Banking Regulation 2024

Last Updated December 12, 2023

Uganda
 Law and Practice
 Trends and Developments
Trends and Developments

Introduction
The banking industry in Uganda has undergone significant change over the
past few years that has compelled financial institutions to adapt to the
changing environment. Developments include regulatory reforms, increased
uptake of digital banking, fintech innovations, reforms in the national
payments system laws, enforcement of data protection and privacy laws, and
increased diligence in implementation of the Anti-Money Laundering laws,
among several others.
Financial Sector Regulatory Changes
Islamic banking
In a bid to promote greater financial inclusion in Uganda, the parliament
amended the Financial Institutions Act to promote the growth of Islamic
banking products in Uganda. Islamic banking was introduced by the Financial
Institutions (Amendment) Act, 2016. It is rooted in morals, values, laws and
principles in Shari’ah law. There are four key aspects of Islamic banking,
namely: prohibition of the charging, payment and receipt of interest (Riba),
prohibition of investment or financing of prohibited activities in Islam, including
sports betting and gambling, among many others, mutuality of risk sharing –
profit and loss, and prohibition of investment in uncertain and speculative
transaction (Gharar).
The Financial Institutions (Amendment) Act, 2016 defines Islamic financial
business to mean business which conforms to the Shari’ah law and includes:

 the business of receiving property into profit-sharing investment

accounts or of managing such accounts;
  any other business of a financial institution which involves or is intended
to involve the entry into one or more contracts under Shari’ah or
otherwise carried out or purported to be carried out in accordance with
the Shari’ah including equity or partnership financing,
including Musharakah, Musharakah mutanaqisah and mudarabah,
lease-based financing, including al-ijarah, alijarah muntahia bi al-
tamlik and al-ijarah thumma al-bai, sale-based financing,
including istisna`, bai` bithaman ajil, bai`
salam, murabahah and musawamah, currency exchange contracts, and
fee-based activity, including wakalah;

 the purchase of bills of exchange, certificates of Islamic deposit or other

negotiable instruments;

 the acceptance or guarantee of any liability, obligation or duty of any

person; and

 the business of providing finance by all means including through the

acquisition, disposal or leasing of assets or through the provision of
services which have similar economic effect and are economically
equivalent to any other financial institution business.

Under the Financial Institutions (Amendment) Act, 2016, a person may apply
to the Bank of Uganda for a licence to carry out Islamic banking business and
an already-licensed financial institution carrying on business may apply to the
Bank of Uganda to carry on Islamic financial business in addition to its existing
licensed business.
The authorised activities under an Islamic banking licence include:

 mobilising funds in the form of deposits such as demand deposits,

savings or other compatible forms based on contracts compatible with
Shari’ah;

 investing in products based on contracts acceptable in Shari’ah;

 distributing financing of leasing moveable or immovable goods to

customers based on the contract ijarah or lease purchase in the form
of ijarah or other contract compatible with Shari’ah;

 granting loans or debt based on contracts compatible with Shari’ah;

  conducting custody for the interest of other parties, such as providing
safety deposit boxes, based on contracts compatible with Shari’ah;

 transferring money, both for own interest and interest of the customers
based on contracts compatible with Shari’ah;

 functioning as trustees based on contracts of wakalah; and

 providing letters of credit facilities and bank guarantees based on

contracts compatible with Shari’ah.

The Financial Institutions (Amendment) Act 2016 also established the Central
Shari’ah Advisory Council in the Bank of Uganda to advise the Bank of
Uganda on matters of regulations and supervision of Islamic banking systems
in Uganda and to approve any product to be offered by financial institutions
conducting Islamic banking.
The Financial Institutions (Amendment) Act 2023, which was assented to by
the President of Uganda in June 2023, was enacted to repeal the section that
granted the Central Shari’ah Advisory Council the power to approve any
Islamic banking product to be offered by a financial institution and allow the
licensed financial institutions to offer Islamic banking products in Uganda
without any approval from the Central Shari’ah Advisory Council. This
Amendment set the stage for Islamic banking in Uganda and consequently,
the first Islamic banking licence was granted by the Bank of Uganda to
Salaam Bank Uganda, a subsidiary of a Djibouti-based bank in September
2023.
Islamic banking differs from conventional banking, which makes it a more
sustainable form of banking and suitable for Uganda. In an economic
environment with high interest rates, Islamic banking could be a potentially
valuable source of funding for Ugandan entrepreneurs and small businesses
that have been unable to access conventional funding. Islamic banking will
also attract more clients and the other banks are set to diversify the portfolio
starting off with debt-based products and then perhaps moving into profit and
loss-sharing products as the market appreciates the unique concepts of
Islamic banking.
Corporate governance
Corporate governance has become increasingly essential for financial
institutions. The banking sector in Uganda has previously experienced bank
failures primarily attributed to poor corporate governance. The corporate
governance requirements under the Financial Institutions Act and corporate
governance guidelines have helped avert these issues and the complex
regulatory landscape of financial entities.
The Bank of Uganda issued the Consolidated Corporate Governance
Guidelines 2022 to supervised financial institutions in Uganda, with the aim of
ensuring good corporate governance in financial institutions. These guidelines
introduced the requirement to have at least four least four independent non-
executive directors and an in-house company secretary approved by the Bank
of Uganda.
Previously, financial institutions were allowed to have external counsel as the
company secretary, but with new guidelines, the role of company secretary
can only be outsourced in exceptional circumstances with prior approval of the
Bank of Uganda. The bank’s rationale in setting this requirement is that the
role of company secretary is integral to management and requires in-depth
knowledge of the SFI’s internal operations, dynamics and access to highly
sensitive and confidential information.
These requirements had a compliance deadline of 31 December 2022.
However, financial institutions requested an extension of time to comply, due
to the lengthy vetting and recruiting process required in appointing four non-
independent directors and an in-house company secretary. The Bank of
Uganda granted the request and extended the deadline of compliance to 31
December 2023.
The Consolidated Corporate Guidelines 2022 also introduced obligations for
financial institutions operating in Uganda under a group structure. The board
of the parent company is required under these guidelines to have adequate
oversight over its subsidiaries while considering the specific requirements in
Uganda and to ensure that significant risks that might have an impact on the
entity as a whole or each subsidiary are given due consideration at the
parent/holding company level. It is the responsibility of the board of the
parent/holding company to have a group organisational, operational, control
and governance framework that defines the roles and responsibilities of the
controlling entity and subsidiaries and ensure that adequate resources are in
place to monitor the compliance of subsidiaries within the group with all
applicable legal, regulatory and governance requirements, regardless of their
geographic locations or regulatory boundaries. Emphasis is also placed on the
board having adequate oversight to ensure that significant risks that might
have an impact on the entity as a whole or each subsidiary are given due
consideration at the parent/holding company level.
Minimum capital requirements
The minimum capital requirements for financial institutions were recently
revised by the Financial Institutions (Revision of Minimum Capital
Requirements) Instrument 2022. This instrument requires financial institutions
to maintain a minimum paid-up capital of UGX120 billion (approximately
USD31,684,464) and non-bank financial institutions to have a minimum paid-
up capital of UGX20 billion (approximately USD5,300,000) invested in liquid
assets in Uganda by 31 December 2022.
Additionally, financial institutions are required by the Financial Institutions
(Revision of Minimum Capital Requirements) Instrument 2022 to have
minimum paid-up capital of UGX150 billion (approximately USD39,605,580)
and non-bank financial institutions to have a minimum paid-up capital of
UGX25 billionm (approximately USD6,600,000) invested in liquid assets in
Uganda by 30 June 2024.
The rationale for the revision of the minimum capital requirements was to
adapt to the changes in assets and risk exposure in the banking sector and
also place the country’s banking industry on par with the region. The
implication of this requirement is that some banks may face challenges in
meeting the new capital requirements. As a result, there are various
opportunities for bank mergers and acquisitions.
Netting
There has been uncertainty on the efficacy of OTC derivatives and repo
transactions entered with bank counterparties in Uganda under the 2002 ISDA
Master Agreement with local banks. In an insolvency scenario, there were
questions on whether close-out netting under ISDA/GMRA is enforceable in
Uganda in light of the provisions of Sections 88(2)(b) and 96(i) and (ii) of the
Financial Institutions Act (as amended) which prohibits the enforcement of any
security over the assets of a financial institution placed in receivership by
BOU. There was also concern on the enforceability of automatic early
termination under the ISDA agreement for transactions with financial
institutions which have been placed in management/receivership by BOU.
The parliament of Uganda passed the Financial Institutions (Preference and
Appraised Book Value) Regulations 2023 to provide clarity on the uncertainty
created by the Financial Institutions Act on netting in the event of insolvency.
The new regulations on preference and appraised book values provide clarity
on the enforcement of close-out netting under International Swaps and
Derivatives Association Master Agreement (ISDA), Global Master Repurchase
Agreement (GMRA) and Global Master Securities Lending Agreement
(GMSLA) contracts with financial institutions. The Regulations permit netting
off, the delivery, payment, transfer, substitution or exchange of cash, margin,
collateral, credit support or any other interests or assets from the financial
institution where the financial institution is a party to a specified financial
contract and is placed under management take-over or closed.
National payments
The National Payments Act was enacted in 2020 to regulate payment
systems, provide for safety and efficiency of payment systems, functions of
the Bank of Uganda in relation to payment systems, prescribe the rules
governing the oversight payment instruments, protection of payment systems
and regulate the issuance of electronic money, to provide for oversight of
payment instruments and for other related matters. The Bank of Uganda is
mandated to regulate, supervise and oversee the operations of payment
systems, consider the applications for licences, monitor and oversee cross-
border payments, provide efficient services to payment systems and
settlement of monetary value of securities, and co-ordinate payment system
activities with relevant stakeholders, amongst others.
The development of this regulatory framework has facilitated digital
transformation and the development of electronic payment in Uganda. The
Bank of Uganda reported that as at 30 June 2023, 26 institutions had been
licensed as payment service providers and payment system operators,
including two commercial banks.
The new National Payment Systems (Amendment) Regulations 2022 provide
for the licensing fees and annual fees. The Bank of Uganda also developed
the National E-Payments Strategy, which is aimed at promoting infrastructure
development and interoperability through the national switch, fostering
innovations, competition, consumer protection and digital financial literacy and
strengthening collaborative stakeholder engagements, both in country and
beyond borders.
The Bank of Uganda: strategic plan 2022–2027
Bank of Uganda launched a five-year strategic plan that determines the
strategic initiatives of the Bank of Uganda to provide a framework for the
development of Uganda’s financial markets that can efficiently and cost
effectively mobilise and allocate resources. The mission of the Bank of
Uganda is to promote price stability and a sound financial system in support of
the socio-economic transformation in Uganda. The strategic objectives are:

 enhancing stakeholder confidence;

  enhancing price stability;

 enhancing financial system soundness and resilience;

 enhancing financial system development;

 enhancing financial performance;

 improving efficiency and reliability of bank processes;

 improving employee competence;

 improving organisational systems and infrastructure; and

 enhancing organisational culture.

