Nathan Were
10 November 2009
opinion
A FinScope study conducted in 2007 established that 62% of the Ugandan population did not have access to either formal or informal financial services.
A recent global competitiveness report also showed that lack of access to affordable and efficient financial services is limiting entrepreneurial growth in Uganda. Access to abroad range of rural financial services can have a significant impact on people's ability to weather economic shocks, make investments and build financial and physical assets.
But efforts to increase supply of finances in rural areas continue to be a formidable endeavour. Faced with high transaction costs and risks of doing business, harsh economic and physical environments, commercial banks have been reluctant to enter rural markets. In there absence, informal financial institutions such as Saccoss, village banks, money lenders and rotating and savings corporative societies have emerged, but these typically offer a narrow range of financial services in a small geographical area.
A promising area that is attracting much attention is the linkage between formal and informal financial institutions as an alternative way of expanding financial services into rural areas.
Linkage banking occurs when formal and informal financial intermediaries come together with the aim of expanding financial access to rural communities that were hither too not reached by both formal or informal institutions as a result of operational constraints.
Saccos are unable to mobilise savings since they are not regulated and have limited financial resources to extend as loans. On the other hand, commercial banks are reluctant to extend there operations to rural areas partly due to high transaction costs associated with small loan sizes and deposits of rural clients.
This as a result has left many potential and legitimate rural communities without access to financial services. While government has implemented a number of programmes aimed at enabling rural communities access finances for agricultural value addition, a lot more stills need to be done like linkage banking.
With linkage banking, commercial banks identify successful and progressive rural financial intermediaries that they support through whole sale lending and building systems that support these institutions to operate more efficiently and expand their operations. Such activities may include training of Saccos staff in basic banking as move to develop their capacity to manage the funds.
In return, the Sacco lends out the money at an affordable interest rate to a large section of rural community, which it was unable to lend to prior due to financial constraints. This move expands operations for banks and improves their profitability.
In Ghana, a local bank has adopted a similar approach using Susu collectors. Susus are powerful and respected business individuals who operate their businesses in rural areas.
Due to their popularity, the banks identified them as an interface between it's self and the communities.
The bank uses the Susu as an intermediary to extend loans and mobilise savings to productive rural communities.
The Susu intermediates on behalf of the bank, conduct appraisals for prospective borrowers and advise the bank on risky ventures within the community. As a result of this approach, there has been considerable improvement in access to rural financial services in Ghana.
Uganda government has encouraged rural communities to form Saccos through which the prosperity fund would be channelled.
The established Saccos could act as important vessels for linkage banking. Commercial Banks could use them as satellite branches for their operations saving.
This will immensely improve access in rural financial services and build sustainable rural financial systems for the poor.
The writer is a microfinance specialist
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