Uganda: Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix analyzes poverty and social development in Uganda. The paper reviews recent poverty and inequality trends, examines how poor people are coping with risk and vulnerability, analyzes the relationship between economic growth, structural reform and poverty, and describes the government policies in these areas. The paper also provides a brief overview of major institutional developments in Uganda’s financial sector since 1993 with regard to the legal, accounting, and general regulatory framework in which financial institutions operate.


This Selected Issues paper and Statistical Appendix analyzes poverty and social development in Uganda. The paper reviews recent poverty and inequality trends, examines how poor people are coping with risk and vulnerability, analyzes the relationship between economic growth, structural reform and poverty, and describes the government policies in these areas. The paper also provides a brief overview of major institutional developments in Uganda’s financial sector since 1993 with regard to the legal, accounting, and general regulatory framework in which financial institutions operate.

II. Uganda’s Financial Sector10

39. This chapter consists of three sections. The first provides a brief overview of major institutional developments in Uganda’s financial sector since 1993 with regard to the legal, accounting, and general regulatory framework in which financial institutions operate. The second section describes the current situation of the financial sector, with a focus on the ongoing structural changes in the commercial banking sectors, the impact of recent supervisory actions by the Bank of Uganda, the insurance industry, the microfinance and cooperative savings institutions, and the capital markets. Conclusions are presented in the last section.

A. Overview of Institutional and Regulatory Changes

40. Development of the financial sector has been one of the key objectives of the broad process of reform begun in Uganda in 1987/88 (July–June). In the period since 1992, the government has undertaken a series of measures intended to facilitate the development of financial and capital markets able to meet the needs of the growing Ugandan economy. Concurrently with liberalizing the financial sector, the government was also undertaking significant institutional and policy changes, including the following:

  • privatizing the two largest domestic banks;

  • restructuring a number of weak banks;

  • attempting to transform a culture conducive to nonrepayment of loans;

  • enhancing banking supervision;

  • introducing the regulation of nonbank financial institutions; and

  • establishing capital markets infrastructure.

41. Considerable progress has been made, particularly with the introduction of statutes that provide the legal framework for financial and capital markets. Given the magnitude of change undertaken in the financial sector, as well as concurrent reforms throughout government and the real economy, it is not surprising that there have been some setbacks, and considerable work remains on the agenda.

42. Prior to 1993, the financial sector in Uganda consisted principally of 15 commercial banks. The largest, the state-owned Uganda Commercial Bank (UCB) accounted for close to 50 percent of banking assets and deposits, with another 30 percent controlled by four major foreign-owned banks, Bank of Baroda, Barclays, Standard Chartered, and Grindlays (later Stanbic). The policy of administered interest rates implemented by the Bank of Uganda in conjunction with the Ministry of Finance inhibited savings growth since highly negative real interest rates were maintained for most of the 1980s. Liberalization of interest rates began in 1992, and by June 1994 all interest rates were freely determined in the market. A lack of clear responsibility for banking supervision was addressed through the 1993 enactment of the Bank of Uganda Statute and the Financial Institutions Statute.

43. The domestically owned banks were generally poorly managed, with weak internal controls. Extensive insider lending, poor credit analysis, a culture of nonrepayment, and uncertain legal recourse contributed to significant loan losses. By 1995, the majority of the domestically owned banks were insolvent. Restructuring of the two state-owned banks, the UCB and the Cooperative Bank (Coop), was undertaken with international technical assistance in conjunction with privatization plans. The Cooperative Bank, with U.S. Agency for International Development (USAID) assistance, was converted into a privately owned bank controlled by USAID in trust, a number of Uganda cooperatives, and the employees of the bank through their pension fund. The initial effort to privatize UCB was not successful (Box 4), but the government has reaffirmed its commitment to privatization. A number of smaller banks were restructured between 1995 and 1998, several with financial assistance in the form of soft loans from the Bank of Uganda. While there are a number of nonbank competitors, the commercial banks remain the dominant players in the Uganda financial sector (Table 9).

Table 9.

Uganda: Financial Sector, end-December 1998

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Sources: Bank of Uganda; Uganda Insurance Commission; Capital Markets Authority; and Uganda Cooperative Savings and Credit Union, Limited.

