Why Uganda Banks should start promoting a saving culture

26-March-2012

The Ugandan financial sector has been faulted as having one of the lowest savings to GDP ratio in Sub-Saharan Africa, standing at 11.8 per cent of GDP with majority of the population being un-banked; this despite the country’s financial sector’s continued growth and various local, regional and international banks setting up bases locally.

Although the banking industry has experienced significant transformation over the past three years, with rapid growth in the number of service outlets for various categories of financial services, statistics indicate that 62 per cent of Ugandans still have no access to financial services.

Statistics from Bank of Uganda further indicate that the number of the total population holding accounts in banks is 4 million, or 33 per cent of the 12 million who are bankable. The savings to GDP ratio is still low at 16 per cent. These numbers do not compare favourably with our regional counterparts.

These low savings rate have been largely due to the fact that traditional banking remains out of reach for most due to factors like inadequate financial services, financial illiteracy, physical distance from banking institutions and high minimum deposit and balance requirements, limiting access to banking services.

However, local banks have taken huge strides in addressing these shortcomings by recognising the potential of the unbanked and are introducing resourceful methods of bringing them back into the formal economy.

This is through opening up branches in the rural areas, installing ATM machines around the country as well as through innovative and hugely successful new services like mobile money services that allow them to easily draw cash, transfer money, make purchases, and even check their bank statements through the mobile phone.

However, since last year, local banks have had to weather down a battering from a weak currency and high inflation rate which has also affected customers due to the high prices of commodities that has left them with little finances to save and deposit, thereby affecting bank deposits.
Mobilisation of deposit is one of the main functions of banking business and an important source of working fund for the bank.

Contrary to popular belief, banks do not have a lot of their own money to give as loans. They depend on customer deposits to generate funds for granting loans to other customers. So, a deposit mobilisation scheme would encourage customers to deposit more cash with the bank and this money in turn will be used by the bank to disburse more loans.

Apart from contributing to sustainability and mobilisation of investment resources, deposits provide security to depositors against future adversities and help build financial discipline such as saving and creditworthiness of individuals.

Even when people have extra money, there may be little incentive to save. In Africa, many economic activities take place in the informal sector. While many households have notable savings, the problem is that these are being held in the non-financial form.

These are not being significantly channelled into productive investments. Financial-sector liberalisation has brought greater competition, forcing banks to be more innovative and to work harder to attract customers.

Majority of local banks have been running deposit mobilisation campaigns with the aim of improving the saving culture in the country while improving their clientele base. With the numbers of un-banked Ugandans still clearly high, there is urgent need to attract Ugandans to get into the financial system.

However, the challenge still remains with the local banks that have to introduce new financial products or instruments that respond to the saving needs of households. Introduce products that permit easy accessibility and allow small transaction at frequent intervals. This would encourage households to shift to the formal system, thereby making such assets available for productive investments.

By Albert Odongo: MD KCB