The Strategic Plan focuses on environmental, social and governance

sustainability (ESG), corporate governance, developing tools for the analysis
of climate change and policy interactions, and a framework for the
enhancement of financial sector resilience amidst disruptive technologies.
In a bid to promote price stability and a sound financial system in support of
socio-economic transformation in Uganda, the Bank of Uganda has developed
a regulatory framework for consumer protection for the national payments
systems and launched the Sustainability Standards and Certification Initiative
(SSCI) of the European Organization for Sustainable Development (EOSD),
which is a framework aimed at engendering sustainability in the Bank of
Uganda. This certification will provide a framework for financial institutions to
assess and improve their sustainability performance and evaluate financial
institutions’ ESG practices.
Waiver of early repayment charges on outstanding loans
The Uganda Bankers’ Association, the umbrella body for regulated financial
institutions in Uganda, suspended the practice of early loan repayment fees
(prepayment penalties) charged on outstanding loans. This decision is set to
take effect on 1 December 2023. This is a relief to the borrowers and will
promote loan buyouts.
AF Mpanga
4th Floor DFCU Towers
Plot 26 Kyadondo Road
Nakasero
Uganda

+256 414 254540

[email protected] www.afmpanga.com
Banking Regulation 2024
Last Updated December 12, 2023

Uganda
 Law and Practice
 Trends and Developments
Law and Practice
Close All

1. Legislative Framework
1.1 Key Laws and Regulations
The primary legislation regulating the banking sector in Uganda is the
Financial Institutions Act, as amended. The Financial Institutions Act was
enacted in 2004 to provide for the regulation, licensing, capital and operating
requirements, control and discipline of banks and other financial institutions in
Uganda.
The Financial Institutions Act establishes the requirement for persons carrying
out “financial institution business” to have a valid licence granted under the
Act. The term “financial institution business” is used to mean the activities
carried out in the banking sector in Uganda.
Financial institution business in Uganda as defined under the Financial
Institutions Act includes acceptance of deposits, issue of deposit substitutes,
lending or extending money held on deposit or any part of it, engaging in
foreign exchange business, issuing and administering means of payment
including credit cards, travellers’ cheques and banker’s drafts, providing
money transmission services, trading in money market instruments, debt
securities and futures, options and other derivatives relating to debt securities,
safe custody and administration of securities, soliciting or advertising for
deposits, money broking, financial leasing, merchant banking, mortgage
banking, creating and administration of electronic units of payment, dealing in
securities business and Islamic financial business.
There are various regulations that have been enacted under the Financial
Institutions Act to regulate banks in Uganda and these include: the Financial
Institutions (Licensing) Regulations, Financial Institutions (Capital Adequacy)
Regulations, Financial Institutions (Corporate Governance) Regulations,
Financial Institutions (Liquidity) Regulations, Financial Institutions (Ownership
Control) Regulations, Financial Institutions (Deposit Protection Fund)
Regulations 2019, Financial Institutions (Revision of the Minimum Capital
Requirements) Instrument 2022, Financial Institutions (Islamic Banking)
Regulations 2018, Financial Institutions (Agent Banking) Regulations as
amended, Financial Institutions (Preference and Appraised Book Value)
Regulations 2023, Financial Institutions (Credit Reference Bureau)
Regulations 2022, Financial Institutions (Capital Buffers and Leverage Ratio)
Regulations, and Financial Institutions (Foreign Exchange Business) Rules as
amended.
The supervision and regulation of financial institution business/banks is a
preserve of the Central Bank – Bank of Uganda (BOU) whose mandate is
derived from Article 161 of the Constitution of the Republic of Uganda, 1995
as amended, the Bank of Uganda Act Cap 51 and the Financial Institutions
Act as amended.
The functions of BOU include but are not limited to supervising, regulating and
disciplining financial institutions, maintaining monetary stability, being a
banker to financial institutions, maintaining an external assets reserve, acting
as an agent in financial matters to the government, and being a clearing
house for cheque and other financial instruments for financial institutions,
among many others.
Other legislation which cuts across the banking sector in Uganda includes the
Anti-Money Laundering Act as amended, which provides for the prohibition
and prevention of money laundering, the Capital Markets Authority Act Cap.
84, which establishes the Capital Markets Authority for the purpose of
promoting and facilitating the development of an orderly fair and efficient
capital markets industry in Uganda and makes provisions with respect to stock
exchanges, stockbrokers and other persons dealing in security, and the
Mortgage Act which regulates mortgages, among many others.
2. Authorisation
2.1 Licences and Application Process
Licences and Permitted Activities
The types of licences that are issued under the Financial Institutions Act as
amended are determined by the financial activities to be carried out. These
licences are the following.
Commercial bank licence
The activities authorised under a commercial bank licence include:

 acceptance of call, demand, savings and time deposits withdrawable by

cheque or otherwise;

 provision of overdrafts and short- to medium-term loans;

 provision of foreign exchange facilities;

 acceptance and discounting of bills of exchange;

 provision of financial and investment advice;

 participation in inter-bank clearing systems; and

 giving guarantees, bonds or other forms of collateral, and accepting and

placing third-party drafts and promissory notes connected with
operations in which they take part.

Merchant bank licence

The activities authorised under a merchant bank licence include:

 acceptance of corporate call and time deposits;

 provision of foreign exchange facilities;

 facilitation of trade through the granting of acceptance facilities;

 provision of corporate finance advisory services through share issues,

rights issues, mergers and acquisitions and corporate reconstruction
and private placement excluding underwriting arrangements;

 issue of bonds, debt obligations and certificates in such loans as they

may grant or any other instrument traded in the domestic market or
abroad according to the regulations BOU may set forth; and
  investment portfolio management, investment advisory services and
nominee services.

Islamic bank licence

The activities authorised under the Islamic bank licence are limited to Shari’ah
law compliant banking business.
Post office savings bank licence
The activities authorised under the post office bank licence are limited to
acceptance of savings and fixed deposits and investment in government
securities.
Mortgage bank licence
The activities authorised under the mortgage bank licence include:

 receiving deposits of participation in mortgage loans and in special

accounts;

 granting of loans for the acquisition, construction, enlargement, repair,

improvement and maintenance of urban or rural real estate, and for the
substitution of mortgages taken out for that purpose;

 giving of guarantees, bonds or other forms of collateral connected with

the operations in which they may take part; and

 obtaining of foreign loans and acting as intermediary in loans extended

in local and foreign currency, having the previous authorisation of BOU
for such loans exceeding a specified limit as prescribed by BOU.

Statutory or Other Conditions for Authorisation

BOU shall grant a licence to an applicant where the applicant:

 demonstrates adequacy of the applicant’s capital structure, earning

prospects, business plans and financial plans;

 has the minimum required paid up cash capital of not less than UGX120
billion and demonstrates the ability to maintain its capital funds,
unimpaired by losses at the prescribed minimum amount at all times;
  demonstrates transparency in the ownership structure of the bank so as
to enable the BOU to evaluate the institution’s substantial, direct and
indirect shareholders and its corporate affiliations; and

 demonstrates the competence and integrity of the proposed

management and that the proposed management satisfies the fit and
proper criteria set out in the Financial Institutions Act.

Application Process
The application process is commenced with lodging the prescribed form set
out in Schedule 1 of the Financial Institutions (Licensing) Regulations to BOU.
The prescribed form requires information including but not limited to:

 name of the proposed financial institution;

 personal information of the directors and the shareholders;

 shareholding of each shareholder;

 qualifications, experience, nationality and other relevant particulars of

the proposed management and staff;

 capital structure and earning prospects of the financial institution;

 applicant’s business, financial plans and earnings forecasts, namely

balance sheet, income statement and cash flow for at least three years,
and sufficient detail;

 summary of the applicant’s board risk management policies and

management operating procedures; and

 description of the applicant’s proposed organisational and management

structure, reporting lines and responsibilities of its Board.

The licensing requirements checklist is available on BOU’s website.

The application is accompanied by certified true copies of the incorporation
documents, proposed capital structure, an information sheet of the applicant,
business plan, personal declaration forms for the directors, officers and
individual credit references for each shareholder, director and officer from
their banker.
Upon receipt of the application, BOU shall, within six months, consider and
assess the application and grant the licence if satisfied with the application.
BOU retains the right to reject the application where sufficient information is
not rendered by the applicant. The process is extensive and may involve
comments and queries from BOU.
Timelines
The process of obtaining a licence may take 6–12 months depending on the
engagement with BOU and the strength of the applicant.
Costs
The applicant is required to pay a non-refundable application fee of UGX1
million (approximately USD264.30), and licensing fees which vary depending
on the type of licence sought.
3. Control
3.1 Requirements for Acquiring or Increasing Control Over a Bank
Change of Control
The control threshold is 5%. A person who wishes to allot, issue, transfer or
register the transfer of 5% or more of any shares in a financial institution to
another or acquire control of a financial institution, shall apply for approval in
the prescribed manner to the Executive Director, Bank Supervision, Bank of
Uganda. The application must contain sufficient detail of:

 a statement of the applicant’s reason for the desire to acquire ownership

of the shares;

 the financial strength and ability of the applicant to provide additional

capital if needed;

 the ownership and operational structure of the financial institution after

the allotment, issue or transfer of the relevant shares; and

 clearance from the home central bank or equivalent in case the

applicant is a foreign financial institution.

BOU shall, within three months, assess the application with due regard to
public interest, the banking industry and the interests of the bank or its
depositors and provide a detailed report. BOU shall grant its approval in
writing if satisfied that the applicant meets the requirements.
Shareholder Restrictions
The Financial Institutions Act restricts any individual or body corporate
controlled by one individual or a group of related persons or a body corporate
owned or controlled directly or indirectly by a group of related persons from
owning or acquiring more than 49% of the shares of Ugandan banks.
Reputable financial institutions or reputable public companies approved by
BOU are exempted from this restriction.
The other restriction laid down by the Financial Institutions Act is that a
Ugandan bank is prohibited from allotting or issuing or registering the transfer
of 5% or more of any of its shares to a person without the written approval of
BOU. Before the proposed transfer, the Uganda bank must prove to BOU that
the acquisition of shares shall not be contrary to public interest or the interest
of a financial institution or depositors and will not be detrimental to the
financial services industry in general. The registrar of companies is also
prohibited from registering such transfer or allotment of shares without the
written consent from BOU.
The transfer of more than 5% of the shareholding of a Ugandan bank to a
person or group of related persons without a notice of no objection from BOU
is prohibited by the Financial Institutions Act. The notice of no objection must
be obtained by the Ugandan bank prior to the transfer.
A person who does not satisfy the fit and proper test relating to shareholders
cannot acquire more than 5% of the shareholding of a Ugandan Bank. The fit
and proper criteria is prescribed in the Third Schedule of the Financial
Institutions Act and focuses on the person’s general probity, competence and
soundness of judgement for the fulfilment of the responsibilities, diligence, the
interest of the deposits or potential depositors of the bank and the previous
conduct of the person. Any appointment of a shareholder who is not a fit and
proper person in accordance with the Financial Institutions Act shall have no
legal effect.
Any transfer done in any of the above instances without the approval of BOU
is deemed void and ineffective.
Nature of Regulatory Filings
As noted earlier, Ugandan banks are required to apply for the approval in the
prescribed form for the bank or person that wishes to allot, issue, transfer or
register the transfer of 5% or more of any of its shares to another or acquire
control of a financial institution. BOU may require the applicant to provide
further information to support the application where necessary.
4. Supervision
4.1 Corporate Governance Requirements
Corporate governance requirements applicable to Ugandan banks are laid out
in provisions of the Financial Institutions Act and the Financial Institutions
(Corporate Governance) Regulations, 2005 and the Consolidated Corporate
Governance Guidelines issued by BOU. These impose minimum standards in
relation to corporate governance. The corporate governance requirements
focus on the responsibilities of the board of directors, independence oversight
of bank management, priority to risk management and the need for
independent audit functions.
A Ugandan bank must have not less than five directors who are fit and proper
persons duly vetted and approved by BOU with at least four independent non-
executive directors. Every financial institution must have at least two executive
directors, resident in Uganda. The chairperson of the board must be an
independent director possessing experience and resident in Uganda.
The operational structure of the board is guided by a board charter which
contains guidance on the general duties and responsibilities of the directors,
board composition, roles of the chairperson, managing director and executive
directors, tenure and retirement age of directors, and remuneration, among
other aspects.
Control Functions
The board of directors must constitute, amongst themselves, the following
committees:

 the audit committee, which shall review the internal audit reports,
financial statements, internal controls, operating procedures and
systems and programs of the bank;

 asset and liability management committee, to perform search functions

as the board may specify including establishing guidelines on the
financial institution’s tolerance for risk and expectations from investment
and monitoring of the financial institution’s policies, procedures and
holding portfolio to ensure that goals for diversification, credit, quality,
profitability, liquidity, community investment, pledging requirements and
regulatory compliance are met;
  risk management committee, which shall provide oversight of the overall
risk strategy and the senior management’s activities in managing credit,
market, liquidity, operational, legal and other risk;

 credit committee, which is responsible for approving and overseeing

compliance with the lending policy, delegating lending limits, and
approving credit facilities that are above the sanctioning authority of
management among others; and

 compensation/remuneration committee, which shall provide oversight

on the remuneration of senior management and other key personnel.

