incidence of illness of family members. At least one in every five adults in 2013 was affected by death of a family member/relative. Illness and death are prevalent as reported risks across regions equally, although residents of Kampala experienced relatively less incidences of illness of a family member/relative (30 percent) and this may explain the lower reported rates of illness in urban areas as observed above. Since Fin- Scope I in 2006 illness in the family has been a persistent risk phenomenon affecting 58 percent the adult population in 2006 (Stedman Group 2007) and 39 percent in 2009 (Synovate Uganda 2009). Risks due to drought as well as crop/livestock diseases outbreaks were also prevalent, affecting 26 percent and 15 percent of the adult population respectively. Rural adults were more likely to cite drought compared to their urban counterparts. In addition, the incidence of reporting drought increased with wealth status. Drought was mostly cited in Northern region (39 percent) while crop/livestock disease outbreaks were most frequent in Western region (19 percent). Previous studies conducted by EPRC (Ssewanyana & Kasirye 2013) showed increasing vulnerability to drought. Similar observations are made in various government policy documents (e.g. MoFPED (2011, 2012, 2013); OPM (2013)). Theft was also a major risk that affected 15 percent of the adult population it raises concerns about the presence of blue collar crimes. 45

66 Table 18: Risk encountered in the past 12 months in 2013, % Fire Floods Theft Drought Ill health of family member Death of family member/relative Death of Livestock Crop/livestock diseases outbreaks Price fluctuations None Others Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Third Fourth Fifth Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western Est. pop ( 000) , , , , , , , , ,

67 7.2 Access to and utilisation of insurance services The above findings on incidence of risks provide useful information to insurance companies regarding product development in order to deal with short- and long-term risks. Yet, only 2 percent of the adult population (representing an estimated 349,295 adults) reported using formal insurance products compared to 43 percent who use informal insurance products (Table 19) the results are not mutually exclusive. There was a marginal reduction from the previous FinScope survey 3 percent (413,585 adults) using formal insurance but an increase in the use of informal institutions (21 percent in 2009). This is consistent with figures from Uganda Insurers Association (UIA) showing that the insurance industry is still underdeveloped with an insurance density of 2 percent (Uganda Insurer s Association, 2011). 5 This implies that formal insurance products are weakly correlated with risk management among adult Ugandans. The low level of formal insurance penetration in Uganda calls for strategic innovations by insurance companies to address the low formal coverage. As it is now, when a disaster occurs, majority of Ugandans resort to a number of rudimentary risk mitigation strategies, most of which are informal in nature. only individuals in the top 20 percent quintile have insurance cover. On the other hand, the use of informal insurance is a rural phenomenon, more prevalent among middle aged adults (25-39 and years) and among adults resident in Eastern and Western regions. Individuals using informal insurance mechanisms (representing 7.2 million adults), were asked to indicate reasons for this preference. The results are presented in Table 20. Among those who stated they did not own formal insurance but belonged to one or more informal insurance groups, majority (44 percent) said it was easier to join such groups. Nearly 15 percent adult population revealed affordability as a key reason for preferring informal insurance was mentioned by about 15 percent adult population. Some 11 percent of the adult population had never heard about any formal insurance products (which suggests signs of a low publicity that insurance companies need to address) while 18 percent simply preferred informal groups. In Table 19, there are other notable patterns regarding access to insurance products that are worth commenting on. First, the proportion of males taking up at least one formal insurance product was nearly five times that of females. Second, higher educational attainment was associated with a greater likelihood of owning a formal insurance product. Finally, the proportion of urban dwellers with at least one formal insurance product was about four times that of rural dwellers. Kampala had more formal insurance than any other region in the country. Ownership of formal insurance is poverty insensitive 5 Insurance density is the ratio of the persons using formal insurance products to the total population. 47

68 Table 19: Overall usage of formal and informal insurance, % Characteristic Any Formal Informal Any Formal Informal form insurance insurance form insurance insurance Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western Note: Estimates under informal insurance by adult characteristics have to be interpreted with caution due to the small observations and hence very high CV (coefficient of variation). 48

69 Table 20: Reasons why adults preferred informal insurance in 2013, % Prefer informal group Easier to join informal group Can t afford formal insurance Have never heard about such companies Other (specify) Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western Risk management profile The adults who had experienced a risk as highlighted in section 7.1 stated how they dealt with the specific risk financially. The results are presented in Table 21. The three most common strategies included: borrowing from friends and family (18 percent), asking for donations from neighbours, relatives and friends (18 percent) and sale of assets such as land (15 percent). There were no discernable gender differences across the cited strategies. However, there were rural/urban gaps with rural population more likely to respond by sale of assets, borrowing from friends/family and seeking do- 49

70 nations compared to their urban counterparts. Coping mechanisms reduced by wealth status, with key options being: borrowing from friends/family, seeking donations and reducing consumption. The self-employed were more likely to reduce consumption (15 percent) compared to those in paid employment (11 percent). Table 21: Risk management mechanisms by adult characteristics in 2013, % Characteristic Sale of assets Borrow from a formal institution Borrow from an informal institution Borrow from friends/ family Salary advance Borrow Seek from donations money lenders Insurance claims Reduce consumption Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western Est. pop ( 000) 2, , , , , ,190.3 Others 50

71 7.4 Barriers to the use of insurance In spite of its simplicity and affordability, there remained barriers to the use of informal insurance as presented in Figure 18. The most cited barriers include failure for members to pay their contributions (43 percent), member pulling out (40 percent) and death of members (39 percent). Therefore, it is possible to conclude that informal insurance groups lacked capacity to provide good quality services to members. This, among other things, opens up a window of opportunity for formal insurance companies to strengthen ties with informal insurance groups with a view to provide the much needed help to increase group sizes to minimise the risk faced by each pool of insured people. people cannot afford it (50 percent); (iii) Some people do not know how to go about buying insurance (17 percent); (iv) Others never thought about it (17 percent); and (v) a few do not know where to buy insurance (10 percent). These five barriers fall in two broad categories namely, affordability and awareness/knowledge of insurance. Therefore, formal insurance institutions need to inform people about their products, where they can be found and how to purchase their products. Insurance companies should also think innovatively how to reduce cost since affordability and convenience are important factors which have made informal insurance attractive to majority of adult Ugandans. In November 2013, Uganda s largest telecommunication company Mobile Telephone Network (MTN) Figure 18: Barriers to informal services use in 2013, % On the other hand, the results in Table 22 show that the five most important barriers (i.e. barriers cited are not mutually exclusive) to the use of formal insurance products in Uganda were in that order: (i) Lack of knowledge about insurance and how it works (55 percent); (ii) Insurance is expensive and many partnered with insurance companies to introduce a low cost life insurance policy to be operated over mobile money platform (Box 1). It is also important to point out that most insurance policies require a recurring annual premium implying that someone should be earning, at least on an annual basis. 51

72 Table 22: Barriers to formal insurance products and services in 2013, % Do not want it Cannot afford Does not know how it works Lacks knowledge on how Does not know where to buy it Never thought about it Insurance do not pay enough compensation Claim process too long Others Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western

