SPEEDING TOWARDS A CASHLESS SOCIETY

Two weeks ago the Bank of Uganda released the quarterly ”Financial Stability Risk Assessment Report” for the last quarter of 2023.

Long story short most risk in the banking industry is under control and the sector is generally in good shape and has come some way from Covid-lockdown crisis.

That  should be a relief to any one who has an interest in the economy. More interestingly for me is the rate at which cashless payments are  increasing every quarter.

In the last three months of 2023 debit card payments rose to sh581.1b from sh532.9b in the previous quarter a near ten percent jump. In the meantime mobile money transactions  increased in value to sh62.2trillion from sh60.5trillion. To further emphasise the point of the shift away from cash mobile banking transfers increased to 2.4 million

  from sh1.9 million transfers in the previous quarter.

Even more interesting is that over the year  mobile money transactions crossed the sh200trillion mark up from the 2022 figure of sh190trillion transacted on all mobile money platforms.

This trend is a useful one because it means more and more of our cash is being liberated from our pockets, socks, mattresses and other dark, dank places we have been storing our money. This money is finding its way into the formal financial system where it is not only beneficial to you but also  is made available to others who have need for resources when you don't. It would be interesting to track the uptake of mobile money loans, despite their eye-gouging rates.

Basically the more of currency in circulation is in the formal financial sector the better for an economy.

The mobile phone is accelerating this process in Uganda.

If you think about the sh200trillion-plus in mobile money transactions is about $52b or bigger than the economy of Uganda. We can expect this trend to continue as more people  appreciate the convenience and businessmen allow it as an option for payment.

Speaking for myself I save on a fintech app, which gives me seven percent on savings, posting the  interest daily. I borrow the savings of other users from my mobile money provider and I virtually walk around without money in my pockets, because I can pay for anything using mobile money and if the worst comes to the worst reach into my bank account using my phone to meet other needs.

This means I keep my money in the bank or on mobile phone longer. I remember a time when eye watering qeueus used to form at the bank on Fridays to withdraw money for the weekend. God help if you if you did not make it to the bank on time, which used to be 1 pm, on Friday.

The counter intuitive thing is also that money is staying more in the formal financial sector because of the ease of withdrawal.

And this trend has other far reaching implications for the economy. A major reason for the high lending rates is the low savings rates in this economy. As a result the banks charge higher rates.

Banks are often walking a tight liquidity tight rope. Lending out of their capital and the few long term savings accounts. If more of us fixed our money longterm the risk to the banks to get caught in a liquidity squeeze would reduce and they would be able to lower lending rates.

This trend being pushed by mobile money is good place to start.

Of course the major reason lending rates are high is government borrowing from the public and paying double digit interest  rates. It is a no-brainer every money manager will lend to government first and then think about his riskier customers and force them to pay a premium for the  privilege.

But with oil revenues just over the horizon, one can expect government appetite for debt to reduce and the with the trend of more money finding its way into the formal financial sector and bank operational costs sliding, lower lending rates is becoming more of a reality.

To speed up the process towards a cashless society, it would help if government scrapped the larger denomination notes – sh50,000 and even sh20,000, forcing more transactions into the financial sector and even serving a fatal blow to corruption in Uganda.

It is very likely that in five to ten years the clamouring for more  branch opening by banks will be a thing of the past. The competition to reach clients will go online with the banks with the most user friendly platforms taking the day.