Ugandan banks are also required to appoint an internal auditor and an

external auditor. The duties of an internal auditor shall include, but not be
limited to, evaluating the reliability of the information produced by accounting
and computer systems, providing an independent appraisal function and
evaluating the effectiveness, efficiency and economy operations. All internal
auditors of financial institutions are required to be members of the Institute of
Certified Public Accountants of Uganda. The external auditor’s duty is to
perform an audit of the financial statements of the financial institution and to
give an opinion in accordance with the Financial Institutions Act and
International Standards on Auditing. External Audit firms are periodically
assessed and pre-qualified by BOU for purposes of providing external audit
services to banks.
Ugandan banks are also required to develop a code of conduct which focuses
on areas such as ethical risk, help foster a culture of honesty and
accountability, conflicts of interest, fair and honest dealing, anti-discrimination,
gifts and relationships with customers and provide guidance to directors in
complying with applicable laws, rules and regulations. Its good practice for all
directors to sign the code of conduct upon appointment.
4.2 Registration and Oversight of Senior Management
Approval of Directors
Before the appointment of any director or any person in senior management
of a Ugandan Bank, the approval of BOU must be obtained. Prospective
directors are not permitted to attend any board meetings without the approval
of the appointment by BOU. Senior management is composed of the
executive officers and heads of the different departments in banks.
The prospective director is nominated by a nominations committee or similar
body after conducting a selection process that involves considering the
knowledge, skills, integrity, reputation, ability to perform the duties and
possible conflicts of interest, among others.
The prospective director must be a fit and proper person. The fit and proper
criteria is prescribed in Third Schedule of the Financial Institutions Act and
focuses on the director’s general probity, competence and soundness of
judgement for the fulfilment of the responsibilities, diligence, the interest of the
deposits or potential depositors of the bank and the previous conduct of the
director. Any appointment of a director who is not a fit and proper person in
accordance with the Financial Institutions Act shall have no legal effect.
Upon selection of the director, the bank shall serve a written notice to BOU of
its nomination. BOU shall vet the proposed director within six months and
notify the bank. BOU shall give a written approval if it is satisfied that the
prospective director is:

 above 18 years of age;

 of sound mind and has not been declared of unsound mind by any court
of law;

 not an undischarged bankrupt;

 a fit and proper person as in accordance with the fit and proper test
prescribed in the Financial Institutions Act; and

 not serving as a director of any other bank.

Roles of Directors and Accountability

The roles of directors are extensive but can be summarised in four key areas,
namely: providing strategic direction, policy formulation, decision making and
providing oversight of executive management. Directors are responsible for
ensuring good corporate governance and business performance and ensuring
that the business of the financial institution is carried on in compliance with all
applicable laws and regulations and is conducive to safe and sound banking
practices.
Directors stand in a fiduciary relationship to the bank and the shareholders
and they have a duty to act in good faith and with utmost honesty. Directors
are accountable to the shareholders of the company and must report to the
shareholders.
4.3 Remuneration Requirements
There are generally no remuneration requirements prescribed by law or BOU
that are applicable to banks. Remuneration of employees in a bank is solely
determined by, and at the discretion of, the bank. Guidance is provided by the
compensation committee of the bank which has the function of providing
oversight of the remuneration of senior management and other key personnel
and ensuring that compensation is consistent with the institution’s culture,
objectives, strategy and control environment. BOU does not exercise any
specific supervisory right prescribed by law over remuneration in banks.
5. AML/KYC
5.1 AML and CFT Requirements
The primary legislation regulating money laundering and counter-terrorist
financing is the Anti-Money Laundering Act (AMLA) as amended, and the
Anti-Terrorism Act as amended, which criminalises any aid or financing of any
preparation, commission or instigation of acts of terrorism. The AMLA was
enacted in 2013 to criminalise the process of turning illegitimately obtained
property into seemingly legitimate property and it includes concealing or
disguising the nature, source, location, disposition or movement of the
proceeds of crime.
Regulatory Supervision
The AMLA establishes the Financial Intelligence Authority (FIA) with a
mandate to enhance the identification of the proceeds of crime and the
combating of money laundering and ensure compliance with the AMLA. FIA
exercises supervisory powers in relation to money laundering and counter-
terrorism financing over banks.
AMLA and CFT Requirements
There are several obligations laid out by the AMLA applicable to banks in
combating of money laundering and counter-terrorism financing. These
include:

 registration with the FIA as an accountable person;

 identification of customers by the prospective customer’s true names,

address including postal and residential, employment, and occupation at
onboarding;
 verification of identification information of prospective customers
through due diligence measures. Identity verification is a continuous
obligation throughout the existence of the relationship;

 implementation of risk assessment measures to identify, assess, detect

and monitor its money laundering and terrorism financing;

 maintenance of records on customer identification information, account

files information and any business correspondence for at least ten
years;

 recording and reporting each cash and monetary transaction involving a

domestic or foreign currency exceeding UGX20 million;

 monitoring and reporting of transactions which are inconsistent with a

customer’s known legitimate business or personal activities or with the
normal business for that type of account or business relationship, or a
complex and unusual transaction or complex or unusual pattern of
transactions. Such suspicious transactions are reported to the Financial
Intelligence Authority;

 where a person is a politically exposed person (PEP), obtaining the

written approval of senior management before establishing a business
relationship with that PEP person, establishing the source of wealth of
that PEP and conducting constant monitoring of the business
relationship with the PEP. PEPs are individuals who are or have been
entrusted with prominent functions in a country, such as heads of state
or of government, senior politicians, senior government, judicial or
military officials, senior executives of state-owned corporations, and
important party officials, as well as family members or close associates
of such individuals;

 conducting periodic anti-money laundering audits to assess the

efficiency of the anti-money laundering measures in place; and

 timely submissions of risk assessment reports, AML compliance reports,

product risk assessment reports, suspicious transaction reports and
AML audit reports to the FIA.
6. Depositor Protection
6.1 Depositor Protection Regime
The Financial Institutions Act as amended establishes a Deposit Protection
Fund to act as a deposit insurance scheme to customers of deposit-taking
institutions licensed by BOU. The Deposit Protection Fund of Uganda is the
designated authority as the body responsible for management and control of
the deposit protection fund.
The finances of the fund consist of monies contributed to the Fund by financial
institutions and microfinance deposit-taking institutions, grants, income from
investments of the Fund and borrowed money by the board. Every financial
institution is required to contribute to the fund a sum of not less than 0.2% of
the average weighted deposit liabilities of the financial institution in its
previous financial year. A financial institution which does not pay its
contribution shall be liable to pay to the Fund a civil penalty interest charge of
0.5% of the unpaid amount for every day for which the amount remains
unpaid.
Every customer deposit in a financial institution and a microfinance deposit-
taking institution is protected by the Deposit Protection Fund for an amount up
to UGX10 million (approximately USD2,643.04). Upon closure of a financial
institution or a microfinance deposit-taking institution which necessitates a
payout, the customer may lodge a claim with the Deposit Protection Fund
Board for payment of the protected deposit, which is the amount being the
aggregate credit balance of any accounts maintained by a customer at a
financial institution less any liability of the customer. The Deposit Protection
Fund shall make payment of the protected deposit to customers within 90
days after closure of the financial institution and shall become entitled to
receive from the financial institution the amount paid to customer. The Deposit
Protection Fund is not liable to pay any interest on protected deposits.
All deposits in a licenced financial institution are covered by the Deposit
Protection Fund.
7. Bank Secrecy
7.1 Bank Secrecy Requirements
Confidentiality is a fundamental aspect of the banker-customer relationship
under Ugandan law and its origin can be traced from common law. Ugandan
banks owe their customers a duty of confidentiality. This duty is supported by
Article 27(2) of the Constitution of the Republic of Uganda which protects the
right of privacy. Banks are obliged to maintain appropriate confidentiality in all
transactions with their customers. It is an implied term in banking contracts
that the bank shall not disclose information concerning the customer’s affairs
without consent.
Confidentiality extends to all information including the customer’s personal,
account and transactional information obtained by the bank arising out of the
banking relationship with the customer, whether obtained from the customer
or a third party. The duty of confidentiality may be overridden in four
instances, namely where the disclosure is under compulsion of law, there is a
duty to the public to disclose, the interests of the bank require disclosure, and
the disclosure is made by the express or implied consent of the customer.
The customer may claim damages from the bank where there is unlawful
disclosure in breach of confidentiality.
8. Prudential Regime
8.1 Capital, Liquidity and Related Risk Control Requirements
Adherence to Basel Standards
BOU is currently implementing the Basel II Capital Accord. In a circular
referenced rEDS.306.2 and dated 11 February 2021, BOU commenced the
implementation of Basel II and directed that the full transition to Basel II was
effective from 1 January 2022. Whilst the implementation of the Basel II
Capital Accord is ongoing, BOU is also implementing some elements from the
Basel III. The Basel III focuses on minimum capital requirements, leverage
ratio and liquidity requirements. In furtherance of the implementation of the
Basel III Capital Accord and Basel III aspects and the aim of strengthening
regulation, supervision and risk management within the banking industry,
BOU has revised the capital adequacy requirements and the minimum
required capital requirements, among others.
Capital
The Financial Institutions (Revision of Minimum Capital Requirements)
Instrument 2022 revised the minimum paid-up capital requirements for banks.
Commercial banks are required to maintain a minimum paid-up capital of
UGX120 billion (approximately USD31,716,468). The minimum capital funds
unimpaired by losses of a licensed bank were also revised to an amount not
less than UGX120 billion) approximately USD31,716,468.
The capital buffers required of financial institutions are provided for in the
Financial Institutions (Capital Buffers and Leverage Ratio) Regulations, 2020
and these are:
  capital conservation buffer of 2.5% comprised of a core capital (Tier 1)
of not less than 12.5%, a total capital of not less than 14.5% (all
percentages of total risk-adjusted assets plus risk-adjusted off-balance
sheet items);

 systemic risk buffer ranging from 0% to 3.5% of the total risk-adjusted

assets plus risk-adjusted off-balance sheet items over and above the
minimum ongoing core capital requirements and the total capital
requirements and the capital conservation buffer; and

 countercyclical capital buffer ranging from 0% to 2.5% of the total risk-

adjusted assets plus risk-adjusted off-balance sheet items.

