DIGITALIZATION OF FINANCIAL SERVICES AND FINANCIAL INCLUSION IN

UGANDA; A CASE OF LANGO SUB REGION

BY

MILLEN NAMANYA
2022/HD10/820U
0755978811
namanyamillen123@gmail.com

A PROPOSAL SUBMITTED TO THE SCHOOL OF MANAGEMENT SCIENCES

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD
OF A MASTERS OF SCIENCE IN ACCOUNTING AND FINANCE
OF MAKERERE UNIVERSITY

NOVEMBER, 2023.

PLAN A

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 TABLE OF CONTENTS

TABLE OF CONTENTS..........................................................................................................i

LIST OF ACRONYMS AND ABBREVIATIONS...............................................................ii

CHAPTER ONE.......................................................................................................................1

INTRODUCTION....................................................................................................................1

1.1 Background to the study.......................................................................................................1

1.2 Theoretical background........................................................................................................3

1.3 Statement of the Problem.....................................................................................................4

1.4 Purpose of the Study............................................................................................................4

1.4.1 Specific Objectives of the study........................................................................................5

1.5 Research Questions..............................................................................................................5

1.6 Research Hypotheses...........................................................................................................5

1.7 Conceptual frame work........................................................................................................5

1.8 Justification for the study.....................................................................................................6

1.9 Significance of the study......................................................................................................7

1.10 Scope of the study..............................................................................................................7

1.10.1 Subject Scope..................................................................................................................7

1.10.2 Geographical Scope........................................................................................................7

1.10.3 Time scope......................................................................................................................7

REFERENCES...........................................................................................................................8

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 LIST OF ACRONYMS AND ABBREVIATIONS
ASCA: Accumulating Savings and Credit Association
ATMs: Automatic Teller Machine
BoU: Bank of Uganda
FE: Financial Exclusion
FI: Financial Inclusion
MDIs: Microfinance Deposit Institutions
MFIs: Micro Finance Institutions
MSMEs: Micro, Small and Medium Scale Enterprises
ROSCA: Rotating Savings and Credit Association
SACCOs: Savings and Credit Cooperatives
UNCDF: United Nations Capital Development Fund
VSLA: Village Savings and Loan Associations

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 CHAPTER ONE
INTRODUCTION
1.1 Background to the study
Most nations throughout the globe have chosen financial inclusion and entrepreneurial develo
pment as effective instruments and panaceas for addressing socioeconomic ills such as inequa
lity of opportunities and, for that matter, achieving Sustainable Development Goals 1, 2, and
8, which aim to reduce poverty and hunger and create wealth and jobs (Iannone & Caruso,
2023). The origin for financial inclusion (FI) can be traced in the late 1990s when United Nat
ions Capital Development Fund (UNCDF) work at the local level often included support for
microcredit institutions (Ratnawati, 2020). By that time, FI and financial exclusion (FE) were
initially used in the early 1990s to draw attention to the limited access to formal financial serv
ices (Leyshon & Thrift, 1994; 1995). Over the years, financial inclusion has become a priorit
y to policy makers globally (Demirguc-Kunt and Klapper, 2012, Ardic et al., 2011). In China,
Fungacova and Weill (2015) studied the areas that provide essential support for financial awa
reness and financial literacy and observed that the richer, more educated, and older were mor
e financially included.
Compared with other parts of the world, Africa registers the lowest levels of financial inclusi
on among its population, which is largely poor. Only 25% of the adult population own an acc
ount in a formal financial institution compared with 39% in Latin America and the Caribbean
and 89 percent in high income countries (Mhlanga, 2022). Low levels of financial inclusion r
emain a challenge on the African continent (World Bank, 2020). The World Bank (2019) rep
orted that only 34% of adults in Sub-Saharan Africa are financially included. A significant pr
oportion of adults across Africa fall outside the formal financial system because of poverty, c
osts, travel distance, low confidence in the banking sectors and lack of financial education. In
Kenya, access to formal financial services by small scale manufacturing enterprises is still lo
w despite the government through Vision 2030, championing the need to increase financial in
clusion to a wider section of Kenyans, including the micro, small and medium- scale enterpris
es (MSMEs).
In Uganda, various efforts have been made both by the government and its partners to sustain
ably improve financial inclusion. For instance, the financial inclusion project of the Bank of
Uganda (BoU) intends to expand access to financial services to a cross-section of Ugandans.
One key to achieving this goal is through the growth of E-funds transfer banking in the count
ry (BoU, 2013). In 2006, 62% of Ugandans (8.1 million) were financially excluded with only
18% (2.4 million) having an account in a formal financial institution, including commercial b

