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 25 commercial banks, 29 insurance companies, 1 re-insurance company, 5 credit institutions, 38 money remitters,   4 micro finance deposit taking   institutions and 265 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 the country’s capital markets are still in early development stage.
  • The banking products are narrow and maturity terms are short.

Current situation on the sector

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 most  of the country but levels of access to financial services is still low in the rural areas.

As mobile money and FinTech grow exponentially, traditional banking faces pressure to maintain customer value and protect profitability. The enactment of the FIA Act brought with it ground breaking innovations aimed at widening and deepening access to borrowing and services as follows;

Islamic banking: This is premised on the principle of risk sharing rather than risk transfer. It’s a model that provides access to affordable credit and is bound to deepen financial inclusion as well as bring certainty in the market by stabilizing the cost of borrowing. By conserving cash flows and spreading out the loan recovery period over potentially longer periods of time, Islamic banking has the potential to improve business cash flows and therefore success.

Agency banking: This enables commercial banks to use other typical business establishments e.g petrol stations, shops and supermarkets to extend simple services such as cash transactions and loan applications on behalf of banks.

Banc assurance: This is a service that will allow commercial banks to operate as agents on behalf of insurance companies. This is bound to increase insurance sector penetration and reduce cost of service delivery by leveraging on existing bank delivery channels.

Other reforms

From end December 2016, all commercial banks will be required to set aside a capital conservation buffer of 2.5 percent of risk weighted assets (RWA). In addition, domestic systemically important banks (DSIBs) will be required to hold a capital surcharge of 1-3.5 percent of RWA. To enhance the liquidity buffers of banks, the BOU will require all commercial banks to meet the Liquidity Coverage Ratio (LCR) in both foreign currency and local currency starting in January 2017. In May 2016, BOU instituted a limit of 70 percent on the Loan to Value (LTV) Ratio for foreign currency loans for land purchase

Mobile money

There were 21.2 million registerd mobile money customers in Uganda by December 2015. In terms of monetary value UGX 32.5 trillion was transacted through the mobile money system in 2015. This accounted for over 30% of the GDP and represents growth of 35% in the value of transactions from 2014.  While adoption of internet and online banking is still low in Uganda, we have witnessed phenomenal growth if mobile money services in Uganda since inception in March 2009. This platform has brought access to basic payment services within reach of millions of Ugandans who don’t have ready access to bank branches or own a bank account.

Banks have recognised the need to embrace mobile money which has been able to reach 4 times the number of Ugandans that banks have in over five years. A number of commercial banks have devised ways of tapping into the mobile money market for bank products, enabling customers to deposit mobile money directly onto their bank accounts from their phones, or withdrawing money from their bank acconts onto their mobile money accounts. MTN Uganda has been the first telecom company to offer loan products through mobile money.

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 witnessed only limited levels of activity resulting from 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.

Mortgage finance

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 of less than 25% 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.

The financial sector profile has been summarised to include the following

History of Uganda Currency

Assets and market share

Financial Investment Opportunities

Financial Services Penetrations

Challenges in Financial Sector