Banking Regulation

• The 1995 Constitution of the Republic of Uganda (as amended);
• The Bank of Uganda Act (Cap 51);
• The Financial Institutions Act 2004 (as amended);
• The Financial Institutions (Amendment) Act 2016;
• The Financial Institutions (Ownership and Control) Regulations 2005;
• The Financial Institutions (Licensing) Regulations 2005;
• The Financial Institutions (Corporate Governance) Regulations 2005;
• The Financial Institutions (Liquidity) Regulations 2005;
• The Financial Institutions (Limits on Credit Concentration and Large Exposures) Regulations 2005;
• The Financial Institutions (Insider-Lending Limits) Regulations 2005;
• The Financial Institutions (Credit Classification and Provisioning) Regulations 2005;
• The Financial Institutions (Capital Adequacy Requirements) Regulations 2005;
• The Financial Institutions (Credit Reference Bureaus) Regulations 2005;
• The Financial Institutions (Foreign Exchange Business) Rules 2010;
• The Financial Institutions (External Auditors) Regulations 2010;
• The Financial Institutions (Consolidated Supervision) Regulations 2010;
• The Financial Institutions (Anti-Money Laundering) Regulations 2010;
• The Financial Institutions (Revision of Minimum Capital Requirements) Instrument 2010;
• The Financial Institutions (Foreign Exchange Business) (Amendment) Rules 2013;
• The Financial Consumer Protection Guidelines 2011;
• The Financial Institutions (Islamic Banking) Regulations 2018;
• The Financial Institutions (Deposit Protection Fund) Regulations 2019;
• The Foreign Exchange Act 2004;
• The Anti-Money Laundering Act 2013; and
• The National Payments Systems Act 2020.

• The Articles of Agreement of the International Monetary Fund;
• The Articles of Agreement of the World Bank; and
• The Treaty for the Establishment of the East African Community.

• To formulate and implement monetary policy directed towards the economic objectives of achieving and maintaining economic stability; and
• To engage with banks through the issuance of circulars and notices.

Primarily commercial banks, coupled with other non-banking institutions regulated by the central bank.

They are incorporated as limited liability companies.

No.

No. The Financial Institutions Acts specifically states that no one may undertake any deposit-taking or other financial institution business in Uganda without a valid licence granted for this purpose under the Financial Institutions Act.

The following licences are granted for banks under the Financial Institutions Act 2004 (as amended):

• Class 1 – commercial banks;
• Class 2 – post office savings banks; and
• Class 3 – merchant banks; and
• Class 4 – mortgage banks.

The following must be provided in order to obtain a licence:

• a certificate of incorporation and the memorandum and articles of association from the Uganda Registration Services Bureau;
• a business plan and financial projections for at least three years (including the assumptions underlying the projections and a sensitivity analysis of the plan on varying assumptions);
• a certified copy of the resolution of the board of directors, authorising the preparation and submission of the application;
• an information sheet for the applicant and for each of its substantial shareholders (if corporate), subsidiaries or affiliates;
• for existing financial institutions and companies which have been engaged in other businesses before applying to obtain a licence, certified copies of audited financial statements for the past three years prepared in accordance with generally accepted accounting principles;
• if the most recent audited accounts are more than six months out of date, management accounts (which need not be audited) showing the current financial position and the current results of the institution;
• individual credit references for the applicant and each of the substantial shareholders, directors and officers from their bankers;
• a personal declaration form for each of the proposed directors, officers and substantial shareholders (if natural persons);
• the proposed capital structure of the financial institution;
• for foreign applicants, a statement from the supervisory authority of the home country declaring that it has given prior approval or ‘no objection’ to the establishment of a subsidiary or any other office in Uganda, and that the applicant’s chairperson, directors, managers and substantial shareholders as a whole are fit and proper persons within the meaning of the law;
• any other information relating to the viability of the proposed institution or other matters which the applicant may consider relevant; and
• any other information which the central bank may request the applicant to provide.

