World Consumer Rights Day: It’s in the Ts & Cs

By Anthea Paelo, PhD

When did you last read the terms and conditions (Ts & Cs) of any digital product before clicking accept? Or review the Ts & Cs before taking up that digital loan or ordering a product off an e-commerce platform? If you are like most digital consumers, you accept the terms and conditions without reading them. As it is World Consumer Rights Day, it is a good time to consider Ts and Cs.

With rapid technological advances in the past decade, we are very much in the digital age. In East Africa, this has been more apparent in digital financial services led by mobile money. These new technologies have increased the convenience of transactions, increased efficiency in accessing financial services and been instrumental in facilitating trade and business.

However, the increased efficiency brought about by the digital economy has not kept up with consumer education on their rights and the risks of using digital financial services. For instance, consumers are increasingly becoming overindebted and falling prey to predatory money lenders due to the increased ease of access to digital credit. The quick access to credit over the phone has eliminated the requirement of a loan officer who might have, in normal circumstances, been able to explain to consumers the key terms and conditions of the loan they are getting, including the repayment periods and penalties.

Additionally, due to the unsecured nature of these loans the interest rates are often higher than what would typically be experienced from traditional financial service providers. While these high-interest rates may be specified in the terms and conditions presented to the consumer before they subscribe to the products, only a few read them, and if they do, even fewer comprehend them. This may be due to desperation for money. Still, it is important to acknowledge the role of opaque and lengthy terms and conditions in limiting consumers’ understanding of the details of the products they subscribe to.

In 2020, with support from Financial Sector Deepening Uganda, Uganda Communications Commission conducted a study on data transparency and consumer consent to understand how digital consumers engaged with the terms and conditions of digital services. A key finding from the study was that the Ts and Cs of digital service providers assessed in the market were filled with jargon that needed explanation. Additionally, these service providers did not adequately disclose information on fees or how the company would use the consumer’s data.

The study also employed an experiment in which one group of consumers was given terms and conditions from digital service providers in their typical format. The other group was provided with a summary of the terms and conditions that listed vital elements such as the price to be paid for the data and how the company would use their data. After that, the consumers were asked questions to check their understanding. As expected, those who received a summary of the terms and conditions had higher comprehension of the products.

The study’s key recommendation is essential for digital consumers as we observe consumer rights day this year. Digital service providers should provide consumers with a summarised version of the terms and conditions that customers can quickly

review. With the implementation of the General Data protection Regulation, websites have adopted a summarised version of a consent form for the use of consumer data. A similar approach can be adopted for digital financial services, including price information. The summary can be disseminated using USSD (such as *130#) technology to account for most digital consumers in Uganda who use feature phones.

Digital service providers benefit from consumers’ lack of understanding of their Ts and Cs, so a push from the regulator may be necessary to ensure implementation of the use of summarised Ts and Cs. In the meantime, before you take that loan, do you know the interest rate charged on the loan, the amount you will be expected to pay each month and the penalties of default? Read those terms and conditions.

Photo credit: Pch vector on Freepik

Anthea Paelo, PhD is FSD Uganda’s Intervention Manager, Business Environment

Can financial inclusion ease the back-to-school pressure?

Bu Anthea Paelo, Ph.D

At the start of this academic year, schools reported a low turn-up of students, with parents citing the lack of money to pay for school fees. Beyond school fees, students often require additional material to facilitate their attendance. For cash-strapped parents, the financial demands of the beginning of a school term are excessive. As a result, several students begin the school term late or without the necessary material to aid their studying resulting in poor performance, especially in rural schools.

While parents are aware of the necessity for school fees months in advance, it is still a challenge for most to plan for timely payment due to low incomes. The other challenge is that even where parents have a steady source of income, they need access to financial services to help them plan, save, or access credit that would provide cash flow during the opening of the school term. Such parents could benefit from financial inclusion.

Financial inclusion refers to the access and usage of financial services. According to the 2021 Global Findex study, 66% of Ugandan adults own a regulated deposit account, an increase from 59% in 2017. The Bank of Uganda also reports that there were over 22 million active mobile money subscribers and 235 financial access points for every 10,000 adults in Uganda, thrice the number five years ago. Uganda has thus seen significant progress in access to some financial services.

However, there needs to be more growth in the usage of financial services and the benefits consumers derive. For instance, according to the 2021 Global Findex study, of 71% of Ugandan adults who saved money, only 39% did so using an account from a formal financial institution. Additionally, of the 75% of Ugandan adults who borrowed money in 2021, only 29% did so from a formal financial institution.