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anks, Microfinance Deposit Institutions (MDIs) or credit institutions regulated by the BoU. O
nly 3% were served by semi-formal Savings and Credit Cooperatives (SACCOs) or micro fin
ance institutions (MFIs), while 17% (2.2 million Ugandans) used informal financial services t
hrough informal groups like Accumulating Savings and Credit Association (ASCA), Village
Savings and Loan Associations (VSLA) and Rotating Savings and Credit Association (ROSC
A) (Tiony, 2023).
Digital financial inclusion is a complex practice (Vasile & Panait, 2021). It entails the use of
cost-effective digital methods to provide a variety of official financial services tailored to the
needs of currently financially excluded and vulnerable populations. (Adegbite & Machethe, 2
020; Ahmed & Chinembiri, 2021; Baker, 2021). Digital financial inclusion is the use of digita
l financial services to spearhead financial inclusion. These financial services are prudently su
pplied at reasonable cost to customers, and at the same time, are sustainable for the providers
(Ina Ibor et al., 2017; Shipalana, 2019). The digital financial services on the other hand comp
rise of a wide array of financial services retrieved and delivered through digital platforms (An
akpo et al., 2023). The services may be payments, borrowings, savings, settlements, and insur
ance. Mobile financial services are also included.
Access to financial services in Lango sub region includes access to a bank account and access
to a debit card; while use of financial services includes use of a bank account and use of a deb
it card. Access to financial service promotes thrift and develops culture of savings. Efforts to
increase formal financial inclusion in Lango sub region are faced with significant challenges
which are both supply and demand side in nature (Museba et al., 2021). The high cost of prov
iding financial services in Lango sub region often means that formal financial institutions lac
k the incentive to penetrate these areas as well as the ability to mitigate perceived operational
risks (Lango sub region report, 2019). From a demand-side perspective on the other hand, the
most significant challenge is that most adults in Lango sub region rely on sources of income t
hat give them access to small amounts of cash on an inconsistent basis. The financial behavio
r of people in Lango sub region is driven by their daily needs as they are likely to save and bo
rrow small amounts, quick access to savings and credit would be a key requirement, and they
are therefore unlikely to see value in opening a bank account or using other formal financial i
nstitutions. However, Lango sub region has a relatively sparse financial infrastructure by inter
national standard and more than half of the Lango sub region’s bankable population is still tot
ally out of the financial services orbit (Odongo, 2022).

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1.2 Theoretical background
This study will be guided by the theory of social construction of technology. This theory was
advanced by Collins (1975); Pinch (1977, 1986); and Pickering (1984). This theory is based o
n four main assumptions. First, the theory assumes that any technological innovation must ha
ve an interpretive flexibility if customer satisfaction is to be achieved. Pickering (1984) postu
lates that expertise enterprise is an open procedure that can yield diverse upshots reliant on th
e social situations of improvement. Therefore, he argues that there is a need for technologies t
o be rooted from intergroup negotiations over the interpretation of observations if future cust
omer satisfaction is to be enhanced (Wang & Fu, 2021).
The second assumption is that the any new technological innovation must be relevant to the t
argeted social group. This is because besieged or pertinent social clusters are the bywords of
particular explanations, thus, multiple groups may have different definitions of a working tec
hnology, so, introduction of new technological development requires to be implemented until
when all groups come to a consensus that their common artifact works.