The building society is inactive.

There are approximately 175 additional inactive cooperative savings and credit societies.

Uganda: Privatization of the Uganda Commercial Bank

Preparations for the privatization of the Uganda Commercial Bank began in 1994. An expatriate management team was retained, and some U Sh 72 billion of nonperforming assets were transferred to (he specially created Non-Performing Asset Recovery Trust (NPART), with a corresponding amount of low-interest government bonds injected to shore up the balance sheet in preparation for privatization. In 1996, tenders for the UCB were sought internationally with the assistance of investment bankers Morgan Grenfell (now Deutsche-Morgan Grenfell). Of the short-listed interested bidders, only Westmont Land (Asia) of Malaysia submitted a formal bid, which was accepted. An agreement was signed on October 27, 1997 to sell a 49 percent interest in UCB to Westmont Land (Asia), with an option to purchase a further 2 percent. A management agreement was also executed, providing Westmont with management control while the government retained majority ownership.

After delays from the originally agreed 1997 closing date, the sale closed on April 30, 1998. It was subsequently discovered that this transaction had been financed by loans from Greenland Bank. In September 1998, a Bank of Uganda (BOU) on-site examination of the UCB revealed that, while operating under Westmont-appointed management, the bank had placed deposits with Greenland Bank in excess of the amount that had been advanced to Westmont to finance the purchase of shares of UCB. The examination also raised concerns about advances made to parties related to Greenland Bank, while the UCB was under Westmont management. The BOU placed one of its senior staff at the bank to oversee management, and the government referred the Westmont contracts to the Inspector General of Government and the Criminal Investigation Department. On April 8, 1999, the BOU appointed an Acting Managing Director and a new board of directors, and the government announced that it had initiated action to terminate all contracts with Westmont. It is the intention of the government to operate the bank under interim management while the bank is again prepared for privatization.

44. While increasing over time, Uganda’s level of monetization is still the lowest in East Africa (Figure 2). The growth of commercial banking sector assets from 8.2 percent of GDP in 1990 to 16.9 percent at end-1998 and of total deposits (excluding interbank deposits) from 3.3 percent to 9.3 percent of GDP over the same period is indicative of the growing importance of financial intermediation in Uganda. However, by most measures the depth of Uganda’s financial markets remains below the average of countries in sub-Saharan Africa.11 Legal and accounting framework

Figure 2.
Figure 2.

Broad Money (M2)/GDP, 1993–98

(End of period; in percent)

Citation: IMF Staff Country Reports 1999, 116; 10.5089/9781451838633.002.A002

45. An adequate framework of commercial law is a prerequisite for a well-functioning financial sector. Uganda has generally appropriate commercial laws, including adequate de jure provisions for both private and public enforcement of security interests, as well as legislation to deal with insolvency and restructuring. However, while progress has been made, there are still allegations of corruption and inefficiencies in the legal system. These difficulties are more pronounced in rural areas, with the result that bank credit is more difficult to obtain outside the Kampala region.

46. The Institute of Certified Public Accountants of Uganda (ICPAU) adopted International Accounting Standards with effect from January 1, 1999. General public awareness of accounting standards is low, and prior to 1999 accountants in Uganda were free to use their own discretion in determining what constituted generally accepted accounting standards. There is a shortage of qualified accountants both in the auditing profession and within the industry, which may contribute to the perception that the quality of audit standards varies significantly among different accounting firms. Also, obtaining financing is made more difficult for many Uganda firms because of a general concern that financial statements may not accurately depict the financial condition of an enterprise.

47. All of the Uganda financial sector statutes are quite recent, and collectively they provide an adequate legal framework for the sector (Table 10). Financial sector regulation has evolved rapidly in Uganda with the creation of the Insurance Commission and Capital Markets Authority (Table 11), and the strengthening of the off-site and on-site supervision capacity of the Bank of Uganda (BOU). The BOU has considerable legal autonomy arising from the legislation that provides its powers and mandate, the Bank of Uganda Statute and the Financial Institutions Statute (FIS).

Table 10.

Uganda: Financial Sector Legislation

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Source: Bank of Uganda.
Table 11.

