According to Uganda’s National Household Survey 2016-2017, eight out of every 10 Ugandans reside in rural areas, with the majority engaged in agriculture, while those living in urban areas are mostly involved in the trade and service sectors.
The national poverty estimates show that rural areas have a high incidence of poverty in comparison with urban areas: Three out of every 10 Ugandans live below the poverty line.
If this rural-urban income inequality is addressed, Uganda can take a giant stride to alleviating poverty. The question then is: What role can the financial sector play in addressing this challenge?
Findings from the 2018 Finscope survey show a wide divide between the rural and urban residents in access and use formal financial services.
Looking at savings, there are more urban residents with access to formal saving products than rural residents.
Three out of every 10 urban residents have access to formal savings compared with one out of every 10 rural residents. Rural residents thrive on informal saving mechanisms like the village savings and credit associations and self-saving where they manage their own savings.
Urban residents report higher levels of access to formal credit than rural residents. Only 3 per cent of rural residents have access to formal credit compared with seven out of every 100 residents in urban areas.
However, the predominant use of informal lending mechanisms in rural areas means they register lower levels of exclusion from the credit markets than urban areas. Five out of every 10 rural residents are excluded from the credit markets compared with six out of every 10 residents in urban areas.
The financial sector can play a critical role in addressing the poverty challenge by providing the necessary financial resources to drive productivity and growth in rural areas. That is why it is critical to design policies and innovative solutions to bridge the financial inclusion divide between the rural and urban areas.
Foremost, there is a need to identify the main drivers of the financial inclusion divide.
The 2018 FinScope Survey identified the main barriers to access and use of formal financial services as; low levels of incomes, poor levels of proximity to formal financial institutions and low levels of awareness and understanding of formal financial products.
From a policy and regulatory perspective, three things can be done to address these challenges.
(i) First, reducing the cost of financial service delivery. For example, the government can facilitate and promote an industry-wide shared cash-in, cash-out networks that not only lower operating costs but also bring financial services closer to consumers in rural areas.
This could be through policies that incentivise agent density in underserved areas, as well as public-private partnerships that look at increasing agent profitability in rural areas.
(ii) Second, utilising technological innovations to effectively address issues of account opening, customer verification, and the delivery of savings, credit and insurance products over digital channels.
Technology has the power to reduce the cost of service delivery for providers while increasing the number of financial products to customers, at affordable price-points. Digital financial services, therefore, promise increased access to and also use of formal financial services by the poor.
(iii) Third, to increase the introduction of new game changing solutions by financial institutions the government needs to put in place policies, laws and regulations that allow for new business models and approaches to financial delivery.
Innovative regulatory approaches like “sandboxes”, where startups are allowed to conduct live experiments in a controlled environment, have demonstrated success in developed markets. Regulators can therefore play a crucial role in being financial inclusion catalysts.
With 80 per cent of the population in rural areas, the private sector needs to take a proactive role in serving this large market.
Urban markets are becoming extremely competitive and the private sector needs to develop solutions that speak to the needs of not only the rural populace but the rural poor in particular.
Product development approaches like human-centred design, can help financial institutions develop affordable and relevant products targeted at this market.
Jimmy Ebong is a research specialist at Financial Sector Development programme Uganda, while Joseph Lutwama is a policy, legal and regulatory specialist at FSD Uganda.