Statistics suggest that while Ugandans require financial services such as savings and credit, which could come in handy during the back-to-school period, minority access these services from financial institutions. Likely, the type of savings and credit products available at these institutions do not cater to the specific profile and needs of a large portion of the Ugandan population. Financial service providers need to go beyond their traditional services to meet the needs of their clients by, for example, developing customised tailored services to support parents in planning, saving, and borrowing to meet their school fees demands. These financial service products should have three key features to help solve beginning-of-school term dilemmas.

First, these products should let parents deposit money as and when they receive it, not monthly. Much of the Ugandan population are seasonal income earners, Uganda being an agricultural economy. Given the sector’s seasonality, income is only available during specific periods of the year. These periods only sometimes coincide with the opening of schools. This feature would enable parents to save their income during the harvest season when products are on sale and shore this up for periods of planting and low income.

Second, these financial accounts should be low-cost or even zero-rated. Finscope 2018 survey data cited the high bank fees as one of the reasons Ugandans avoid formal financial institutions. Low-fee accounts would incentivise parents to open and continually deposit income as and when it is received. The frequent use of the account would help parents obtain a credit history that would form the basis for small loans to capture shortfalls at the start of the school term. Financial institutions would benefit from increased deposits and use of the services by the parents.

Third, these financial services should be convenient. The account should be easy to open and maintain. Parents should be able to access the account through their phones and even carry out some transactions using USSD such as *130#. Deposits should be possible through various channels, such as agents. Schools could consider being agents to ease the collection and payment of fees.

An inclusive financial sector can alleviate stress caused by the demands of the start of the school term. However, financial institutions must be prepared to develop and provide innovative financial services that meet the needs of consumers.

Photo credit: Image by Freepik

Anthea Paelo, PhD is the Intervention Manager, Business Environment at Financial Sector Deepening Uganda

Are digital platforms a clear path out of poverty for Uganda’s smallholder farmers?

By Geoffrey Okidi

John, a 50-year-old smallholder farmer in Mbale district grows maize, beans, and cassava on less than one acre of land for own consumption and sale. His farm production is affected by over reliance on traditional farming practices, use of low yielding varieties, small farm size and limited access to finance. John often sells his produce at his farm to middlemen at a low price, earning less than UShs1 million annually. John’s story is that of a typical smallholder farmer. His story represents that of 6.9 million households in Uganda according to the 2019 Uganda Annual Agricultural Survey report.

Fortunately, this narrative stands to change if Uganda’s third National Development Plan (NDP III) 2020/21 – 2024/25 goal to increase household incomes and improve the quality of life of Ugandans is realised. The NDP III recognises that a high proportion of the population is still dependent on subsistence agriculture due to: (i) low agricultural production and productivity; (ii) poor storage infrastructure; (iii) poor market access; (iv) low value addition; (v) limited access to agricultural financial services and critical inputs.

To solve these challenges, the government is committed to the Agro-Indutrialisation Programme, increase of ICT penetration and use of ICT services for social and economic development. But how can this commitment solve the challenges being faced by Uganda’s smallholder farmers?

The Financial Sector Deepening Uganda believes that embracing technology platforms is one way to activate this commitment.

The technology platform concept is fundamentally simple: create a place where producers and consumers can come together in interactions that create value for both parties using digital technology. Examples of digital platforms include Uber, Airbnb, Amazon, Jumia among others.

There are multiple ways by which digital platforms can create gains in production, efficiency, information flow, inclusion for marginalised groups, and transparency across segments in the agricultural value chain—all of which contribute to improved outcomes for small-scale producers. Some of the potential benefits of digital platforms include:

Market aggregation: Platforms create new efficiencies by aggregating unorganised markets. Market aggregation provides information and power to platform users who formerly engaged in interactions in a haphazard fashion, often without access to reliable or up-to-date market data. Using platforms, economies of scale can be realised when numerous dispersed smallholder farmers get organised into viable economic units or groups that are engaged in producing for the market. The 2019 Uganda Annual Agricultural Survey report revealed that only six percent of the adult household members belonged to a farmer group. To improve their incomes through collective actions, small holder farmers need to join farmer groups. Working in groups increases their bargaining power, possibilities of sharing services, assets, and infrastructure such as warehousing and processing equipment. This enhances post-harvest handling, value addition and product quality. Additionally, working in organised groups reduces the unit cost of production and delivery of services to smallholder farmers thereby increasing the possibilities of profitability and growth.