73 Box 1: MTN Introduces low cost life insurance policy By Zurah Nakabugo In what could turn out to be a great innovation, MTN Uganda has partnered with insurance firms AON and Jubilee to launch MTN LifeCare, a low-cost life insurance policy. It is probably the lowest- priced life insurance policy on the market and for as low as Shs 7,500 per year, MTN customers and non-customers shall get at least Shs 1 million as pay-out in the event of death. Subscription to the policy shall be through the MTN mobile money service. MTN Uganda continues to lead in innovation by becoming the first company to offer affordable life insurance services paid through mobile money in partnership with AON Uganda and Jubilee Insurance, Ernst Fonternel, MTN s chief marketing officer, said. To register for the policy, Fonternel said, a customer can simply dial *221# to get insured and then follow the prompts as directed on the phone. Under the policy, there will be three insurance cover options, each with a different pay-out upon death of the insured customer Silver (1,000,000), Gold (3,000,000) and Platinum (5,000,000). Fonternel said a customer can only subscribe to one insurance cover per year. For one to qualify to benefit from this policy, he/she must be a registered MTN customer. However, there will also be arrangements for non-mtn customers to register for the policy. Life is unpredictable but with MTN LifeCare, MTN customers can count on their mobile money accounts to secure the future of their families in a simple, yet cost effective and reliable way. It s a great addition to the innovative mobile money services already offered by MTN, Fonternel said. Jeremy Kirkland, the AON director in charge of large clients, welcomed the partnership with MTN. He said the premium would be paid as a one-off lump sum and the cover expires after 12 months upon which the customer can choose to renew it. Kaddunabbi Lubega, the Chief Executive Officer of the Insurance Regulatory Authority (IRA), the body that regulates the sector, encouraged people to take out this policy. I request Ugandans to take on this insurance coverage since... death doesn t discriminate between the poor and the rich, he said Patrick Kimathi, the manager, Life Assurance, at Jubilee, said: The claims process is very simple. Pay-out cash upon the death of the insured is processed via mobile money within 48 hours upon receipt of the complete claim documents by Jubilee Insurance. Claim forms shall be got from any MTN service centre or dealer outlet or they can be downloaded from the Jubilee website Uganda has one of the lowest insurance penetration rates in the region standing at 0.7 per cent of GDP compared with Tanzania at 0.9 per cent and Kenya at three per cent. Source: The Observer 17 th 53

74 7.5 Concluding remarks Taking all the different financial access strands, insurance products and services were the least used. Nearly 6 in every 10 adults were excluded from the insurance products and services despite the many risks that affect them financially. There are no significant changes in the access to formal insurance since 2009 even after the reforms in the insurance sector. Affordability and lack of knowledge of how formal insurance works remained major impediments. The insurance industry needs to provide more information and educate the public about the products on offer, where they can be bought and how to go about buying them. On the other hand, use of informal insurance more than doubled since There were several reasons for this preference, which the formal insurance institutions could study in order to provide products and services that the majority of the adult population can afford. Notwithstanding its popularity among the adult population, informal insurance groups seem to suffer from governance issues including weak institutional development and accountability. 54

75 8. REMITTANCES AND MONEY TRANSFERS Contextually, money transfers involve the sending or receiving of money from one person/entity to another. The transfers can be from within the country; or extend beyond the national borders (remittances). The survey collected information on whether people sent or received money; the institutions, if any, used for money transfer services; the regularity of sending or receiving transfers; the usage of funds received; and whether transfers were received for own use or on behalf of someone else. The objectives of this Section is to establish: access and use of money transfer services; the channels through which money transfer transactions are made; and whether funds received originated from within or outside Uganda. Such information is useful in enhancing the understanding of the factors that constrain access to; and use of transfer services in Uganda. that 36 percent of females and 46 percent of males received remittances using formal institutions (the categories are not mutually exclusive). At least 16 percent of both females and males received remittances through informal sources. Use of formal institution to receive remittances was highest among individuals in the middle age category as well as those with relatively higher educational attainment 62 percent for some secondary education and 76 percent for persons with O- level or higher education. On a regional basis, Kampala and Central region had the highest rates of use of formal financial institutions to receive remittances 81 percent and 56 percent respectively. On the other hand, Western region had the highest use of informal sources 22 percent compared to 16 percent for across Uganda. 8.1 Remittances Strand Table 22 shows the landscape for receiving remittances and transfers during FinScope II and FinScope III. It is indicated that the proportion of the adult population receiving remittances nearly doubled from 30 percent in 2009 to 55 percent in The above changes were driven by increase in receiving formal (non-bank) remittances and transfers whose rate increased from 11 percent to 41 percent during this period. The table shows some widening gender gaps with 52 percent of females receiving remittances and transfers compared to 59 percent of their male counterparts in Furthermore, the youth (18-24 years age category) also reported relatively higher rates of receiving formal transfers in 2013 (42 percent) compared to 12 percent in This may be partly attributed to the fact that younger persons adapt more easily to technological changes than their older counterparts. When one classifies banks and mobile money as formal institutions, the table further shows 55

76 Table 23: Remittances and transfers, % Any remittances Formal Informal Any remittances Formal Informal Uganda Gender: Female Male Age in years: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western Frequency of use of money transfer services Figure 19 shows the extent to which money transfer services were used i.e. sending or receiving of funds by gender and geographical location. It was noted that while 36 percent of all individuals sent money, the corresponding rate for those that received money was higher at 45 percent. The higher rate of receiving was explained by the remittances from outside Uganda and also due to multiple senders to more than one recipient. Males were 56

77 more likely than female to send money (41 percent against 31 percent). However, when one considers receiving of funds, the gender gaps were relatively small 43 percent for females against 48 percent for males receive money. Overall, males were more likely than females to engage in money transfer services. This particular finding is in line with results of Fin- Scope II, which established similar patterns i.e. a higher proportion of male adults than females reported being engaged in money transfer services of any form (Synovate Uganda 2009). The plausible explanation for this pattern is the set-up of the traditional African family where males shoulder family responsibilities and therefore those (males) who stayed away from home regularly remit money for family upkeep and other necessities. In terms of location, it was only for the adults residing in Kampala where the rates of sending and receiving funds were relatively similar 73 percent compared to 76 percent. For the rest of the other regions, there were more likely to receive than send. This suggests that Kampala was a major source of funds transferred to the other regions. Unfortunately, the survey did not gather information on the volume of transactions. Demographically, as indicated in Table A 2 in the appendix, middle aged adults (25-39 years) were more likely to send money (42 percent) than any other age group. Furthermore, increased educational attainment was associated with an increased likelihood of sending funds 51.4 percent for persons with some secondary education and 67 percent for persons with O-level or higher education. A similar demographic pattern was observed for receiving money 72 percent of persons with O-level or higher education (Table A 3 in the appendix). Figure 19: Use of money transfer services in 2013, % 8.3 Channels used to send and receive Money transfers The survey inquired about the channels used to send and receive funds. In Figure 20, the channels were aggregated into four broad categories: cash with relative or friend; by bank; by mobile money; and other channel including electronic transfers, money gram and Western Union by gender of the respondent. Given that multiple responses were possible for these specific questions, the rates reported in Figure 20 are not mutu- 57

