Commercial banking and financial inclusion of Uganda’s middle class - the case of Kampala city

Abstract

Studies have demonstrated that financial inclusion or being part of a formal financial system, has the potential to improve the quality of life, and is one of the key pillars of economic growth, given that it promotes social inclusion and reduces poverty levels. Consequently, a number of jurisdictions including Uganda, have over the years put in place deliberate policies to encourage the financial inclusion of their citizenry. However, the national census of 2014 revealed that approximately 57 percent of the urban households did not have bank accounts. Most of the middle class reside in urban areas and, therefore, it implies that a large number of them appear to be excluded from the banking sector. It is worth noting that in the context of Uganda and this research, bank account do not include mobile money accounts, although mobile money companies are regulated by the Central Bank. The middle class play a significant role in promoting economic growth especially through their purchasing power. As such, their continued exclusion from the formal banking sector, specifically that which is regulated by the Central Bank, could have far-reaching implications on the pace of the country’s economic growth. A significant proportion of bank deposits in the formal banking sector regulated by Bank of Uganda sit in Commercial banks, with a small percentage held in Credit Institutions and Micro finance Deposit Taking Institutions (MDIs). As such, this study, sought to understand the major factors affecting access, usage and quality of commercial banking services accessed by the middle class, using a case study of Kampala which is the capital city of Uganda. It has been ascertained that financial inclusion is sensitive to context and is affected by the emotions of people. It was against this background that a literature review on factors affecting financial inclusion in six (6) countries was conducted. The countries spanned across the developed and less developed world namely: United States of America, United Kingdom, India, Nigeria, Kenya and Uganda. The review gave the researcher a broad view of the various factors affecting financial inclusion or access to formal financial services generally, excluding mobile money. These were subjected to further research, to ascertain whether they affected the middle class in Uganda. In order to obtain credible research findings, a mixed methods research approach was adopted. Logistic regression and the Linear Probability Model (LPM) were used to analyse the primary data which was collected using questionnaires completed by a quasi random sample of two sub-groups of the urban middle class. Follow-up qualitative interviews were held with respondents who were willing to share additional information. This enabled the researcher obtain a better appreciation of the motivations and experiences lying behind the statistical results. The results of the study revealed that the major factors affecting financial inclusion amongst the Ugandan middle class were; high bank charges, inadequate handling of customer complaints, fear of compromised privacy, low trust in the banking sector, long lines in banking outlets, negative experiences with banks, unstable internet and ATM services, amongst others. Arising from these findings, and benchmarking with other countries, the study has highlighted a number of recommendations for various stakeholders. The Government of Uganda should consider the need to have a professionally managed and widely marketed Government owned commercial bank with a large branch network to cater better for the needs of the middle and lower class Ugandan. The Central Bank should consider engaging with commercial banks to explore the possibility of opening ‘basic bank accounts’ or ‘no frill accounts’ which do not attract any fees or charges, for certain segments of the population, as has been done in other jurisdictions. Additionally, Bank of Uganda should enhance its effort in strengthening the customer complaints management process by both the commercial banks and within the Central Bank itself. Alternatively they could consider establishing a Consumer Protection Department or Unit for financial services. The Government should intensify its drive of providing stable, faster and affordable internet across the country in order to better support alternative channels of banking. Finally, the public should be better informed about the role of the Deposit Protection Fund of Uganda in compensating depositors up to the insured limit in the event of a bank closure.