• An application for a licence is submitted in writing to the central bank, specifically stating the class of licence which is sought.
• In reviewing the application, the central bank will satisfy itself as regards:
• • the financial condition and history of the applicant;
  • the nature of the business of the applicant, including the range of services and products proposed;
  • the competence and integrity of the proposed management;
  • the adequacy of the applicant’s capital structure, earning prospects, business plans and financial plans;
  • the convenience and needs of the community to be served;
  • the geographical locations and branch distribution network of the proposed business;
  • whether the directors and officers of the applicant are fit and proper persons for the purpose of transacting business as a financial institution, according to the criteria set out in the Third Schedule to the Financial Institutions Act and such other criteria as the central bank may determine;
  • the structure and shareholding of the group of companies of which the applicant forms a part or intends to form a part;
  • whether the applicant is or will be able to apply or maintain adequate, effective and proper internal control systems when conducting financial institution business under the licence;
  • whether the public or economic interest will be served by the granting of the licence;
  • whether the promoters, controllers and substantial shareholders are fit and proper persons;
  • whether the institution’s business is or is required to be directed by at least two individuals;
  • the existence of a moratorium in force against the licensing of new financial institutions; and
  • any other matter which the central bank may regard as relevant to the application or to the applicant.
• Within six months of receipt of the application or any additional information requested in support of the application, the central bank will investigate and prepare a detailed report in respect of the application.
• Within 14 days of preparing this report, the central bank will:
• • grant the licence, if it is satisfied that the application is in accordance with the law;
  • grant a conditional licence, stipulating such conditions as it may deem necessary;
  • grant a limited licence covering only that part of the business for which it is satisfied that the applicant meets the requirements; or
  • refuse to grant a licence for reasons are set out in a letter of refusal.
• The applicant must be notified of this decision within seven days.

This procedure takes six months and 21 days, as per the Financial Institutions Act.

They are funded through both private and public means. For privately owned institutions, their shareholders will raise the capital. A few banks that are listed raise some of their funds through the capital markets.

Banks are mandated under law to have a minimum paid-up cash capital of at least 1,250,000 currency points invested in such liquid assets funds as the central bank may approve (one currency point equates to UGX 20,000).

In the same vein, the minimum capital funds unimpaired by losses of a licensed bank must, at any one time, be at least 1,250,000 currency points.

The central bank may prescribe for each bank or group of financial institutions the minimum cash reserve balances, inclusive of vault cash, which may be required to be maintained in the form of deposits at the bank or any other method laid down by the bank.

The total amount of these cash reserve balances must not exceed 25% of the financial institution’s deposits and other liabilities. However, within this overall limit, the central bank may impose incremental reserves of up to 100% on any increase in any kind of liability from a date prescribed by the bank.

The requirements with regard to the supervision of financial institutions are set out in the laws and regulations that govern financial institutions in Uganda. They include the following, among others:

• to observe the minimum capital requirement;
• to obtain a licence from the central bank;
• to maintain a register of the current beneficial holders of all shares in the financial institution in such form and manner as the central bank may approve;
• to provide the central bank every six months with the most up to-date returns of the register; and
• at all times, to keep financial ledgers and other financial records which show a complete, true and fair state of its affairs; and to explain its transactions and financial position to enable the central bank to determine whether it has complied and continues to comply with the laws and regulations.

In a bid to build a resilient banking sector, and informed by its Financial Stability Report 2013, the regulator has noted that it is important to identify certain banks as domestic systemically important banks, in order to reduce the risk of failure, minimise the potential impact of failure and improve resolution. This is not unique to Uganda; since the global financial crisis hit, such requirements have been introduced to ensure that systemically important banks seek capital buffers and do not require government bailouts.

These reforms can be seen as an effort by the government and the regulator to create a robust and resilient environment, in addition to enhancing financial inclusion, which in return would could attract investment in the sector.

The functions of the central bank are as follows:

• to formulate and implement monetary policy directed towards the economic objective of achieving and maintaining economic stability;
• to maintain monetary stability;
• to maintain an external asset reserve;
• to issue currency notes and coins;
• to be the banker to the government;
• to act as financial adviser to the government and manager of public debt;
• to advise the government on monetary policy;
• where appropriate, to act as an agent in financial matters for the government;
• to be the banker to financial institutions;
• to be the clearinghouse for cheques and other financial instruments for financial institutions;
• to supervise, regulate, control and discipline financial institutions and pension funds institutions; and
• where appropriate, to participate in economic growth and development programmes.

(a) Mortgage lending

• The Mortgage Act 2009;
• The Registration of Titles Act (Cap 230); and
• The Security Interests in Movable Property Act 2019.

(b) Consumer credit

• The Financial Institutions (Credit Reference Bureaus) Regulations 2005;
• The Financial Institutions (Credit Classification and Provisioning) Regulations 2005; and
• The Financial Consumer Protection Guidelines 2011.

(c) Investment services

• The Contracts Act 2010; and
• The Financial Consumer Protection Guidelines 2011.

(d) Payment services and e-money

• The National Payment Systems Act 2020; and
• The Financial Consumer Protection Guidelines 2011.

