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

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