Dr Louis A. Kasekende, Deputy Governor at the Bank of Uganda, provided an assessment of the state of the financial sector, key challenges and untapped opportunities. He said the size of Uganda’s economy has grown from USD 18.8Billion in 2010 to USD 25Billion. He added that contribution of the Diasporas to Uganda’s economic development in remittances of USD 1 billion in 2014 (AfDB AEO report, 2015) was to support mainly household expenditure such as education, health, and construction.
He pointed out significant transformation of the financial sector over the last two decades with about 25 banks that are well capitalized with capacity to finance solid projects. “We have managed to keep inflation at below 5% within single digit. This is also underpinned by prudent macroeconomic management and market oriented economic reforms and adoption of a liberalised foreign exchange regime, both for financing trade and investment, free to bring in money for investment and free to take out dividends, free to open letter of credit and finance trade. Both current and capital accounts are liberalised.”
On steady expansion of the banking sector, Dr Kasekende said that the Credit/GDP now is about 15% compared to below 5% in 1990 and improved soundness on non-performing loans down to an average of 4% (2010-2014) from 20% in 1998. Nevertheless, he said that more needs to be done to support the banking sector to achieve optimum growth and development.
On innovation of the payment system, he talked of the use of mobile money payment services which continue to grow strongly, increasing financial inclusion and access, especially for the unbanked population. Over six years ago, Uganda had only 10,000 users of mobile money and now has 19million registered users of mobile money. This has greatly increased safety of money transaction and cost of transferring money in the region. Kenya has about 24million registered mobile money users and Tanzania has 22million users. A regional system is needed where a user in the East African region can send money using mobile money to anyone within the region.
He talked about the promotion of the use of regional currency where an LC (Letter of Credit) in regional local currency can be issued without opening an LC in USD or £; and plans to extend the use of local currency to the COMESA region with about 22 countries.
Dr. Kasekende also talked about investment in government securities in form of treasure bills and bonds which are issued to finance government projects. On treasury bills, short term instruments has 91 days, 182 days issued bi-weekly and 364 days and treasury bonds long term has 2, 5, 10 and 15 years maturity structure issued once a month. Yields on selected Uganda Government securities are as follows; 91 Day 18.8%, 2 Year 18.72%, 5 Year 17.80%, 10 Year 18.04% and 15 Year 18.17%.
The amount for non-competitive auction has been increased from UGX10M to UGX200M starting FY2014-15; hence increased success for the retail segment. He advised investors to visit the Bank of Uganda website where the government securities Calendar and yield curve on the BOU guide people on participation, pricing and valuation of portfolios.
He disclosed that the EAC Capital Markets Infrastructure will go live in February 2016 to link the EAC financial markets and enable the realisation of a single market for financial markets products and link the securities exchanges to the Central Securities Depositories at the Central Bank, which will allow online bidding.
He also pointed out the Anti-Money Laundering Act- integrity of the financial sector being passed and the amendments to Finance institution act 2004 that permits Islamic & agent banking, Bancassurance.
Uganda has now listed equities over 16 plus some corporate bonds and recently migrated from a manual trading to an Automated Trading System.
He said that one of the biggest challenges is that Uganda’s financial sector is dominated by commercial banks (accounts for about 80% of total assets in the financial system). There is a need to reduce it to about 50% and promote the non-bank segment of the financial system like insurance, unit trusts, pension schemes as a way to diversification of financial products. Intermediate costs remain very high with 8-10% as the intermediation margin were most of the banks pay about 15% to mobilise long term resources and after adding on the 8%, then lending rates are about 23%. And capital markets remain under-developed thus limiting opportunities to invest in financial assets beyond government bonds.
He finally talked of key risks to financial sector development which were unintended consequences of anti-money laundering legislation and fines that are being imposed on banks constraining relationship between banks and those in the West and also the transfer of money especially to countries like Somalia; contagion from the volatility in advanced and emerging markets; risk of macroeconomic instability especially the current volatility of the exchange rate (External sector vulnerability-Current Account deficit (USD2.5Billion and exports USD3Billion) and ineffective prudential regulation of the financial sector, with key lessons from the 2007/08 global financial crisis.
Dr. Kasekende concluded by saying that Bank of Uganda’s commitment to the maintenance of price stability and a sound financial system remains unequivocal.