Malta: Commonwealth 3rd Country Training Program BANKING & FINANCE IN SMALL STATES: ISSUES & POLICIES Uganda’s case Presenter – Christopher KIGENYI, FCIB. Presentation Outline. -Uganda: General Information; - Institutional Set Up (Forex & Domestic Markets – Money & Capital markets); -The USE – Uganda Securities Exchange; -The BOU – Central Bank; - Other Financial Institutions; - Regulatory Framework; - Uganda: The Basel Framework; -Other Issues (Tax framework, FATF, Regional payments system); -Strengths & Weaknesses; -Conclusion: Continuing debate. UGANDA: GENERAL INFORMATION -Full name: Republic of Uganda - Location: Eastern Africa - Population: 33.8 million (UN, 2010) - Area: 241,038 sq km (93,072 sq miles) - Life expectancy: 55 years (men), 56 years (women) (UN) Presenter: Christopher KIGENYI, FCIB UGANDA: GENERAL INFORMATION - Monetary unit: 1 Ugandan shilling = 100 cents; USD 1 = UGX 2390 - Main exports: Coffee, fish and fish products, tea; tobacco, cotton, corn, beans, sesame - GNI per capita: US $460 (World Bank, 2009 Presenter: Christopher KIGENYI, FCIB INSTITUTIONAL SET UP: FINANCIAL MARKETS. Emerging market, at an early stage of development. Main categorization: -Forex market; -‘Domestic’ Markets (Money & Capital Markets); Authority allotment: -Central Bank – Banks & Financial Institutions; -Insurance Commission – Insurance Industry; -Capital Markets Authority – ‘Term’ Investments. Presenter: Christopher KIGENYI, FCIB INSTITUTIONAL SET UP: FINANCIAL MARKETS IN UGANDA. The Forex Market. Four main participants; 1. The Bank of Uganda (the Central Bank); 2. The Inter-bank market; 3. The Forex Bureaus (that act as money shops); 4. Retail customers or end users of forex. Legislation: The Foreign Exchange Act, 2004 (reviewed); Market status: Liberalized since 1990 – Bureaus introduced. Presenter: Christopher KIGENYI, FCIB INSTITUTIONAL SET UP: FINANCIAL MARKETS IN UGANDA. The (Gov’t)Securities Market. Four main markets - The Treasury Bill Primary & - Secondary market - The Treasury Bond Primary & - Secondary market Primary market T-Bills issued at 91, 182 & 364 days; Bonds introduced in Jan 2005 for 2,3,5 & 10 year tenure, Auctioned every 28 days (aimed at stimulating secondary market, like the fortnightly T-Bill auction vis Weekly auctions) Presenter: Christopher KIGENYI, FCIB INSTITUTIONAL SET UP: FINANCIAL MARKETS IN UGANDA. Notes – Developments on the Govt securities market. • Central Depository System(CDS) . Bearer T-Bill certificates did not activate secondary market trading because of their security risk; now replaced with an E-registry, the book entry CDS. •Financial Accountability Act of 2003 – to recognize paperless transactions; • Primary Dealer ranking system, with monthly pronouncements of ‘Winner’, to stimulate Secondary market Presenter: Christopher KIGENYI, FCIB INSTITUTIONAL SET UP: FINANCIAL MARKETS IN UGANDA. Notes – Developments on the Govt securities market. •The bonds support monetary policy implementation by improving liquidity management and promoting market development; •Bonds have also provided an additional saving instrument and have deepened the capital market; Presenter: Christopher KIGENYI, FCIB INSTITUTIONAL SET UP: FINANCIAL MARKETS IN UGANDA. The Repurchase Agreements (Repo) Market. Repos were introduced to manage intra-auction liquidity variations. The vertical repo market reflects repo transactions between primary dealer commercial banks and the central bank. This market was introduced in 2002 by the Bank of Uganda as a mechanism to deal with managing liquidity in the banking system in the interval between auctions of treasury bills. Presenter: Christopher KIGENYI, FCIB INSTITUTIONAL