Uganda amends Financial Institutions Act

In Summary

In one last gust move, the Ugandan Parliament on January 6 passed the long delayed Financial […]

In one last gust move, the Ugandan Parliament on January 6 passed the long delayed Financial Institutions Act (Amendment) Bill 2015, opening new possibilities for the country’s financial sector. The Bill is an amendment to the Financial Institutions Act 2004, which governs Uganda’s financial sector especially the commercial banking and insurance sectors.

In the amended bill – which has been pending on the priority list of Cabinet, and Ministry of Finance for over 5 years now, the government has introduced changes that will allow agency banking – a form of banking that will allow commercial banks to use Agents in the form of established business entities such as petrol stations, post office branches, hardware stores and the alike to conduct minor banking services (deposits, loan applications etc) on behalf of the commercial banks. This is expected to reduce the cost of operation for the commercial banks, which will no longer need to set up brick and mortar branches to extend reach.

According to Finscope 2013, only twenty percent of Uganda’s adult population is banked or using a formal regulated financial intermediation service. Available data shows that in a population of nearly 34 million Ugandans, only just over 5 million bank accounts.

In a related development, the amendment will also help the insurance sector increase penetration – currently below 5% (only 2 percent of adult population reporting use of insurance services) Finscope2013. The FIA amended law prescribes, Bancassurance – a service that will mandate commercial banks to operate as agents on behalf of insurance companies.

One of the biggest challenges to Uganda’s economy is a lack of access to credit, or for that matter affordable credit. With the current Central Bank Rate (CBR) at 17% and most commercial banks offering loans at 22% interest, accessing loans has become prohibitive, with most Ugandans falling to the mercy of loan sharks and informal forms of credit through SACCOs and the alike. The FIA Bill 2015 seeks to address this; with the introduction of Islamic Banking (IB) a form of shariah based financing that presents a new model for interest free loans.

According to Shariah Banking, the lender and the recipient become partners in the business venture receiving the loan, and there is full transparency in the execution of business, with the lender and borrower sharing in the profits and losses of the business, and therefore NO interest is charged on the loan. This model has become especially popular in Nigeria and Tanzania, where IB is practiced. Some say this clause was introduced at the behest of the Muslim Community in Uganda, and the business traders association, during the regime of former Finance Minister, Maria Kiwanuka, who was campaigning for the IB clause to be introduced in the Bill.

The FIA now just awaits assent by the President to become law. Several players in the finance sector including the Bank of Uganda (BOU), Uganda Bankers Association (UBA), Private Sector Foundation of Uganda (PSFU) and Insurance Regulatory Authority (IRA) have for several years made urgent calls for the passing of the amended law.

Several analysts of Uganda’s financial sector have reiterated that this amendment presents many opportunities for financial inclusion for Uganda’s rural poor and is a major development for the economy.

“It opens up lots of opportunities for financial sector development that should gives us room for creativity geared the bottom of the pyramid,” Dr. Fred Mumuza a senior manager for Financial Services Inclusion at Financial Sector Deepening Uganda.

The law which is also to energise the Credit Reference Bureau could also attract new players to the sector to offer Islamic Banking.


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