EFFECT OF FINANCIAL INNOVATION ON FINANCIAL INCLUSION IN MICRO FINANCE INSTITUTIONS IN GULU DISTRICT, UGANDA
Abstract
Purpose of the Study: The purpose of the study was to examine the impact of financial innovations on financial inclusion within microfinance institutions (MFIs) in Gulu District, Uganda, specifically focusing on the roles of agency banking, automated teller machines (ATMs), mobile financial services, and digital payments.
Methodology: The study employed an explanatory research design with a multiple regression model. The sample consisted of 85 respondents from registered microfinance institutions in Gulu District, representing managers, technical staff, and agents. Data were collected using structured questionnaires and analysed through both descriptive and inferential statistics, including Pearson correlation and multiple regression analysis. Reliability was validated through Cronbach's Alpha and various diagnostic tests including Variance Inflation Factor, Breusch-Pagan, and Durbin-Watson tests.
Findings: The study established that agency banking and mobile financial services significantly enhanced financial inclusion by extending access points and reducing barriers for rural communities, with positive correlation coefficients of 0.30 (p = 0.01) and 0.28 (p < 0.01) respectively. However, ATMs showed limited effectiveness with only a marginal improvement (β = 0.15, p = 0.04) in financial inclusion, primarily due to operational limitations and high costs in rural settings. Digital payment services demonstrated mixed results, improving transaction convenience but facing adoption challenges due to cost constraints.
Conclusion: The study concludes that financial innovations, particularly agency banking and mobile financial services, play a pivotal role in advancing financial inclusion in Gulu District. These innovations effectively address critical barriers such as physical access and affordability, thus extending services to rural populations. However, the limited impact of ATMs and cost-related challenges in digital payment services highlight areas requiring strategic intervention for improved effectiveness in rural contexts.
Recommendations: The study recommends that financial institutions should prioritize the expansion of agency banking and mobile financial services in rural areas, supported by comprehensive training programs and robust security measures. Additionally, stakeholders should develop cost-effective solutions for digital payment services, implement targeted financial literacy programs, and establish regulatory frameworks that promote innovation while ensuring consumer protection. It is also recommended to establish a coordinated approach to financial inclusion initiatives through centralized monitoring systems and regular stakeholder engagement.
Keywords: Financial innovation, financial inclusion, micro finance institutions, Uganda
References
Akkaya, A. (2019). Financial innovation and its impact on economic growth: Evidence from Turkish economy. Economic Research, 30(2), 1231-1242. https://doi.org/10.1080/1331677X.2019.1616560
Byegon, C., Kibet, L., & Kiprop, J. (2019). Agency banking and financial inclusion in Kenya: Evidence from commercial banks. African Journal of Business Management, 13(16), 551-559. https://doi.org/10.5897/AJBM2019.8797
Chinoda, T., & Kwenda, F. (2019). The role of mobile money in promoting financial inclusion among the marginalized: A case study of Zimbabwe. Journal of African Business, 20(2), 256-273. https://doi.org/10.1080/15228916.2019.1584216
Demirguc-Kunt, A., Klapper, L., Singer, D., Ansar, S., & Hess, J. (2018). The Global Figure index Database 2017: Measuring financial inclusion and the fintech revolution. World Bank. https://doi.org/10.1596/978-1-4648-1259-0
Hasan, M., Fatima, J., & Shaikh, A. (2021). Digital financial services and financial inclusion: Empirical evidence from emerging economies. Emerging Markets Finance & Trade, 57(2), 679-694. https://doi.org/10.1080/1540496X.2020.1717479
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
Kim, J., Yoo, S., & Park, Y. (2018). Mobile payment and financial inclusion: A case of M-Pesa in Kenya. Journal of Information Technology & Politics, 15(2), 155-170. https://doi.org/10.1080/19331681.2018.1449707
Lyimo, G., & Mbesigwe, A. (2022). Challenges of digital payment adoption among low-income earners in Tanzania. East African Business Journal, 3(1), 112-127.
Mader, P. (2018). Contested meanings of financial inclusion in global development. Third World Quarterly, 39(1), 34-52. https://doi.org/10.1080/01436597.2017.1368384
Maliwichi, L., Chikoko, L., & Chivhanga, S. (2021). Financial literacy and agency banking adoption in rural Zimbabwe. Journal of Finance and Accounting, 9(2), 88-97. https://doi.org/10.12691/jfa-9-2-4
Mugenda, O. M., & Mugenda, A. G. (2013). Research methods: Quantitative and qualitative approaches. Acts Press.
Mutua, A. (2018). Digital financial systems and financial inclusion. African Journal of Finance, 7(2), 112-127.
Nabatanzi, R. (2021). The role of agency banking in financial inclusion. Journal of Microfinance and Development, 6(1), 67-83.
Omondi, G., & Otieno, M. (2023). Challenges and prospects of ATM adoption in financial inclusion. East African Financial Journal, 12(3), 144-158.
Pelletier, A., Ndiaye, B., & Tano, S. (2019). Mobile money and economic inclusion in sub-Saharan Africa. Journal of Development Economics, 140, 120-131. https://doi.org/10.1016/j.jdeveco.2019.05.004