Financial institutions are also required to have a leverage ratio equal to or

greater than 6% of the total balance sheet and off-balance sheet assets.
BOU requires banks to have the core capital and total capital to total Risk
Weighted Assets (RWAs) ratios of at least 8% and 12% respectively, which is
above the Basel III requirements of 6% and 8% respectively.
Liquidity
The liquidity requirements are provided for in the Financial Institutions
(Liquidity) Regulations, 2005. A financial institution is required to maintain
liquid assets amounting to not less than 20% of the deposit liabilities on a
weekly average basis. The liquid assets include legal tender in Uganda and
any other currency, balances held at the Central Bank for cash reserves and
clearing purposes, moneys at call and balances at banks in Uganda, Uganda
treasury bills maturing within a period not exceeding 91 days, government
securities, uncommitted balances at banks outside Uganda withdrawable on
demand and money at call outside Uganda and commercial bills and
promissory notes which are eligible for discount by commercial banks.
Financial institutions must also have an asset and lability management
committee as discussed in 4.1 Corporate Governance Requirements.
BOU also requires financial institutions to have a policy on liquidity
management focused on aspects such as good management information
systems, central liquidity control, analysis of net funding requirements under
alternative scenarios, diversification of funding sources and contingency
planning.
Risk Management
Financial Institutions, as part of the corporate governance requirements, are
required to have a risk management committee, which shall provide oversight
of the overall risk strategy and the senior management’s activities in
managing credit, market, liquidity, operational, legal and other risk. BOU has
also issued various guidelines on risk management such as Money
Laundering/Terrorist Financing/Proliferation Financing Risks Assessment
Guidelines to aid financial institutions in managing risk.
The other requirements relate to reporting by financial institutions, submission
and publication of annual and quarterly financial statements, disclosures and
notifications to BOU.
9. Insolvency, Recovery and Resolution
9.1 Legal and Regulatory Framework
BOU has developed the legal and regulatory framework governing the
insolvency, recovery and resolution of failing banks significantly since the
closing of four insolvent banks in 1998/1999. The Financial Institutions Act
2004 as amended was enacted to strengthen the insolvency procedures of
financial institutions and lays down various mechanisms in which a failing
bank can be addressed. The overall responsibility of overseeing the
insolvency, recovery and resolution of a failing bank falls to BOU and it may
take various actions depending on the circumstances of the failing bank.
These actions include corrective actions that the financial institutions must
comply with, placing the institution under statutory management or
receivership and liquidation.
The corrective actions which may be taken by BOU include halting the failing
bank from declaring and distributing any dividends, prohibiting the bank from
paying any bonuses or making salary increments, among others. The failing
bank shall also be requested to submit a capital restoration plan. In a case of
failure to submit the capital restoration plan or to implement the plan, BOU
shall impose further restrictions.
Statutory management by BOU is another mechanism in which a failing bank
can be resolved. BOU may take over the management of a failing bank
where: the failing bank is conducting its business in a manner contrary to the
Financial Institutions Act, the continuation of its activities is detrimental to the
interests of depositors and the licence has been revoked. In such
circumstances, BOU shall either continue or discontinue any of its operations
as a bank, reorganise or liquidate the bank, close the institution and sell the
failing bank.
BOU is also empowered under the Financial Institutions Act as amended to
place a bank under receivership. A bank may be placed under receivership
where it is determined by BOU that the bank will not be able to meet the
demands of depositors or pay its obligations in the normal course of business,
where the bank has incurred or is likely to incur losses that will deplete all or
substantially all of its capital and where the bank is significantly
undercapitalised. Once the bank is placed under receivership, BOU or any
other person appointed by BOU shall become the receiver of the bank and the
bank in receivership shall be protected from any enforcement of any security
over its property and any proceedings, execution and legal process.
During the receivership of the bank, BOU, with the aim of protecting interest of
depositors, minimising costs to the Deposit Protection Fund and ensuring
stability of the financial sector, shall consider and implement recovery options
such as a merger with another bank, the purchase of assets and liabilities by
another bank, sale of the bank in receivership and liquidation of the bank in
receivership.
Compulsory liquidation may be commenced by BOU or the person appointed
by BOU. A bank may, with written approval from BOU, apply to the High Court
for voluntary liquation. BOU or any person appointed by BOU shall be the
liquidator of the bank. Upon commencement of the liquidation process of the
bank, the bank shall cease operations, except those which are incidental to
the orderly realisation, conservation and preservation of its assets and the
settlement of its obligations.
Uganda is a member of the Financial Stability Board (FSB) and the FSB Key
Attributes of Effective Resolution Regimes, such as transfer of the assets and
liabilities of the failing bank, are embedded in the Financial Institutions Act as
amended. The implementation of the FSB Key Attributes of Effective
Resolution Regimes is spearheaded by BOU and the Deposit Protection
Fund.
The insolvency preference rules applicable to deposits have been discussed
in 6.1 Depositor Protection Regime. Payment of any claims in insolvency
shall be made according to ranking prescribed in the Financial Institutions Act.
First ranking in payment of claims is given to the Deposit Protection Fund,
second to the liquidator for all expenses incurred, third to employees for all
wages and salaries due, fourth to secured creditors in pari passu; fifth to
depositors for deposits which are in excess of the protected deposit amount
and lastly to other creditors ranking in pari passu.
Uganda recently enacted the Financial Institutions (Preference and Appraised
Book Value) Regulations 2023, which provide for enforcement of close-out
netting under International Swaps and Derivatives Association Master
Agreement (ISDA), Global Master Repurchase Agreement (GMRA) and
Global Master Securities Lending Agreement (GMSLA) contracts with
financial institutions. The Regulations permit netting off, the delivery, payment,
transfer, substitution or exchange of cash, margin, collateral, credit support or
any other interests or assets from the financial institution where the financial
institution is a party to a specified financial contract and is placed under
management takeover, or closed.
10. Horizon Scanning
10.1 Regulatory Developments
Islamic Banking
The Financial Institutions (Amendment) Act, 2023, which was assented to by
the President of Uganda in June 2023, repealed Section 115B(2) that grants
the Central Shari’ah Advisory Council the power of approving any Islamic
Banking product to be offered by a financial institution. The effect of this
amendment is to allow the licensed financial institutions to offer Islamic
banking products in Uganda without any approval from the Central Shari’ah
Advisory Council. Consequently, BOU granted its first Islamic banking licence
to Salaam Bank Uganda, a subsidiary of a Djibouti-based bank, in September
2023. This amendment will strengthen the banking industry in Uganda and will
make a significant contribution to the growth and advancement of Uganda’s
financial sector.
Minimum Capital Requirements
The Financial Institutions (Revision of Minimum Capital Requirements)
Instrument 2022 require banks to have a minimum paid capital of UGX150
billion by 30t June 2024, invested initially in such liquid assets in Uganda as
BOU may approve. The implication of this requirement is that banks will have
difficulty in raising this significant capital, especially the indigenous banks.
Larger and foreign-owned banks are better positioned, while smaller,
indigenous banks face greater challenges in meeting Uganda’s increased
minimum bank capital requirements.
Agent Banking
The Financial Institutions (Agent Banking) (Amendment) Regulations, 2023
amended the prerequisites for conducting agent banking in Uganda. The
duration for which an applicant must have operated an account in the licensed
financial institution which they seek to act for as an agent was amended from
six months to 12 months. Agent banking is a developing area in the banking
industry and this amendment limits the agent banking business in Uganda
despite it being the most effectively used.
Online Business Registration System (OBRS)
The Uganda Registration Services Bureau (the Companies Registry) rolled
out a fully-fledged electronic registration system, the OBRS, in June 2023,
which facilitates seamless registration of companies, business names, legal
documents, insolvency and other related services. As a result, the Companies
Registry requires all entities that were registered/incorporated before 9
December 2022 to upload their company data onto OBRS and have an OBRS
account for all company filings.
Ultimately, all legal documents are to be filed exclusively through the OBRS
system, which eases filing of transactional documents and registration of such
transactional documents.
Beneficial Ownership Requirements
In a bid to combat money laundering and terrorism financing, Uganda has
promulgated various laws regarding beneficial ownership information including
the Companies (Beneficial Owners) Regulations that require corporate entities
to disclose the personal data and information regarding the nature of
ownership or control of their beneficial owners. A beneficial owner is
considered to be a natural person who has final ownership or control of a
company/partnership/trust or a natural person on whose behalf a transaction
is conducted in a company/partnership/trust and includes a natural person
who exercises ultimate control over a company/ partnership/trust.
Company Secretaries for Banks
BOU recently issued a directive instructing all supervised financial institutions
to stop outsourcing company secretaries effective 31 December 2023 and
have in-house company secretaries. Non-compliance could attract regulatory
sanctions. The objective behind this move is to fortify corporate governance,
which is an essential aspect of the banking industry.
11. ESG
11.1 ESG Requirements
Environmental, Social and Governance (ESG) in the banking industry
presently has no specific binding legal framework in Uganda. However, BOU
has prioritised ESG principles in its policies, processes and operations as well
as the banking sector. BOU recently recast its mission to read “To promote
Price Stability and a Sound Financial System in Support of Socio-Economic
Transformation in Uganda”. Financial institutions are encouraged by BOU to
leverage emerging technologies which have been recognised as critical tools
for addressing social, environmental and economic challenges.
In BOU’s strategic plan for 2022–2027, BOU will institutionalise an ESG
framework across the regulated financial institutions so that financial
institutions can prioritise social good and sustainability in addition to making
profits for shareholders. In this strategic plan, BOU aims to pursue various
initiatives for sustaining financial stability, such as:

 issuing guidelines to financial institutions on disclosing climate-related

risks in their existing financial reporting systems;

 integrating climate-related risks in the stress testing and domestic

systemically important bank (DSIB) analytical frameworks;

 mandating disclosure of how climate-related risks are provided for within

the Internal Capital Adequacy Assessment Process (ICAAP), a central
component of risk-based supervision; and

 introducing a new ranking criterion for banks that considers their

sensitivity to climate and environment-related issues and their impact on
their balance sheets and continued sustainability.

In BOU’s efforts to promote price stability and a sound financial system in

support of socio-economic transformation in Uganda, BOU launched the
Sustainability Standards and Certification Initiative (SSCI) of the European
Organization for Sustainable Development (EOSD), which is a framework
aimed at engendering sustainability in the BOU. This certification will provide
a framework for financial institutions to assess and improve their sustainability
performance and evaluate financial institutions’ ESG practices.
AF Mpanga
4th Floor DFCU Towers
Plot 26 Kyadondo Road
Nakasero
Uganda
+256 414 254540
[email protected] www.afmpanga.com
Law and Practice
Authors

William Kasozi

Jonathan Kiwana
Derrick Kuteesa

Brian Banana Baine

AF Mpanga was founded in 2003 and has established itself as a leading, full-service
corporate commercial law firm in Uganda and the East African region. Clients of the firm
include local commercial banks, as well as regional and international development
banks. It has previously acted for and advised the Central Bank and maintains good
relations with the Capital Markets Authority. It is also retained to act for and advise the
Uganda Bankers’ Association, an umbrella organisation bringing together all the
commercial banks in the country. AF Mpanga is a founder member and lead adviser to
the Financial Technologies Services Providers’ Association, an organisation bringing
together players in the financial technology and payments services subsectors.

