Laying the foundations of the digital economy

30/01/202404/11/2024

FSD Uganda

***This is a brief from the 2023 annual report

Using digital financial services to drive financial inclusion necessitates a functional digital economy that seamlessly integrates technology with financial systems, enabling widespread access to services and fostering economic growth. This requires the development of robust digital infrastructure, an enabling policy and regulatory framework, supportive regulatory and policy institutions and an inclusive and competitive ecosystem that empowers individuals and businesses to participate in the formal economy.

FSD Uganda is actively contributing to the growth of the digital economy through its digital economy pillar which comprises of three facets: policy, legal and regulatory reforms, shared digital market infrastructure and institutional development. These facets involve direct collaboration with regulators, particularly the central bank, government ministries, agencies and departments, and industry associations.

Policy, legal, and regulatory reforms

FSD Uganda’s work in the policy, legal, and regulatory reforms aims to provide an enabling regulatory environment for an inclusive financial landscape by having the right policies in place. Such an environment allows for innovation, ensuring consumer protection and promoting healthy competition within the financial sector.

This year was a culmination of a work spanning over six months in which FSD Uganda in collaboration with the Bank of Uganda (BoU) and the Ministry of Finance, Planning and Economic Development (MoFPED), developed the National Financial Inclusion Strategy (NFIS II) that will run for five years from 2023 to 2028. This is a critical financial inclusion policy that serves as a strategic roadmap that guides stakeholders in implementing effective and efficient actions to improve financial inclusion in Uganda especially for the marginalised and underserved population segments. The major objective of NFIS II is to reduce poverty and promote economic growth through affordable financial services. FSD Uganda played a key role in this strategy through providing technical assistance and conveying strategic partners to achieve national targets.

Institutional development

The policy, legal and regulatory frameworks are enforced by government institutions and policy makers and their effectiveness depends on the entities having the capacity and tools to enforce them. Recognising this, FSD Uganda is actively involved in strengthening this area at three levels: human resources, institutional structures, processes and systems. This approach ensures that the various policy and regulatory requirements are executed efficiently.

Recognising the growing reliance on technology in Uganda’s financial markets, FSD Uganda this year embarked on a project to support Bank of Uganda in developing an innovation strategy and adopt a more technology driven approach to bank supervision (SupTech). This is all in a bid to enable the Central Bank to become more adaptive and responsive in a rapidly evolving financial services sector. FSD Uganda’s support highlights its commitment to fostering a resilient and forward-looking financial ecosystem in Uganda.

Digital shared market infrastructure

In addition to an enabling environment, financial inclusion through digital financial services requires more efficient, affordable and inclusive digital market infrastructure. This can only be achieved through shared digital market infrastructure that allows for more competition and a variety of product offerings in the market. Digital shared market infrastructure allows for more collaborative use of digital platforms and technologies by multiple financial institutions limiting the barriers to entry and anti-competitive practices that come with the massive capital investments required of individual market infrastructure development.

To facilitate safe transactions, it’s essential to digitally identify and verify customers which requires robust infrastructure to be put in place within the digital ecosystem. Two years ago, FSD Uganda supported the banking sector to develop a shared digital market infrastructure to provide Electronic – Know Your Customer(e-KYC) services. This would enable the remote on-boarding of customers in far-to-achieve areas thereby increasing the possibility of extending the financial inclusion frontier to the unserved and underserved population segments. This year, FSD Uganda embarked on a review of the performance of the same infrastructure with the goal of scaling the same platform to the more inclusive and grassroot Tier IV financial institutions.

Initial findings from the impact assessment indicate that the e-KYC system has been largely successful for supervised financial institutions. It significantly enhanced the efficiency of customer onboarding, reducing the process time from up to two weeks to an average of 5 minutes, and improved identity verification, with 68 percent of institutions finding it effective and user-friendly. Additionally, the system has contributed to better financial crime risk management, reducing risks like impersonation and fraud.