78 ally exclusive. The figure indicates that majority of money transfers were through mobile money at least 74 percent of the males and 60 percent of females who reported that they sent money, indicated using cash. The corresponding rates for receiving transfers by cash though informal means were about 65 percent regardless of gender. The second most frequently cited channel for sending and receiving funds was through mobile money 50 percent of males and 38 percent of female indicate sending funds by Mobile Money. It is worth pointing out that use of formal commercial banks for money transfers was relatively minimal and used predominantly by males. Part of the explanation is that besides the challenges of formality, most females especially in the villages; and people with modest education largely stay and work in remote areas where they hardly accessed the formal financial institutions. The formal institutions were all located in towns and urban areas. Limitations of formal education and low levels of financial literacy coupled with inaccessibility to the service providers adversely affected the usage of money transfer services by females and adults of modest education. Figure 20: Methods used to send and receive money transfer services in 2013, % In terms of demographic (Table A 2 in the appendix), banks are highly used for sending money by those in paid employment; and those resident in Kampala and Western regions. On the other hand, Table A 3 shows that it is mainly middle age individuals (aged years) that receive funds through banks; those with higher educational attainment and those resident in Kampala all characteristics associated with holding a bank account. 8.4 Frequency of receiving remittances Figure 21 shows that majority of individuals receive funds on a monthly basis (36 percent) with the least being weekly remittances (10 percent). Quarterly remittances also featured highly. This category could be going towards expenditures such as school fees which were paid per term. It is also noteworthy that the don t know category was sizeable. These are remittances with no defined regularity mainly because of the purpose for which they were sent. These findings contrast with the results of FinScope II which indicated that money was most often (37 percent) sent and received unsystematically whenever there was a need; and only 18 percent sent and received money monthly 58

79 (Synovate Uganda 2009). This shows changing trends from sending when needs arise to sending regularly per month. In contrast, Fin- Scope South Africa showed that 87 percent of transfers in South Africa were on a weekly basis. The plausible explanation for the results of this survey (FinScope III) lies with the system of payment for labour in Uganda where most workers are paid monthly. This has set the month as the standard for settlement of payments and therefore, the right time for those with distant dependents to remit funds. family members, parents, and children within South Africa; while Rwanda (FinScope 2013) reported 14 percent as the proportion of people involved in money transfers. Focusing on only those that received money transfers, in absolute numbers, about 4.1 million adults received money transfers in 2009 compared to 7.5 million adults in The number receiving transfers from outside Uganda remained at 0.6 million adults. Figure 22 shows the proportion of adults that received money from sources within Uganda and from outside Figure 21: Regularity of receiving remittances in 2013, % 8.5 Origin of Money transfers It was indicated that the majority of adult population received funds/transfers from within the country (41 percent) while only about 16 percent of the adults received remittances from abroad. This represents an increase in utilization of the money transfer services of 29 percent (within Uganda) and reduction to 5 percent (external) reported by FinScope II (2009). Compared to other countries, this result shows Uganda ahead of many peer countries in usage of money transfer services. For example, FinScope South Africa (2012) shows that only 18 percent of adults in South Africa either sent or received money to or from Uganda during the 12 months preceding this FinScope survey. It is evident that nearly 9 in every 10 Ugandan adults received transfers coming from within the country whereas, the shares of those that received transfers from abroad declined. Figure 22 also shows regional distribution of the adult population that received or sent money. The providers of money transfer services were based in urban areas with very limited, if any presence, in the rural areas. The infrastructure, most importantly electricity that is critical for money transfer services is more inadequate in the rural areas than in 59

80 the urban settings. This also passes for the regional differences as the central region is more developed in terms of infrastructural facilities, than the other three regions, the northern region being the most underdeveloped. The conclusion is therefore that people in urban areas use money transfer services more than their counterparts in rural areas because of better access and more pronounced presence of service providers. Improvement of rural infrastructure is therefore key in attracting money transfer services to the rural areas. The most common formal method of receiving funds was by mobile money at least 30 percent of individuals report receiving funds by mobile money services. Indeed, it was only in Kampala where about 9 percent of the adults received funds via international money transfer services (Western Union and Money Gram). These findings on mechanisms used to receive money, compare favourably with other African countries. For example, FinScope Rwanda 2012 (National Institute of Statistics of Rwanda 2012) revealed that the people of Rwanda preferred non-bank formal remittance mechanisms about 44 percent reported using mobile-based transfer services; only 17 percent reported using informal mechanisms e.g. family and friends to transport the money. In contrast, most South Africans used informal channels, especially by sending cash with a friend. In comparison to the previous FinScope II findings, FinScope II shows that mobile money was fast becoming the most popular formal means of transferring money in Uganda. The lesson for financial institutions and money transfer service providers is that the mobile phone offers an opportunity to reach the previously un-banked population and mobile money can be used to mobilize rural savings. Figure 22: Receipt of transfers from within and outside Uganda in 2013, % For example, data obtained from BoU shows that in one month alone (December 2012), providers of mobile phone services handled 29.6 million monetary transactions valued at UShs 1,317 billion. 8.6 Uses of funds received There were diverse purposes for which such money were used: home consumption, child education, child care, as well as for investments in farming or business start-up/expansion. Figure 23 shows that in both rural and urban areas (again the rates are not mutually exclusive), most remittances were devoted to home consumption about 62 percent. The second most frequently cited use of funds 60

81 received was child education and this was followed by child care. Only a small proportion of respondents indicated investing the received transfers in farming 18 percent in rural areas and 9 percent in urban areas. These findings are consistent with findings of FinScope II which reported that the majority (63 percent) used money received for home consumption (food, clothing, rent). The details show that the money received was used to cater for basic household necessities like health (34 percent), educating others (14 percent) and other household members (24 percent) or taking care of children (19 percent). Relatively fewer people used the money received for investing in income generating activities like farming (16 percent) or in businesses (13 percent). males were more likely to invest in business start-up/expansion than females 16 percent compared to 11 percent. Geographically, the northern and Eastern regions reported the highest levels of utilization of remittances on home consumption (about 70 percent). At the same time, persons in Northern region were more likely to use the received funds for farming (31 percent) compared to the whole of Uganda (16 percent). The Northern region also allocates a disproportionately higher share of the remittances to child care, emergencies and home improvement. The most plausible explanation is the long period of insurgency which has deprived the region of productive investments, rendering most Figure 23: Uses of remittances and transfers by location in 2013, % With regard to demographics, Table A9.2 in the appendix shows that females were more likely than males to use the received funds for home consumption 68 percent females compared to 56 percent for males. On the other hand, males were more likely to invest in farming (18 percent) compared to their female counterparts (13 percent). Similarly, households to depend on remittances. The uses put to remittances were not different from those reported under Sections 5 and 6 the uses are largely for consumption. 8.7 Receiving funds on behalf of others For adults who reported receiving transfers, the survey inquired whether the funds re- 61

82 ceived were: for own use; on behalf of someone else; or both. 6 The reported rates are presented in the last three columns of Table A.4 and indicate that over 80 percent of the respondents received the funds for own use. The national rates for receiving funds on behalf of someone else or both were 8 percent and 9 percent respectively. Individuals aged less than 18 years were far more likely to receive funds for own use than any other age category (92 percent). Persons resident in Kampala and Eastern Uganda were more likely to receive remittances on behalf of someone else (16 percent and 11 percent respectively). 8.8 Concluding remarks The survey results revealed that the frequency of Ugandans sending and receiving money increased from 30 percent in 2009 to 55 percent by These changes were mainly driven by transfers through mobile money that grew from less than 1 million users in 2009 to about 5.1 million in Those who received money were more than those who sent, with most of them transacting on a monthly basis. There was also a larger variation by gender, education and the wealth status in remitting funds within the country. Majority of money transfers were through mobile money services. In terms of origin of funds, the main transactions were within the country, with a slight decline in remittances from outside from 16 percent in 2009 to 8 percent by The interesting finding from this survey is that the majority of the adults that received money transfers used it largely for consumption purposes- which is not a good indicator for household savings and future investment for the future. 6 The actual question asked as Thinking about the last time you received money, did you receive it for yourself or on behalf of another person? 62

