Lessons for building resilience through inclusive financial services

How the financial lives of Ugandans have changed to respond to the effects of the Covid-19 crisis

By Jimmy Ebong and Diana Ngaira

FinScope 2018 showed that 75% of Ugandans did not have enough money to pay for living expenses, prior to the COVID-19 crisis. They have small amounts of savings and 23% who coped by working more when facing financial hardship would not be able to work during the lockdown. Many adults were at a high risk of not being able to meet their most basic needs for food and housing. The COVID-19 tracker survey provided additional insights about the financial behaviour of Ugandans when faced with a financial crisis. The study shed more light on employment and sources of income, access to credit and source of emergency funds, and the adoption of mobile-driven digital solutions, uncovering opportunities to build the resilience of Ugandans by fostering an inclusive market for financial services.

Financial Sector Deepening Uganda (FSD) Uganda partnered with Ministry of Finance, Planning and Economic Development (MoFPED) to conduct a survey to track the impact of COVID-19 on the financial resilience of Ugandan households. Funded by the Bill and Melinda Gates Foundation (BMGF), this study was also conducted in Kenya, South Africa, Tanzania, Nigeria, and Rwanda, and was coordinated by FinMark Trust (FMT). Data was collected through 4 waves of a longitudinal research conducted through telephone interviews.

The first case of COVID-19 in Uganda was announced on 18th March 2020 and on 21st March, several lock-down measures were announced in the first presidential address on the issue, and additional restrictions were introduced incrementally. The lockdown followed a global trend of how countries were responding to the COVID-19 pandemic. Expectedly, it led to a slowdown in economic activities, which adversely affected many households. Although easing of the lockdown measures started towards end of April 2020, not all restrictions have been relaxed and the effects of previous lockdown measures still linger.

The first three waves of the COVID-19 tracker study were conducted in April 2020, May 2020, and June 2020, with the fourth and fifth waves conducted in July and September of the same year. Findings from the five waves provide lessons that market actors can factor into their recovery strategies, to ensure no one gets left behind, and enable the country to recoup some of the gains made in financial inclusion.

The restrictions in movement of people and closure of workplaces severely impacted employment and consequently incomes of many people. Over the whole period of study, the very large majority – more than 85% – of main income earner had less income compared to the same period of April to September in the previous year. This impact was most significant in the month of May 2020, when 32 % of main income earners had no income. Households showed signs of recovery in September 2020 when the share of main income earners who are not making any income reduced to 11%, with 2% of them registering higher earnings than before COVID-19.

The poorest 40% of households and those living in rural areas were most affected by the lock-down measures. Over the whole period, main income earners belonging to the poorest 40% of the population were more likely not to have any income, and those living in rural areas were most hit in the month of April and May of 2020.

Many people lost jobs as a result of the closure of many workplaces. However, status of employment improved steadily between April and September. The share of those who did not work at all dropped from roughly 60% in April to less than 15% in September. The five waves have shown a strong impact on casual laborers as most farmers who employ have been hiring less – this was particularly striking in September. Many businesses experienced a reduction in demand for their goods and services. This was to be expected because overall, many people had lost jobs and incomes hence did not have effective demand. Similarly, during the lockdown, it became increasingly harder for farmers to sell their produce, and this was true for both crops and livestock.

Households adopted different mechanisms to cope with the loss of income. These mechanisms included reliance on remittances, informal borrowing and use of digital tools, with many households relying on remittances and gifts from family and friends to pay for living expenses. The share of adults who borrowed money steadily increased between April and June and then stabilized from June to September. There was increased use of digital borrowing, and in September, more than 15% of borrowers accessed credit from digital applications, money lenders, groups, and shopkeepers. Consequently, towards the end of the survey, many households were not able to repay their debts. This can be attributed to the fact that borrowers used credit to smoothen consumption, as opposed to investment to increase productivity.

Selling assets was another coping mechanism that many households, especially the richest 20%, adopted. In September, 18% of the respondents claimed to have sold assets since March 2020. This was highest for the most affluent participants, who probably used income from such sales to cope with income loss caused by COVID-19. Majority of Ugandans who did not have any assets to dispose of were adversely affected.

From early April 2020, many households were not able to come up with emergency funds. Most households, especially the poorest 40%, do not save and hence had no immediate sources of emergency funds. In September, two thirds of the respondents still thought they would not be able to come up with Uganda Shillings (UGX) 115,000 emergency funds within seven days in case of a sudden need.

The resilience of many households worsened during this period. The perception of lack of food became more acute as the restrictions continued. In July, 25% of respondents reported scarcity of food. Towards September, scarcity of food was reported by 42% of survey respondents. Alarmingly, about a third of the sample claimed to have cut down on the number of meals eaten per day.

Before Covid-19 restrictions were put in place, the economic resilience of many households was already weak, as they had little to no savings, and they predominantly relied on informal financial services to meet their needs. However, households demonstrated adaptable behavior to mitigate the additional financial stress caused by loss or depressed incomes, notably by embracing digital tools to access credits. These changes present an opportunity to encourage the unserved and underserved to interact with formal financial services, but also expose the vulnerable to risk when they are not able to repay their loans.

The key lesson learnt which should inform interventions for inclusive recovery include prioritizing sectors that have been severely affected. While all sectors have been massively affected by the pandemic (particularly trade, transport, services and manufacturing) inclusive interventions will need to target support towards the agricultural sector where a majority of the poorest derive their livelihood. Economic recovery measures should leverage coping mechanisms that respondents embraced more readily, including digital tools, which can play a big role in smoothening household needs during emergencies. Interventions should also support the development of robust remittance and digital payment systems that enable governments and humanitarian actors to deliver emergency support, including unconditional cash transfers, effectively and efficiently.

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