Appropriate value and supply chain financing: Access to finance remains a limiting factor for many farmers to invest in productivity enhancements. As such, only four percent of Ugandan farmers use a full package of production enhancing technologies (a combination of fertilisers and improved seeds) and supportive services according to the NDP III. This is partly because smallholder farmers are engaged in the production of a variety of enterprises that makes it uneconomical and increases the risk for lenders. Using a market-led approach to farming, smallholder farmers should be supported to participate in one or two profitable value chains appropriate to their agro-ecological zone. This will enable them increase access to internal and external value chain financing opportunities that platform participants can proffer. To begin with, smallholder farmers should be rallied around the 10 priority commodities in NDP III namely, coffee, tea, fisheries, cocoa, cotton, vegetable oil, beef, maize, dairy and cassava. Specialisation in these commodities will facilitate the development of appropriate value and supply chain financing business models and financial solutions in the digital marketplace.

Strong and sustainable partnerships in the platform economy: Within the digital platform, producers and consumers will be connected to each other to exchange value. For example, a platform would facilitate interactions between smallholder farmers, off takers, input suppliers, Financial Services Providers (FSPs), providers of social services, etc. Digital data from platform activities can drive increased financing to farmers, both as buyers of services and sellers of produce. The platform would also afford participants economies of scope which increases the opportunities for economic multiplier effects for the financial service providers, other economic actors, and the value chain actors. For example, FSPs can deliver financial services to different actors across the value chain thereby increasing the possibilities of revenue and profits. Platform participants would have increased access to various services across the value chain in addition to the primary economic activity. There is also increased ability to bundle services together to alleviate multiple constraints at one time. For example, platforms can easily facilitate contract farming while tying output markets to credit markets. Risk mitigation measures such as agriculture insurance and irrigation can also be bundled up with other services on the platform.

To determine the viability of embracing technology platforms, the Financial Sector Deepening Uganda has partnered with three technology platforms – Ensibuuko Tech Ltd, Quest Digital Finance Ltd and Emata Uganda Ltd to pilot three-year programs. The programs will digitise different agricultural value chains, trade, and light manufacturing supply chains. This is with a goal to support the development of sustainable business models, products/services, and solutions for delivery of financial services to the underserved market segments. Learnings from these pilots will be shared in subsequent blogs and case studies.

Photo credit: Image by Freepik

Building efficient credit markets in Uganda

By Joseph Sanjula Lutwama

Given that the average annual savings for adult Ugandans is under Ushs 5,000, many of us will have to interface with credit at one point in our lives. This becomes more likely when it comes to running a business. Credit is a critical component of the daily operations and survival of any business because few (especially the micro, small and medium enterprises) have sufficient business savings to meet their working and long-term capital needs.

Unfortunately, not many Ugandans or their businesses have access to credit from formal financial institutions such as banks. The most recent national surveys on the demand for financial services put that figure to about 2 out of every 10 adults in Uganda. The other 8 rely on family and friends, informal financial institutions, and money lenders to meet their credit needs. In fact, many Ugandans are not even keen to access credit from formal financial institutions. This is in part because of past experiences where their property or that of close acquaintances was liquidated by banks for failure to pay back their loans.

From high interest rates due to risky businesses and non-performing loans to burdensome collateral requirements, the state of credit markets in Uganda is informal, opaque and makes capital extremely costly. This is not a conducive environment for business growth and keeps individuals and businesses in a perpetual vicious cycle of debt.

Thankfully, this narrative is bound to change with the amended Credit Reference Bureau regulations issued by Bank of Uganda on September 9, 2022. Credit Reference Bureaus ensure that transparency prevails in the credit markets as they track the credit history of all borrowers to enable lenders know how they repay their loans. This enables the financial institutions adequately assess and minimise the risk of default by providing credit and safeguards commensurate to the risks of the borrower. Until the recent amendments, this service was only available to the formal banking sector that covers Tiers 1-3 (commercial banks, credit institutions and finance companies and microfinance deposit taking institutions) of Uganda’s financial system.

The amended regulations now extend this service to the entire economy to cover both formal and informal credit providers. It also expands the scope of credit to include financial and non-financial credit. This will greatly enhance the transparency in the entire credit market enabling both suppliers and consumers in this market to have a more complete credit risk score. The new regulations will also help level the playing field for small and large lenders.

The hope is that this enhanced transparency will reward more disciplined borrowers with increased access to credit at affordable interest rates. The other anticipated benefit is more appropriate collateral requirements given that credit reports will become their ‘reputation collateral’.

Credit reporting by the credit reference bureaus requires digitalisation of consumer and SME finance which represents a large opportunity to expand access to finance to unserved and underserved market segments. As the provision of digital financial services rises beyond traditional banks, expanding access to data from multiple financial institutions, from traditional formal to the less formal, is more critical than ever which makes this amendment timely.