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Law and Practice

1. Legislative Framework

1.1 Key Laws and Regulations

2. Authorisation

2.1 Licences and Application Process

3. Control

3.1 Requirements for Acquiring or Increasing Control Over a Bank

 4. Supervision

4.1 Corporate Governance Requirements

4.2 Registration and Oversight of Senior Management

4.3 Remuneration Requirements

5. AML/KYC

5.1 AML and CFT Requirements

6. Depositor Protection

6.1 Depositor Protection Regime

7. Bank Secrecy

7.1 Bank Secrecy Requirements

8. Prudential Regime

8.1 Capital, Liquidity and Related Risk Control Requirements

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9.1 Legal and Regulatory Framework

10. Horizon Scanning

10.1 Regulatory Developments

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Abstract
Uganda is one of the few African countries praised by the World Bank, the
International Monetary Fund and the international financial community for
its reduction in the government’s economic role and its economic policies
on privatization and currency reform. The Ugandan financial sector is
based on commercial banks, credit institutions, deposit-taking
microfinance organizations, and savings and credit cooperative
organizations. Ugandan capital markets in Africa are among the more
developed markets, but in global terms still relatively small. Due to the
dominant role of the banking sector within the financial system, the main
regulatory authority for the sector as a whole is the country’s central
bank, the Bank of Uganda, while for investment funds the CMA (Capital
Markets Authority). Regulatory directives, thanks to the British colonial
past and the international background of local banks, more or less follow
European directives.

Keywords: banking, investment funds, financial system, regulation,

Uganda

JEL classification: E58, G24, N2,

1. Introduction
As we are heading towards southern Europe on the map, not only the
climate and the landscape change significantly, but also cultures and
national economies. Market developments and economic regulations are
followed by certain historical events and so creating exciting diversity in
our world today, which wants to follow unified and common standards. In
this article, we envisage the examination of a country and a business
area where this type of standardization is only beginning to develop, so
significant differences may be observed also within global systems. This
is because globalization interweaves the entire investment and financial
sector: it allows international access but at the institutional level with
different regulations and financial literacy from country to country
(Pásztor, 2019a).

In order to understand and to assess the financial system of Uganda, it is

important to note that Uganda belonged to the British colony
(protectorate) between 1894 and 1962 and became independent in 1962.
Because of this historical relationship, Uganda’s legal system is closely
integrated into the English legal structure and system. In Uganda, the
supreme law is the Constitution of the Republic of Uganda adopted in
1995, as subsequently amended. However, the privileged position of the
English common law and equity has remained in Uganda’s legal system to
the present day recognising them as sources of law.

2. The Ugandan economy

Uganda is endowed with significant natural resources, including ample
fertile land, regular and heavy rainfall, significant extractable oil
reserves, and, to a lesser extent, copper, gold, and other mineral
resources. Agriculture is one of the most important sector of the economy
(Popp et al., 2019) since its employment rate is 72%. Uganda’s industrial
sector is small and weak and highly dependent upon imports of refined
oil, tools and machines necessary for production. Overall, productivity is
limited by a number of supply-side factors, including inadequate
infrastructure, lack of modern technology in agriculture, and corruption
(Tarrósy, 2010; Lakner, 2012; Pásztor, 2019b)

Since 2016, Uganda’s economic growth has slowed down as a result of

sudden increase in national debt and public expenditures. Its budget is
dominated by expenditure on energy and road infrastructure, the biggest
infrastructure projects are financed by preferential loans from abroad
causing further increase in national debt. Oil revenues and taxes are
expected to become an increasingly important source of public financing
as oil production begins in the coming years.

The economy of Uganda developed rapidly in the 1990s and early 2000s
and its economic stability and dynamics on high growth was recognised.
It is one of the few African countries whose efforts for reduction in the
government’s economic role and its economic policies on privatization
and currency reform were acknowledged by the World Bank, the
International Monetary Fund and the international financial community.
Uganda has been particularly successful in using international funds and
drawing of loans. In 1997, Uganda was among the few countries receiving
debt relief due to the successful implementation of rigorous economic
reform projects. In January 2000, as a result of its efforts, Uganda was
eligible and qualified for additional debt relief under the enhanced HIPC
framework, thus ensuring a further reduction in external debt to USD 1.3
billion. Therefore, Uganda was able to focus on eradicating poverty and
exploiting resources, as well as developing industry and tourism (Vida et
al., 2020).
3. Caracteristics of the financial
sector in Uganda
The financial system of Uganda is composed of banks, microfinance
deposit-taking institutions (MDIs), savings and credit cooperative
associations (SACCOs), commercial banks, credit institutions, insurance
companies, MDIs and microfinance institutions. However, access to
financial services remains a challenge, especially for the rural population.

In Uganda, the financial sector experienced more stricter supervision by

the Central Bank, better regulated operating conditions and higher capital
requirements with the adoption of the Financial Institutions Act in 2004
and the Implementing Regulations on Financial Institutions in 2005.
However, after an uncertain period following the closing of domestic
banks in 1998-1999, thus contributed to the quick recovery of the
financial sector and to the market transparency.

The banking sector in Uganda is characterized by a large share of foreign

ownership and high concentration with leading international financial
institutions such as Stanbic, Citibank, Barclays and the Standard
Chartered. However, a number of domestic banks have also been
established, including DFCU Bank, Crane Bank and Cerudeb.

The revenue of the financial sector has increased due to the rise of
lending to the public largely financed by a growing deposit base. The
efforts to increase customer deposits were justified by the decision of the
Bank of Uganda decision in 2005 whereby all government project funds
were withdrawn from commercial banks. There is still a wide disparity
between the lending and deposit rates, mainly due to the inefficiencies of
the sector.

The insurance sector remains a small part of the financial services

system. In 2005, it was composed of twenty licensed insurance
companies under the supervision of the Uganda Insurance Commission.
The National Insurance Company – which was former one of the largest
insurance companies – was successfully privatized. The sector awaits the
establishment of the first official reinsurance company by the Uganda
Insurers’ Association, the Uganda-Re with high expectations. In 2004, the
Bank of Uganda successfully issued 2-3-5 and 10-year government bonds
on the assumption that they encourage private companies to access debt
markets. The Standard Chartered Bank issued its first bonds and the
DFCU Limited but also the Nile Bank are ready for it.

A large part of the microfinance institutions have also evolved in the past
years from donor funded non-governmental organizations to financial
institutions funded by members using governmental liquidity funds. The
sector currently consists of over 1,000 microfinance institutions.

Commercial banks – as largest financial institutions and lenders of the

country – are considered reliable and liquid. Together, they manage 95%
of total private sector loans. The remainder is shared by other
institutions, including SACCOs and mostly NGO-based microfinance
institutions. Commercial banks realize adequate returns, with their non-
performing loans around 4–5%, which is a fairly good value (BoU, 2017).
Commercial banks have sufficient liquidity: UGX 9.9 billion (1 USD = 3,654
USh rate for 20/05/2020) with total liquid funds, representing 37% of the
total assets.

In rural areas of Uganda, the presence of traditional branch-based

financial institutions is rather limited, however, mobile banking agents
offer a large number of access points. According to the IMF Financial
Access Survey in 2016 (IMF 2016), there were 566 bank branches in
Uganda, namely 2.77 branches per 100,000 adults, a value much lower
than in Kenya (5.43) or Rwanda (6.16). Therefore, the rural population has
limited access to bank branches in Uganda, in addition, 70% of these are
urban-based. The coverage of the mobile banking agent network is far
beyond traditional banks. Meanwhile only 16% of the population had
access to a banking service point within a 1 km radius of it, 54% of the
population had access to a mobile payment point in 2015 (Republic of
Uganda, 2017). Agency banking was not allowed until recently, but the
National Bank of Uganda – which is also the banking and insurance
regulatory authority – finally approved an amendment to the Financial
Institutions Act in July 2017 to proceed with it (Panturu, 2019). Since
early 2018, as a result of changes in the banking regulatory framework,
several banks have launched agency banking services with the
professional support of the Uganda Bankers’ Association.

Nevertheless, the absence of financial services in rural areas is

significant. Approximately 25% of the adults in rural areas have no
access to financial services compared to only 14% in urban areas. In
addition, only 10% of adults residing in urban areas rely entirely on
informal services compared to those in rural areas (23%). As 76% of the
adults in Uganda residing in rural areas, financial institutions that do not
provide services in these regions are forfeit their largest market
potential. Likewise, small agricultural households have limited access to
financial services. According to the national survey by the Consultative
Group to Assist the Poor (CGAP), only 10% of smallholder farmers in
Uganda have a bank account and 73% of them used mobile funds
(Anderson et al, 2016). 93% of the households interviewed say they use
immediate cash transactions for the purchase of agricultural raw
materials, while only 7% have access to some sort of credit which allows
them to pay later.

In the early 1990s, the banking sector was comprised mainly of four
foreign banks (Standard Chartered, Standard Bank, Barclays and Baroda),
and the two large indigenous banks (UCB and Co-op) that controlled 70%
of the banking assets and liabilities but were insolvent. By the end of
2005, the system had substantially grown and was made up of a formal
and an informal sector. The formal sector encompassing the commercial
banks (Tier 1), 8 credit institutions (Tier 2), and since 2004 microfinance
deposit-taking institutions (Tier 3), National Social Security Fund (NSSF),
a Postbank, insurance companies, Forex bureaus, and the stock
exchange. The informal sector comprises of a wide range of
moneylenders (SACCO), Rotating Savings and Credit Association
(ROSCAs) and the microfinance institutions (MPIs). In terms of the
informal financial institutions, there has been a considerable progress in
expanding the outreach of these institutions and improving the access to
financial services, in particular by the rural population.

Uganda has a developed and diversified microfinance sector, yet it

suffers from low capitalization and a number of legal problems (Oláh–
Molnár, 2001). These disadvantages limit the sector’s ability to meet the
development financing needs of the rural and micro-enterprise sector
representing a majority of manufacturing enterprises in Uganda and
accounts for more than 50 % of GDP. Thus, microfinance is unable to
overcome the chronic shortage of larger and longer-term loans to small
businesses, especially in the commercial economy sector.

The expansion of SACCOs, ROSCAs and MPIs cause a concern regarding

the safety of small-balance deposits. Some of these institutions use also
subsidized funds from the government – partly for political reasons –
supported Microfinance Support Centre for lending which might introduce
distortions: lack of the development of the credit culture and thus
undermine the viability of these institutions.

Overall, though financial literacy remains low, signs of recovery are

unmistakable and encouraging. Financial intermediation dominated by
commercial banks is low, playing a limited role in the provision of funds
for development finance. Financial intermediaries are limited in number,
small in size and relatively ineffective (Mallinguh–Zéman, 2018).
Consequently, only a limited number of financial instruments are available
for savings mobilisation, liquidity management and portfolio
diversification.
At the end of December 2018, the total assets of the financial sector was
45.81 trillion USh which accounts for 44.3 % of GDP in Uganda. The
financial sector is dominated by the banking sector which is regulated by
the Bank of Uganda (see Table 2 below).

Table 2: Structure of the financial system in Uganda, 2019

Source: Bank of Uganda, 2019

The banking sector of Uganda includes commercial banks, credit

institutions and microfinance deposit-taking institutions. At the end of
June 2019, commercial banks accounted for 95.2 % of the banking sector
total assets of USh 31.2 trillion.
Most commercial banks are majority-owned by foreigners, a fact that –
given that most of them are prominent, internationally recognised banks –
has a positive impact on the stability of the financial system because of
both the resettlement of well-capitalised owners and the introduction of a
world-class banking culture.

The Uganda Capital Markets along with several African markets – outside
of South-Africa – belong to the more developed markets but are still
relatively small markets. Since 1997, the country’s stock market is
available on the Uganda Securities Exchange (USE). Currently, the
Uganda Securities Exchange (USE) has 16 listed companies, whose
shares can be subscribed by a securities central depository through eight
brokers and four custodian banks with the permission of the Capital
Markets Authority of Uganda (CMA). The stock market in Uganda
generates relatively high turnover. The securities of listed companies
have a monthly turnover of between USD 1 million and USD 9 million, with
a total market capitalization of about USD 70 million.
The insurance and pension funds play a significant role on the capital
markets. Meanwhile there are 64 registered pension savings funds, the
National Social Security Fund of Uganda is the most dominant
institutional investor in the local capital markets: it owns 86% of the
financial assets of the National Pension Fund. The balance sheet
accounted 6.5 trillion UGX (USD 1.9 billion), of which 70% was invested in
government bonds, treasury bills and 29% in shares of stock.

