Review of a roundtable discussion with stakeholders by UNCDF & Bank of Uganda

Digital financial services (DFS) have enabled more Ugandans to access formal financial services – but the gains are still restrained to basic account services and payments. According to the Findex 2021, 66% of Ugandan adults are estimated to have access to an account – a rise that has been driven by the penetration of mobile money. Lately, agent banking is also enabling banks to reach beyond urban and peri-urban areas of the country. That said, the gains in access to products and services, are yet to translate to substantial usage of financial services. Payments are the most prominent formal financial transactions at 64%, while formal saving and borrowing remain low, at 32% and 29% respectively. The financial inclusion gains enabled by DFS are limited beyond payments.

Digital credit particularly is still in its early stage in Uganda, majorly as consumer lending, begging the question of how its potential might be catalyzed to enable access to finance for Ugandans and their businesses. Close to 77% of Ugandans borrow money – but only 31% borrow from a formal financial institution, (Findex 2021). The classic way of assessing creditworthiness by financial service providers (character, capacity, capital, collateral, conditions) is clearly excluding a significant share of the market. Data driven credit scoring and digital lending models are already proving – in some markets – to be effective and efficient in loan origination, risk assessment, making loan disbursements, and monitoring repayments.

Digital lending is specifically pertinent for Uganda for a number of reasons:

• It is an emerging and fast growing fintech model in Uganda.
• Traditional lending to the informal sector, mainly micro and small enterprises remains a big challenge – and if well guided, digital lending might provide a part of the solution.
• There are lessons to learn from some of the existing deployments of digital credit in Uganda, the region and beyond – to enable FSPs to build and scale-up digital credit better. Some of the challenges currently associated with digital credit include over indebtedness, unproductive – consumer lending, high interest rates, and high default rates. These can be seen either as deterrents or as areas where improvement is needed to better harness the potential of DFS, that has already been demonstrated in driving the much-needed access to finance in Uganda.

With this as the conversation backdrop, Bank of Uganda (BOU) and UNCDF joined forces to host a roundtable discussion revolving around the following:

• What will it take to drive DFS / fintech beyond payments - to also impact credit?
• How might we foster innovation in digital credit - beyond consumer lending?
• How might we foster partnerships among incumbent and new players (fintech, agtech, edtech, health-tech), to see more and improved digital lending models emerge on the market?
• How might we enable new players and new business models to thrive on the market?
• How might we avert the known risks associated with digital lending?
• How might we ensure adequate financial literacy and consumer protection as we seek to scale such models?

Here are some key takeaways from the conversation:

What next following this engagement?

It was clear from the discussion that there is unanimous consensus on what digital lending can do for the country. Traditional lending institutions often require extensive paperwork, collateral, and lengthy approval processes, making it difficult for individuals and small businesses to secure loans. However, the rise of digital lending platforms has bridged this gap, offering accessible and convenient credit solutions to the masses. The onus is now on all stakeholders to continue to harness this potential and ensure enough is being done to regulate and innovate for digital credit.

UNCDF and the Bank of Uganda have formulated an action plan to ensure that the concerns brought up during the roundtable discussion are addressed. Discussion between industry players, regulators and other stakeholders, will continue with the objective of fostering responsible digital lending for productive use in Uganda. These will be hosted under the National Financial Inclusion Strategy working group.

For more on our recent work with digital credit in Uganda click here.