83 9. ACCESS TO AND UTILISATION OF MOBILE MONEY SERVICE This Section looks at the demand for, access to and use of mobile money services in Uganda. Mobile money can be defined as an electronic wallet service that enables one to send and receive money anywhere using a mobile/ cellular phone. In Uganda, the services started in 2009 and have since changed Uganda s financial landscape to include a large section of the population that was formerly financially excluded as noted in Section 3. Since introduction, mobile money services have evolved beyond money transfer services (sending and receiving), to include other services like payment of utility bills, air time purchase and savings and the recent development by MTN on low cost life insurance policy as discussed in Section 7. This Section, therefore, analyses how the different segments of the adult population use mobile money services. The Section also looks at barriers to access and use of the various mobile money products and services. 9.1 Comparison of use of mobile money relative to other financial services Since introduction in 2009, the use of mobile money services has grown and surpassed other forms of non-bank formal financial services. Results from the survey show that the share of registered mobile money users was higher than bank account holders as well as other users of non-bank financial institutions. This relatively high growth in use of mobile money services largely contributed to the declining share of the population excluded from the use of financial services from 30 percent in 2009 to about 15 percent in 2013 (see Figure 4). This growth has been aided by the increased use of mobile communication services in Uganda. Regardless of age, mobile phone subscription increased from 2 million in 2006 to over 16 million in 2012, largely due to the increase in number of mobile telecommunication companies that lowered the cost of mobile communication services and the availability of relatively cheaper mobile phone sets on the market. In addition, the growth in use of mobile money services can be attributed to the ease, convenience and relatively lower transaction costs of using the services compared to other formal services. 9.2 Knowledge and use of mobile money services The survey set out to analyse the level of usage, awareness and knowledge of the various mobile money services in Uganda. Nearly 77 percent of the adult population had knowledge of mobile money. However, there were notable variations across the different population segments. In terms of gender, males had more knowledge of the services than females while the educated had more knowledge about the services than the less educated. Results further showed that knowledge about the services was higher amongst the urban population than the rural population and higher amongst the rich than the poor. Spatially, the result point to geographical bias towards the better developed regions i.e. Kampala and Central. The observed differences in knowledge point to the information gap between the different segments of the population with the vulnerable groups i.e. females, the poor and the less educated having less access to information than their less vulnerable counter parts. Despite the relatively high level of knowledge about mobile money, only 34 percent of the adult population were registered users of the service. The likelihood to register increased with education level and wealth status. Furthermore, adults in paid employment (48 percent) were more likely to use these services compared to their counterparts in self-employment (31 percent). On the other hand, 56 percent of all adults were currently using mobile money services. A large proportion of the users therefore accessed the services through a third party s account. Results also show that utilization was higher amongst 63

84 males than females, higher in urban than in rural areas, higher amongst the educated than the less educated and higher amongst the rich than the poor. Nearly 8 in every 10 of the adult population resident in Kampala were using mobile money services by the time of the survey compared to about 3 in every 10 in Northern region. 9.3 Utilization of different Products The survey results revealed that the majority of adults mainly used mobile money services for cash withdraws (56 percent), followed by receiving (54 percent) and sending money (46 percent). Usage of the other products and services like payment for utilities, school Table 24: Knowledge and use of mobile money services in 2013, % Characteristic Knowledge about mobile money Registered user Currently using Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western

85 fees, and purchase of airtime was relatively low. Generally, there were gender and rural/ urban dimensions by transactions. Adults in paid employment were more likely to use mobile money services for cash deposits, cash transfer and to send money compared to their counterparts in self-employment. This could be explained by the regularity in earning for those in paid employment. Table 25: Transactions done with mobile money in 2013, % Cash withdrawal Cash deposits Cash transfer Purchase of air time To send money Receive money Currently not using Others Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western Notes: Caution in the interpretation of the estimates for currently not using, airtime, cash transfer and other by region, education levels, employment and age group due to very high CV. 65

86 9.4 Utilization of mobile money services by service provider Respondents were asked which mobile money service provider they used in order to assess competition among different service providers. Majority of the respondents used MTN, followed by Airtel. 7 This finding could be explained by the fact that MTN was the first to initiate mobile money services and as such has more registered agents compared to other networks. Reasons given for the choice of a particular service provider included convenience and cost of the service in that order of importance. There appears to be a lifecycle dimension for the below 18 years using Airtel more than MTN. Furthermore, the urban population was more likely to use MTN mobile money services compared to their rural counterparts. Table 26: Utilisation of mobile money services by service provider in 2013, % MTN Airtel Others All Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western Warid merged with Airtel in May

87 9.5 Barriers to mobile money services use While more than half of the adult population were currently using mobile money services, the report explores the reasons why the remaining population did not. The multiple reasons for not using mobile money are presented in Table 27. The most cited reasons included: lack of cell phone (26 percent) followed by the lack of money to send or receive through cell phone money services (19 percent). Lack of information on mobile money services (9 percent) ranked third and other reasons included the lack of mobile money agents in some areas and the cost of the services. Table 27: Reasons for not using mobile money services in 2013, % Not enough information Cannot afford cost Not educated No money to send/ receive No dealers No sim card No cell phone Not thought about it Nothing specific Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western Others 67

88 9.6 Concluding remarks Overall, it is evident that the demand for, and use of mobile money services is relatively high compared to other formal financial products (both bank and non-bank). Further analysis however, revealed that vulnerable groups i.e. females the youth, the less educated, the unemployed and the poor use less of the services than their less vulnerable counterparts. Lack of cell phone, no money to send/receive came up as the major barriers to access and use of mobile money services. Compared to other products, there was high degree of awareness of these products among the adult population going by the low percentage of 9 percent without such knowledge. 68

89 10. FINANCIAL LITERACY AND CONSUMER PROTECTION Governments in developed economies have recognised financial inclusion and consumer protection as an integral part of achieving financial stability and integrity (Cohen & Candace 2011). Financial literacy can have different meaning to different people. In developed economies being financially literate might require knowledge of tax codes, insurance requirements, credit cards, while for the unbanked population in developing countries, financial literacy is more likely defined by basic concepts of safe and secure savings, budgeting and wise borrowing. Financial literacy may also mean evolving state of competency that enables each individual to respond effectively to ever changing personal and economic circumstances. It is in this framework that financial literacy was analysed. Financial literacy as used in the context of this report means the knowledge and the understanding of operations of financial institutions including financial products, their use and how they can benefit clients and the general economy. Earlier on, the study findings showed that many adults do not understand the meanings of savings and investment; and how and where to buy insurance. This Section gives insights into source of financial information, financial numeracy and perceptions of Ugandans on paying back loans. Focusing on those adults who had ever received credit, the Section has insight customers dissatisfaction with financial institutions customers and how complaints could be handled. Perceived transparency and fairness in dealing with financial institution clients are also discussed Main sources of information The source of information on financial issues is important as it determines not only the credibility of such information but also the clarity and subsequent response from potential clients. Table 28 shows that the main source of financial information was radio used by 53 percent of the adult population. This is true regardless of socio-economic grouping. By implication, financial services providers need to creatively package their information as well as identify radio stations with a greater reach to the target adult population. Worth noting is the share of adult females (38 percent) that received information from friends/relatives compared to males (26 percent). The same source was cited more in rural areas, than in urban areas. This finding is not surprising given the fact that most females were residents in rural area where the majority of the adult population relied more on the informal financial institutions. Yet, such information from relatives/friends against the low financial literacy levels raises concerns on authenticity and quality of information received. 69

