Navigating the pitfalls: 3 consumer challenges in Uganda's Financial Consumer Protection
Uganda's financial landscape is booming, with mobile money leading the surge in financial inclusion. However, this progress demands robust consumer protection measures to prevent financial harm.
In recent years, Uganda has made significant strides in enhancing financial inclusion and access to financial services.
According to Finscope data (2023), financial inclusion increased since the last FinScope survey in 2018, by 4 percentage points from 77 percent registered in 2018 to 81 percent registered in 2023. The biggest driver of this growth has been formal financial inclusion which has grown by 10 percent from 58 percent in 2018 to 68 percent in 2023. Informal financial inclusion grew slightly from 50 percent registered in 2018 to 52 percent in 2023. The proportion of overall mobile phone ownership increased from 59 percent reported in 2009 to 72 percent in 2023. The same is the case across the genders, though the gender gap in mobile phone ownership has steadily increased from 8 percent in 2009 to 16 percent in 2023.
With this growth, the Bank of Uganda, which regulates the financial sector, sees the imperative to protect consumers from potential risks and malpractices. The Bank recognizes that safeguarding consumer interests is essential to maintaining trust and ensuring the stability of the financial system as it expands.
In 2011, Uganda issued its Financial Consumer Protection Guidelines, applicable to institutions licensed under the Financial Institutions Act and Bank of Uganda (BoU) updated its National Payments Act in 2022, including financial consumer protection provisions.
In Uganda’s National Financial Inclusion Strategy 2023-2028, Financial Consumer Protection (FCP) policies are a priority. While individuals may face potential financial risks, improving the quality of financial services, increasing transparency, and enhancing access to redress mechanisms can mitigate these risks and empower consumers to make sound financial choices. The evolving landscape is shaped by regulatory reforms, institutional frameworks, and increasing consumer awareness.
UNCDF has a longstanding collaboration with the Bank of Uganda, supporting their national goals for financial inclusion and consumer protection. This blog highlights three major consumer challenges in Uganda’s financial sector and outlines several policy options available to the Bank of Uganda to address these challenges.
1. Frauds and scams
Fraud and scams are among the biggest challenges for financial consumers in Uganda.
An Innovations for Poverty Action survey (IPA) found that about 47% of survey respondents have experienced attempted scams or instances of attempted fraud since March 2020.
While evolving technology will continue to thrive and risks may increase, it is crucial to raise awareness around them so that consumers make informed decisions. The rise in digital financial services, such as mobile money, has led to a surge in fraudulent activities. Phishing attacks, identity theft, and unauthorized transactions have become common pitfalls for consumers.
A new form of fraud that has emerged is Artificial Intelligence (AI) fraud, which involves the use of AI technologies to deceive or exploit individuals and financial institutions. This can include sophisticated phishing attacks, deepfake scams, and automated financial manipulation. The Bank of Uganda acknowledges that combating AI fraud is a significant challenge, given the rapid advancements in AI technology and the evolving tactics used by fraudsters. Addressing AI fraud requires continuous updates to regulatory frameworks, enhanced detection mechanisms, and increased public awareness. However, raising awareness about the risks associated with it is crucial. In response, the Bank of Uganda (BoU) intends to release cybersecurity guidelines that will provide financial institutions with standards and practices to strengthen their systems against cyber threats.
While these guidelines primarily focus on provider systems and compliance, they also aim to indirectly benefit consumers by enhancing the overall security of financial services. By ensuring that financial institutions adopt robust cybersecurity measures, the guidelines help protect consumers from potential fraud and cyber threats, thereby improving their trust and confidence in the financial sector.
Optional regulatory responses may include:
Issue cybersecurity guidelines, for the entire financial sector
Invest in financial education strategies, starting from primary education;
Design relevant, demand driven and evidence-based digital financial literacy and capability interventions;
Apply FCP requirements on an activities-basis (lending and investment-related services), rather than by institution type;
Extend existing FCP requirements to P2PL and, where necessary, introduce additional FCP rules for P2PL;
Impose licensing / registration, vetting, and competence requirements for operators and related parties;
Require operators to have in place adequate risk management and governance measures, e.g. enhanced KYC requirements, improve technological systems for transaction monitoring.
2. Over-indebtedness and predatory lending
With the rapid expansion of digital financial services in Uganda, digital loans have become increasingly popular.