4. Supervision of the financial sector

The Capital Markets Authority (CMA) – established for supervision of
capital markets – implemenąts its tasks in Uganda since 1996; in
cooperation with the National Bank of Uganda, they supervise 25
commercial banks and 12 investment funds in the country. Regulatory
directives – thanks to the British colonial past and the international
background of local banks, more or less follow the European directives.
However, we cannot ignore the fact that it is a young capital market with
its strengths and weaknesses. It made rapid progress thanks to the
smooth and globalized development of the last decades, however, the
financial culture evolved over the past few decades (Mallinguh–Zéman,
2019). There are financial services which are completely absent from the
financial market or they were not established in the course of the market
development, and there are services to be considered much more
developed and innovative as financial products available on European
markets. This meant, for example, that the fintech mobile money solution
– which operates out of the banking networks – is widespread and used by
more than 73% of the population. It makes possible to pay bills or even
make transactions with each other using mobile phones without banking
service providers. Due to its simplicity and low cost structure, the
commercial banking services have to face intensified competition.

These transparent services, the rapid development of capital markets,

and the deliberate improvement of regulatory authorities have all
contributed to providing at least as clear picture of the costs of
commercial banking to the public in Uganda as of other alternative
services. The Bank of Uganda makes available to the public – on a
quarterly basis, as an appendix to a local daily newspaper – the costs and
investment interest of the personal accounts of the 25 commercial banks
enumerating costs and investment interest for each account. This
educational initiative also helps financial improvement.

The financial sector of Uganda dominated by the banking sector is fully

liberalised and, mentioned beforehand, its legal system is based on
English Common Law and customary law. Since 1987, ambitious reforms
have been introduced to increase the competitiveness and efficiency of
the sector. In addition to the growth of the banking sector, Uganda is also
experiencing an intensification of capital market activities, which has
brought new alternatives to the capital market but also to savings and
investments in Uganda. Furthermore, insurance and pension funds
become increasingly significant role in Uganda’s financial system. In
terms of regulatory measures, due to the dominant role of the banking
sector within the financial system, the main regulatory authority for the
sector as a whole is the Central Bank of the country, the Bank of Uganda.

A number of acts, decrees and instruments regulates the operation and

supervision of financial institutions of the Central Bank of Uganda. For
example, the Act of 2000 on Bank of Uganda, which lays down the
fundamental rules for regulation and supervision of financial institutions
by the Bank of Uganda; the Act of 2004 on Financial Institutions, which
 provides a legal framework for regulation and supervision of commercial
banks under the supervision of the Central Bank; the Act of 2003 on Micro
Deposit Taking Institutions and the Act of 2004 on Foreign Exchange,
which is to be considered as governing regulation for forex bureaus and
for money remittance service providers.

The most important acts and regulations applied by BoU to regulate the
banking sector in Uganda:

 Financial Institutions Licensing Regulations (2005)

 Financial Institutions Credit Reference Regulations (2005)
 Microfinance Deposit Taking Institutions Regulations (2004)
 Foreign Exchange (Forex Bureaux and Money Remitters) Regulations (2006)
 Financial Institutions (Revision of Minimum Capital Requirements) Instrument
(2010)
 Financial Consumer Protection Guidelines (2011)
 Anti Money Laundering Regulations (2009)
 Provisions for External Auditors (2010)
 Regulation on mergers, acquisitions and takeovers (2008)
 Regulation on reporting requirements of internal auditors (2006)

In order to ensure effective supervision, financial institutions in Uganda

are categorized from 1 to 4 as explained above. Tier 1 includes
commercial banks, Tier 2 credit institutions and Tier 3 microfinance
deposit-taking institutions. Operations of financial institutions from Tier
1-3 are governed by various regulations of the Central Bank, while
institutions of Tier 4 – which includes other financial institutions such as
Savings and Credit Cooperative Organizations (SACCOs) and the
microfinance institutions (MPIs) – are not under the supervision of the
Central Bank.

Thus, the Bank of Uganda – in its supervisory function – is the main

regulator of the financial system. It is an autonomous body established to
create a stable macroeconomic environment in order to boost investment
and economic growth in the country. The central bank provides financial
services to actors of private and public sector; participates in the
development and implementation of monetary policy to enhance
macroeconomic stability; manages the country’s public debt; supervises
and regulates financial institutions and pension funds; issues banknotes,
coins and secures its foreign reserves.
Furthermore, the Bank of Uganda as supervisory body applies a number of
quality assurance measures. These include the criteria for risk
management but also for the appointment of directors and management,
moreover, corporate governance and disclosure requirements.

For commercial banks, the Central Bank as supervisory body uses

regulatory instruments as detailed in Table 1 to ensuring stability in the
banking sector.

regulatory instruments guidelines

required reserve ratio 10% of total receivables and
9% of fixed-term deposits at the Bank of Uganda
minimum capital requirement 2 billion USh from 1 January 2001
4 billion USh from 1 January 2003
10 billion USh from 1 March 2011
25 billion USh from 1 March 2013
capital adequacy ratio risk-weighted assets and risk-weighted off-balance
sheet items shall not exceed 8% of share capital and 12% of total capital
credit conditions the maximum amount of risk to a borrower is 25% of the
capital
the aggregate credit risk to insiders is 25% of capital; and the total loan
amount is a maximum of 800% of the capital
liquidity requirements 20% of receivables and 15% of fixed-term deposits
in liquid assets
foreign exchange exposure ratio 25% of the capital

Source: own data and based on data from BoU

In conclusion, the regulatory framework is structured as follows:

According to the Bank of Uganda Act (Chapter 51), the Bank of Uganda is
established as the Central Bank of the country for the purpose of
directing and implementing monetary policy and regulating financial
institutions. The Central Bank publishes each year an annual supervisory
report to inform the public about issues related to the prudential
regulation and financial soundness of the financial sector in Uganda. The
report provides information on the supervisory activities of the Central
Bank during the year, the reforms undertaken in the regulatory
 framework, and the assessment of the performance of the financial
system and the risks to financial stability.

The Act of 2004 on Financial Institutions, which had been subject to

numerous amendments, provides for regulation, control and discipline of
financial institutions by the Central Bank, as well as sanctions. The
financial institutions concerned are: commercial banks, post office
savings banks, investment banks, mortgage banks, credit institutions,
international trade financier, discount houses and finance houses. A
number of implementing regulations have been adopted under the
Financial Institutions Act:

 the Act of 2003 on Micro Deposit Taking Institutions provides for licensing,
regulation and supervision of the microfinance sector;
 Tier 4 Microfinance Institutions and Money Lenders Act of 2016 provides for
licencing and control of Tier 4 microfinance institutions and money lenders. The
regulatory function in this regard is performed by a separate agency, the Uganda
Microfinance Regulatory Authority;
 the Foreign Exchange Act of 2004 provides for the exchange of foreign
currencies in Uganda and the making of international payments and transfers of
foreign exchange.

The best practices and standards recommended by the Basel Committee

on Banking Supervision (in particular Basel I, Basel II and Basel III) have
been transferred to the regulatory framework of the sector as part of the
supervisory framework of the Central Bank of Uganda. The Basel
Committee’s principles for effective banking supervision are enshrined in
a number of additional regulations under the Financial Institutions Act, in
particular licensing, capital requirements, credit rating and provisioning,
credit concentration and large exposure limits, insider lending limits,
liquidity, corporate governance issues, consolidated supervision, financial
reporting and auditing requirements, consumer protection and money
laundering.

The Bank of Uganda also uses the risk-based supervision framework (in
addition to the rules-based framework) as a comprehensive, formally
structured system, which assesses risk factors within each institution
(operational, market, credit, related parts and liquidity) and the wider
impacts of the financial system, with particular emphasis on minimizing
risks in order to avoid the uncontrolled spread of risks for the stability of
the financial system.

In terms of foreign exchange regime, Uganda is fully liberalized and there

are no restrictions. The regulatory requirement of the Foreign Exchange
Act of 2004 provides that all payments all payments in foreign currency,
to or from Uganda, between residents and non-residents, or between non-
residents, shall be made through a licensed commercial bank.

Conclusions and vision

The number of banks on the African continent is steadily declining. This is
due to strict regulations, acquisitions and mergers, as well as liquidations
and bankruptcies (Zéman et al., 2018). Based on figures from 2004, 27 of
the 89 existing banks remained (Neszmélyi, 2016) in Nigeria. In Kenya, 2
banks have disappeared from the market since 2016 and 10 bank mergers
have taken place. Nevertheless, or perhaps that is why there is a need for
physical bank branches that strengthen confidence among the
population. Based on what has been said so far, we can see that there is
still a great mistrust and ignorance among the local population towards
the banking systems.

Continuous innovation and development has been also followed by

stricter capital and money market regulations. Close monitoring of
banking operations can be observed across the continent. In Kenya, for
example, lending rates were capped by law and eventually withdrawn
according to the World Bank guidelines because the share of loans to the
private sector declined from 25% of GDP in 2014 to 1.6% of GDP in 2019.
The continent’s financial and capital markets are still characterized by
seeking out their own way. Regional standards in the sector are now
beginning to develop and emerge. Cyber security, consumer protection,
the security of data processing in digital financial services, and the
security provided by the GDPR systems already adopted in Europe for
handling of consumer data, all these determine the direction of
development. It is still up to the service providers to decide which
standards will have priority. In this respect, the African continent is a
very interesting crucible. Both European and Asian/Indian banks are
present across the continent, even within a single country, so a diverse
banking system is developing.

The banking system of sub-Saharan Africa is projected to have a great

future. Institutions with the right strategy can gain a huge market
advantage. With the revolution of mobile banking systems, digital banking
services forecast 450 million users by 2022, which was only 300 million in
2017 and the number of users is increasing every year. According to the
World Bank, the market currently serves only 21% of the adult population,
well lower than global average for emerging markets. In terms of
customer growth, Africa is surpassed only by the South American
continent.

Most banks are trying to take advantage of this growth. The British
Barclays, that has established the banking for small and medium-sized
enterprises by its market presence on the continent, or even the Trust
Merchant Bank (TMB), that has introduced innovative solutions and made
improvements in the Democratic Republic of Congo since its foundation in
2004 not only in the capital, Kinshasa, but also in rural settlements, all
these factors contributed to the result that every fifth Congolese has a
TMB account, which is a significant market share in a country of nearly
100 million people.

Nevertheless, it is not an easy task for anyone trying to provide banking

services on the African continent, because a wide range of sectors of the
economy needs to be served. The difference between the sections of
society is very large, as in the case of small and medium-sized
enterprises. There are no uniform standards yet and in many cases
official statistics are missing. This is offset by the high population and the
potential size of the market.

