Introduction
Fintech is one of those areas that most Ugandans would not really grasp at first glance, and surprisingly, even many lawyers and law students find it unfamiliar. It seems a strange term but when it is broken down as is done in this blog, you will see that almost each and every one of us has or is interfacing with fintech. In the traditional reading lists of the law schools around the country, it is present and actually studied by students who undertake to do Banking Law and Negotiable Instruments as a course unit even if they may or not know they are studying fintech. However, with the world evolving, so too are the things around us. As lawyers, it’s our responsibility to go beyond the familiar and take the initiative to understand these emerging fields, not only for ourselves but to see how we can contribute to them.
The term "fintech" is short for financial technology, referring to new technologies aimed at improving and automating financial services. At its core, fintech helps companies, business owners, and consumers manage their financial operations, processes, and daily lives more efficiently.[1] It typically involves the use of specialised software and algorithms on computers and smartphones.
When fintech first emerged in the 21st century, it primarily focused on the backend systems of established financial institutions, like banks. However, from around 2018 to 2022, there was a noticeable shift toward consumer-oriented services.[2] Now, fintech encompasses a wide range of sectors, including education, retail banking, fundraising, and more.
Another key area of fintech is cryptocurrency, with Bitcoin being the most well-known example. While crypto often grabs the headlines, the real bulk of fintech activity lies in the global banking sector and its enormous market capitalisation.[3] Essentially, fintech covers any innovation in how people transact business, and with the rise of digital money and the internet revolution, fintech has grown at an explosive rate.
What many people don’t realise is that they use fintech every day without knowing it. Whether it is transferring money between your bank accounts via your phone or sending cash to a friend, fintech is at work. According to EY’s Global Fintech Adoption Index,[4] a FinTech adopter is defined as someone who has used two or more “buckets” of services, since this indicates a habitual change in behaviour in a way that use of a single service does not.
In the Ugandan context, fintechs are emerging and growing rapidly. With each passing day, more people are interacting with these technologies, though most know them as the platforms they use, like mobile money, without realising that they’re part of a broader fintech design.
Uganda’s fintech sector has seen remarkable growth in recent years, transforming the way financial services are delivered. Innovations like mobile money and digital payment platforms have significantly increased financial inclusion, especially among the unbanked population. However, despite the progress, fintech companies in Uganda still face various challenges that must be overcome for the sector to fully thrive. This blog explores the financial inclusion opportunities, challenges facing fintechs in Uganda and offers solutions to create a more supportive environment for growth.
The Rise of Fintechs in Uganda
Fintech in Uganda began gaining momentum with the introduction of mobile money services in March 2009,[5] spearheaded by telecom companies. Since then, the sector has diversified to include mobile banking apps, peer-to-peer lending platforms, digital wallets, and remittance services. Uganda’s fintech sector is experiencing rapid expansion, with over 29 licensed fintechs operating in the country under section 9 of the National Payments Systems Act.[6]
According to the Bank of Uganda, the number of mobile money transactions has surged, with millions of Ugandans now using these services daily for payments, savings, and loans. As of December, 2014, there were over 18 million registered mobile money customers, and the average monthly number of transactions in the last quarter was 46 million while the average monthly value of the transactions was UGX 2.1 trillion.[7]
The need had always been present for people not to always go to a physical branch of bank if you wanted to make a transaction and this is exactly the gap that fintechs exploited and are exploiting. Kenya even got access to these fintechs earlier in 2007, through the meteoric rise of Safaricom’s M-Pesa and mobile money.[8]
Everyday more and more people are becoming comfortable with the digital platforms on which fintechs operate due to the increasing use of smart phones. As the fastest-growing start-up industry in Africa, the success of fintech companies is being fuelled by several trends, including increasing smart phone ownership, declining internet costs, and expanded network coverage, as well as a young, fast-growing, and rapidly urbanising population.[9]
Uganda has the second youngest population in the world.[10] More than three quarters (78 per cent) of its citizens are below the age of 35, and this youthful population is projected to double in the next 25 years which just even presents more potential for fintechs to grow. During 2023, African fintech start-ups collectively raised $1.5 billion. Together with Nigeria, South Africa, Kenya and Egypt the most activity in Africa’s fintech start-up landscape during 2023 took place in Burkina Faso, Cameroon, Ghana, Ivory Coast, Morocco, Rwanda, Senegal, and Uganda.[11]
The Financial Technologies Services Providers’ Association (FITSPA) is the umbrella body for fintechs in Uganda with many members.[12] These fintechs and their apps are transforming the way we think about financial transactions be it online purchases, paying school fees or for utilities.