Uganda: Financial Sector Regulation

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Sources: Bank of Uganda, Uganda Insurance Commission, Capital Markets Authority, Uganda Cooperative Savings and Credit Union Limited.

There are no staff dedicated exclusively to the supervision of these financial institutions.

48. The BOU has used its regulation-making authority pursuant to the FIS to issue several regulations, addressing such areas as liquidity, capital, and loan classification. However, some provisions in the current act could impinge on the autonomy of the banking supervisor. The BOU must consult with the Minister of Finance when revoking a bank license (Section 11) or closing a bank (Section 32). Also, the BOU does not have complete ability to reject an application for a banking license. Currently, under Section 6(4)(b) of the FIS, an aggrieved applicant may appeal to the Minister of Finance, “who shall deal with the appeal in consultation with Central Bank.” These provisions increase the likelihood of political influence over prudential decision making.

49. The government has committed to introducing a new Financial Institutions Statute in parliament during 1999/2000. It is expected that the new act will provide the BOU with the legal ability to deal with bank licenses and closure without consultation with, or appeal to, the Minister of Finance. Other key provisions of the new act are expected to increase the minimum capital required to incorporate a financial institution, and to raise the minimum ongoing core and total capital requirements to 8 percent and 12 percent of risk-weighted assets from the current levels of 4 percent and 8 percent, respectively. The new act is also expected to expand the powers of the BOU to deal with unsound banks, although the current statute already provides wide powers of intervention under Part VI, including seizure, replacement of management and directors, and liquidation. A more serious issue has been the lack of decisive supervisory action to deal with some of the banks facing difficulties. This issue is to be addressed both through continued expansion of the capacity and capability of the supervision function within the BOU, and the expected inclusion in the new FIS of provisions for prompt corrective actions. These provisions would require supervisory action when capital levels fall below established trigger points.

50. The BOU has been increasing the frequency of on-site examinations, with the objective of examining every bank once each year. Resources have not yet permitted achievement of this goal, with half of the commercial banks having been examined in 1998/99. The quantity and quality of on-site inspections have shown recent improvement; however, there had been insufficient follow-up on the findings of inspections undertaken prior to 1998. Thus, the on-site examinations completed in 1998/99 revealed many of the same internal control and asset quality problems that had been previously identified. A significant challenge is to reduce the shortage of suitably qualified and trained professional staff. The BOU is in the process of doubling its roster of supervisors, but rapid expansion provides its own challenges of training and integrating new staff. The BOU and the government are aware of the issues and are committed to taking further action to strengthen banking supervision, including the use of technical assistance to increase the capacity of the BOU.

51. Bank subsidiaries and affiliates are active in all aspects of financial services in Uganda, and close cooperation among the supervisory bodies is required to ensure that significant prudential risks are not undertaken outside the purview of the regulators. At present, the ownership linkages among various financial institutions are not always clear to the regulators, and, even where there are known linkages, coordination among the various supervisors is not formalized. The importance of all of the financial sector regulators’ working together to ensure the consolidated supervision of financial groups will increase as capital markets develop and the insurance business grows.

Deposit insurance

52. The Deposit Insurance Fund, administered by the Supervision Function of the BOU, was established pursuant to the 1993 Financial Institutions Statute. It was initially capitalized by a contribution by the government, and the commercial banks pay an annual premium of 0.2 percent of total deposits. The Deposit Insurance Fund does not yet have resources of an adequate size to cover multiple bank failures (Table 12), but the BOU will when required advance sufficient funds to the Deposit Insurance Fund to permit it to pay all insured deposits. This advance will be repaid as the Deposit Insurance Fund recovers the proceeds of the liquidation of the failed banks. Given the priority position in law of the claims of the Deposit Insurance Fund, this fund is likely in many cases to ultimately recover the full amount of insured deposits paid. Any shortfall would be repaid over time from the assessments paid by the commercial banks.

Table 12.

Uganda: Transactions of Deposit Insurance Fund, 1994–February 1999

(In billions of Uganda shillings)

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Source: Bank of Uganda.