The third assumption of theory is related to closure and stabilization. Bachas, Gertler, Higgin
s, & Seira, (2018) agitates that multiple groups of people must be involved in the continued d
esign of the new technology to avoid conflicting images and this should continue until when
all conflicts were resolved and the artifact no longer poses a problem to any relevant social gr
oup. The last assumption under which this theory is built is wider context. In this study theref
ore, this theory presupposes that if digital finance is to be adopted in commercial banks, there
is a need to ensure that all customers have the same interpretive flexibility, relevant to all of t
hem, all people targeted or customers are involved in designing the design and fully welcome
d by the entire community, if customer satisfaction is to be achieved.
One of the strengths of this theory is that it recognizes the importance of human actions in
shaping the technology. This is unlike in the actor-network theory where human superiority is
ignored. This aspect has significantly contributed in the effectiveness of this theory. This is
because human activities have played an important role in shaping their environment.
Another advantage of SCOT is that it can be a methodology. In other words, it gives the
principles and steps to follow in case someone wants to find out the causes of successes or
failures of a particular technology.

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1.3 Statement of the Problem
The financial inclusion strategy was put in place with emphasis on five pillars of reduction of
financial exclusion and barriers to access financial services, developing the credit infrastructu
re, building the digital infrastructure, deepening and broadening formal savings, investment a
nd insurance usage, and protecting and empowering individuals with enhanced financial capa
bility which articulates a vision for Uganda by 2022 in which all Ugandans have access to, an
d use, a broad range of quality and affordable financial services (Ministry of Finance, 2018).
Rendering to this strategy, a number of efforts have been made to increase financial inclusion
in both rural and urban areas, that includes digitalization of financial services in order to prov
ide financial service providers (FSPs), primarily banks, with insights into consumer segments
they may want to target were agents are appointed by commercial banks to set up their own b
rick and mortar structures so as to introduce digitalization of financial services services and re
lated products that are affordable (Nakintu, 2021; Finscope, 2018).
Notwithstanding the above efforts, levels of financial inclusion in rural areas are still inadequ
ate and this has not left Lango sub region exceptional as the municipality has relatively sparse
financial infrastructures by international standard and more than half of the Lango sub regio
n’s bankable population is still totally out of the financial services orbit, lack of digital
financial literacy, high financial service costs, limited access to Banking Services basing on
the digital transformation roadmap 2023/2024 - 2027/2028 (Mubiru, 2020). The banking hall
remains the predominant channel, allowing face to face interaction (a form of preference) foll
owed by the ATMs and thus 58% of the potential users of digitalization of financial services
need to travel for more than 1 hour to access a bank branch in Lango sub region (Lango Sub
Region Report, 2022). This has resulted into high costs of providing financial services, partic
ularly in the rural areas and among the poorer segments of the population, lower revenue for f
inancial service providers given that poor households have limited investment opportunities a
nd small transaction amounts. In order to fill the problem gap of insubstantial access to
affordable financial services in Lango sub region, this study will examine the relationship
between digital finance and finance inclusion.
1.4 Purpose of the Study
The purpose of the study is to examine the relationship between digital finance and financial
inclusion in Lango sub region.
1.4.1 Specific Objectives of the study
i. To examine the relationship between Mobile Phone Banking and financial inclusion i
n Lango sub region.

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 ii. To establish the relationship between Internet banking and financial inclusion in Lan
go sub region.
iii. To examine the relationship between E-funds transfer banking and financial inclusion
in Lango sub region.
1.5 Research Questions
i. What is the relationship between Mobile phone banking and financial inclusion in Lan
go sub region?
ii. What is the relationship between Internet banking and financial inclusion in Lango su
b region?
iii. What is the relationship between E-funds transfer banking and financial inclusion in L
ango sub region?
1.6 Research Hypotheses
H1: There is a significant relationship between Mobile Phone banking and financial inclusion
in Lango sub region.
H2: There is a significant relationship between Internet banking and financial inclusion in La
ngo sub region.
H3: There is a significant relationship between E-funds transfer banking and financial inclusi
on in Lango sub region.
1.7 Conceptual frame work
DIGITALIZATION OF FINANCIAL SERVICES (IV)
Mobile Phone Banking
 Bank to wallet
 Wallet to Bank
 Balance inquiry H1 FINANCIAL INCLUSION (DV)

Internet banking  Bank accounts access

 Instant Money Transfer
 Deposits/Savings
 Email H2
 Payment services
 Website services
 Loans accessibility
E-funds transfer banking  Financial insurance
 Cost
 Internal transfer H3
Source:
 Adapted andTransfers
Telegraphic modified by researcher from literature (Bakkabulindi, 2006; Jayawar
dhena & Foley, 2000; Sohail & Shanmugham, 2003).