This shift has brought financial services closer to underserved populations in rural areas, allowing them to participate in the formal economy. However, as fintechs continue to scale, various obstacles hinder their growth and impact.
Financial Inclusion Opportunities
Fintechs in Uganda have opened up massive opportunities for financial inclusion, particularly in rural and underserved areas. They're bringing financial services closer to people with low incomes, who make up a large portion of Uganda’s population. In the past, many Ugandans, especially those in remote regions, were left out of formal banking systems because there were no physical bank branches nearby, and traditional banking services were too costly. However, fintechs have stepped in to bridge this gap by offering easy access to financial services through mobile phones.
One of the game-changing innovations is mobile money. This service allows people to send, receive, and store money digitally, without needing a bank account. Platforms like MTN Mobile Money and Airtel Money are leading the way, letting users make payments, transfer funds, save, and even access loans and insurance products—all through their phones. A case in point is when MTN Uganda added aYo insurance products to its Senkyu loyalty program.[13] This has been a huge boost for low-income individuals, women, and small business owners who previously had little to no access to credit or formal financial services.
On top of that, peer-to-peer lending platforms and digital wallets have added even more options for both individuals and small businesses. For instance, small and medium-sized enterprises (SMEs) can now get loans from fintech platforms without needing traditional collateral, which has always been a big barrier for many Ugandan entrepreneurs.
An example is Numida which helps grow micro and small businesses in Africa. Its platform offers digital working capital loans between $100 and $5,000 via mobile money. Businesses can receive credit in as little as two hours.[14] These platforms use alternative data like mobile money transaction history to assess someone's creditworthiness, making it much easier for those without a formal banking history to access financial products.
Fintechs are also making it easier for Ugandans living abroad to send money back home. Cross-border remittances have become more efficient and affordable, which is a big deal in Uganda, where remittances are a crucial source of income for many households. We have seen growth of up to 1.4 billion USD come into the Ugandan market, majorly from the Middle East, Europe, and the UK. If we do the conversion to Ugandan shillings, having 5.5 trillion Ugandan Shillings in terms of remittances is quite big. This shows how important cross-border payments are for Uganda’s economy.[15] By digitising these transactions, fintechs have lowered costs and sped up the process.
Additionally, fintechs are playing a role in boosting financial literacy. They’re offering digital tools that are more user-friendly, along with educational resources to help people better manage their money.[16] This is particularly important for those in rural areas, empowering them to take control of their finances and participate more in the economy, something that was not possible for many before fintechs came along.
Challenges Facing Fintechs in Uganda
Regulatory Uncertainty
As companies handling other people’s money, fintechs in Uganda are now subject to strict regulations, which require licensing under different categories and capital requirements similar to those for traditional financial institutions. The Bank of Uganda (BoU) has also introduced a "regulatory sandbox," under section 16 of the National Payments Systems Act where smaller fintechs can test their innovations in a controlled environment, but they have to pay a fee for this privilege.
In the past, there was no clear regulatory framework for fintechs, and this lack of clarity created confusion about which financial products and services these companies could legally offer. Banks, mobile network operators, and regulators struggled to engage meaningfully with fintechs, leaving early market players to dominate the scene.
Despite some progress, regulatory uncertainty remains one of the biggest challenges for fintechs in Uganda. The laws that currently govern the industry—like the Financial Institutions Act[17] and the Mobile Money Guidelines of 2013, were not really designed for fintech companies and do not fully address the new complexities that come with emerging technologies.
