Since the Ugandan Government initiated economic reforms over 16 years ago, the country has undergone several remarkable changes. Coupled with an increase in public investment, the banking, finance and insurance industry has witnessed the growth and promotion of the private sector. Furthermore, the Ugandan government is increasingly directing its efforts to those areas that create a conducive environment for poverty eradication and sustainable economic growth through its comprehensive policy framework. A core sector to the economy, the financial institutions have blossomed over the past ten years with 17 commercial banks, 8 credit institutions, 2 development banks and over 50 forex bureaux providing professional and competitive services. The Ugandan securities market has also expanded and is developing more instruments for its clientele. Bank of Uganda, the country’s central bank has taken a lead position, and its role as a supervisor has become increasingly visible and respectable.

© Martin Malungu

Management of the Sector by Bank of Uganda
The Bank of Uganda (BoU) continued to implement prudent monetary policies to maintain fiscal discipline and match expenditures to the available resources. As a result, inflation averaged 5 per cent this financial year. BoU has also played a great role in the market forces involving the exchange rate. Over the last FY, the exchange rate has faced appreciation pressures, largely on account of strong dollar inflows from the export sector, investment portfolio inflows and high levels of donor aid, especially, project support and transfers to NGOs. The appreciation of the shilling was also partly caused by the persistent weakness of the US dollar on the world market.

Interest rates on Government securities were high and volatile for the last part of the 2003/04 FY, as upward pressure on the exchange rate constrained Bank of Uganda’s ability to sell foreign exchange. This necessitated a heavy reliance on the sale of government securities to meet the inflation target. BoU increased the sale of Treasury Bills which further led to a rapid increase in interest rates across all maturities. The high interest on Treasury Bills in turn led to higher lending rates offered by commercial banks.
Bank of Uganda also offered bonds of two, three, five and ten year maturities. Ministry of Finance officials say the response from the market has been overwhelmingly positive.

Capital Market and Stock Exchange
The Capital Market demonstrated strong growth during the 2003/04 FY. The capitalization of the Uganda Securities Exchange (USE) rose by 245 per cent to sh1,300b. The performance was attributed to the general appreciation of share prices of listed securities, the issuance of a corporate bond by Uganda Telecom Limited and the introduction of the government long term bonds. The growth of corporate interest in the bond market and the sale of government shares in a number of state enterprises are expected to lead to a further deepening and widening of the capital market during the 2004/05 FY.

Securities Brokers unite
An association bringing together securities brokers and dealers to develop Uganda’s capital markets was launched in March 2004. The Association of Uganda Securities Broker/Dealers (AUSBD) is made up of licensed brokers, dealers and investment advisors who are all members of the Uganda Securities Exchange (USE). The body will enable USE join hands with the CMA and counterparts in Kenya and Tanzania to further develop Uganda’s nascent capital market.
In January, the British Council Uganda in partnership with capital markets institutions launched a campaign aimed at creating awareness about the importance of the stock market in economic development process of the country. The activities included a capital market’s exhibition, a management forum, a television and radio programmes, together with a stock market mock trading session. The latter was handled by the Uganda Securities Exchange and the Capital Markets Authority. British Council officials said capital markets were featured because of their potential in accelerating development.

Stock Market growing
Nine more state equities are to be listed to the Stock Exchange through the privatization process during this financial year. These include; dfcu Bank, New Vision, Kinyara Sugar, Stanbic and Barclays banks, Dairy Corporation, Apollo Hotel, uganda telecom and Housing Finance Company of Uganda. Another five family-owned firms, including Ugachick will also come on board. Altogether, up to 60 companies are expected to be listed in the next three years.
USE has also begun conducting training programmes for professionals eager to learn more about the opportunities available in the securities industry. Government intends to use the securities markets to transform the economy. Analysts say the securities markets can overtake banks as the major provider of finance for productive enterprise.

NIC Divestiture Set
For August
Government has finalized plans to privatize the National Insurance Corporation Limited (NIC). The move was welcomed by the insurers’ fraternity who believe that the sale would strengthen the country’s insurance sector. Transaction advisers from the UK’s Adam and Smith Institute arrived in the country early this year to prepare the parastatal for divestiture.

Micro Finance industry grows by 70%
The micro finance industry has undergone rapid growth over the last ten years with a growth rate of over 70% annually over the last five years. Bank of Uganda officials say at least 500,000 clients were being served by larger institutions, as at April 2004. Outstanding loans to micro finance clients stood at sh86.5b while saving balances of micro finance client stood at sh129.1b by the same time. A survey conducted in June 2004 showed that most micro-finance institutions were active in 52 out of 56 districts. Most of them are however, still operating in and around major trading centres. A strong micro finance sector has now been boosted by a credit line of sh40.8b from the African Development Bank. It is projected that in the 2004/05 FY, sh11 billion will be available from this credit line. Another credit of US$18 million has been secured to facilitate the expansion of outreach services of the rural financial system.

Insurance set for expansion
Players in the insurance sector in Uganda are still reeling from the shock decision by the Uganda Insurance Commission (UIC) to increase fivefold the required minimum share capital for all insurance companies. Insurers feel the increase — from Ush200 million ($111,000) to Ush1 billion ($555,000) for general insurance and from Ush400 million ($222,000) to Ush2 billion ($1.15m) for the life and general insurance business — was too much, considering that it was the first since the government began implementing the 1996 Insurance Act. Uganda has 18 insurance companies in Uganda, six of which are foreign owned. There was however a general increase in premium over the last financial year with gross written premiums totaling Ush41billion in 2003.

Insurance companies shun life schemes
Ugandan insurance companies are still reluctant to write longterm schemes such as life insurance despite improvement in the economy. Out of the 20 companies that are operating in the country, only five write life insurance schemes. The President of the Uganda Insurers Association, Geoffrey Kihuguru, said this made the trend in Uganda different from other countries which offer life insurance. He attributed the poor performance of the longterm schemes to the poor pension system in the country, which he said should be liberalised.

Challenges facing financial institutions
An important challenge to Uganda’s financial sector is the need to improve Commercial banks’ response to Bank of Uganda’s policy signals. While the prime lending rates continue to decline every FY, there is still concern about the wide intermediation margins. Overall, the lending rates are still a constraint on the overall development plans of the economy. Although the monetisation of the economy is increasing, the levels are still low.
There is also need to spread banking services further into the rural areas.
Even if there is increased use of technology and the growth in financial innovations, there still remains the challenge of preparing the sector for the implications of increasing globalization.
Analysts also argue that there is still need to attract new players into our financial system so as to enhance dissemination of know-how, and new technology, and new types of institutions such especially merchant and investment banks. This will involve the introduction of new financial products by the banks, improvement in the clearing systems, wide-spread automation of the banking system, and linking more rapidly the national payments system, as well as improving the outreach for both the users and promoters of financial services.

Conclusion
Uganda’s financial sector has continued to grow despite the globalisation trend which has enhanced the transmission of external shocks to the economy. However, integration into the world financial system has also provided better opportunities for both private and public sector to use market-based hedging tools. Risks will always exist, and the challenge for our financial institutions is not only to take advantage of such tools but also to enhance their risk managerial skills, and to develop forward markets and instruments to hedge against risk. It is important to strengthen the financial system so that it is less prone to crisis. And whenever a crisis does occur, the resultant damage to the financial sector and the economy in general is minimised.