The amended credit reference bureau regulations also pave way for a discussion about the role that the Credit Reference Bureaus Association of Uganda registered in 2021 can play in credit reporting, a fairly new concept for majority of finance sector players while ensuring financial inclusion.

From setting up industry standards for credit reporting, to educating borrowers and lenders about credit reporting, the to do list for the association is endless. The need to setup structures for less sophisticated financial institutions and measures to protect borrowers from excess risk as well as their data prove that a lot needs to be done to improve the status of Uganda’s credit market. To tackle this uphill task, the Financial Sector Deepening Uganda is keen to play a convening role for key credit reporting stake holders to discuss and agree on how to build an efficient credit market in Uganda that includes the unserved and underserved market segments.

Photo credit: Image by pch.vector on Freepik

Rebooting the Manufacturing Sector Post the Covid-19 Pandemic: A Case for the Platform Economy

By Joseph Lutwama

Taking Stock

In the manufacturing sector, the Covid-19 pandemic came with a mixed bag of fortunes. The pandemic presented an opportunity for some industries and catastrophe for others. Industries producing accessories related to the pandemic and those producing necessities like processed foodstuffs were not severely affected as they continued to operate^[1]. However, those that rely on global supply chains for their industrial inputs were severely affected as the economic lockdowns across the globe made it very difficult to easily access imports^[2].

With the pandemic on its way out, how do we build the ruins into a more resilient manufacturing sector?

Most of the recovery initiatives have focused on short-term stimulus packages to keep the manufacturing industries afloat. However, a lot more emphasis needs to be placed on setting the right foundations that will ensure long-term sustainability and resilience to future economic shocks such as the one occasioned by the Covid-19 pandemic.

The State of Manufacturing in Uganda

What makes most manufacturers vulnerable to economic shocks is their size and individual production capacity that makes it difficult to adjust and adapt in the face of economic disruptions. Obwona et al^[3]. in their research on the evolution of industry in Uganda note that eight out of every ten manufacturers employ less than 35 people and nearly five out of every ten employ less than 10 people.

Most of the manufacturers are small cottage industries heavily reliant on savings and informal credit from family and friends. In cases where they can access formal credit, it is limited in tenure and amount, usually not exceeding a year or two and small amounts ranging from US$100 to US$3000. Such terms leave no wriggle room for one to undertake long-term investments to build a strong foundation to cushion against economic shocks.

The Platform Economy: An Anti-Dote to the Vicious Cycle of Vulnerability

So then are these manufacturers doomed to a vicious cycle of vulnerability to economic shocks? I believe the platform economy has the anti-dote to this vicious cycle of vulnerability. The platform economy harnesses the power of technology platforms to transform micro and small manufacturing entities into viable and profitable business units with the capacity to grow into medium and large business ventures. There are three building blocks of the platform economy; aggregation, a supply-chain approach and technology.

1. 1. 1. Aggregation looks at the ability of technology platforms to aggregate small economic units into large collective business ventures which results into economies of scale and scope. Economies of scale in the sense that the small manufacturing entities can produce at scale what previously was unimaginable as individual units. One thousand producers of honey collectively can produce honey at scale enough to compete for the large honey markets with much higher returns on investment in both the domestic and export markets. Economies of scope make it possible for the manufacturers to receive a variety of services and products at a much lower unit cost. Some of these services are provided as a shared service across all the platform participants thereby spreading out the cost.

         A clear path to scale allows these small manufacturers to consistently grow their business savings, providing them with a solid track record to access more reliable and affordable credit from formal Financial Service Providers (FSPs). It is these financial savings and formal credit that will provide a cushion in the event of an economic shock thereby building resilience within the business.

1. 1. 2. The supply chain approach facilitates and promotes specialization among small manufacturers as they can only focus on one or two products if they are to maximise returns from a particular supply chain. These small manufacturers are used to engaging in a wide variety of products and services which they keep changing from time to time. While this may be a great strategy to ensure survival as a small business, it is not attractive to formal financial institutions as it does not create a clear path to growth and long-term sustainability. It only keeps them small as they never produce a product long enough to gain mastery and specialty which are critical ingredients of growth and scale.

         Operating in formal and organized supply chains (which technology platforms provide) forces these small manufacturers to focus and organize their businesses for scale and growth as they are now required to specialize in the production of specific products. This not only increases their access to formal financing but also reduces their financing risk. Being part of a formal and well-organized supply chain reduces the individual financing risk of a small manufacturing as their overall risk is spread out across the other more financially sound large supply chain actors.