This uncertainty can create risks for fintechs, making it harder for them to innovate and scale. By January 2024, BoU had licensed 29 fintech firms, but in late 2023, Richard Byarugaba, acting Executive Director Finance at Bank of Uganda, pointed out that many fintech owners were either dodging or ignoring the licensing process.[18]
Limited Access to Capital
Accessing capital is another major hurdle for fintech startups in Uganda, especially in their early stages. Traditional banks are often hesitant to lend to fintechs because they view the sector as too risky. Most fintechs operate in the payments space, but many want to diversify and expand their services, however, they lack the long-term capital needed to do so. As a result, these startups are constantly on the lookout for venture capitalists who are willing to back their ideas.
Unfortunately, venture capital funding in Uganda is still in its early stages compared to more developed markets. This lack of funding makes it harder for fintech companies to grow and compete. On top of this, the cost of getting a license is steep with the basic license for electronic funds transfer services costs UGX100 million, while an electronic money issuer license is UGX250 million. Applicants must also be vetted by the National Information Technology Authority of Uganda (NITA-U), hire a Data Protection Officer, and register with the Financial Intelligence Authority, all of which add to the financial strain.
Cybersecurity Threats
As fintechs deal with sensitive financial data, they’re prime targets for cybercriminals. Cybersecurity is a huge concern, particularly for smaller fintech startups that may not have the resources to invest in strong security systems. Data breaches and financial fraud can quickly erode consumer trust in digital services, making cybersecurity a critical issue for the industry.
The more financial transactions move online, the more vulnerable we become to cyber-attacks. As fintechs rely heavily on IT infrastructure, they face an increasing number of risks, as cybercriminals exploit weaknesses in digital systems to steal valuable data, which has become the "new oil."[19] A failure to protect this data can lead to identity theft, financial losses, and serious damage to a company's reputation. Fintechs also have to deal with internal threats, like when an employee intentionally leaks confidential information.
Lack of Digital Literacy
While mobile phone penetration has grown rapidly in Uganda, many people especially in rural areas still lack the digital skills needed to fully take advantage of fintech services. This lack of digital literacy can be a barrier to fintech adoption, as potential users may not understand how to navigate or use these digital platforms.
For fintechs to truly succeed in promoting financial inclusion, there needs to be a stronger focus on educating the population about digital financial services. Only then can these companies fully reach the people who need their services the most.
Competition with Traditional Banks
Fintechs in Uganda also face stiff competition from established banks, many of which are now rolling out their own digital solutions. While fintechs are typically more agile and innovative, banks have the upper hand in terms of brand recognition, regulatory compliance, and access to a much larger customer base. This competition makes it tough for fintechs to carve out a significant share of the market, despite their technological edge.
Solutions for Overcoming Challenges
Strengthening the Regulatory Framework
A well-defined regulatory framework is essential for fostering innovation while ensuring consumer protection and financial stability. The recent enactment of the National Payment Systems Act (2020) is a positive step toward regulating digital payment platforms, but more needs to be done. Regulators, including the Bank of Uganda, should work closely with fintechs to create a flexible, tech-friendly environment that encourages innovation while mitigating risks.
Expanding Access to Funding
To address the issue of limited access to capital, the Ugandan government and financial institutions should create initiatives that support fintech startups. This could include the establishment of fintech-specific funding programs, tax incentives for investors in the fintech space, and partnerships with international venture capital firms. Creating a conducive investment climate will enable fintechs to access the funding they need to scale their operations.
Enhancing Cybersecurity Infrastructure
Given the growing threat of cybercrime, fintechs must invest in robust cybersecurity measures to protect user data and transactions. Collaboration between fintech companies and cybersecurity firms can help strengthen their defence mechanisms. Additionally, the Ugandan government could establish cybersecurity regulations specific to fintechs and provide training programs to enhance cybersecurity awareness. Uganda’s fintechs must accept the added expenses associated with data protection, notably by investing in such things as hardware encryption.[20]
Promoting Digital Literacy
To increase the adoption of fintech services, a nationwide digital literacy campaign is necessary. Both the government and fintech companies should invest in educational initiatives, particularly in rural areas, to teach people how to use digital financial tools safely and effectively. These campaigns should focus on simplifying fintech platforms and offering customer support in local languages to ensure inclusivity.
