How Risk Management Tech and Digital Payments Drive Financial Inclusion in Uganda

Summary:

The finance director at the Bank of Uganda Richard Byarugaba, says a total of 30 digital financial services institutions have to-date been licensed and has revealed that a significant number about 27.9% are on board. He was speaking at a launch of a Microfinance database of dashboard, where officials also said, SACCOs using digital channels have been found to make more gains in revenue and have seen a reduction in operational costs by 20%.

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KAMPALA, (Examiner) – The head of the fintech licensing department at the Central Bank emphasizes the pivotal role of risk management technologies in bridging the financial inclusion gap. He highlights how these technologies enable microfinance institutions to extend their services to thousands of unbanked individuals. Electronic payments, in particular, have catalyzed significant progress.

Since the enactment of relevant laws in 2020, over 30 institutions have been licensed, facilitating increased access to finances through mobile money. The efficiency and speed of these transactions are beneficial for the economy, as they enhance liquidity, which is vital for economic activity. Additionally, reducing cash usage is a priority for the Bank of Uganda due to the inherent risks associated with physical currency, such as production costs and security concerns.

A report by the gnuGrid Credit Reference Bureau reveals that only 1% of borrowers in savings and cooperative groups who utilize digital channels consistently repay their loans on time. Conversely, those who don’t use digital channels exhibit a higher default rate. This underscores the importance of adopting digital solutions in promoting financial discipline and sustainability. Circles, a type of microfinance institution, often grapple with loan defaults, posing a threat to their viability.

To address this challenge, the bureau proposes credit referencing as a solution. The current default rate among borrowers is alarmingly high, exceeding 10%, surpassing the market standard of below 5%. The COVID-19 pandemic has exacerbated this issue, prompting stakeholders to seek innovative solutions.

More than a dozen circles convene to explore a new database designed to assess the creditworthiness of financial services consumers at the microfinance level. This database aims to provide insights into repayment trends and identify risky borrowers preemptively. By leveraging technology, lenders can mitigate risks and improve loan recovery rates.

The Bank of Uganda also plans to extend access to the agriculture credit facility and the small business recovery fund to tier 4 institutions, which were previously restricted to supervised tier 3 entities. This expansion aims to enhance financial support for agricultural and small business ventures, thereby fostering economic growth and resilience at the grassroots level.