DIANA NGAIRA: Meeting Today’s Financial Service Needs While Regulating For Tomorrow’s Market

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Insights from the 2018 Finscope report, an important barometer on the demand-side of Uganda’s financial sector, might have been predictable.

However, they gave emphasis to the importance of strengthening regulation and coordination for lower tier financial institutions – which most adult Ugandan rely on.

Findings indicated that only 10% of adults in the country had access to formal banking services, with 60% meeting their financial needs through semi-formal and informal financial institutions.

Building awareness and improving oversight of these semi-formal and informal financial institutions will help protect lower-income earners from poor market conduct, and potentially open new economic opportunities for them.

Access to relevant financial products and services that meet the people ‘where they are’ is key to helping them improve their wellbeing and recover faster from financial shocks such as the COVID-19 pandemic.

A Financial Sector Deepening (FSD) Uganda assessment on the economic resilience of Ugandan households prior to COVID, and a suite of reports that have been released since the first case was reported in the country, highlight the need for deliberate strategies to support informal and semi-formal financial institutions in the wake of such crises.

This will ensure economic response measures benefit the most vulnerable. They form a key part of the solution for economic recovery and are a critical jigsaw piece in the country’s growth ambitions.

How technology is redefining the rules of the game

Technology is redefining how entire financial systems operate – how businesses are modelled, how products are developed, how consumers interact with them and how efficiency gains are distributed along the value chain.

In Uganda, mobile money has served as the biggest pull/ push factor in driving financial inclusion. A similar story has played out across Sub-Saharan Africa, with mobile money and agent banking redefining how unserved and underserved people interact with financial products and services.

At the time of the Finscope survey, seven out of ten adults had access to mobile money. Expertise such a mobile telephony will continue to impact how the finance industry and supplementary market players operate, and open financial inclusion opportunities for billions of individuals and millions of small businesses.

This will ensure economic response measures benefit the most vulnerable.

While studies have shown that there is room for improvement in the adoption of FinTech solutions to meet some challenges within the sector to help it realize its full potential, the pace of adoption is only expected to go up and regulators need to prepare themselves for a future where technology sets the rules of the game.

The regulator of the future

A consultative review of the 2016 Tier 4 Microfinance Institutions and Money Lenders by key stakeholders, including FSD Uganda, led to the establishment of the Uganda Microfinance Regulatory Authority (UMRA), a milestone in the governance Tier 4 financial institutions and money lenders.

The Authority created a structure through which the savings of depositors could be protected, predatory lending and unethical practices could be addressed, and overall trust in the system could be promoted. Potential actors subject to licensing by the Authority number more than 30,000. A traditional approach to market supervision would limit the operational efficiency of any organization with such a broad mandate.

New solutions, driven by technology, are required to remove supervisory blind spots, manage operational risks, and drive proactive regulation. Additionally, these market actors, who include Savings and Credit Cooperatives (SACCOs), Non-Deposit taking Micro finance institutions and community-based and informal financial groups, such as Village Savings and Loan Associations (VSLAs) are themselves operating in a fast-changing landscape driven by disruptive advancements in technology.

The existing standards of policy and regulation in the financial sector are being challenged with each advancement, and proactive rather than reactive engagement of regulators and policy makers with emerging technologies will help them keep up with these changes.

Promoting innovation among lower-tier financial institutions will support the development of a more inclusive financial service market that meets the needs of the 60% adult population that relies on semi-formal and informal financial institutions.

Furthermore, opening digital channels were FinTechs can pilot and scale innovative pay-as-you-go models will enable access to basic services such as water and energy.

Building a culture of innovation

FSD Uganda supports transformative regulatory reforms that will ensure excluded or underserved customer segments gain access to financial services including payments, credit, savings, insurance, and investment.

Our Digital Transformation Project builds the capacity of financial sector regulators (including telecommunications) by providing phased support to identify opportunities to embed innovation within organizations’ structures and the market before moving to create strategies, including sandboxes, that are piloted using live cases.

Technical assistance from FSD Uganda is being provided to review the digital readiness of UMRA and a sample of tier 4 financial service providers that report to the Authority.

Existing regulatory and supervision processes will be appraised to see how accommodative they are to digital financial services, what changes need to be made, and innovative regulatory tools that promote innovation will be developed. Our partnership with UMRA under the Digital Transformation Project is expected to demonstrate the value of an innovation-led approach to regulation and market development.

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Learnings from financial service providers who participate in the pilot phase of the project are expected to provide a demonstration effect to similar market actors, driving adoption of technology and enhancing financial inclusion. Uganda’s National Financial Inclusion Strategy has clear targets for financial inclusion.

Deliberately including the market segment that UMRA oversees to bridge financial inclusion gaps will be key to achieving these ambitious objectives.

The writer is the Communications Specialist at the Financial Sector Deepening (FSD) Uganda.

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