Financial institutions are subject to the following reporting and disclosure requirements:

• to maintain a register of the current beneficial holders of all shares in the financial institution in such form and manner as the central bank may approve;
• to provide the central bank every six months with the most up to-date returns of the register;
• at all times, to keep financial ledgers and other financial records which show a complete, true and fair state of its affairs; and to explain its transactions and financial position to enable the central bank to determine whether it has complied and continues to comply with the laws and regulations;
• to keep and record all accounting entries in financial ledgers and all financial records in the English language using the system of numerals employed in government accounts;
• to preserve these financial ledgers and other financial records for a period of not less than 10 years;
• within three months of the end of its financial year, to submit to the central bank its audited annual financial statements approved by its board of directors, together with the auditors’ report and the management letter;
• within four months of the end of its financial year, to publish its audited annual financial statements together with the auditors’ report in a newspaper of national circulation in the format prescribed in the regulations, or in such other format as may be prescribed by notice to the financial institution issued by the central bank;
• to exhibit on a half-yearly basis, in the banking hall of each of its offices and branches, a copy of its unaudited financial statement, stating the fact that they are unaudited;
• to exhibit throughout the year in a conspicuous place in the banking hall of each of its offices and branches a copy of its audited annual financial statements, together with the auditors’ report;
• to provide the central bank, at such times and in such form as the central bank may prescribe, with all requested information and data on its operations in Uganda, including periodic returns requested by the central bank, and its own audited balance sheet and profit and loss account, as well as those of any subsidiary, affiliate, associate or holding company to that financial institution which the central bank may require for the proper discharge of its functions under the Financial Institutions Act;
• to report to the central bank all loans granted or extended to insiders at least once every month; and
• to report all suspicious transactions to the central bank.

Every financial institution must have a board of directors of at least five directors. The board of directors must be headed by a chairperson, who must be a non-executive director.

Notwithstanding anything to the contrary in any other written law or any agreement, not more than 50% of the directors of the financial institution may be employees of the financial institution or any of its subsidiaries or affiliates, except where the central bank is satisfied that all of those employee directors have been deemed fit and proper to be directors of a financial institution by the financial institution’s home country regulator.

A director of a financial institution must also meet the following requirements:

• He or she must be over the age of 18;
• He or she must be of sound mind and not have been declared to be of unsound mind by any court of law in Uganda or elsewhere;
• He or she must not be an undischarged bankrupt;
• He or she must be a natural person;
• The financial institution must have served a written notice on the central bank of its nomination of that person to become a director; and
• The central bank must have issued written approval of his or her compliance with the fit and proper test.

At least 50% of the directors of a financial institution licensed under the Financial Institutions Act must be resident in Uganda during the tenure of their office.

• Mandatory acquisition of licences to operate a financial institution;
• Capital adequacy; and
• Maintenance of adequate records, including daily balance sheets and periodic statements of income and expense, to enable proper computation of its capital adequacy.

• Each financial institution must appoint an internal auditor who is suitably qualified and experienced in banking, and who will report to the auditing committee of the board of directors.
• The Financial Institutions Act also provides that every financial institution must annually nominate for appointment, from a pre-qualified list published by the central bank, a firm of qualified auditors, to audit the financial statements of the financial institution and to issue an opinion in accordance with the Financial Institutions Act, the Companies Act and the International Standards on Auditing, as adopted in Uganda, on the annual balance sheet, profit and loss account and other financial statements which the financial institution must submit to the central bank under the act. Within 30 days of the nomination of the external auditor, the financial institution must apply in writing to the central bank for approval of the appointment.

An applicant for a banking licence must prove to the satisfaction of the central bank that its management satisfies the fit and proper test in the Third Schedule to the Financial Institutions Act, which sets out the criteria for determining whether a person is a fit and proper person to manage, control or become a director or substantial shareholder in a financial institution.

In order to determine the professional and moral suitability of persons proposed to manage or control a financial institution, or to become a substantial shareholder or director, the central bank shall have regard to the following qualities, insofar as they are reasonably determinable, in respect of the relevant person:

• his or her general probity;
• his or her competence and soundness of judgement for the fulfilment of the responsibilities of the office in question;
• the diligence with which he or she is fulfilling or likely to fulfil those responsibilities; and
• whether the interests of depositors or potential depositors of the institution are, or are likely to be, in any way threatened by his or her holding that position.