Loan recovery

53. The Non-Performing Asset Recovery Trust (NPART) was established in 1996 to collect on bad loans transferred from UCB as part of the process of restructuring for privatization. NPART’s mandate expires in September 1999, but it is likely to be extended as it continues to have some success in collecting outstanding loans. Cash recoveries to date have been about U Sh 20 billion of a face value of U Sh 71 billion. One side-benefit of the creation of NPART has been its contribution to the development of routine loan recovery procedures. There is still a shortage of commercial judges and lawyers, and allegations of corruption among the judiciary persist. However, NPART has initiated numerous seizures, sales, and other legal actions. These actions have the benefit of both underscoring the unacceptability of default and establishing routine methods for debt collection that ultimately may benefit all creditors.

B. Current Situation of the Main Segments of the Financial Sector

Commercial banks

54. The two-tier banking system in Uganda is composed of the central bank, the Bank of Uganda, and 20 commercial banks.12 Recent closures of three commercial banks, including the second-and third-largest domestically owned banks, and the sharp declines in profitability and capitalization in late 1998 suggest that there has been a deterioration in the soundness of the banking sector. Information on these developments and a more accurate depiction of the state of Uganda’s banks (including their long-standing problems) have become available because of the enhanced on-site examination activities of the Bank of Uganda. More decisive supervisory action, coupled with the expected increase in capital requirements pursuant to the new FIS, should lead to the emergence of a smaller number of stronger banks in the longer term.

55. A contributing factor to the current weakness in the commercial banking sector is the rapid expansion in the number of banks since 1990. Five new banks were formed between 1990 and 1993, and five more were created in 1995. A number of these new banks were among those requiring restructuring in the 1995–98 period, and a moratorium on new bank licenses was introduced in 1997. Recent bank closures reflect in part the consequences of a too rapid expansion in commercial banking.

56. The former oligopolistic structure of two larger domestic banks (the Uganda Commercial Bank and the Cooperative Bank) and four major foreign-owned banks has given way to a more fragmented market and a reduction in concentration (Table 13).

Table 13.

Uganda: Concentration of the Commercial Banking Sector, 1995–98

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Source: Bank of Uganda.

57. There are four distinct segments in the commercial banking market (Figure 3). The remaining state-owned bank, the Uganda Commercial Bank, has the largest branch network and largest share of both deposits and assets. The major foreign-owned banks comprise a second segment, with 4 smaller foreign-owned banks and 11 domestically owned banks constituting the balance of the commercial banking sector. Activity in the interbank market is almost exclusively limited to transactions among the largest foreign-owned banks, reflecting general uncertainty about the financial strength of the domestic and smaller foreign banks.

Figure 3.
Figure 3.

Uganda: Commercial Bank Market Share, March 1999 1/

(In percent of total assets)

Citation: IMF Staff Country Reports 1999, 116; 10.5089/9781451838633.002.A002

Source: Bank of Uganda.1/ Excludes International Credit Bank and Greenland Bank, closed in September 1998 and March 1999, respectively.

58. With some notable exceptions, the Uganda banking system suffers from a profitability problem (Figure 4). The sharp decline in profitability in 1998 is largely a result of the increased loan loss provisions required following on-site examinations. The majority of the commercial banks are small, with inadequate internal controls, and, as the on-site examinations have revealed, they have generally understated loan loss provisions and thus overstated profitability and capital. Many of the domestically owned banks are controlled by, or linked to, commercial or industrial groups, raising concerns regarding transparency and related-party lending.

Figure 4.
Figure 4.

Uganda: Commercial Bank Return on Assets, 1996:Q1–1999:Q1

(In percent of total assets)

Citation: IMF Staff Country Reports 1999, 116; 10.5089/9781451838633.002.A002

Source: Bank of Uganda.

59. While the BOU’s off-site examination reports continue to indicate that the commercial banking system overall is adequately capitalized (Figure 5), as noted above, the results of the enhanced on-site examination program suggest that capital may be overstated. It is likely that a number of banks will require capital injections to meet prudential requirements when adequate provisions are made. Also, the new Financial Institution Statue is expected to increase the minimum capital adequacy requirement from the current 8 percent of risk-weighted assets to 12 percent. This increase will likely lead to consolidation among the smaller banks. All banks have their headquarters in Kampala, and most banking assets are also concentrated in the capital region—a situation that is consistent with the concentration of economic activity around Kampala. However, one consequence is that there are limited delivery points for financial services in rural areas.