1. 1. 3. Technology is the third building block of the platform economy which connects all the dots of the platform economy. It facilitates the interactions among the platform participants in ways previously unimaginable in a physical environment. Technology is more efficient and cheaper as it enables interactions and transactions across a multitude of participants in real-time which otherwise would take days or months to accomplish at a higher cost in a physical environment. Technology not only enables efficiency gains and higher productivity (all critical to achieving scale and growth) but it also increases accessibility to finance at a much lower cost.

A Parting Shot

Technology platforms, that can crack the puzzle of crafting the right business model, that brings together the different actors on to the platform, to harness the economic advantages highlighted above, present an immense opportunity to increase access to formal finance. These platforms are also a path to long-term sustainable growth for the manufacturing sector in Uganda – a sector that is more resilient to economic shocks, adaptable and responsive to the ever changing and disruptive domestic and global markets

REFERENCES

[1] https://www.ubos.org/wp-content/uploads/2020/06/Impact-of-COVID-2019-On-the-Ugandan-Economy692020.pdf accessed on 23/06/2022
[2] ibid
[3] https://www.brookings.edu/wp-content/uploads/2016/07/L2C_WP9_Obwona-et-al.pdf accessed on 23/06/2022

Making a Culture out of Saving Money

By Carolyne Ariokot and Brenda Banura

In a country whose citizens’ saving culture is in its adolescence, with only 54% of Ugandan adults saving an average of UShs6,000 (2018 Finscope Report respectively), commemorating the World Savings Day provides a great opportunity to highlight why saving money is essential.

Saving money enables you invest, put your money to work so that it generates income and appreciates. From asset accumulation to taking up investment products from fund managers, there are varied investment opportunities to choose from.

When you save money, your credit score improves. For people who don’t have assets to use as collateral when in need of loans, saving money accumulatively will help improve your credit score because it means that you are more likely to pay back. This is why, it is common for savings and credit cooperatives to give credit whose value is twice or thrice your saving balance.

Among other lessons, the post Covid-19 pandemic effects demonstrated the importance of saving for emergencies. Saving money enables you deal with uncertainties better and reduces your economic vulnerability.

The 2020 Covid-19 Finscope report (which identifies and describes financial service needs and the gaps in financial service provision), showed that 57% of Ugandans would not be able to sustain their lifestyle after just one day of lockdown.  81% would not be able to sustain it after 15 days. This lack of financial preparedness is partly because of the poor saving culture.

For some individuals especially those in the rural areas and people without steady incomes, despite the multitude of benefits, there just isn’t any money to save after spending on the basics. Therefore, as advocates of financial inclusion, the Financial Sector Deepening (FSD) Uganda has transitioned from viewing access to financial services as an end, to viewing it as an enabler. Financial services include saving, credit, payments, and insurance. The financial inclusion efforts now go beyond individuals and businesses opening bank accounts to leveraging finance services to increase productivity, incomes and employment, access to basic needs and overall economic growth.

By leveraging finance services to increase productivity, we are supporting financial service providers such as banks, insurance companies and financial technology companies to design related products that enable people increase incomes and opportunities to access and utilise financial services such as saving money.

To advance these efforts, in 2019, Opportunity Bank rolled out a group loan product that enabled Christine Abur, a small-scale farmer in Kiryandongo district in Northwestern Uganda rent farming land that enabled her to increase her productivity and income.

Abur narrates her experience saying, “I have been a farmer for a long time but the harvest from my half an acre of land was just enough to feed my family. I knew that renting land in the neighborhood would enable me harvest much more so that I can sell off the excess, but I just couldn’t afford to rent extra land. In 2019, Opportunity Bank educated women in my village about their group loan product and advised us to form a group, start saving and get loans. I joined a group with which I saved Ush50,000 (about USD13) per season. I saved for three seasons and my group guaranteed me to get a loan of UShs450,000 (about USD118). I used the money to rent land, buy seeds and hire extra labour. My harvest increased and so did my income and savings. I plan to rent more land, increase my income, and save a lot more.”

FSD Uganda shares learnings from interventions such as these with other financial service providers to serve as a benchmark to extend similar services to the wider population.

Just like a group loan product was developed to enable Abur increase her productivity, financial service providers design or enhance their various products to enable the different categories of clients especially those at the bottom of the pyramid to access basic services such as health, education, and housing.

Ultimately, an increase in income for individuals and businesses stimulates active participation in the financial market by transacting to meet different needs. This is bound to see an increase in the number of people saving money and the amounts being saved.

Photo credit: Image by jcomp on Freepik