The central bank may have regard to the previous conduct and activities of the person concerned in business or financial matters, and in particular, to any evidence that the person:

• has been convicted of the offence of fraud or any other offence of which dishonesty or violence is an element;
• has contravened any law designed to protect members of the public against financial loss due to the dishonesty or incompetence of, or malpractice by, persons engaged in the provision of banking, insurance, investment or other financial services or the management of companies, or against financial loss due to the conduct of a discharged or undischarged bankrupt;
• was a director of an institution that has been liquidated or is under liquidation or the management of the central bank, or under receivership;
• has participated in any business practice that, in the opinion of the central bank, was deceitful or oppressive, fraudulent, prejudicial or otherwise improper, whether unlawful or not, or which otherwise discredits his or her method of conducting business;
• has engaged or taken part in, or been associated with, any other business practices, or has otherwise conducted himself or herself in such manner as to cause doubt on his or her competence and soundness of judgement; or
• has defaulted on a loan or is a director of a company which has defaulted on a loan.

The central bank may request any person to furnish such additional information as may be necessary to determine his or her professional or moral suitability.

The applicant must prove, to the satisfaction of the central bank, that the financial institution’s business is or shall be directed by at least two executive directors who are knowledgeable about the manner in which the institution’s longer-term strategy will be pursued in practice, and who have the ability to influence the institution’s policies and to effectively direct the business of the institution.

Directors must:

• be over the age of 18;
• be persons of sound mind and not have been declared to be of unsound mind by any court of law in Uganda or elsewhere;
• not be an undischarged bankrupt; and
• be a natural person;

Upon establishing the above, the financial institution must then serve written notice on the central bank of its nomination of that person to become a director; upon consideration of which the central bank will then provide written approval of his or her compliance with the fit and proper test.

The central bank may, for sufficient cause:

• remove a director of a financial institution;
• remove or suspend the whole board of directors of a financial institution; or
• exclude any member of the board from qualifying to serve on a board of any financial institution in Uganda for a period of not less than 10 years.

The board of directors of a financial institution have the following duties:

• to ensure the good corporate governance and business performance of the financial institution;
• to ensure that the board is in full control of the affairs and business operations of the financial institution;
• to ensure that the business of the financial institution is carried on in compliance with all applicable laws and regulations, and is conducive to safe and sound banking practices; and
• to ensure and report to shareholders at the annual general meeting that the internal controls and systems and management information systems of the financial institution:
• • are designed to provide reasonable assurance as to the integrity and reliability of the financial statements of the financial institution and to adequately safeguard, verify and maintain accountability of its assets;
  • are based on established and written policies and procedures, and implemented by trained and skilled officers with an appropriate segregation of duties; and
  • are continuously monitored, reviewed and updated by the board of directors to ensure that no material breakdown occurs in the functioning of such controls, procedures and systems.

Executive compensation is determined by the compensation committee, which is mandated, under Regulation 11 of the Financial Institutions (Corporate Governance) Regulations 2005 to oversee the remuneration of senior management and other key personnel, and ensure that compensation is consistent with the institution’s culture, objectives, strategy and control environment.

Any transfer of assets and liabilities of banks must be approved by the central bank. The central bank can cancel a bank’s licence if it has amalgamated with another financial institution or sold or otherwise transferred its assets and liabilities to another financial institution without the consent of the central bank.

A financial institution or person that wishes to allot, issue, transfer or register the transfer of 5% or more of its shareholding to another, or to acquire control of a financial institution, must apply in writing to the executive director of bank supervision of the Bank of Uganda, explaining in detail the nature of the intended allotment, issue or transfer of shares, and providing all necessary information and supporting documents.

If the application relates to the acquisition of control of, or a change in the control of, a financial institution, it must include the following:

• a statement of the applicant’s reason for the desire to acquire ownership of the shares in, or control of, the financial institution concerned;
• proof of the financial strength and ability of the applicant to provide additional capital if needed; and
• the ownership and operational structure of the financial institution after the allotment, issue or transfer of the relevant shares.

In a bid to protect consumers, the Financial Consumer Protection Guidelines 2011 issued by the Bank of Uganda set out guidelines and requirements that all financial services providers and their agents must follow in order to protect consumers.

The law provides for compensation schemes that protect customers if a bank fails. Under the Financial Institutions Act, the Deposit Protection Fund was initially managed and controlled by the Central Bank. However, following recent amendments to this law, the fund is now independent of the central bank and is a separate legal entity from the central bank.

Section 3 of the Data Protection and Privacy Act 2019 provides that a data collector, data processor or data controller, or any person that collects, processes, holds or uses personal data, must:

• be accountable to the data subject for data collected, processed held or used;
• collect and process data fairly and lawfully;
• collect, process, use or hold adequate, relevant and not excessive or unnecessary personal data;
• retain personal data for the period authorised by law or for which the data is required;
• ensure the quality of information collected, processed, used or held;
• ensure the transparency and participation of the data subject in the collection, processing, use and holding of the personal data; and
• observe security safeguards in respect of the data.