SET UP: FINANCIAL MARKETS IN UGANDA. The Capital Market. …where financial instruments for raising capital are traded e.g. Stocks and Bonds. Uganda Securities Exchange (USE) remains the ONE approved Stock exchange in Uganda. Presenter: Christopher KIGENYI, FCIB INSTITUTIONAL SET UP: FINANCIAL MARKETS IN UGANDA. The USE – Uganda Securities Exchange. Licensed to operate as an approved Stock Exchange in June 1997 by the Capital Markets Authority (CMA) of Uganda, under the CMA Statute, 1996; The USE is a Self Regulated Organization (i.e. creates, amends and implements its own policies and business, within the Statute guidelines; 16 listed companies; no local one; Presenter: Christopher KIGENYI, FCIB INSTITUTIONAL SET UP: FINANCIAL MARKETS IN UGANDA. The USE – Uganda Securities Exchange. Equity trades - 16 listed companies (non with local ownership); Bond listing - Govt, EADB – East African Development Bank; SCB – Standard Chartered Bank & Housing Finance Bank (major shareholder – NSSF). Govt’ remains main player. Illustration: April 13th 33/30 deals were from trades of one company, contributing 360k/400k shares traded – valued at UGX 102m/= (USD 44K) Presenter: Christopher KIGENYI, FCIB INSTITUTIONAL SET UP: FINANCIAL MARKETS IN UGANDA. Bank of Uganda - The Central Bank’s role. Supervision and Regulation of banking activity is vested in Bank of Uganda (BOU). Financial Institutions supervised by BOU are grouped under Commercial banks and Non-bank financial institutions. BOU conducts full on-site examination of all commercial banks using a risk-based supervision methodology; Quarterly Offsite reviews. (Backdrop – Uganda’s Banking crisis – early 1990’s) Presenter: Christopher KIGENYI, FCIB INSTITUTIONAL SET UP: FINANCIAL MARKETS IN UGANDA. Bank of Uganda - The Central Bank’s role. During the year 2004/2005 the Bank commenced the deployment of the Bank Supervision Application (BSA) following successful deployment in ten (10) other countries in the Eastern and Southern Africa region; The Financial Institutions Act 2004 provides for various mandatory Prompt Corrective Actions which the Bank must undertake to correct weaknesses in the financial institutions before they escalate to unacceptable levels; Note: There are 23 Commercial bank in Uganda. Presenter: Christopher KIGENYI, FCIB INSTITUTIONAL SET UP: FINANCIAL MARKETS IN UGANDA. Bank of Uganda - The Central Bank’s role. The non-bank financial institutions supervised by the Bank of Uganda are: - Credit Institutions Micro-finance (3) - Micro Finance Deposit-taking Institutions (3) - Forex Bureaux (167) -Money Remitters (39) Note: The Banking fraternity is tiered into 4 levels: Tier 1 – Commercial Banks; Tier II – Credit Institutions; Tier III – Micro Deposit taking Institutions; Tier IV – Unregulated (including Money lenders & SACCOs – Savings & Credit Co-operative Organizations) Presenter: Christopher KIGENYI, FCIB THE ‘OTHER’ INSTITUTIONS IN UGANDA’S FINANCIAL MARKET The ‘Other’ Financial Institutions: These form part of the Financial markets framework, but are not supervised by BOU , for example: - Insurance Companies; -Leasing Companies; - Insurance Brokers; - Development Banks. There is an evolving Leasing regulatory framework ,while Development banks e.g. EADB are governed under the EADB Charter …cross border legislation, for the 3 East African countries. Presenter: Christopher KIGENYI, FCIB BANKS’ REGULATORY FRAMEWORK. Particularly since Uganda’s own Banking crisis of the early 1990’s, the regulatory environment has been enhanced, Beginning with the BOU Act, 1994 and the Financial Institutions Statute, 1994. These have since been reviewed; Various attendant