Determinants of financial inclusion in urban and rural areas of Uganda

Abstract

In October 2017, the Bank of Uganda and the Ministry of Finance, Planning and Economic Development developed the National Financial Inclusion Strategy (NFIS) of increasing financial inclusion to at least 95% by 2022. However, between 2013 and 2018, financial inclusion had stagnated at 78% thus necessitating understanding of the factors which influence it in Uganda. The study mainly sought to understand the effect of digital technology, trust of financial institutions, financial literacy, asset ownership and demographic factors on financial inclusion while considering the effect of residence in influencing one’s financial inclusion status using data collected from FinScope 2018 survey. The study utilized Pearson’s Chi-square tests and complementary log-log model to find out the factors which influence financial inclusion at bivariate and multivariate levels respectively before and after stratifying by residence. Mantel-Haenszel Chi-Square test was used to determine the existence of residence effect modification between the independent variables and financial inclusion.

The Mantel-Haenszel Chi-Square test showed that residence effect modification existed among urban and rural residence regarding digital technology, financial literacy, and trust of financial institutions. Results from multivariate analysis showed that digital technology, asset ownership, financial literacy and trust of financial institutions increases the likelihood of using financial products in both places of residence. The major difference revealed by the study was age and gender were significant and positively associated with financial inclusion in rural areas yet insignificant in urban areas.

The findings from this study proved that place of residence can influence one’s financial inclusion status. The complementary log-log model also proved to be the suitable model when dealing with groups which have heterogeneity (urban and rural) while modelling binary outcome variables like financial inclusion which are skewed. We therefore recommend that the government work hand in hand with financial institutions to introduce financial talks to public so that people can appreciate the importance of financial inclusion. There is need for financial institutions to increase the level of transparency in terms of account balance and charges whenever a customer effects a transaction to increase the level of trust.