Figure 5.
Figure 5.

Uganda: Banking System Capital, 1996:Q3–1999:Q1

(In percent of risk-weighted assets)

Citation: IMF Staff Country Reports 1999, 116; 10.5089/9781451838633.002.A002

Source: Bank of Uganda.

Supervisory interventions

60. In 1997, the BOU and the government published an explicit intervention policy with regard to distressed banks. Key elements of this policy stipulate that intervention will take place if a bank failing to meet prudential requirements does not reach agreement with the BOU on corrective measures to be taken within an agreed time period not to exceed six months. Failure to adhere to the agreed timetable for corrective measures, including meeting interim targets, would result in immediate intervention.

61. Unfortunately, there has been a divergence between the published policy of the BOU and its practice that has allowed some undercapitalized banks to operate for extended periods. The government announced in June 1999 that in future there would be prompt supervisory intervention in troubled banks. However, given the inconsistent application of the 1997 policy statement, the BOU will have to demonstrate through its actions a firm commitment to the new policy before it gains credibility with consumers and the financial sector.

62. During 1998, the BOU intervened in four banks: the International Credit Bank (ICB), the Trust Bank, TransAfrica, and the Greenland Bank (Box 5). The first was closed in September 1998 owing to mounting insolvency, while the second and third were closed in November and reopened in December 1998 after having agreed with the BOU on remedial measures to be undertaken, The BOU intervened in the Greenland Bank in November 1998 upon learning of significant transactions that had not been reflected in the accounts of the bank. The BOU’s ongoing involvement, following difficulties in the privatization of the Uganda Commercial Bank, led to the replacement of the Managing Director and board of directors in April 1999. In May 1999, the BOU intervened in a fifth bank, the Coop Bank (Box 6)

63. Greenland and Coop were the second-and third-largest domestically owned banks, ranked by assets, but only the fifth-and seventh-largest commercial banks in Uganda because of the significant market share held by major foreign owned banks (Table 14).13 Greenland did not have a significant branch network, and its business was concentrated in the overbanked Kampala area. Coop had the second-largest branch network in the country; however, in almost all of Coop’s locations there was also a branch of the UCB. Also, most of the branches of Coop were sold to Centenary or Standard Chartered Bank, and the business of those branches not sold will be assumed by the UCB, thus maintaining banking services in rural areas.

Table 14.

Uganda: Commercial Bank Market Share, end-December 1998

(In percent)

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64. Some smaller banks experienced runs in the wake of each bank closure, however, by the end of May 1999, the situation appeared to have stabilized. The large market share of foreign-owned banks of undoubted solvency, the very low level of interbank activity, and the apparently adequate liquidity of the smaller banks—despite the runs in April and May—are all factors that have contributed to maintaining systemic stability despite the closure of the second-and third-largest domestically owned banks.

Uganda: Interventions by the Bank of Uganda 1998

International Commercial Bank

This privately owned bank was converted from a nonbank institution in 1992. The following events occurred in 1998–99:

  • ICB closed in September 1998 by the BOU due to mounting losses;

  • insured deposits of U Sh 1.2 billion paid by the BOU in its capacity as administrator of the Deposit Insurance Fund; and

  • announcement by government in June 1998 that depositors not reimbursed by the Deposit Insurance Fund would be reimbursed by the Bank of Uganda.

TransAfrica Bank

This privately owned bank was established in 1995. In 1998, the bank

  • experienced liquidity shortages following the closure of the ICB;

  • was closed in November 1998 by the BOU; and

  • reopened in December 1998 under the terms of an agreement that included the placement of a BOU supervisor on-site to monitor progress.

Trust Bank Uganda Limited

This subsidiary of Trust Bank Kenya was established in Uganda in 1996. Subsequently, this bank

  • suffered a loss of confidence in late 1998 due to regulatory action taken by the Kenyan banking supervisor against its parent;

  • was closed in November 1998 by the BOU; and

  • Reopened in December 7, 1998 under the terms of an agreement with the BOU requiring the injection of new capital and the revocation of security agreements that pledged assets in support of Trust Bank Kenya.

