Africa > East Africa > Uganda > Uganda Financial Sector Profile

Uganda: Uganda Financial Sector Profile

2015/01/29

Ugandan-Currency

 

The Financial Sector of Uganda

The Ugandan financial sector is relatively well developed with growth rate of 11.8% in 2012 and the sector consists of a range of formal, semiformal and informal institutions and currently the sector is improving due to the number of different regional and global financial institutions that have come to Uganda. Uganda has currently 9 foreign based and 11 indigenous commercial banks, 25 insurance companies, 1 re-insurance company, 7 credit institutions, 5 other non-banking finance institutions and 72 forex  bureaux.

Legal Framework in the financial sector

Ministry of Finance planning and Economic Development

Ministry plays a pivotal role in the co-ordination of development planning; mobilisation of public resources; and ensuring effective accountability for the use of such resources for the benefit of all Ugandans.

Functions of the ministry

  • In charge of collecting and budgeting for all government money.
  • Formulate policies that enhance stability and accelerate economic growth and development.
  • Plan and design strategies for rapid economic growth and transformation.
  • Mobilize domestic and external resources.
  • Ensure efficient allocation and utilisation of public funds.
  • Monitor and account for the utilisation of public resources.

The Financial Institutions Act 2004

The Act regulates the operating environment in the financial industry sector. It also provides for the regulation, control and discipline of financial institutions by the Central Bank. The law covers the following among others:

  • Application of the Act
  • Procedures for applying for a license
  • Various factors that are taken into consideration while granting a license
  • Duration, processing/ granting of license, license fee and refusal of license
  • Shareholding pattern of financial institution
  • Various entities that is eligible to hold shares in financial institutions
  • Procedures for registration for the shares
  • Capital requirements
  • Prohibitions and restrictions on lending against different instruments, and under certain given circumstances
  • Financial reporting structure and the corporate governance of the institution;
  • Duties and responsibilities, board meetings, removal of directors, audit committees and its functioning.

Micro-Finance Deposit-Taking Institutions Act (MDI) 2003

The micro-finance deposit taking institutions are regulated by Bank of Uganda under the Micro Finance Deposit-Taking Institutions Act No. 5 of 2003. The Act provides for the licensing, regulation, and supervision of microfinance deposit-taking institutions in Uganda. The Act covers   the following among others:

  • Licensing, capital requirements, capital adequacy requirements, minimum liquid assets, and other matters related to licensing.
  • Restrictions on Certain Transactions and Dealings by Microfinance Deposit-Taking Institutions.
  • Credit facilities and limits, prohibited transactions, and payment of dividends.
  • Ownership and Corporate Governance: provides information on the ownership, leadership, and management of the institution, the role and duties of external auditors, and the role of the credit reference bureau.
  • Supervision of Microfinance Deposit-Taking Institutions: focuses on the responsibilities, duties and powers of the Central Bank, management take-over, and powers and duties of a statutory manager.
  • Receivership: discusses placing an institution under receivership and options available to a receiver.
  • Liquidation: addresses the bar on liquidation, voluntary liquidation, duties of a liquidator, and liquidation by the Central Bank.
  • The Insurance Act Cap 213 (1996) and Insurance Regulations (2002)

Collective Investment Schemes Act (2003)

The CMA regulates financial reporting of collective investment schemes under  the Collective Investment Schemes Act (2003)

The Insurance Act Cap 213 (1996) and Insurance Regulations (2002)
This is the law that regulates the insurance sector in Uganda.

Reference Bureaus gazetted in 2005.
Additional regulations for anti-money laundering, consolidated supervision, foreign exchange business and external auditors; prompt corrective actions, mergers, acquisitions and takeovers, Internal Auditors reporting requirements, Finance Houses and Discount Houses are in the process of being implemented.

Financial sector is relatively well developed with growth rate of 11.8% in 2012 and the sector consists of a range of formal, semiformal and informal institutions and currently the sector is improving due to the number of different regional and global financial institutions that have come to Uganda. Uganda has currently 9 foreign based and 11 indigenous commercial banks, 25 insurance companies, 1 re-insurance company, 7 credit institutions, 5 other non-banking finance institutions and 72 forex  bureaux.

Characteristic of the sector

  • The breadth, depth and efficiency of the Ugandan financial sector are limited
  • Commercial banks account for the majority of assets
  • The institutional investor base is still in its initial stages of development as are the country’s capital markets are still in early development stage.
  • The banking products are narrow and maturity terms are short.
  • The sector includes 11 indigenous commercial banks and 7 credit institutions.

Current situation on the sector

The financial sector in Uganda is improving due to the number of different regional and global financial institutions that have come to Uganda. Uganda has currently 9 foreign based and 11 indigenous commercial banks, 25 insurance companies, 1 re-insurance company, 7 credit institutions, 5 other non-banking finance institutions and 72 forex  bureaux.

The microfinance enterprises are the fastest growing and most resilient component of the Ugandan financial sector given the big size of the unbanked sector. There is therefore an  urgent need for creation of a conducive environment for the growth of this  important sector.

The financial services sector which is supervised by Bank of Uganda is dominated by urban-based commercial banks, which offer a range of traditional banking products including deposits, overdrafts, short-term credit, export finance and foreign currency exchange.

The network of licensed commercial bank branches, credit institutions and deposit taking microfinance institutions (MFIs) covers 51 out of the country’s 55 districts, but levels of access to financial services is still low. The total number of deposit accounts held in financial institutions is estimated to be just over 1.7 million or about 35 percent of the total number of households.

The stock exchange in the financial sector

Uganda Stock Exchange (USE)
The Uganda Stock Exchange (USE) is considered an important pillar of the government’s privatization strategy as a platform for the mobilization of equity for indigenous enterprises. However, the exchange has thus far witnessed only limited levels of activity with high issuance costs amongst other impediments, deterring participation by a larger number of investors.

Uganda’s Capital Market Authority
Uganda’s Capital Market Authority (CMA) has undertaken steps to establish a market framework for encouraging the growth of the institutional investor base. Given the small size of the insurance, pension and capital market sectors, the government is considering the creation of unified authority to supervise the three market segments. The housing finance market is growing, the Housing Finance Company of Uganda (HFCU) is the primary mortgage lender, but commercial banks are also beginning to enter the market.

Opportunities

  • Promoting new or innovative financial products like mortgage financing, venture capital, merchant banking and leasing finance.
  • There are also micro-financing saving institutions which can greatly expand in rural areas.
  • Merchant banking fields
  • Insurance subsector is still young with potential for growth

Challenges in Financial Sector

  • Uganda has the lowest savings to GDP which limits the funds available to the financial sector.
  • The formal financial system largely concentrated in the urban areas and the rural areas are excluded. This limits the growth of the sector.
  • The rural areas where poor people live are mainly served by semi-formal and informal institutions which are weak and not regulated. The savings of the majority in rural areas are not safeguarded. The interest rates charged to the poor people in the rural areas are quite exorbitant.
  • Limited number of financial instruments on the market.
  • Low return on savings due to high liquidity in banks
  • The interest rates charged on loans both short-term and long-term are quite high which in away have limited borrowing by the private sector.
  • The capital market is still quite weak to mobilize domestic resources into the financial formal sector.
  • The lending to individuals is constrained by lack of legal documents like national identity cards which can be used to verify the credit worthiness of borrowers.
  • The lack of funds and security mechanism to lend to specialized areas like agriculture and animal and fisheries. Limited lending to sectors has slowed down the economic growth of the country.