90 Table 28: The most important sources of financial information in 2013, % Radio Television Newspapers Friends/ Relatives Colleagues At Work Church/ Mosque My Bank Sacco Internet Employer Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western

91 The respondents were requested to state the areas where they needed more financial information. The results are presented in Table 29 responses are not mutually exclusive. The majority indicated savings (65 percent) followed by investment (48 percent) and budgeting (31 percent). Other critical areas where Ugandans requested for more information included: opening an account (15 percent) and insurance (12 percent). As far as savings were concerned, gender was not a significant factor as 66 percent females respondents compared to 63 percent males indicated that they needed more information. Significantly more people with no formal education (69 percent) felt a gap in knowledge of savings compared to those with highest education (57 percent). Relatively fewer urban dwellers (57 percent) needed more savings knowledge compared to their rural counterparts (66 percent). Worth noting was the low demand for information on insurance and opening an account. On the former, the result reflects the fact that more than half of the adult population did not know how the formal insurance works (see Table 22). On the latter, as noted earlier adults who did not operate a bank account did so due to lack of income to save and operational costs. In other words, focusing on removing constraints to financial information might not result in increased demand for insurance and holding a bank account. Table 29: Areas where further financial information is required in 2013, % Savings Investment Opening account Insurance Budgeting Others Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western

92 10.2 Knowledge on the basics of financial literacy The survey captured information on the respondents ability to understand and internalise financial literacy. Specifically, the survey posed three questions on interest rates, discount rates and money lending, with multiple choice answer. As shown in Table 30, question on discount on the bicycle was generally answered better than any of the other two, having been solved correctly by 55 percent of the adult population. On all the three questions, a higher percentage of males than females got the answer correctly, and performance was directly related to educational attainment, i.e., the higher the education level, the greater the percentage was, of people who got the answer correctly. Urban residents performed only marginally better on the second question than their rural counterparts. In the category of respondents with highest education, not more than 68 percent got the answer correctly on any of the three problems, which was a reflection of a low level of financial literacy in Uganda. A sizeable percentage of adults with no education were able to answer the three questions. The implication of this finding is that formal education is necessary but not sufficient to ensure competencies in financial literacy. 72

93 Table 30: Testing knowledge of basic financial literacy in 2013, % Characteristic Interest monthly vs annual (a) A discount on bicycle on sale (b) Borrow from a money lender (c) All 5% monthly 20% Annual Not Sure USh30,000 Discount 10% Not Sure M1 M2 Do not know Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level and more Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Middle Fourth Highest Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western Notes: a) N1.5: If you were offered a loan with 5% monthly interest rate and a loan with 20% annual interest rate, which loan would offer better value? b) N1.6: If the same bicycle is on sale in two different shops at UShs200,000 and one shop offered a discount of UShs30,000 while the other shop offered a 10% discount, which one is the better bargain? c) N1.8: You want to borrow UShs500,000 from a money lender (M1). He says that you can get it but you must pay him Ushs600,000 in a month. Another money lender (M2) says you have to pay UShs500,000 back plus interest of 15% in a month. Which one do you take? d) The correct response are marked in grey. 73

94 10.3 Perceptions on loan repayment When somebody takes a loan and does not pay back, he/she affects the operations of the financial system locally and in Uganda as a whole. In the FinScope III survey, respondents were asked to state their opinion on what happens to people who take a loan and do not pay back. The percentage of responses on what would happen is given in Table 31. Majority (60 percent) of the respondents knew that the main repercussion of being unable to pay back loans is losing the property which the borrower had provided as collateral. This response was correct as most formal financial institutions require property as collateral to secure loans (see Section 5 above); and losing the collateral is the greatest fear among real and potential borrowers. This confirms the finding in Section 6 where fear of debts was cited as the main reason for not borrowing. Imprisonment also featured highly (30 percent) being perceived as the repercussion of failing to pay back loans. Table 31: Self-reported perceptions on implications of failure to pay back a loan in 2013, % Characteristic Nothing Gets Warning Loses loan security Not Sure Imprisonment Other (Specify) All Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Third Fourth Fifth Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western

95 Respondents in urban areas (67 percent) were more inclined to say that the loan security would be taken away compared to respondents in rural areas (58 percent), whereas many more in rural areas (31 percent) stated that the defaulter would be imprisoned as compared to respondents in urban areas (24 percent). In general, males and females gave similar perceptions. The likelihood to cite imprisonment was higher among the youth and senior citizens compared to their middle aged counterparts. The reverse is observed for losing collateral security. In terms of wealth status, there were no discernible patterns. This finding was expected given the patterns observed based on employment status. In terms of education, citing loss of loan security increases with educational attainment, whereas citing imprisonment reduces. The adult population with no formal education was more likely to be poor and hence lacking a collateral security Consumer Protection This section focuses on only those individuals who used financial products and services during the past 12 months prior to the Fin- Scope III survey estimated at 13.6 million adults. Satisfaction with financial services providers: The adults that reported to have used financial institutions they were requested to indicate their degree of satisfaction with financial services providers. Nearly 11 percent of the adults reported dissatisfaction. The most highly educated, the urban dwellers and the respondents from Western region showed the highest level of dissatisfaction. Gender did not seem to determine the level of dissatisfaction. The level of dissatisfaction of customers of financial institutions was very high among the urban residents and among those with the highest education. Financial institutions therefore need to probe to find out the actual reasons why there is this widespread dissatisfaction with their services. Indeed, some of these adults (36 percent) indicated that they did not expect to see their complaints being resolved soon, and 23 percent believed that the service provider was too powerful for them to get their complaint resolved. These two results suggest a high level of apathy. Financial institutions, therefore, ought to come out strongly and address the problem of customer dissatisfaction. Handling of complaints: The FinScope III survey asked respondents to indicate the places where they normally go to get their complaints handled (multiple responses); and whether they would feel better if there was an independent complaints handling body. The results are presented in Table 32. Most adults went to the local councils (LCs) (46 percent), institutions providing the service (37 percent) and to the police (25 percent). These patterns appear to reflect the type of financial providers used. The relatively higher percentage on LCs could be reflecting the level of usage of informal financial products and services. If the complaint concerns matters to do with informal financial institutions, then going to the LC structures for dispute settlement would appear to be more appropriate. Nearly 12 percent of the adults mentioned that they would not go to any financial institution if they had a complaint. This is one of the groups which need to be targeted for an intensive financial literacy campaign because their response is nothing but apathy. Majority of Ugandans (66 percent) would feel confident (in their dealings with financial institutions) if there was an independent body to handle complaints. With such a resounding majority preferring an independent body, serious consideration should be given to this matter by the relevant authorities. 75