Greenland Bank

This privately held domestic bank, established in 1991, was part of a group of related enterprises that included insurance and securities firms, as well as a number of commercial businesses. The following events have occurred within the past year:

  • In August 1998, a special examination indicated a capital deficit of approximately U Sh 200 million.

  • In September 1998, the BOU and Greenland Bank agreed on a recapitalization schedule leading to full regulatory compliance by June 1999.

  • In November 1998, Greenland Bank disclosed, when applying to the BOU for a credit facility to regularize recurring overdrafts in its settlement account, that it had provided loans totaling U Sh 20 billion to Westmont Land (Asia) to finance the purchase of shares in the Uganda Commercial Bank. These advances had not been recorded in the financial statements of Greenland Bank.

  • In November 1998, the BOU intervened in Greenland Bank.

  • In December 1998, an examination of Greenland Bank following the replacement of the Managing Director with a BOU appointee revealed an additional U Sh 17 billion in “off-balances sheet” activity, consisting of both assets and liabilities that had not been recorded in the accounts of Greenland Bank.

  • In April 1999, the BOU closed Greenland Bank and appointed a liquidator. The government announced that all depositors will be paid. Legal action was initiated against Greenland Bank’s former Managing Director.

Uganda: Bank of Uganda Intervention in the Cooperative Bank, 1998–99

The Cooperative Bank was founded in 1962 by a group of Uganda cooperatives and subsequently nationalized. With technical and financial assistance from the USAID, it was converted into a private bank in 1996, jointly owned by the USAID in trust, a number of cooperatives, and the employees of the bank. The following events occurred within the past year:

  • A December 1998 inspection by the BOU revealed underprovisioning for loan losses and ongoing losses to employee fraud.

  • Additional loan loss provisions eliminated the capital base of the bank.

  • The USAID commissions review of options with respect to Coop and on completion in May 1999 decided not to provide further support.

  • The BOU intervened on May 20, 1999, closing the bank and offering its assets for sale.

  • The Government and BOU announced that all depositors will be paid.

  • On July 14 agreement was reached to sell most of the branches to Centenary Rural Development Bank and Standard Chartered, with the businesses of the remaining branches to be assumed by the UCB.

Nonbank financial institutions

65. Although generally small in size, there is a large number of nonbank financial institutions in Uganda. Of these, the BOU has supervisory responsibility for the 7 credit institutions, the building society, and 57 foreign exchange bureaus, in addition to the commercial banks. The principal distinction between credit institutions and banks is that credit institutions are not permitted to accept demand deposits. Although the credit institutions are generally small in terms of assets, the Housing Finance Corporation of Uganda has total assets of over U Sh 17 billion, making it larger than some of the banks. The Alliance Building Society is dormant. Two merchant banks have received provisional license approval from the BOU but have not yet commenced operations. The government-owned Post Office Savings Bank, which, despite its name, is not a bank, is being restructured. It currently has about 130 offices providing deposit and payments services, with deposits at end-December 1998 totaling approximately U Sh 2.4 billion. It is expected that as part of the restructuring/privatization of the Post Office Savings Banks, it will obtain a credit institution license.

The insurance industry

66. The insurance industry consists of 15 licensed companies, of which 2 underwrite both life and nonlife insurance, while the other 13 are exclusively nonlife insurers. The industry was unregulated until the passage of the Insurance Statute, 1996, which established the Uganda Insurance Commission. The introduction of licensing requirements pursuant to the statute, which include minimum capital requirements and investment policies, has directly caused a reduction in the number of companies from 26 to the current level. There has been a similar reduction, for the same reason, in the number of insurance brokers, agents, and adjusters. Although no timetable has been established for legislative review, the Insurance Commission is working on revisions to address areas where practical experience with the current statute has identified weaknesses.