The example of Uganda shows that in markets where certain stages of

development have been missed, different products and services often
develop. Mobile money systems can considerably replace the services of
personal accounts of commercial banks. They provide non-cash payment
that enables transactions between customers and payments of various
costs and overhead expenses. However, savings are not yet available in
the application. Some form of financial education is currently underway.
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László VASA
research professor, Széchenyi István University, Hungary chief advisor
and senior researcher, Institute for Foreign Affairs and Trade, Hungary

Andrei RADULESCU
researcher, Institute for World Economy, Romanian Academy of Sciences
Imre VIDA
PhD student, Doctoral School of Regional and Econoic Sciences,
Hungarian University of Agrarian and Life Sciences CEO, Vestoq Ltd.,
Uganda

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← National economy sectors in the bank financing and their profitability
VI Monetary Policy and Financial Sector Reform

Author:

Ms. Hema R. De Zoysa

Mr. Robert L. Sharer

, and

Mr. Calvin A McDonald

Language:

English

Print Publication Date:

01 Dec 1995

Keywords:
 OP; GDP; interest rate; CBI trade liberalization; government; investment-GDP ratio; treasury
bill rate; BOU lending; BOU authority; government treasury bills; BOU reform; Commercial
banks; Monetary base; Real interest rates; Financial sector; Sub-Saharan Africa

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 Abstract
 Full Text
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In pursuit of the Economic Recovery Program, Uganda has taken a number of actions in the
financial sector; most important, the growth of money has been progressively reduced through
strengthened credit and fiscal management. Additionally, interest rates have been progressively
liberalized, ensuring positive real levels and improving the allocation of financial resources. The
authorities have also improved the performance of problem banks. Nevertheless, Uganda's financial
system remains a source of considerable structural weakness. The challenge to the financial sector
is to strengthen resource mobilization and allocation in order to promote the diversification and
development of the economy; new financial instruments are also required for effective policy
implementation.

Structure of the Financial Sector

Since 1987, Uganda's financial sector has grown considerably and now comprises the central bank
(Bank of Uganda), 15 commercial banks, 10 credit institutions (including an almost defunct Post
Office Savings Bank), 19 insurance companies, 2 development banks (which primarily on-lend donor
funds), and 1 building society. In July 1990, as a part of its liberalization program, the Government
commenced licensing foreign exchange bureaus, of which there are now 76. While there appear to
be a large number of financial institutions offering diversified services, the commercial banks have
been the dominant financial intermediary. Uganda's banking system has been dominated by one
government-owned bank—the Uganda Commercial Bank (UCB)—that accounts for about half the
deposits in the system and four foreign-managed banks—Barclays, Bank of Baroda, Grindlays, and
Standard Chartered—that account for an additional 30 percent of deposits. The banking system has
been characterized by a lack of competition and a large element of government ownership and
control. Bank lending has been concentrated in three main areas: manufacturing, agriculture, and
trade and commerce. Most agricultural lending is in the form of crop finance, providing short-term
funds to coffee exporters until they receive payment from foreign purchasers; there is little bank
lending to farmers for the purpose of farming or expansion.

Uganda's formal financial sector is one of the least developed in sub-Saharan Africa. The financial
sector is characterized by a low degree of monetization of the economy. Only some 70 percent of
the economy is estimated to be monetized, and the ratio of broad money to GDP is about 9 percent,
compared with almost 40 percent for Kenya and 35 percent for Tanzania. Moreover, the economy is
cash oriented, with about 34 percent of outstanding money supply in the form of cash, compared
with 20 percent in Kenya and 32 percent in Tanzania. The strong preference for cash reflects in part
the structural deficiencies of the financial sector and in part a lack of confidence in the banking
system, which was exacerbated by the 1987 currency reform that was accompanied by a 30 percent
tax on currency in circulation, bank balances, and financial assets. It was further encouraged by high
inflation and the negative real interest rates between 1985 and 1988. Until April 1992, all interest
rates had been administratively set by the BOU, usually at levels well below the rate of inflation. In
1992/93, however, real interest rates turned strongly positive, which was due to both the progressive
liberalization of nominal rates and a sharp decline in inflation. In 1993/94, real interest rates turned
negative again because of a rise in the rate of inflation and a decline in interest rates on account of
excess liquidity in the financial system (Table 9).
Table 9.
Financial Indicators

Source: Ugandan authorities.

At current market prices.

1

End of period.
2

Calculated as: [(1 + current interest rate)/(1 + year-on-year inflation rate) - 1].
3

View Table

The portfolio of available financial instruments is very limited. Nearly all the financial assets held in
Uganda consist of liabilities of the Government, the BOU, or commercial banks. The development of
a treasury bill market was initially limited by a ban on the holding of treasury bills by commercial
banks. This ban was lifted in February 1991; commercial banks are now the main bidders in an
active weekly auction and hold more than one half of all bills outstanding.

Monetary Policy Framework and Recent Developments

Monetary and Credit Control Framework
The Bank of Uganda has used three main instruments for the implementation of its monetary policy;
reserve requirements, lending to commercial banks, and treasury bill auctions.

Reserve Requirements
Beginning in 1977, commercial banks were required to hold 10 percent of their deposits as statutory
reserves in unremunerated accounts. In 1993, this requirement was reduced to 8 percent of demand
deposits and 7 percent for time deposits. The banking system has typically held considerable excess
reserves, although some problem banks have frequently fallen below their statutory requirements. In
order to make it more effective, the authorities have split the single reserve account into three
accounts—a statutory reserve account, a clearing account, and an interest-bearing borrowing
account.
Bank of Uganda Lending to Commercial Banks
This lending takes place mainly through the borrowing account, but also through an overdraft facility
in the bank's clearing account. Because of the lack of an interbank money market, banks in a tight
liquidity position have had to borrow from the BOU through this facility, making this type of lending
an important source of slippage in the management of monetary policy.

Treasury Bill Auction

In the past, treasury bills were primarily a mechanism for financing government fiscal operations
from the nonbank sector—commercial banks were not allowed to hold treasury bills. Since April
1992, treasury bills have been used as an instrument of monetary policy; the weekly issue of bills
has been increased to affect liquidity conditions in the banking system. Although there are no
repurchase agreements nor a secondary market, the BOU allows secondary sales and stands ready
to discount bills at the rediscount rate.

Recent Developments in Monetary Policy

Since the beginning of the structural adjustment period in 1987, monetary aggregates have been
influenced by the policy on credit to the public sector: both excessive net credit to the Government
and periodic direct central bank credit to public enterprises have caused high monetary growth and
consequent inflation, frequently leaving the commercial banks and the private sector with a tight
liquidity constraint. Thus, during 1991/92, net credit to the Government expanded by 32 percent of
the initial money stock and led to a rate of inflation of 63 percent on a year-end basis (Table 10), or
an annual average of 42 percent. A tight fiscal policy was introduced in 1992/93, during which time
the Government of Uganda repaid U Sh 17 billion to the banking system, equivalent to 8 percent of
initial money stock, and the rate of inflation plunged to a negative 1 percent on a year-end basis. The
evolution of prices in 1992/93 can be traced to developments in liquidity conditions in the monetary
sector. The tighter liquidity resulted from the Government's net repayments to the BOU, the increase
in foreign exchange purchases for imports, and the large amount of nonperforming loans—all
effectively removing Uganda shillings from the banking system. As a result of the generally tight
conditions during 1992/93, the private sector increasingly went abroad for financing in the form of
coffee prefinancing and additional private foreign transfers. The result was an expansion in money
supply (M2) in 1992/93 by 42 percent, of which over 70 percent was due to the increase in net
foreign assets of the banking system. In contrast, in 1991/92, a 53 percent (U Sh 74 billion) increase
in money supply was fueled by a 75 percent (U Sh 218 billion) rise in net domestic assets, which,
given a large decline in net foreign assets, was equivalent to almost three times the expansion in
money supply.
Table 10.

Monetary Survey

(In billions of Uganda shillings)

Source: Ugandan authorities.

Foreign exchange deposits of residents.

1

View Table

The trends that began in 1992/93 were also broadly observable in 1993/94. Fiscal conditions
continued to be tight with the Government continuing to repay the banking system, such that it was,
for the first time, in a net creditor position vis-à-vis the banking system. Following the major
improvements and liberalization efforts in Uganda's exchange and trade system during the early part
of the year, net foreign assets (particularly in the BOU) improved dramatically, by U Sh 131 billion,
while net domestic assets declined by U Sh 40 billion. Thus, the increase in money supply (M2) of U
Sh 101 billion, or 33 percent, was wholly on account of a 67 percent increase in net foreign assets,
which was partially offset, for the first time, by a contraction in the net domestic assets of the banking
system.10 Inflation as measured by the consumer price index remained well under control, with the
annual average declining from 28 percent in 1992/93 to 6.5 percent in 1993/94.
Interest Rates and the Market for Government Securities
Interest Rate Policy
Until 1992, the monetary authorities determined all formal financial sector interest rates, including
treasury bill rates. The level and structure of interest rates were administered by the BOU, which, in
consultation with the MOFEP, made periodic adjustments. The resulting interest rate policy led to
highly negative real interest rates throughout most of the 1980s, which inhibited saving and
encouraged speculation. Only in mid-1990 did the Government commit itself to achieving positive
real interest rates and begin the necessary quarterly adjustments. Institutional regulations further
discouraged saving; as of end-1990, commercial banks were not allowed to hold government
treasury bills, and they held just 0.1 percent of other government securities outstanding. The reform
of interest rates and the market for government securities began only in 1992.

The maximum lending rate charged by commercial banks was also administratively set by the BOU
until November 1992. At that time, the monetary authorities decontrolled interest rates by freeing
some and linking others to a reference rate—the annualized discount rate on treasury bills. The
reference rate was used to set the maximum lending rates for term loans, development loans, and
agricultural loans, as well as the minimum deposit rates for time and savings deposits. Lending rates
on overdraft accounts and interest rates on demand deposits were freed completely and have since
been determined by market forces. To reinforce the improved allocation of financial resources, the
Government abolished, effective July 1, 1994, the formal links between the reference rate and
lending and deposit rates. The borrowing rate paid by the Government on its ways and means
advances remained constant at 14 percent from September 1990 until October 1993, was raised
gradually to 22 percent by March 1994, and reduced to 11 percent by June 1994. The Government
also receives the same rate on all its deposits; this has assumed some significance with the large
net payments to the BOU in 1992/93 and 1993/94. BOU lending to commercial banks is at the bank
rate, which historically has been set at one percentage point above the rediscount rate, an
administered rate. These rates have effectively set a ceiling on the commercial banks' cost of funds.
For the years prior to November 1992, the bank rate averaged 49 percent, but it declined
subsequently, reaching 24 percent by September 1993 and 20 percent by end-June 1994 (Tables
11 and 12 and Charts 10 and 11).
Table 11.

Structure of Interest Rates, March 1990–December 1992

(On a quarterly basis)

View Table

Table 12.

Structure of Interest Rates, January 1993–June 1994

Source: Ugandan authorities.View Table

View Full Size

Chart 10.

Structure of Interest Rates

 (on a Quarterly Basis)1
Source: Ugandan authorities.1 Annual percentage rates.

 Download Figure
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Chart 11.

Structure of Interest Rates

(on a Monthly Basis)1

Source: Ugandan authorities.1 Annual percentage rates.

 Download Figure
 Download figure as PowerPoint slide
Market for Government Securities
The money market in Uganda is dominated by treasury bills, which account for 99 percent of all
government debt. A treasury bill auction was initiated in April 1992 and was offered initially on a
biweekly basis but later on a weekly basis. The auction offers a predetermined quantity of 91-day
bills to bank and nonbank bidders. While most bids are competitive, small purchases are allowed on
a noncompetitive basis. In January 1993, the term structure of the bill market was lengthened, with
the weekly auction being augmented by a monthly allocation of 182-day and 273-day bills. Despite
its operational success and its sizable increase in recent months, the bill market remains small, at
around 8 percent of broad money; most of the bidders are commercial banks. In addition to treasury
bills, there are also small amounts of nontradable government securities—comprising ordinary
stocks, tax certificates, and crop finance bills—accounting for only about 1 percent of total
government securities.

