Banking in Uganda: Navigating Current Trends and Developments

In 2023 and 2024, Uganda's banking industry saw substantial transformation due to both technical advancements and regulatory revisions. These changes are a result of the government's attempts to fortify the industry, the changing demands of consumers, and the increased emphasis on financial inclusion.

The banking industry is well-positioned to contribute significantly to stability, economic growth, and better access to financial services as Uganda's economy expands.

Enhanced Regulatory Framework

1. The Environmental, Social, and Governance (ESG) Framework:

This was launched in 2023 by the Bank of Uganda, in collaboration with the Uganda Bankers Association, as part of Bank of Uganda's 2022-2027 strategic plan.

The framework aims to promote sustainability in Uganda's banking sector, ensuring financial institutions are resilient while supporting national sustainability goals. Its key objectives include enhancing financial inclusion, integrating ESG factors into banking policies, and aligning with global best practices tailored to Uganda’s needs.

The framework draws on international standards such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and the United Nations Sustainable Development Goals (SDGs). It encourages banks to adopt sustainable practices and policies that promote environmental protection, social welfare, and good governance.

Integrating ESG factors into banking policies helps banks better assess potential risks to their loan portfolios. By considering environmental factors such as climate change, banks can identify risks related to natural disasters and climate-related policy changes, allowing for more informed decision-making and risk management.

By adopting ESG principles and reporting standards, banks can improve their transparency and accountability, attracting both domestic and international investors.

2. Minimum paid-up capital for commercial banks:

The Bank of Uganda (BoU) is committed to ensuring that financial institutions maintain sufficient high-quality capital to protect depositors, shareholders, and stakeholders, hence reducing the need for costly bailouts in case of institutional failures.

Banks must meet the capital requirements set by the BoU and other banking authorities, in line with the Basel Accords (Basel I, II & III), which establish capital rules based on risk exposures to help banks withstand economic downturns.

According to a BoU circular dated July 6, 2023, commercial banks were required to maintain a minimum paid-up capital of UGX 120 billion, and credit institutions UGX 20 billion, by December 31, 2022. These thresholds were set to increase to UGX 150 billion for commercial banks and UGX 25 billion for credit institutions by June 30, 2024.

Institutions were required to submit their capital compliance to the BoU by this date.

Some commercial banks have opted to downgrade their licenses, anticipating difficulties in meeting the new capital requirements. Others are considering mergers or acquisitions as a solution to address capital gaps.

This demonstrates the banks' recognition of the BoU's firm stance on these thresholds and its commitment to safeguarding against macroeconomic shocks and liquidity challenges.

For banks that are better positioned to meet these requirements, they must update their Internal Capital and Liquidity Adequacy Assessments (ICAAP & ILAAP) to maintain compliance. However, ICAAP and ILAAP are not just compliance tools, they are strategic processes that improve operations and risk management, helping institutions ensure capital sufficiency and resilience, especially when supported by strong corporate governance.

3. Enhanced Corporate Governance:

Corporate governance remains a key focus in the Bank of Uganda's (BoU) 2022–2027 strategic plan.

As part of efforts to strengthen governance within the financial sector, BoU introduced the Financial Institutions (Corporate Governance) Regulations 2024, which replace the 2005 regulations, and the Microfinance Deposit-Taking Institutions (Corporate Governance) Regulations 2024, extending governance requirements to microfinance institutions.

These regulatory changes aim to address the vital role financial institutions play in Uganda's economy and the need for robust governance frameworks.

Weak corporate governance has been identified as a major cause of corporate failures in the Uganda and beyond.

The new regulations require financial institutions to have a comprehensive board charter, a board of at least five directors (with a majority being independent non-executive directors), and an odd number of board members for efficient decision-making.

While appointing the board of directors, the financial institution is expected to appoint at least five directors who possess expertise and experience relevant to the functions of the financial institution including financial controls, capital management, banking risks and corporate planning.

Institutions must also appoint a company secretary, implement a succession policy for board vacancies, and develop a risk appetite statement suited to their business environment.

Additionally, the regulations mandate the formation of several key board committees, including:

• An audit committee with at least three independent non-executive directors, chaired by someone with accounting or audit expertise.
• An asset-liability management committee.
• A risk management committee to oversee the institution's risk strategy.
• A compensation committee.
• A credit committee to supervise credit operations in line with the institution's credit strategy.

These new regulations, aligned with the 2022 BoU Corporate Governance Guidelines, now have the force of law, ensuring compliance and effective governance across the financial sector.

4. Digital Lending Regulations in Uganda:

The Uganda Microfinance Regulatory Authority (UMRA) has implemented a set of regulations to govern digital lending in Uganda, with the aim of protecting consumers from predatory practices, ensuring responsible lending, and fostering a transparent and innovative lending environment. These regulations include the following key provisions:

o??? Licensing Requirements Digital lenders were expected to obtain a license from the UMRA to operate legally within Uganda. This ensures that all entities involved in digital lending are subject to regulatory oversight, ensuring accountability and consumer protection.

o??? Interest Rate Caps The UMRA has established interest rate caps under Legal Notice No. 21 of 2024, issued under the Tier 4 Microfinance Institutions and Money Lenders Act, Cap. 61. The maximum interest rate is set at 2.8% per month or 33.6% per annum, applied to the principal or the actual sum advanced to the borrower. These caps are intended to prevent excessive interest charges and protect borrowers from exploitative lending practices.

o??? Regulatory Compliance and Enforcement In response to concerns over certain harmful practices in the digital lending sector, UMRA has issued a circular to all licensed digital credit providers, urging them to cease any deceptive, unethical, or aggressive lending practices. These include:

o?? False or misleading representations: Providing inaccurate or deceptive information about loan terms, interest rates, or fees.

o?? Unethical Debt Collection Practices: Using aggressive or harassing tactics to collect debt from borrowers.

The UMRA has directed all digital credit providers to comply with the Digital Lending Guidelines Vol. 1 (2024) and other relevant laws, which cover critical aspects such as interest rate caps, loan terms, and consumer protection. Providers that fail to comply with these regulations will face administrative measures, including penalties, fines, or even the revocation of their license.

These regulations and enforcement measures are designed to ensure that digital lenders operate fairly and transparently, with a focus on protecting consumers from exploitative practices. By enforcing these rules, the UMRA aims to promote responsible lending, enhance consumer confidence, and support the continued growth of the digital lending sector in Uganda.

Conclusion

Uganda's banking sector is evolving rapidly, driven by regulatory reforms and technological advancements aimed at promoting financial stability and inclusion. Key initiatives, such as the introduction of the ESG framework, increased capital requirements, and updated corporate governance regulations, are strengthening the sector's resilience.

Additionally, the new digital lending regulations focus on consumer protection and responsible lending. While challenges remain, these reforms present significant opportunities for growth, transparency, and greater financial access. As Uganda’s economy grows, the banking sector is well-positioned to support sustainable development and contribute to long-term economic stability.