96 Table 32: Preferred options for dispute settlement in 2013, % Place where a complaint is registered Service provider Police Local Councils None Others Independent body Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Third Fourth Fifth Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western About a third of Ugandans believed that financial institutions provide enough information to safeguard payment instruments such as cheque books. This shows that more work needs to be done by financial institutions in this area. Less than ten percent of respondents were able to access a hotline to report stolen instruments, which suggests that this matter deserves attention. Perceived transparency and fairness of financial institutions: This section focuses on the proportion of the adult population (20 percent) that reported to have accessed formal 76

97 bank institutions. The survey asked respondents to state how they perceived transparency and fairness with which financial institutions render financial services. About 3 in 10 adults (34 percent) mentioned that they got clear and easy-to-understand information from financial institutions while 42 percent trusted the advertising of financial service providers (Figure 24). Nearly 6 percent had taken a financial product only to be later surprised that the product had hidden fees/ charges. Figure 24: Transparency and fairness of financial institutions in 2013, % Of the Ugandans who did not get clear and easy-to-understand information from financial service providers the main reasons were: transactions documents were written in small font (2 percent); some clients could not read and yet the information had not been explained orally (22 percent), others found that the language used was difficult (27 percent); or the clients got the information in a language they did not understand (15 percent); while others found that crucial elements were hidden (20 percent). These results indicate that many clients in Uganda made financial transactions with service providers in a language they did not understand; or they felt that crucial information was withheld from them by financial institutions, which are both signs of lack of transparency. However, one should not overlook the fact that some adult Ugandans cannot read much as the banks could be able to provide the relevant information. That said, in order to increase transparency, financial institutions need to use simplified language and treat customers who cannot read and write in a correct and special way. Turning to fair treatment: The results of the survey showed that 42 percent of adult population were treated fairly by financial institutions. Only 3 percent had ever been threatened or treated in a violent or humiliating manner; 4 percent had ever been taken advantage of; 3 percent had been sold a financial product and later on noticed that the product was not in their best interest; while 2 percent had been sold a loan without the financial service provider assessing their ability to repay the loan. In general, the results reflect fair treatment of Ugandans by financial service providers. 77

98 10.5 Budgeting On budgeting, results of this survey showed that 44 percent of adult population always budgeted before they engage in any financial transaction; 19 percent knew exactly how much money they personally spent in the 7 days preceding the survey; 21 percent always kept track record of money they got and spent; while 10 percent always prioritised their spending to ensure that there is enough money left. This shows that financial institutions need to carry put in place an appropriatetraining program to improve the knowledge of budgeting among Ugandans Concluding remarks In summary, the survey findings revealed the importance of consumer education to enhance financial literacy and financial capability among Uganda s adult population. This is revealed by the majority of the adult population who reported the need to have more information on savings (65 percent), investment (48 percent) and budgeting (31 percent). Although the results showed a high level of financial numeracy spatially, it was more inclined to males and the more educated, than with the females and the less educated,and not knowledgeable about financial matters. Most of the adult population related the cost of defaulting on loan repayment to loss of property pledged by the client. While there has been tremendous growth in financial institutions over the years, about 11 percent of the adult population were not satisfied with their services. This would call for the financial institutions to invest more in outreach services to popularise about their products and services. On complaint handling, majority of the adult population would prefer an independent institution. This is a very important consideration for the financial inclusion strategy in Uganda to improve financial literacy and capability. 78

99 11. CONCLUSIONS AND EMERGING POLICY IMPLICATIONS Overall there has been remarkable improvement in financial inclusion in Uganda since 2009 from 70 percent in 2009 to 85 percent in However, this improvement was registered mainly in the non-bank formal sector largely driven by the introduction and growth in mobile money services. With the exclusion of mobile money which is largely used for money transfers and not financial intermediary, formal financial inclusion in Uganda remains low when compared with other countries like South Africa, Namibia, Swaziland and Kenya where similar FinScopeSurveys have been carried out. Financial inclusion through formal banking institutions of the adult population remained unchanged after a four-year period despite an increase in the number of commercial banks and commercial bank branches during this period. The low usage of the formal banking products and services impacts heavily on the level of savings mobilised domestically through the financial system, which in turn affects access to credit and investment by the private sector. The survey results showed that the majority of the adult population was excluded from borrowing from financial institutions which limits a large section of the population from engaging in economic activities resulting into low economic growth, low incomes and unemployment. Low savings mobilisation and limited access to credit keep a large section of the Ugandan population in a vicious cycle of poverty and widens income inequalities. The survey results showed that even the few who borrowed did so largely through informal institutions, which by their very nature are too small and less capitalised to support the start-up or expansion of business investments that can bring about significant economic growth and development. Furthermore, the majority of those borrowing did so mainly for consumption purposes and less for investment. Access to and use of formal banking services were skewed heavily towards the adult population within the wealthiest quintile, in the more developed regions and in urban areas; as well as towards adults who were males, with better educational attainment and in the middle age contributing further to inequalities in incomes across and within these categories. When it comes to insurance, the survey findings revealed that access to and usage of formal insurance products and services in Uganda remained low. Subsequently, the majority of the adult population resorted to informal ways (with all their limitations) to hedge against risk. Limited use of insurance services negatively retards the growth of business ventures that are prone to risk and thus inhibits the entrepreneurship potential of the country. The low usage of insurance products and services was, among other things, largely due to lack of knowledge about insurance by the majority of the population in addition to the high cost of insurance products and services. Despite the reforms in the sector, the low level of penetration of the insurance services shows that the sector is still operating under capacity and further reforms are necessary to increase the outreach on insurance services. The survey findings revealed that the level of financial literacy among the adult populationremained low. This was particularly demonstrated when it came to solving simple arithmetic problems involving interest rates and financial numeracy. Low literacy and numeracy levels limit the individuals ability to digest financial information and to make informed financial decisions. Lack of knowledge about existing financial products and services was rife among a large proportion of the adult population. 79

100 The information gap shows that there is the need for financial institutions to increase their outreach of financial information services to the public through the available channels including the media, in addition to customizing important messages to rural areas. Although the majority of the adult population seemed to be satisfied with the services of the financial institutions this did not correlate with the numbers using the formal banks and those with bank accounts. Regarding the handling of complaints made to financial institutions, the majority Ugandans preferred an independent body to resolve financial-related complaints and a good number preferred neutrality in complaint handling with the service providers. What comes out from this analysis is that financial institutions need to improve their transparency and fairness in dealing with their customers especially by using a language that is conducive to genuine understanding and communication between the client and the service provider. The information packaging should take into account the educational attainment of the adult population. Overall, regardless of strand, lack of information or awareness on financial products and services featured prominently. The lack of information is more pronounced for insurance as well as credit and borrowing. Although a lot has been done to address the supply side constraints, much more needs to be done differently to spur demand for and access to formal financial services among the adult population. The barriers to financial inclusion are of multidimensional nature though critical if financial inclusion for the entire adult population is to be realised. The self-reported barriers are both demand-side and supply-side related and also cut across different stakeholders in the financial sector. As such addressing only a single barrier might not translate into improved financial inclusion. If the different barriers are to be addressed, there is need for coordination and collaboration among various stakeholders in order to collectively learn and innovate and where possible scale upon proven innovations. Some key policy actions: Maintaining macroeconomic stability: The results of FinScope 2013 suggest that macroeconomic instability has an adverse effect on the utilisation of financial products and services. High inflation adversely affects the demand for credit and the cost of borrowing. It also adversely affects savings as well as investment decisions of households as illustrated in Section 5. There is therefore a need to maintain macroeconomic stability at all times in order to accelerate the growth of the financial sector. There is no doubt that the macroeconomic conditions that prevailed between 2009 and 2013 impacted on the demand for formal financial products especially in terms of savings/investments and borrowing. Spatial targeting to promote financial inclusion: From the results it is clear that access to and use of financial products and services were skewed toward the urban population and better developed regions. Northern region registered the highest level of exclusion partly due to the lingering effects of the civil war. Hence there is need to consolidate government s efforts to prioritize infrastructure and energy in the region. The private sector should also be encouraged and/or supported to increase its broad-based investment in activities to complement government efforts. There is no doubt that increased connectivity will to some extent unlock the barriers to financial inclusion in Uganda. On the other hand, there should be efforts to sustain the progress made in financial inclusion across the region. This is illustrated by the fact that while Eastern region was ahead of the Western region in 2009 regarding access to formal bank institutions, by 2013, it had slipped in the regional rankings. 80

