A market systems approach to financial inclusion: Going beyond supply and demand
Playing the game
“Joel… You have to take your brother”, my mother would tell me when I went to play basketball with my friends. Bringing my younger brother always felt like drudgery. It always ended the same way: he would try to play with the big boys, have trouble understanding the rules, make technical errors and get completely outplayed. It was not fun for him.
I think about this often when I hear the words “financial inclusion”. My mother had good intentions wanting me to include my brother in our games. However, without a proper understanding of the rules, and with the game itself set up to benefit the bigger players, he ended up having to opt out and watch from the sidelines.
Inclusion is bringing access… but more is needed
This story is an apt metaphor for the financial system in developing countries. The problem is clear: financial institutions are set up to service large businesses and formally employed people, and sit on large sums of money that could be productively invested by small businesses and people that need it. Meanwhile, the people who make up the majority of developing countries’ populations operate in the informal economy, and do not enjoy equitable access to formal finance.
Innovations like mobile money that brought banking to mobile phones have transformed the state of financial services in an effort to rectify this disconnect. According to the World Bank, more than 1.2 billion people worldwide have gained access to a financial account since 20111. This is largely thanks to partnership-building efforts between financial institutions, mobile network providers, governments, donors and more aiming to extend financial services to a larger segment of the population.
As a way to measure the impact of these partnerships, organisations such as The Center for Financial Inclusion outline a number of key indicators to measure supply- and demand-side progress in financial service offerings and reach. These include the number of bank branches or point of sale devices in rural areas on the supply-side, and the cost of opening a bank account on the demand-side. Usage indicators such as savings balances and number of transactions, and quality indicators measuring how appropriate the products and services offered are for meeting users’ needs, particularly those of traditionally excluded groups (rural populations, small holder farmers, youth, micro businesses and women), are also tracked.
However, these measures are still too narrow. They fail to tell the full story of the market system in which the demand for and supply of financial services takes place. Uganda’s National Financial Inclusion Strategy2 for instance emphasises that the barriers to financial inclusion acting as an engine for economic development extend beyond mere supply and demand constraints: they include the infrastructural, technological, educational and legal environment in which these services are provided.
Source: flickr user Rachel Hinman
Market systems approach
While work to address the demand and supply constraints to financial service access is a key priority for actors in the financial inclusion space (including governments and development organisations), it is crucial that attention also be paid to supporting the broader structures and rules that frame the system. The picture below (the “doughnut”) shows how one might think about the financial market ecosystem3. The demand for and supply of any service is at the core, but the marketplace is held together by two broad categories of enabling ecosystems. These are:
- Supporting functions: the infrastructure, services and information needed for supply to effectively meet demand.
- Rules: the accepted norms and means of engagement that players agree to follow.
Figure 1: The Doughnut
Source: M4P Operational Guide
The development of mobile money and the penetration of mobile phones – including cheaper than ever smartphones – have spurred the growth of technology services such as aggregators and Fintech companies (Pegasus, and Yo! Uganda are two Ugandan examples) supporting the expansion of financial services to people who were previously unbanked. What was once a simple remittance service is now, thanks to these players, a mechanism that enables bulk payments, bank transfers, payment of bills and even merchants. Use cases are expanding as technology improves thanks to the investments made by government, donors and financial service providers.
It is time for these same institutions to pay similar attention to the rules of engagement and the legal landscape in which these services are offered. At present, there are a number of constraints to the full inclusion of previously excluded populations. An example of such a constraint is the requirement that financial institutions obtain Know Your Customer (KYC) details from new customers. The specific details required vary across different financial products: one may only need a national ID to open a savings account, but will need to provide an ID, proof of residence and other non-KYC requirements to access credit. Thus, people can easily open an account, but cannot readily do much more than that.
Figure 2: Percent of adults owning the following proofs of identification, Uganda (2018)
source: Finscope 2018 survey
The rules of the game are skewed against small players
The focus of my work at Financial Sector Deepening was Micro, Small and Medium Enterprise (MSME) financing. Most of the Ugandan economy is comprised of informal and unregistered MSMEs, which employ up to 90% of Uganda’s workforce. These are unable, or sometimes unwilling, to access formal finance. Uganda ranks 116th out of 190 economies for “ease of doing business”. The myriad challenges involved in just formalising a small business include corruption, fear of taxation, high bank fees (charged for checking proof of business registration and ownership at the registration bureau), not to mention land registration-related challenges which result in only 13% of Ugandan adults having a formal title of land ownership. The majority of Ugandans do not have formal employment so collateral is crucial for access to credit. However, without a recognized title that can be checked for encumbrances, even owning land is no guarantee to accessing finance.
For many small-scale entrepreneurs considering these challenges, it might make more sense to operate in the informal space and rely on informal financing networks, albeit at high interest rates and often not in amounts that can make a significant impact on the business. Indeed, the Finscope 2018 survey shows that most Ugandans opted to borrow from friends or family (53%), or Village Savings and Loans Associations (47%). The average amount borrowed from informal providers is only about UGX 50,000, compared to UGX 500,000 and UGX 450,000 from banks and SACCOs respectively, which are each used by only about 3% of borrowers.