Fostering Partnerships with Traditional Banks
Rather than competing with traditional banks, fintechs should explore partnerships that leverage the strengths of both parties. Banks can benefit from fintechs' innovative solutions, while fintechs can tap into banks' established infrastructure and customer trust. Such partnerships could lead to a more integrated financial ecosystem that benefits consumers and businesses alike.
Conclusion
The world has evolved from what was to what is, and this is a reality we cannot hide from but must embrace. Fintechs represent the future, as the world increasingly moves towards cashless transactions, making these technologies even more essential. While solutions need to be found for the challenges fintechs face, there is tremendous growth potential and many opportunities waiting to be exploited in this space. By addressing obstacles like regulatory uncertainty, access to capital, and cybersecurity, fintechs can play a pivotal role in shaping the future of financial services and promoting financial inclusion in Uganda. BY OBITA CALVIN STEWART*
* Fourth Year Law Student at Makerere University
Editor-in-Chief at Lawpoint Uganda.
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[1] Julia Kagan, Financial Technology (Fintech): Its Uses and Impact on Our Lives, <https://www.investopedia.com/terms/f/fintech.asp> (accessed on 10/09/2024).
[2] Ibid.
[3] Ibid.
[4] EY Global FinTech Adoption Index 2019, 6, <https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/banking-and-capital-markets/ey-global-fintech-adoption-index.pdf> (accessed on 10/09/2024).
[5] Emmanuel Tumusiime-Mutebile: The development in mobile banking in Uganda, https://www.bis.org/review/r150310d.htm> (accessed on 10/09/2024)
[6] Cap. 59.
[7] Ibid (n5).
[8] Uganda’s fintech companies rise to the occasion, <https://businesstimesug.com/ugandas-fintech-companies-rise-to-the-occasion/amp/> (accessed on 10/09/2024)
[9] Mckinsey & Company, Fintech in Africa: The end of the beginning August 30, 2022 | Report, <https://www.mckinsey.com/industries/financial-services/our-insights/fintech-in-africa-the-end-of-the-beginning> (accessed on 10/09/2024).
[10] UNICEF, U-Report Amplifying voices for young people, <https://www.unicef.org/uganda/what-we-do/u-report> (accessed on 10/09/2024).
[11] Ibid (n8).
[12] Financial Technology Association of Uganda, https://www.fitspa.ug/ (accessed on 10/09/2024)
[13] MTN Uganda adds aYo insurance products to its Senkyu loyalty program in a move lauded by IRA and IBAU (09 August 2022), <https://www.mtn.co.ug/mtn-uganda-adds-ayo-insurance-products-to-its-senkyu-loyalty-program-in-a-move-lauded-by-ira-and-ibau/> (accessed on 09/09/2024).
[14] Uganda-based digital lending platform Numida nets $12.3m, <https://fintech.global/2022/09/29/uganda-based-digital-lending-platform-numida-nets-12-3m/> (accessed on 10/09/2024).
[15] Fintech Fuel Uganda: Improving Efficiency in Cross-Border Payments, https://azafinance.com/fintech-fuel-uganda-improving-efficiency-in-cross-border-payments/> (accessed on 10/09/2024).
[16] Zofi Cash, How Fintechs Are Improving Financial Literacy in Uganda (August 4, 2023), https://blog.zoficash.com/how-fintechs-are-improving-financial-literacy-in-uganda-7cdb5973cbd2> (accessed on 09/09/2024).
[17] Cap. 57.
[18] Ibid (n8).
[19] The deputy BoU Governor Michael Atingi-Ego speaking during the 2023 Annual Bankers Conference, <https://businesstimesug.com/ugandas-fintech-companies-rise-to-the-occasion/amp/> (accessed on 10/09/2024)
[20] Ibid (n8).
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