As the sun crests over the horizon, Ben finds himself caught in the familiar grip of the morning rush. He taps his fingers impatiently against the steering wheel, aware that time is fleeting. His thoughts swirl as he prepares to drop his child off at school, a necessary stop before he can finally retreat to the comfort of his air-conditioned office. Yet, a distant irritation gnaws at him, a subconscious thought of his bank's constant barrage of unwelcome SMS reminders that he can now borrow up to UGX 2,000,000 from his emergency digital loan.
Meanwhile, across town, the morning unfolds in stark contrast for Jane, Margaret, Simon, and Ali. Jane wakes to hear her baby's restless whimpers, punctuated by the distressing heat of a fever that has taken hold. She feels a piercing anxiety as she realizes she has no money to take her child to the clinic for the care needed. Just down the road, Margaret's night took an unanticipated turn when an urgent family emergency drained her finances, forcing her to dip into the UGX 100,000 she had earmarked for replenishing her tomato stall stock. With planting season upon him, Simon finds himself in a frustrating bind; he is unable to purchase maize seedlings and fertilizers, essential supplies for his livelihood. In a heartbreaking moment of helplessness, Ali faces the grim reality that his son has been sent home from school, unable to pay the outstanding 70,000 balance owed to the school. The looming deadline of 15 days until his next payment leaves him anxious and frustrated, wondering how he can bridge that gap.
If only they could log onto their phones to access the 100,000 they so desperately need. Yet, the digital lenders that once provided a lifeline have recently closed shop, a consequence of harsh policy changes that have forced them out of the market. Their dreams of quick financial relief fade before their eyes, leaving only a sense of despair.
Digital credit is not merely a topic for Zoom calls or panel discussions; it is an integral part of survival for many Ugandans. For them, the stakes are stark: the difference between a meal or hunger, profit or loss, health or disease, poverty or prosperity. This instant, collateral-free credit represents their last and only hope, an essential tool in navigating the precarious balance of daily life in an increasingly tough economy. Thus, digital credit in Uganda should not be fumbled with.
Pioneer Species
In Forest Ecology, I learned about pioneer species, organisms that transform barren landscapes into thriving ecosystems over time. Pioneer species are marked by their ability to thrive in harsh conditions that few other life forms can endure. They gradually break down solid rock into nutrient-rich soil and transform desolate areas into mature, stable ecosystems where more complex organisms thrive.
I liken digital lenders in financial ecosystems to pioneer species. From a financial inclusion perspective, they are catalysts in building more inclusive financial environments. They break into uncharted territories, introducing financial services to previously underserved or overlooked populations by conventional financial institutions. Digital lenders use mobile technology, data-driven algorithms, and innovative credit assessments to operate in challenging markets, where traditional banks are often absent due to infrastructure limitations or perceived high risks.
From an economic growth standpoint, digital lenders lay the groundwork for broader economic development. They provide access to collateral-free small loans to individuals and narrow the finance gap for Micro, Small, and Medium Enterprises (MSMEs). Over time, they chart a pathway for the informal majority to graduate to advanced financial services. As they build their customer base and collect financial data, they create fertile ground for traditional banks and other financial players to enter underserved markets to offer other financial products and services, like savings accounts, insurance, and investment options.
A basket of Good and Bad Eggs
It is indisputable that Uganda’s digital lending ecosystem is littered with bad actors who have done a great job tarnishing the reputation of the entire sector—a classic case of biting the hand that feeds you. Notwithstanding, some reputable lenders have invested heavily in building compliant operations that serve thousands of Ugandans. Although it is crucial not to conflate these players with fraudulent ones, it is unfortunate that many would-be proponents of digital lending are quick to amplify negative stories about bad lenders instead of celebrating the achievements of the good actors.
On a positive note, launching the Tier 4 Microfinance Institutions and Money Lenders Digital Lending Guidelines earlier this year is a step in the right direction for the ecosystem. If followed, the guidelines offer a clear frame for licensing, governance, credit information sharing, limits on interest from non-performing loans, credit collection, consumer protection, and anti-money laundering and terrorism financing and reporting, which will ultimately streamline the industry.
However, it is imperative to acknowledge that the guidelines are not the panacea to the ecosystem challenges. The transition to this new regulated environment will undoubtedly take time for lenders, and it will require a concerted effort characterized by patience, collaboration, and support from all stakeholders involved. Implementing these guidelines will offer a great opportunity to gradually phase out the bad eggs. Hopefully, good eggs like Jumo, Numida, 4G Capital, Flow, Emata, Fido, UNIFI, and Zofi Cash among others will be recognized for their contributions in the lives of those once forsaken.
The bottom line is that digital lending policy should not aim to “deal with” or “crash” digital lenders. Instead, it should seek to simultaneously organize the ecosystem, facilitate the adoption of best practices. It should intricately pick out the bad eggs without crushing the good ones. The rough diamond should be cut and fine-tuned, not thrown back into the river.
By
George Wilson Ssenkande
Digital Finance Practitioner