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Figure 1.1: showing the relationship between digitalization of financial services and fina
ncial inclusion
The conceptual framework in Figure 1.1 indicates the relationship between digitalization of
financial services and financial inclusion. The independent variable digitalization of financial
services is measured in terms of Mobile Phone Banking with subthemes of Bank to wallet,
Wallet to Bank and Balance inquiry, Internet banking with subthemes ofInstant Money
Transfer, E-mail and Website services and E-funds transfer banking with subthemes of Cost,
Internal transfer and Telegraphic Transfers. The dependent variable financial inclusion is
measured in terms of bank accounts access, deposits/savings, payment services and loans
accessibility and financial insurance. It is hypothesized any changes in the independent
variable will bring a change in the dependent variable by the same magnitude.
1.8 Justification for the study
Digitalization of financial services is a powerful approach in the quest for financial inclusion
because of its ability to reduce bank costs to serve. Many banks are deterred from setting up b
ranches in remote, poor and sparsely populated areas because of the high set up costs which d
oes not correspond to the perceived business from such areas. By setting up agent banks and
making use of existing infrastructure offered by retailers a bank is able to penetrate underserv
ed areas and at low cost which ought to reduce financial exclusion. Digitalization of financial
services systems are up to three times cheaper than traditional bank branches because they mi
nimize fixed costs by leveraging existing retail outlets thus reducing the need for the financial
institution to invest in their own infrastructure. Additionally, this financial inclusion on a digi
tal platform has been complimented as a vehicle for addressing Sustainable Development Go
als (SDGs) especially SDG 1 – No Poverty, SDG 2 – Zero Hunger; SDG 8 – Decent work an
d Economic growth, and finally SDG 9 Industry, Innovation and Infrastructure. It offers grad
ual and supportive remedies to confront poverty and income inequality hovering across Afric
a (Shipalana, 2019). It is beyond reasonable doubt that digital financial inclusion should be in
dispensable with all governments and company structures (Baker, 2021; DavidWest, 2016). C
onsequently, an all-encompassing, inclusive development and advancement of financial servi
ces to vulnerable segments of the society will be achieved.

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1.9 Significance of the study
Policy makers: the study findings will help enable policy makers to come up with policies
that support the adoption of digital finance in all forms to be used by commercial banks in
Uganda.
Banking Industry; the study findings will be significant to various banking institutions and
the industry as a whole in assessing the effect of digitalization of financial services on
financial inclusion and help the institutions to adopt the right technology that is essential to
their banking performance. The findings also informed strategic planning of the financial
institutions since technology is considered as one of the biggest disruptions in the banking
industry.
Scholars and Researchers; the study findings will be also significant to the researchers and
academicians that seek additional knowledge in the field of digitalization of financial services
and financial inclusion taking place in the banking industry. Scholars and researchers can
also use the findings of the study in their literature review as far as their study touches the
effects of technological inventions on performance of the banking industry.
1.10 Scope of the study
1.10.1 Subject Scope
The study concentrated on the relationship between the transformation of digital finance and
financial inclusion impacting the economic growth in Lango Sub region.
1.10.2 Geographical Scope
The study targeted the population of people living in Lango sub region, and this is because a
report was made that thousands of people in Northern Uganda are living above the poverty
line. However, the report says household income in Lango increased by 59.6 percent, from
shs 94,631 in 2017 to shs 151,066 by December 2020 (Daily Monitor 16 March 2021). This
is resulted by improved services like financial services extended to the region
1.10.3 Time scope
The time scope is 2015 to 2023 because this is the period when the customer satisfaction of E
quity Bank- Uganda has been characterized by massive inefficiencies. It is reported that the i
mprovement in the utilization of digitalization of financial services and financial inclusion.

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