101 Promoting broad-based growth: While Uganda has been able to meet the MDG goal of halving poverty from 56 percent in 1992 to 22 percent in 2013 (preliminary estimates) not everyone has benefited from this growth as demonstrated by increasing income inequalities. It is also evident from the survey findings that the development of the financial sector has not benefited all socioeconomic groups. There are notable gender gaps, rural/urban gaps, and gaps across educational attainment. There is need to promote broad-based growth policies that will lift the majority of the population from poverty and reduce income inequality. The results showed that the rich had a higher chance of accessing and using financial products and services than the poor. Therefore, it is anticipated that improvement of incomes of the poor will improve their access to financial services. Promoting broad-based long-term savings and investment to support sustainable growth: The study revealed that most of the financial services available were of a shortterm nature, and therefore suitable for supporting short-term consumption. There is a major gap in the provision of long-term savings mobilisation to support long-term investment efforts. Policies aimed at eradicating slack capacity in long-term savings mobilisation and investment remain critical and paramount. Financial education and information dissemination: One of the barriers which leads to financial exclusion especially in the strands of savings/investments, credit, and insurance is lack of knowledge/publicity about these services. This is exacerbated by the low levels literacy and numeracy among the Ugandan population. The results showed that lack of financial knowledge and information was one of the barriers to the use of financial products and services. This calls for intervention from both the private sector and government to design programs that will improve financial literacy as well as increase information of the financial products and services. This is especially important for the insurance sector given the increasing vulnerabilities faced by the adult population. There is need for a policy on training in entrepreneurship and financial literacy, which should go hand in hand for sustainability purposes. Technological innovation and utilisation: There is no doubt that the use of technology led to improvement in access to non-bank formal financial services although this segment is dominated by mobile money transfer services. As such, other strands such as insurance should develop appropriate products in line with Uganda s risk profile. The survey has provided evidence which shows that new products like mobile money can improve the access to and use of financial services in Uganda. However, the use of mobile phone technology is still limited to only money transfer services. There is therefore need to adopt and extend this technology to the provision of other products and services like savings mobilisation as well as credit extension through mobile money banking, agent banking and micro banking. This will enable the services to reach the population not only in urban areas but also in rural and hard-toreach areas. Product Differentiation and market segmentation: From the survey results it is clear that the supply of formal financial services especially insurance is lower than the demand due to lack of access to and the complexity of the services. There is need for financial institutions to creatively introduce products and services and marketing techniques that are better tailored to the needs and development of individuals in view of the population differences in terms of location, age, gender and economic status. For example, insurance products required for the urban population are quite different from those needed in rural due to differences in risks encountered. 81

102 Legal, Institutional and Regulatory Framework: The results also revealed increased access to and usage of SACCOs and other MFIs (Tier 4 institutions). Some of these institutions are dependent on government through the Microfinance Support Centre. On the other hand, the extent of mobilization of savings has remained very low since 2005 and as such rely heavily on government. As such sustainability is unlikely to be achieved for institutions that receive public support. This calls for a well-thought through exit strategy. Specifically, the government has to put in place mechanisms that will strengthen the institutional infrastructure of the SACCOs and other MFIs to increase their mobilization of savings and deposits in order to sustainably extend loans to members. Likewise, the survey results have demonstrated increasing use of ICT in enhancing financial inclusion. This calls for well-coordinated institutional arrangement among the key stakeholders in the financial sector when refining the existing laws and regulations. 82

103 REFERENCES Bank of Uganda (2013), Financial Stability Report Issue No. 5 Bategeka L., and L.J. Okumu (2010), Banking Sector Liberalisation in Uganda Process, Results and Policy Options, Research report, Centre for Research on Multinational Corporations. Brownbridge M. (1996), Financial Repression and Financial Reform in Uganda, UNCTAD (Division for Least Developed Countries), Geneva, Switzerland. Cohen M. and N. Candace (2011), Financial Literacy: A step for Clients towards Financial Inclusion, 2011 Global Microcredit Summit. FinMark (2012), FinScope Survey on Access to Financial Services in South Africa. Kasekende L.A. and M. Ating-Ego (2003), Financial Liberalisation and its implication for the domestic system: The case of Uganda, AERC Research Paper, No African Economic Consortium, Nairobi. Lwanga M.M., A. Kuteesa, and E. Munyambonera (2013), Determinants of Domestic Private Credit Growth and Distribution in Uganda. EPRC Research Series (forthcoming), Economic Policy Research Centre Ministry of Finance, Planning and Economic Development (Several Issues). Background to the Budget, Kampala-Uganda. Munyambonera E., A. D. Nampewo (2013), Adong, and M. Mayanja (2013) Access and use of Credit: Unlocking the Dilemma of Financing Small Holder Farmers. EPRC Series 109. National Institute of Statistics of Rwanda (2012),FinScope 2012: Financial Inclusion in Rwanda National Planning Authority (2013), Uganda Vision Office of the Prime Minister (2012), The Integrated Rainfall Variability Impacts, Needs Assessment and Drought Risk Management Strategy, Department of Disaster Management, Office of the Prime Minister. Ssewanyana S. and I. Kasirye (2013), The dynamics of income poverty in Uganda: Insights from the Uganda National Panel Surveys of 2009/10 and 2010/11 forthcoming. Ssewanyana S. and I. Kasirye (2012), Poverty and Inequality Dynamics in Uganda: Insights from the Uganda National Panel Surveys 2005/6 and 2009/10 EPRC research Series No. 94. Stedman Group (2007),FinScope 2006: Results of National Survey on Access to Financial Services in Uganda. Synovate Uganda (2009),FinScope 2009: Results of National Survey on Demand, Usage and Access to Financial Services in Uganda. Uganda Bureau of Statistics (2011), A Census of Uganda Microfinance Institutions Uganda Insurers Association (2011),Uganda Insurers Association Annual Report: Assessing the Performance of Uganda s Insurance Industry. 83