regulations have also been promulgated, to take into account Uganda’s local and International Financial markets ‘contextual’ framework. AGAIN …other FIs are similarly supervised and regulated by relevant Authorities e.g. The Insurance Act, 1996. Presenter: Christopher KIGENYI, FCIB BANKS’ REGULATORY FRAMEWORK. Major Legislation: -Bank of Uganda Act, 2000 (Revised from 1990); -Financial Institutions Act, 2004 (Revised from 1994); Various Regulations issued in 2005 e.g. Ownership & Control; Capital Adequacy; Credit Reference etc - Micro Deposit taking Institutions Act, 2003; - Foreign Exchange Act, 2004 (Revised from 1990); Presenter: Christopher KIGENYI, FCIB BASEL FRAMEWORK: UGANDA’S ‘BIT’. (‘Nominal Basel II Compliance’) Uganda is part of the International ‘Financial system’, under the BIS & Basel Accord framework. The Dec 2009 Proposals by the Basel Committee on Bank Supervision (BCBS) were approved by the Group of Governors and Heads of Supervision, the Oversight body; There are implications for Uganda’s banking Industry. Examples: a fully fledged Financial Stability section at BOU; a regular Financial Stability Report, about the economy and Financial sector, in particular. Presenter: Christopher KIGENYI, FCIB BASEL FRAMEWORK: UGANDA’S ‘BIT’. BCBS Reforms : a)Capital (K) Regulations -Raising the quality, consistency & transparency of the K-base -Enhancing the risk coverage of capital -Implementing a leverage ratio -Reducing pro-cyclicality & promoting countercyclical K-buffers -Addressing systemic risk & interconnectedness b) Liquidity Regulations - Enhancement of liquidity risk measurement, standards and monitoring Presenter: Christopher KIGENYI, FCIB BASEL FRAMEWORK: UGANDA’S ‘BIT’. Policy Implications. Phased implementation by member countries, Jan 2013, to 2018; In the main - stricter definition of capital and higher global minimum standards, enhancing risk coverage and introducing a global liquidity standard. In particular - 3.5 percent common equity/RWAs; 4.5 percent Tier 1 capital/RWAs; 8.0 percent Total capital/RWAs (FSR – June 2010, BOU) Presenter: Christopher KIGENYI, FCIB BASEL FRAMEWORK: UGANDA’S ‘BIT’. Policy Implications – Illustrations from Uganda.. - 2% to 4% tangible common equity to capital, by Jan 2015 (UGX 4bn to 25 bn by Jan 2013). ‘Tier 1 capital’ qualifying elements to increase from 4% to 6% by Jan 2015; - Stock surpluses (share premiums), minority interests, pension fund assets, deferred tax assets, goodwill and other intangibles, and the shortfall of provisions to expected losses will be excluded from Tier 1 capital, ensuring consistency of the regulatory capital base. Presenter: Christopher KIGENYI, FCIB BASEL FRAMEWORK: UGANDA’S ‘BIT’. Policy Implications – Illustrations from Uganda.. However: The ratio of ‘Tier 1’ capital to risk weighted assets for Ugandan banks was 19.2 percent at end June 2010, far above the new requirement of 6 percent. Largely because Uganda’s banking is still aligned to Basel 1 recommendations. The FIA 2004 already requires that goodwill and other intangible assets, minority interests, and deficiencies in provisions to be deducted from ‘Tier 1’ capital. The FIA 2004, provides for Deposit protection …and stringency regarding deposit taking e.g. only 3 MFIs, of hundreds, have qualified to MDIs. Presenter: Christopher KIGENYI, FCIB BASEL FRAMEWORK: UGANDA’S ‘BIT’. As well: The Uganda Liquidity regulation requires banks to keep liquid assets not less than 20 percent of deposit liabilities – far above the BCBS minimum 7.5% liquidity test recommendations for various categories of liabilities. While there is an apparent ‘constraint’ to business afforded by current bank