Going deeper than the barriers to formalisation, the very core of financial services is trust (the word “credit” itself comes from the word “credo”, meaning trust). The dearth of formal financial institutions engaging with the informal sector is clear indication of their mistrust of the structures that employ the bulk of Uganda’s population. They simply speak a different language. Interestingly, the level of informal sector trust in formal financial institutions remains equally low. This lack of trust applies to legal protections too: only 59% of Ugandans report trusting the judicial system. They also report inadequate access to the court system to help defend their rights in the event of a dispute with a financial institution. The recent Justice Law and Order Sector report states that “access to legal aid services is vital in the administration of justice”, however at present only “39.02% of the magisterial areas have access to state funded legal aid services”. In light of this, the informal sector’s lack of trust in formal finance seems justified.
Those who are excluded (or opt out of using) formal financial services instead rely on networks of friends, family, neighbours and other informal relationships where they are, at the very least, considered peers. This social capital – the ability to count on your community of family, friends and neighbours in times of need – is often deemed more reliable than any formal institution; the cost of formalisation allowing access to formal finance is perceived to be higher than its benefits. Social capital is measured by a number of factors including having people to turn to, the tendency to form groups to support each other and relatively low incidence of crime. According to the Finscope survey chart below, we see that rural in particular Ugandans place strong emphasis on social capital.
Figure 3: Evidence of social capital, Uganda (2018)
Source: Finscope 2018 survey
Financial inclusion done well can give people and businesses access to the tools that will help them spur economic development. Indeed, access to an array of financial services, including business credit, insurance, investment and savings, can fuel business growth, creating a pathway to economic transformation. However, without the right rules and supporting functions in place, the outcome may be broad financial inclusion on paper, with only limited use of the breadth of available financial services in practice. For people to find value in depositing their savings, trust in formal financial institutions must increase. Moving from informal to formal finance will in turn lower the cost of borrowing for those who need to finance the growth of their business.
Recent market system reform efforts
The good news is the market systems approach is increasingly being adopted in Uganda. Actors such as Financial Sector Deepening (FSD) Uganda, the Mastercard Foundation and the Bill & Melinda Gates Foundation support not just narrowly defined access to finance, but also emphasise the business rules and market infrastructure needed for financial services to thrive4. One recent success is a set of policy changes allowing agency banking in Uganda, which brings banking services closer to customers through third parties such as neighbourhood shops and pharmacies. Other policy changes include the introduction of a movable collateral registry that allows people to register assets that previously could not be pledged as collateral due to their “movability” (e.g. a motorbike), and support for the development of interoperability across telecom companies allowing people to send money to wallets serviced by different providers.
Current efforts by the legal sector aim to improve access to legal services. These are supported by the Ministry of Finance, Planning and Economic Development through mandates in the National Financial Inclusion Strategy, as well as work to provide access to the national ID database for accredited credit providers, increasing the reliability of the KYC data collected. The emphasis on systemic changes to the market system that surrounds access to finance is increasingly being taken into consideration.
In its financial inclusion strategy document, the government acknowledged that “the end goal of financial inclusion is not just having more people with accounts, who are making transfers and are getting loans; rather it is ultimately about reducing poverty and enhancing the economic security of families through usage of affordable financial services.” Financial inclusion is necessary but by no means sufficient to create systemic change and development.
So, as various financial inclusion stakeholders consider the promising financial inclusion figures, they should not neglect to ask the questions my mother never did: what kind of game is actually being played? Are all the players granted a level playing field? What lies behind those numbers; whom does the broader ecosystem currently work for? Only in this way can the financial system begin to be reformed to responsibly and productively bring in the people who are currently excluded.
 Most of these gains have occurred in the last three to four years.
 The document outlines the government of Uganda’s strategy to create a more enabling environment for financial inclusion to spur economic development.
 Market systems change considers all the elements that keep demand and supply active in any economy rather than just the demand and supply of financial services, for instance.
 FSD work across 28 countries includes policy changes as well as technical support for infrastructure to be put in place to make financial markets work better including in Uganda.
Feature image: Ed Ram
Joel is a product development and digital finance specialist who leads strategic partnerships and the execution of JUMO strategy in Uganda. He has worked in financial services in Uganda, Kenya and Zambia. More recently, he worked as a grants and project manager with Financial Sector Deepening Uganda, where he worked to increase access and usage of financial services. His work includes launching the first Microinsurance Challenge Fund in Uganda worth £400,000, and building the business case for the first bank-to-wallet solution in Uganda. He is particularly interested in decision science, customer engagement and product research and design, to maximize utility for end users and believes that finance is one of the key tools for helping people live lives of dignity and freedom. Joel is an avid reader of philosophy and a fan of the NBA. He also nurses a “quiet “obsession with rock music.