Developments in the Treasury Bill Market

The 91-day treasury bill rate is the most important rate in the country as it represents a risk-free rate
and, even now, an informal reference rate for the banking system. The response of the treasury bill
rate to market forces has been impressive. At the time of liberalization, the discount stood at 39
percent and the auction was generally fully subscribed. A substantial reduction in issues created a
growing excess demand, which pushed the annualized discount to 22 percent by the end of
December 1992. An increase in issues brought the rate back to 18–24 percent through the end of
1993. With the increasing liquidity of the banking system that stemmed from rising external inflows,
and despite the doubling of the weekly bid, the rate stood at 11 percent by end-June 1994, about
half the level prevailing at the beginning of 1994. In the meantime, the annualized rate for 182-day
bills declined less strongly, from 20 percent at end-December 1993 to 16 percent by end-June 1994,
indicating the strong preference for liquidity (over profitability) for bills of short maturity.
Relationship Between Money and Prices
Data since 1989 indicate a strong linkage between broad money and prices in Uganda, and similarly
between base money and prices. Econometric evidence substantiates this relationship and implies
that, on average, 70 percent of the change in broad money has translated into price changes within
three to four months and that the whole effect has been felt within nine months. However, for the two
years 1992/93 and 1993/94, Uganda saw considerably higher money growth than inflation. Thus in
1992/93 broad money grew by 42 percent, and the annual average increase in the consumer price
index was 28 percent, while on a year-end basis the rate of inflation was minus 1 percent. In
1993/94, broad money grew by as much as 31 percent while the annual average increase in
consumer prices was 7 percent and 16 percent on an end-year basis. This suggests that policy
changes over the past two years or the source of the impulse may have resulted in some behavioral
change and that some structural factors also came into play.

The critical factor affecting the money-inflation relationship is the apparent declining velocity of
money of about 0.5 per annum on average. Despite the instability of the velocity ratio, there may be
a decline under way on account of the continued monetization of the economy, the reduction in
inflation, the rise in real interest rates, and the recent attractiveness of an appreciating Ugandan
shilling, which has been enhanced by the political and economic uncertainty faced by some of
Uganda's neighbors. The monetary component of GDP continued to rise from 1987/88 to 1991/92
with the return of political and economic security, rebuilding of the infrastructure, and improved
marketing and distribution mechanisms. The second element affecting the historical money-inflation
relationship is the emergence of positive real interest rates owing to a drastic decline in inflation.
Thirdly, the cause of the increase in money supply has changed from domestic asset creation to net
foreign assets, and it may be that the transmission mechanism between foreign assets and prices is
less certain and direct. Finally, the Ugandan shilling has become a stable currency and, with its
recent appreciation, has become very strong regionally. Given the economic instability in some
neighboring countries, the stability and strength of the Ugandan shilling have led to its more
widespread use, especially in its border trade, in those countries (Chart 12).

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Chart 12.

Components of Monetary Survey, Exchange Rate, Broad Money, and Prices

(1980 = 100)
 Source: Ugandan authorities.

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Structural Problems in the Banking Sector
Until recently, banking legislation fragmented responsibility for the formulation and implementation of
monetary and supervisory policies and limited the power of the BOU to enforce directives issued.
Moreover, there were weaknesses in the capacity of the BOU, particularly in the formulation and
implementation of monetary and supervision policy. The internal accounting of the BOU is weak, as
is its balance sheet. Inadequate prudential regulation and supervision have been major constraints
on the efficiency and the depth of Uganda's financial system. BOU's Bank Supervision Department
was, until the early 1990s, seriously understaffed and thus unable to examine banks at sufficiently
frequent intervals. Also, there is often inadequate follow-up to see that corrective actions are carried
out satisfactorily.

As mentioned before, the most dominant financial institutions are government owned. The system
initially had a large foreign presence, but in the past decade the Uganda Commercial Bank and the
Cooperative Bank (COOP)—both government owned—have acquired the bulk of the branch
network. The UCB and the COOP have been subject to extensive government intervention,
particularly regarding their lending priorities. There is also a high degree of market concentration in
the banking system. The formal financial sector is dominated by the UCB and the COOP bank in
terms of assets, deposits, and the branch network. There are also legitimate complaints about the
poor check-clearing facilities within the banking system, difficulties in the use of checks, and the
inconvenience of cash transactions. As a result of the inefficiencies in the payments system, the
public in Uganda has a strong reluctance to use checks as a system of domestic payments; this is
reflected in the unusually high ratio of currency in circulation to money supply. The financial distress
of the commercial banks has also been particularly acute in the recent past. The most important
impediments to a healthy and growing banking system include the lack of public confidence in the
financial system, the short maturity and instability of deposits, and the lack of adherence and
absence of well-defined standards of accounting and auditing practices.

The Government has recognized that an efficient financial sector with an effective banking system at
its core is essential to support and foster Uganda's stabilization and adjustment program. The overall
and long-term objective of the Government's reform program is to deepen the financial system and
to establish an efficient system of resource mobilization that would offer a greater variety of
instruments to borrowers and savers in an increasingly liberal and market-oriented environment. The
Government's reform program has been supported by a World Bank Financial Sector Adjustment
Credit and covers actions on the policy, legal and regulatory, and institutional fronts.

Monetary Policy
Responsibility for monetary policy formulation and implementation has now been completely
transferred from the MOFEP to the BOU; earlier, the authority for approving changes in interest rates
had rested with the MOFEP. With the liberalization of interest rates in 1992, most rates are market
determined, and the authority to determine other rates is now wholly with the BOU. Accordingly, the
BOU has ensured that both the availability of technical staff and resources reflect this shift of
responsibility. While the range of monetary policy instruments available to the BOU has remained
limited, action has been taken (as outlined above) to widen the scope of the treasury bill market and
introduce new instruments to the public. A strategy for improved monetary control through reserve
money programming and management has already been developed with technical assistance from
the IMF. To ensure timely and accurate information, commercial banks have been reminded of their
legal responsibility to provide regular data, and a Monetary Policy Management Unit has been
created in the Research Department of the BOU to supervise this. The open-ended lending to
commercial banks, which was a significant source of inflationary pressure, has been eliminated. In
the future, the BOU will lend only as a source of reserve management and as temporary financing
for liquidity shortfalls. Initial steps have been taken to facilitate the development of an interbank
market, but the lack of an appropriate infrastructure and wide differences in the financial health of
commercial banks are major obstacles to its development. The Government's commitment to move
to a market-determined interest rate structure has been fully realized. Since June 1994, interest
rates have been fully liberalized, and the BOU has been managing these rates through indirect
monetary instruments, with a key interest rate (the treasury bill rate) as an anchor.

To raise the efficiency of the financial system as a whole, the Government has taken actions to
encourage effective and genuine competition among banks and reduce its own participation in the
financial system. With the recent licensing of 3 new domestic banks and 1 foreign bank, the number
of commercial banks has risen to 15. To improve the competitive environment, the new Financial
Institutions Act (see below) has liberalized entry and exit barriers in the banking sector. In order to
avoid an excessive proliferation of small banks, the Government has increased minimum capital
requirements for new and existing banks, although the increased minimum capital requirements still
remain quite low.

Legal and Regulatory Reforms

The legal and regulatory reforms consist principally of revisions to the BOU Act and the replacement
of the Banking Act with the new Financial Institutions Act (FIA) enacted in March 1993. Major
objectives of the revisions are to ensure that primary responsibility for the formulation and
implementation of monetary policy rests with the BOU and that the BOU has adequate powers to
fulfill its regulatory and supervisory functions in relation to all financial institutions. The new BOU
legislation enacted in 1993 (i) clarifies and strengthens the role of the BOU as the monetary
authority; (ii) specifies clear legal limits on lending to the Government; (iii) ensures BOU control over
lending to banks; (iv) gives the BOU authority to ensure that all clearing arrangements are effective
and operate on a sound basis; (v) provides for an increase in BOU capital; and (vi) establishes
mechanisms to maintain adequate capital in the future. The FIA provides a sound basis for the
prudential supervision of banks and provides the BOU with unambiguous powers to (i) license banks
and other financial institutions; (ii) specify capital adequacy requirements; (iii) specify prudential
liquidity requirements; (iv) establish minimum requirements with regard to nonperforming assets; (v)
undertake inspections when necessary; and (vi) require banks to redress difficulties that emerge or,
if necessary, for the BOU to take over the management.

Institutional Reforms
Institutional reforms consist mainly of central bank (BOU) reforms and restructuring of the UCB and
the COOP. The BOU reforms are the result of extraordinarily productive collaboration between the
IMF, the World Bank, and the Government. Under the reform program the BOU has been steadily
upgrading its operations. The capacity of the Research and Bank Supervision Departments of the
BOU has been substantially bolstered so that they can play an increasingly important role in policy
formulation, implementation, and prudential supervision. Moreover, to improve the technical
efficiency of the BOU, its organizational structure is being changed. The BOU has recently approved
a business plan that will result in significant changes over the next few years. The plan is intended to
ensure that the BOU maintains and strengthens its role as a viable and independent agency.
Restoring the financial health of the central bank is one of the key aims of the plan, given the toll that
the reforms of the financial sector have exacted. Under the business plan the MOFEP has provided
for a capital injection for the BOU of around U Sh 15 billion in the form of interest-bearing securities,
and operating expenses will be reduced to match revenues more accurately. In an effort to foster a
well-developed accounting framework and a check-clearing system, daily statements of commercial
bank accounts are being provided and clearing times in Kampala and the regions have been
improved. With regard to the BOU's supervision function, its Bank Supervision Department has
made significant progress in the development of banking laws, the design of supporting regulations,
the modernization of supervision methodology, and the institution of ongoing reporting and
monitoring. However, important outstanding issues remain, including a lack of both timely decision
making and regular structured reporting, particularly on unsatisfactory institutions.

The UCB is the largest commercial bank, which had about 190 branches in early 1993, providing
commercial banking services to much of the country. This extensive branch network, a lack of
trained managers, and a lack of viable economic opportunities had a negative effect on the UCB's
financial performance. As a result, the UCB has been insolvent for some time, with nonperforming
loans exceeding one-third of its portfolio. Under the reform program, the UCB has appointed a new
Board of Directors, comprising individuals who possess recognized financial or banking experience.
An operations management contract has been signed and senior staff members are in place. The
UCB was downsized during 1993/94, with roughly one-fourth of the branches closed and one-fifth of
the staff eliminated. The nonperforming loans will be transferred to a Non-Performing Assets
Recovery Trust created explicitly for the troubled bank. A financial restructuring plan has been
prepared and will be finalized when the amount of the nonperforming loans has been determined.
The restructuring measures are expected to result in a sharply improved financial performance, and
operating losses are expected to be eliminated in 1994/95.

Although much less significant in the financial system, the COOP has serious management
problems; its financial performance had been impaired by a severe liquidity squeeze. The
restructuring of the bank has made good progress with a recapitalization and short-term technical
assistance to help complete its restructuring plan.

Financial Markets Development

With the return to profitability of the UCB, it is proposed to privatize the bank as rapidly as possible.
However, the authorities have expressed concern about the dominance of the UCB in the banking
sector. To this end, a contract will be awarded to a merchant bank to study optimum shares in the
banking industry and how to achieve this, including the breakup of the UCB into more than one unit.
A stock exchange is under preparation and could become operational during 1994/95. Necessary
legislation is also being prepared to promote and facilitate the creation of a capital market.

10

Foreign exchange deposits of residents with the banking system also continued to increase
throughout the two years. Inclusive of such deposits, broad money (M3) increased by 34 percent in
1993/94, compared with 43 percent in the previous year.