WHY FINANCIAL INCLUSION IS IMPORTANT

During a recent discussion on transforming the economy through industrialisation the speakers did the traditional thing of bashing the “Washington Consensus” for Uganda’s growth, which has come without jobs and with widening income inequalities.

The Washington Consensus refers to an economic model prescribed for developing nations that had as its pillars macroeconomic stability and liberalisation of markets.

Speakers argued to various degrees during the occasion sponsored the Friedrich Ebert Stiftung foundation, that this laissez affaire approach to the economy with the government taking a back seat to the private sector and abrogating its responsibility to direct the economy, was what has brought us to our current economic situation.

Of course they referred to the east Asian tigers and even further back to post-colonial America, to show how  other economies have defied the conventional wisdom to jump out of poverty  into modernisation.

I think they used their facts selectively, not least of all the ignoring or omitting the context in which 18^th century America or east Asian tigers operated to be able to do the things they did, some of which it would be relatively harder to do now.

My argument has always been it is neither neo-liberalism or central planning that is important but delivering an improved standard of living for the people. Whether one does it with markets or with government intervention is immaterial. After all, those same distinctions are political ones that neither the west nor the east follow to the letter...

But in all the neo liberalism bashing and the yearning for a return to state control, neither of the  speakers paid much or any attention to local resource mobilisation. Most especially mobilisation of financial resources.

This is important because history has shown that no country has transformed to a modern one with the use of foreign aid, suggesting that all developed countries became so largely on their own steam.

And it is at this point that the issue of financial inclusion becomes important, even critical.

Financial inclusion presupposes an ever increasing proportion of the population having access to and using the financial sector to carry out financial transactions, to save or use other financial instruments.

Interestingly according to the World Bank our gross domestic savings in 2016 stood at about 15 percent, woefully lower than those countries we want emulate – China 46 percent, South Korea 36.5 percent.

But according to a the most recent FinScope survey carried out in 2013, financial inclusion in Uganda rose to 85 percent in 2013 from 70 percent in 2009.

They make the point that the increase in financial inclusion came with the explosion in mobile money but at the time they also noted that most of the mobile money data represented transactions. This will definitely change when the new survey is out, as people are now actively saving on their mobile phones and accessing credit too.

The challenge of mobilising savings is made all the more difficult when there are no convenient channels to mop up our excess cash.

The expansion of deposit taking institutions, Savings & Credit Cooperatives and now mobile money means it is actually easier than 10 or 20 years ago to mobilise savings.

In more developed economies only about 80 percent of their currency in circulation is in the financial sector while in Uganda it’s the exact opposite. This has far reaching implication for our development ambitions.

If we can get more and more of this money into the financial sector it will grow lending to businessmen if for no other reason that lending rates will become cheaper. The mobilised resources would be put to use by those who need it rather than serving as dead capital under your mattress or in the hole in the ground in the banana plantation.

The issuse of who regulates the telecommunications growing pool of monies will be an ongoing challenge, which needs to be addressed quickly to increase confidence in the sector and grow savings.

"In under a decade the mobile money user accounts have grown to about eight million more than 7.5 million bank accounts. In 2016 it was reported that sh44trillion passed through all mobile money platforms in Uganda. This figure was more than the sh28trillion national budget in that year. And this figure keeps growing....

If you look into the not so distant future, you can see that there could be a real transformation in as far as how much money still remains outside the formal financial sector and what the net effect has been of this giant mopping up of cash has had on the economy.

Clearly it is in our best interest to keep this growth going, seeing as banks are scaling back their operations.

To begin with the government has to maintain macroeconomic stability so that people have the confidence to save but also to attract more investment into the sector. With the proliferation of mobile telephones there still may remain a skewing of financial inclusion towards the urban areas so there has to be more productive policies to ensure rural communities jump on the band wagon – taxes on phones may not be the best long term strategy in view of this.

To push the agenda forward government needs to look harder at the issue of mobilising long term savings. Thankfully it will not be very long and a private sector solution will emerge. A sit is now to have a fixed deposit account for instance banks only have a threshold amount, below which they would not be interested in your money – a few millions.

Imagine if a bank set up a product and sold it as a fixed deposit where people can save any amount for a given period of time through their mobile phones. So if I feel I have an extra one thousand shillings today I can put it on my fixed account, tomorrow sh2,000 the following day sh500 and so on so forth what a revolution it would be?

With modern technology the issue of administration is not a problem and you would be shocked how many people would be able to commit money for a year or upwards if only they had a convenient avenue to do so. A collaboration between government and other stakeholders would be needed to make this possible.

And then of course there has to be a deliberate, systematic and widespread campaign to improve financial literacy. This cannot be understated because often times we are poor or financially distressed for lack of knowledge of what to do with our money.