regulation, it has provided for the requisite capital buffers for developing economy conditions, and thereby avoided the gradual build-up of excessive on and off-balance sheet leverage by financial institutions – one cause for the recent Global crisis. Presenter: Christopher KIGENYI, FCIB •TAXATION IN THE INDUSTRY OTHER ISSUES: Uganda – Tax Haven? Taxation Withholding Tax on 10% taxed at source Dividends Stamp Duty Nil Capital Gains Tax Nil Corporate tax 30% Currently there are no restrictions to foreign investors in the Ugandan market – quite a ‘Tax haven’, and promoted so, by the UIA – Uganda Investment Authority. Presenter: Christopher KIGENYI, FCIB OTHER ISSUES: Uganda – CDD Imperatives. -Uganda is a signatory to the FATF – Financial Action Task Force framework; -Regulation requires a Risk based approach to CDD; - AML policy guidelines a MUST for all Financial Institutions; -BOU daily and periodic reports conform this e.g. >USD 10k transactions; My bank’s ‘Big Movers’ = > UGX 10 million i.e. c. USD 4.5k. Presenter: Christopher KIGENYI, FCIB UGANDA’S ECONOMY : SOME STRENGTHS (Banking & Financial Sector) Robust regulatory framework, especially since Uganda’s banking crisis of the early 1990s (e.g. BOU Act 1994, revised in 2000; FIA 1994, revised in 2004 etc); The East African region has weathered the effects of the global crisis relatively well, because of strong macroeconomic policies in the region and generally sound banking systems which are not dependent on international markets for funding. All of the countries in East Africa recorded positive GDP growth in 2009/10 (Foreword, BOU Financial Stability Report, June 2010); Presenter: Christopher KIGENYI, FCIB UGANDA’S ECONOMY : SOME STRENGTHS (Banking & Financial Sector) -Low and stable inflation, necessary for underpinning sustainable economic growth; -Liberalized economy with a vibrant Private sector / forex market / competitive environment for the Commercial banking industry; -Favorable tax regime, for attracting Direct Foreign Investment e.g. In the financial year 2008/9, persons who export at least 80% of their finished consumer and capital goods were granted a 10-year tax holiday; Presenter: Christopher KIGENYI, FCIB UGANDA’S ECONOMY : SOME WEAKNESSES (Banking & Financial Sector) -Vulnerability to International exogenous factors remains, although not well integrated in the International Financial system -Developing financial market with shallow depth e.g. Financial Instruments available; -Banking and Financial industry not ‘domesticated’; -Even devoid of Political Interference, the Government remains the main player in the market Presenter: Christopher KIGENYI, FCIB Conclusion: CHALLENGES & CONTINUING DEBATE While the World delves into the high level elements of Capital buffers and Risk management / Hedging models, the vulnerable economies of small States in Sub Saharan Africa have ‘OTHER’ issues to STRUGGLE with: - Financial Inclusion; - Financial market depth; - Economic stagnation; - Non developmental attitudes & Culture, Corruption etc The other challenge relates to the essential linkage among Practitioners, Academia, Regulators and the Political arena. Such programs as these avail the impetus to improve on the ‘status quo’ of just ‘following’ the developed economies. Presenter: Christopher KIGENYI, FCIB Reference: www.bou.or.ug Bank of Uganda / Central Bank www.use.or.ug Uganda Securities Exchange / Stock exchange; www.cmauganda.co.ug Capital Markets Authority Presenter: Christopher KIGENYI, FCIB Malta: Commonwealth 3rd Country Training Program BANKING & FINANCE IN SMALL STATES: ISSUES & POLICIES Uganda’s case DISCUSSION Presenter – Christopher KIGENYI, FCIB.