104 APPENDIX 1: SURVEY DESIGN Survey Population This was a cross-sectional population-based study conducted to measure financial access among respondents aged 16 years and above (adult population) sampled countrywide. Sample Design The sample for the FinScope III was designed to provide financial indicator estimates for the country as a whole and for urban and rural areas separately. Estimates were also reported for the five regions of Uganda with Kampala as one of the region separated from Central region. A two stage sampling design was used to draw the sample. At the first stage, Enumeration Areas (EAs) were drawn with Probability Proportional to Size (PPS), and at the second stage, households which were the ultimate sampling units were drawn using Simple Random Sampling (SRS). A total of 4,032 households were selected using 2012 Uganda Population and Housing Census Mapping Frame. At the EA level, the target was eight house- holds. The survey selected one adult respondents from the list of adults in the selected household using KISH grid method. Sample frame The sampling frame used for the 2013 Fin- Scope is the 2012 Population Census Mapping listing provided by the Uganda Bureau of Statistics (UBOS). The UBOS has an electronic file consisting of 78,950 Enumeration. Areas (EAs) created for the 2012 Population and Housing Census. An EA is a geographic area consisting of a convenient number of dwelling units that serve as counting units for the census. Tables A.1 provide information on the distribution of EAs and households in the sampling frame by region and residence. Table A.1 shows that among the 78,950 EAs, (22 percent) are in urban areas and (78 percent) are in rural areas. The average size of an EA, measured in number of households, is 95 in an urban EA and 77 in a rural EA, with an overall average of 79 Table A 1: Enumeration areas and households Number of enumeration areas in frame Number of households in frame Rural Urban total Rural Urban total Kampala 0 3,199 3, , ,995 central 13,785 3,022 16,807 1,203, ,352 1,499,304 Eastern 19,652 2,302 21,954 1,400, ,032 1,594,691 Northern 15,790 1,651 17,441 1,162, ,889 1,304,873 Western 16,636 2,913 19,549 1,260, ,141 1,499,714 Uganda 65,863 13,087 78,950 5,028, ,414 6,235,577 Sample Size 84

105 The size required for the sample was determined by taking into consideration several factors, the three most important being: the degree of precision (reliability) desired for the survey estimates, the cost and operational limitations, and the efficiency of the design. The FinScope III actual sample with completed information were 3,401 translates into a completion of 84 percent and response rate of 85 percent. Listing, Pre-test, Main Training, Fieldwork, and Data Processing Listing:The listing was performed by organizing the listing staff into 10 teams, with 3 listers per team. Supervision teams were dispatched to the listing teams to crosscheck the listing exercise. This comprised of staff from UBOS and two staff from EPRC. Pretesting:Before the start of fieldwork, the questionnaires were piloted in English to make sure that the questions were clear and could be understood by the respondents. This was done during the finalization of the draft questionnaire Main Training for enumerators and supervisors: REEV Consult International recruited and trained 60 enumerators and 6 supervisors who also acted as field editors, the fieldwork consisted of both male and female personnel and the reserve interviewers were also trained to remain on standby in case there was need for re-enforcement in the field. Initially, training was conducted for 8 days, but due to further changes in the questionnaire, two additional days were added before the team left for the field work. The training consisted of instruction regarding interviewing techniques and field procedures, a detailed review of questionnaires, tests, and instruction and practice. The training also included mock interviews and role plays among participants in the classroom and in the neighbouring villages. Team supervisors and editors were further trained in data quality control procedures and fieldwork coordination, and use of the GPS machine. The training mainly used the English questionnaires, while the translated versions were simultaneously checked against the English questionnaires to ensure accurate translation. Main fieldwork: A centralized approach to data collection was used and comprised of 9 field teams. Each team consisted of one Supervisor, male and female Enumerators and one Driver. Fieldwork was undertaken with the use of mobile field teams whereby work was programmed from the headquarters to all the sampled areas. There are nine statistical sub regions, and the teams were recruited based on the languages mostly used in each sub region. In total, there were 9 Supervisors, 60 Enumerators, 4 Regional Supervisors, 4 Senior Supervisors and 15 drivers. The fieldwork was conducted between June-July, Data entry, cleaning and processing: Completed questionnaires were sent to the office as soon as they were ready/filled. Data was first entered in Epi Data while the second data entry was done in CS Pro version. Data quality / assurance: As part of quality assurance, UBoS and EPRC staff carried out supervision visits during the main fieldwork and would review collected questionnaires and check for completeness and consistency in addition to attending interviews to assess the flow and how questions were asked. The interview teams were then advised on where they needed to improve if necessary. Also the data from both the first and second entry was reviewed and validated by UBoS, checking for any inconsistencies that needed reconciling, The data was then shared with the research house for final check before it could be used for computation of weights, analysis and tabulation of results. 85

106 Weighting Procedures in stratum In order for the sample estimates from the FinScope III survey to be representative of the population, it was necessary to multiply the data by a sampling weight. The basic weight for each sample household was equal to the inverse of its probability of selection (calculated by multiplying the probabilities at each selection stage). A household weight was attached to each sample household record in the data files. The individual weight was computed based on the number of persons interviewed in an EA vs. the eligible i.e. those aged 16 years and above. Below is the detailed explanation how the weights were. The weights were calculated based on the probability of selection at each stage. At the EA level the weights were computed separately for each stratum (region residence e.g. central rural, Western Urban etc.). Based on the stratified three-stage sample design, the probability of selection for the sample households within a sample EA can be expressed as follows: where: (1) = probability of selection for the sample households in the sample PSU in stratum (region, rural/urban) = number of sample PSUs selected in stratum h for FinScope survey 2013 = total number of households in the frame for the sample PSU in the stratum = total number of households in the sampling frame for the stratum = number of sample households selected in the sample PSU = total number of households with listed in the sample PSU in the stratum The basic sampling weights, or expansion factors, are calculated as the inverse of these probabilities of selection. Based on the previous expressions for the probabilities, the weights for the sample households can be calculated as follows: (2) where: = basic weight for the sample households in the sample PSU of the stratum Design weights were adjusted for household non response and also for individual non response to get the sampling weights. The differences of the household sampling weights and the individual sampling weights are introduced by individual non response and individual probability selection. The individual probability was based on the number of eligible persons found in the household during the interview. Eligibility for the individual interview was for persons aged 16 years and above, and only one eligible person per household was selected. The final adjusted weight for the sample households can be expressed as follows: where: (3) = total number of valid (occupied) sample households selected in the sample PSU of the stratum = number of sample households that have completed household questionnaires in the sample PSU of the stratum 86

107 Table A 2: Remittances and transfers - Sent, 2013 (%) Channels used to send money How often do you send money? Characteristic Send money Cash Bank Mobile money Others At Least Once A Week Once A Month Quarterly Bi-Annually Annually Do n t Know Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Third Fourth Fifth Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western Uganda

108 Table A 3: Remittances and transfers receipts, 2013 (%) Channels used to receive money How Often Do You Receive Money From Outside Your Household? Characteristic Received Cash Bank Mobile money Others At Least Once A Week Once A Month Quarterly Bi-Annually Annually Do n t Know Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Third Fourth Fifth Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western

109 Table A 4: Use of funds received and recipient in 2013, % Characteristic Home consumption Child care Child education Transport fees Money received used for: Who received money? Farming Business startup/ expansion Home improvement Emergencies Others Own Use Another Person Uganda Gender: Female Male Age group: Below Educational attainment: No Formal Education Some Primary Completed Primary Some Secondary O-Level Employment status: Self Employed Paid Employees Contr. Family Worker Not Working Wealth quintile: Lowest Second Third Fourth Fifth Place of residence: Rural Urban Region: Kampala Central Eastern Northern Western Both 89

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112 Economic Policy Research Centre Plot 51, Pool Road, Makerere University Campus P.O. Box 7841, Kampala, Uganda Tel: /4 Fax: www. eprc.or.ug eprcuganda.blogspot.com