67. An issue for the Insurance Commission is the winding up of previously unlicensed insurance companies, or companies that were licensed in 1997 or 1998 but have not had their licenses renewed. The Insurance Commission is hampered by a lack of staff (only four professionals) and the difficulty in locating and supervising companies, agents, and brokers that previously were unregulated. Nevertheless, the commission is attempting to enforce the requirement that unlicensed companies cease to write new business and may not renew existing policies so that their business will be wound up over time. There have been a number of instances where these companies have been unable to meet claims because of poor management or outright fraud. Some unlicensed companies have clearly siphoned off policy premiums and have been able to meet claims only from the collection of new premiums. Policyholders have no recourse other than as general creditors in liquidation. There is no policyholder protection scheme or priority claim for policyholders under the Insurance Statute.

68. Short-term prospects for growth in the life insurance industry in Uganda are not particularly promising. Life insurance premiums declined by 20 percent to U Sh 2.7 billion between 1996 and 1997. Since demand for life insurance is generally a logarithmic function of economic growth, this is the opposite of what would be expected. Emergence of a middle class is the driving force behind life insurance growth in developing countries. However, the impact of inflation and currency reform in the 1980s has made Ugandans skeptical of long-term savings vehicles, such as whole life insurance, and the decline in life expectancy attributable to AIDS has made life underwriting extremely risky. The development of reliable actuarial tables in these conditions is difficult, with the result that, where life insurance is made available, it will be an extremely expensive product owing to the actuarial uncertainty. A further hurdle for the industry is a level of general public distrust arising from the failure of hitherto unregulated insurance companies to pay claims.

69. The nonlife insurance industry in Uganda would appear to be extremely lucrative. The primary product is automobile third party-liability insurance, which is required by law for all automobile owners. Nonlife insurers collectively earned an underwriting profit (premiums written less claims) of 74 percent in 1997. In developed countries, profitable nonlife insurers typically earn only a modest underwriting profit, or even incur underwriting losses, relying on investment income to achieve a satisfactory return.


70. There are about 35 microfinance organizations in Uganda, many formed with assistance from international donors. These organizations focus on very small savings and lending activity, relying heavily on peer group involvement to ensure repayment. While they technically could be captured in the definition of banking or credit institution in the FIS, it is intended that the new FIS contain a provision for the BOU to exempt microfinance organizations from the regulatory requirements applicable to a financial institution. Given the very small scale of microfinance operations, their objective of being self-sustaining but “not for profit,” and the social importance arising from their contribution to economic development in the most depressed areas, operation outside the mainstream of financial sector regulation is viewed as appropriate.

Cooperative savings institutions

71. As of March 1999, there were 624 savings and credit cooperatives registered with the Ministry of Tourism, Trade, and Industry. Of these, about 175 were inactive. Approximately 100 of the 450 active cooperative savings institutions belong to Uganda Co-operative Savings and Credit Union Limited, a small credit union central organization that provides education and support services for its members. The 100 members of Uganda Co-operative Savings have an estimated 90 to 95 percent of the assets of all cooperative savings institutions, totaling some U Sh 9.4 billion at February 1999. Virtually all of the cooperative savings institutions are small, with only one or two of the largest having full-time staff. The balance is run entirely by volunteer boards. The largest number of cooperative savings institutions is found in the capital region, with most having an employee bond.14 The largest credit union has 900 members, with most being much smaller.

72. Savings and credit cooperatives are regulated pursuant to the Cooperative Societies Act, 1991, and the Cooperative Societies Regulations, promulgated pursuant to the act in 1992. The current regulatory approach is unsatisfactory in two respects. First, the current legislation focuses primarily on nonfinancial cooperatives, and thus lacks such key provisions as minimum capital and other prudential requirements. Second, although the cooperative savings institutions are supposed to be subject to yearly examinations by officials from the district commercial offices of the ministry, in practice these inspections are sporadic, and the staff of the ministry generally have insufficient knowledge of financial institutions. A new Savings and Cooperative Credit Associations Act, which would provide an appropriate legislative framework, has been drafted with technical assistance from the World Council of Credit Unions. The date for introducing this legislation has not yet been set.