These loans, often disbursed via mobile phones and online platforms, provide quick and easy access to credit for many Ugandans. However, it has led to significant challenges when consumers borrow more than they can afford to repay, particularly due to predatory lending practices. Predatory lenders may offer loans with exorbitant interest rates, hidden fees, and aggressive collection tactics.
As a result, consumers find themselves trapped in a never-ending cycle of debt. These concerns have been raised by several national regulators, including the Bank of Uganda and the Uganda Microfinance Regulatory Authority (UMRA).
Regulatory responses may include, but are not limited to:
Require providers to assess the ability of prospective customers to repay loans and grant loans only where they are affordable to potential borrowers.
Impose requirements that limit rollovers and multiple borrowing to decrease the risk of over-indebtedness.
Require enhanced monitoring of loan portfolios, particularly where automated credit scoring is utilized.
Develop and enforce a robust regulatory framework that addresses the digital lending ecosystem.
Establish and integrate a comprehensive credit registry to facilitate better credit assessment and risk management. The role of credit reference bureaus, such as those represented by the Credit Reference Bureau Association (CRBA), is crucial in this context for providing accurate credit histories and promoting responsible lending practices.
3. Limited redress and complaints handling
Challenges in redress and complaints handling in Uganda’s financial sector are evident. Often, consumers are unaware of the available redress mechanisms or find the processes overly complicated and time-consuming.
A 2022 IPA study found that only around 40% of customers who lodged complaints and experienced financial losses had their issues successfully resolved. The limited coordination between regulatory bodies, such as the Bank of Uganda, the Uganda Microfinance Regulatory Authority (UMRA), and the Insurance Regulatory Authority (IRA), exacerbates these issues. The absence of robust redress mechanisms exposes consumers to various risks, including lack of accountability for financial institutions, disempowerment of consumers, and financial hardships.
While the BoU has established guidelines for financial consumer protection, including provisions for complaint resolution, the implementation and enforcement of these guidelines varies across institutions, causing challenges to financial consumers.
A suitable response from a regulatory standpoint may involve:
Ensure that financial service providers (FSPs) have effective complaints handling mechanisms in place to receive, collect, resolve and report complaints data, while allowing consumers to register complaints, assert their rights and ensure negative trends can be detected and mitigated before they have macroeconomic impacts;
Enhance and enforce comprehensive consumer protection regulations, including timelines for resolution and penalties for non-compliance;
Promote consumer awareness about the availability of redress mechanisms and consumer rights, e.g. through public awareness raising campaigns, educational programmes;
Establish independent bodies specifically tasked with handling consumer disputes could ensure impartiality and fairness in the resolution process;
Simplify the complaints handling process, e.g. by providing multiple channels for lodging complaints (online, in-person, via phone), or leveraging technology like digital platforms to lodge complaints.
Addressing these major consumer risks is crucial for fostering greater trust in Uganda’s financial system, while contributing to a more inclusive and resilient economy. Limited redress mechanisms pose significant risks, including the lack of accountability for financial institutions and financial hardship. Uganda could enhance its FCP landscape by strengthening its regulatory framework, simplifying complaint processes and raising consumer awareness.
The power of collaboration
Regulators such as the Bank of Uganda and UMRA play a vital role for implementing and enforcing measures to protect consumers. Likewise, consumers need to stay informed, being vigilant against fraud, seeking transparent information and borrow responsibly. Promoting responsible lending practices could address over-indebtedness and predatory lending, while creating an equitable and sustainable digital financial ecosystem.
By working together, Uganda’s regulatory bodies and financial consumers could create a robust financial system where consumers are protected. The recognition of the significance of financial consumer protection, as emphasized in the National Financial Inclusion Strategy, is a major step towards fostering greater trust in Uganda's financial system and ultimately create a robust financial ecosystem where consumers are protected by:
Strengthening the regulatory framework: Empowering institutions like the Bank of Uganda and UMRA to enforce clear consumer protection measures.
Simplifying complaint processes: Making it easier for individuals to seek redress when wronged.
Raising consumer awareness: Educating users about their rights, responsible borrowing, and how to avoid fraud.
Promoting responsible lending: Discouraging predatory practices and over-indebtedness.
The Financial Consumer Protection Guidelines 2011 are a foundation to strengthen the existing legal and regulatory frameworks, potentially using evidence from market research to justify turning the guidelines into a regulation in the future.
By working together – regulators, financial institutions, and informed consumers – Uganda can create a thriving digital financial ecosystem that prioritizes the financial well-being and rights of consumers where everyone benefits, including the most vulnerable.