Capital markets

73. There are currently 11 licensed broker-dealers and 13 licensed investment advisors in Uganda, with about half of these being commercial banks or subsidiaries of banks. This number is expected to decline in 1999/2000 as the Capital Markets Authority will not renew licenses for firms that have not complied with the requirement to establish an operating entity for securities activities separate from parent or affiliated companies. Given the limited capital markets activity in Uganda and the slow pace of development, complying with even the minimum financial and operational requirements established for broker-dealers has not proved attractive. Few of the existing firms are profitable, and there is currently a moratorium on issuance of new licenses. As of April 1999, East Africa Development Bank (PTA) bonds were the only issue, other than treasury bills, trading on the Uganda Securities Exchange.

74. Both the Capital Markets Authority—the regulatory body for the securities industry—and the Uganda Securities Exchange became fully operational in 1998, some three years after the passage of the Capital Markets Statute. The government is attempting to encourage the growth of capital markets both by funding the development of the necessary infrastructure and by considering offerings through the Uganda Securities Exchange as one option in the privatization of state-owned enterprises. No privatization issues have yet been floated, but the option remains under consideration. Few private Uganda companies currently have the size, record of profitability, or financial statements prepared according to international standards that would make them attractive as issuers of securities. There are few potential domestic institutional buyers of securities. Although a Collective Investment Schemes Statute, which would facilitate the creation of mutual funds, is in preparation, it seems unlikely that individual investors in a population that has not fully embraced checks and bank deposits will rush to mutual funds.

C. Conclusions

75. While much remains to be done, significant progress has been made toward the establishment of an effective financial services sector. The implementation since 1993 of statutes with accompanying regulations for the central bank, commercial banks, nonbank deposit-taking institutions, insurance companies, and securities broker-dealers and advisors has provided in a short span of time a generally appropriate legal framework for the sector. While new legislation and revisions to existing laws will continue to be required, the more immediate need is to continue with the implementation of policies contemplated under the existing statutes. The insurance and capital markets regulators are newly established, and banking regulation, while established earlier, requires further enhancement.

76. The recent success of the BOU in introducing more effective on-site examinations, including following up on reported deficiencies, has had the effect of highlighting the weaknesses of the commercial banking sector. The sharp deterioration in profitability, asset quality, and capital reported in the second half of 1998 would appear to be indicative of underlying problems. The on-site examinations are revealing long-standing problems with asset quality and internal controls that had previously not been detected by the overly optimistic off-site reporting by the commercial banks.

77. There has not been consistently decisive supervisory action in the past, in response to the problems that have been uncovered. The program of follow-up compliance examinations at banks that have agreed to remedial memoranda of understanding with the BOU is a positive step toward ensuring that agreed recapitalization and other measures occur on schedule; similarly, the commitment by the government to prompt supervisory actions in the future is welcome. The ongoing development of expertise in performing the supervisory and regulatory functions of the BOU is laying the foundation for a sounder Ugandan banking system. Once all the commercial banks have been subjected to full-scope on-site examinations with appropriate follow-up (completion expected by the end of 1999/2000), the authorities will have a much more accurate picture of the health of the banking system. Continued development of regulatory capacity in the nonbank sectors is required, as is the ongoing review and refinement of financial sector legislation. The additional enhancements to the banking legislation contemplated during 1999/2000, coupled with decisive regulatory action as required, will go a long way toward establishing a sound financial sector better able to meet the intermediation needs of a developing economy.


This chapter was prepared by Michael Andrews.


Hassanali Mehran and others, Financial Sector Development in Sub-Saharan African Countries, IMF Occasional Paper No. 171 (Washington: International Monetary Fund, 1998).


Of these, three are no longer operating.


The ICB had only about 2 percent of deposits and ranked fifteenth in size by total assets at the time of its closure.


Membership in cooperatives is open to people sharing a common “bond of association.” The largest savings cooperatives are the employees of the Post Office and the Civil Aviation Authority.

Uganda: Selected Issues and Statistical Appendix
Author: International Monetary Fund
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    Broad Money (M2)/GDP, 1993–98

    (End of period; in percent)

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    Uganda: Commercial Bank Market Share, March 1999 1/

    (In percent of total assets)

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    Uganda: Commercial Bank Return on Assets, 1996:Q1–1999:Q1

    (In percent of total assets)

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    Uganda: Banking System Capital, 1996:Q3–1999:Q1

    (In percent of risk-weighted assets)