A financial services provider must not disclose any information about a consumer to a third party, except where:

• it is compelled by law to disclose the information; or
• the disclosure is made with the express consent of the consumer.

The duty not to disclose any information about a consumer includes information relating to his or her account and any information about the relationship between the financial services provider and the consumer.

The Computer Misuse Act 2011 aims to:

• ensure the safety and security of electronic transactions and information systems;
• prevent unlawful access, abuse or misuse of information systems, including computers (and electronic devices such as mobile phones);
• facilitate the secure conduct of electronic transactions in a trustworthy electronic environment; and
• provide for other related matters.

• The Anti-Money Laundering Act 2013;
• The Anti-Corruption Act 2009; and
• The Financial Institutions (Anti-Money Laundering) Regulations 2010.

Banks are expected to observe these laws to the extent that they apply to their operations.

Clause 3 of the Financial Consumer Protection Guidelines 2011 issued by the Bank of Uganda states that a financial services provider shall not disclose any information about a consumer to a third party, except where:

• the financial services provider is compelled by law to disclose the information; or
• the disclosure is made with the express consent of the consumer.

The duty not to disclose any information about the consumer includes information relating to the consumer’s account and any information about the relationship between the financial services provider and the consumer.

The challenges are as follows:

• slow credit growth;
• non-performing loans and difficulties in realising the value of loan collateral in property markets, which have made banks much warier about the creditworthiness of loan applicants and thus more reluctant to extend credit to them;
• the existence of multiple financial institutions that provide similar financial services;
• high operating costs, which must be met without compromising on service delivery or access to services; and
• the adoption of electronic banking technologies in a way that ensures they can deliver the same quality of, and access to, services for customers as the more traditional technologies, and that the risks entailed in electronic banking are fully understood and managed effectively.

Pro-competition measures include the following:

• Banks must ensure that their electronic systems can be safeguarded against cyber-attacks, both to protect the integrity of individual customers’ accounts and to prevent threats to the financial safety of the bank itself.
• The adoption of mobile and online banking, together with smart ATMs, will help banks to reduce their costs, although unfortunately this will also mean lower employment in the banking industry.
• Due to the adoption of international best practices and the use of modern technology, banking is one of the leading industries in Uganda.
• Banking also operates within a macroeconomic and prudential regulatory environment which provides scope for investment and innovation, while at the same time safeguarding the interests of depositors and the safety and soundness of the financial system.

The central bank is mandated to take corrective measures where it has reason to believe or finds that:

• the affairs of a financial institution are being conducted in a manner that is detrimental to the interests of depositors or prejudicial to the interests of the financial institution, or in contravention of the laws governing the financial institution;
• the financial institution has refused to submit to an inspection or provided false information; or
• the financial institution is undercapitalised or, despite compliance with the capital requirements, is likely to incur large losses with in any financial year.

These measures include the following:

• ordering the financial institution to take remedial action to comply with the laws and regulations governing financial institutions;
• issuing directions regarding measures to be taken to improve the management, financial soundness or business methods of the financial institution;
• prohibiting the financial institution from declaring and distributing dividends which, in the opinion of the central bank, are likely to cause the financial institution not to comply with the capital requirements;
• undertaking frequent inspections of the financial institution;
• requiring the directors or management of financial institution to provide a written explanation detailing the causes of the losses and the measures to be taken by the financial institution to rectify the position or avert future losses;
• ordering the financial institution to submit to the central bank within 45 days a capital restoration plan to restore the financial institution to capital adequacy within 180 days of making the order;
• prohibiting the financial institution from awarding bonuses or increments in the salary, emoluments and other benefits of all directors and officers of the financial institution; and
• appointing a person who is suitably qualified and competent, in the opinion of the central bank, to advise and assist the financial institution in designing and implementing the capital restoration, and who must regularly report to the central bank on progress.

• Part XI of the Financial Institutions Act 2004, which provides for the liquidation and winding-up of financial institutions through the central bank; and
• The Insolvency Act 2011.

Uganda’s banking sector is characterised by innovative players with new products, mainly in the fintech area. This space is now regulated following the enactment of the National Payments Systems Act 2020.

No reforms are anticipated in the next 12 months. In terms of trends, we predict greater take-up of Islamic banking in the industry.

There are no laws regulating cryptocurrencies in Uganda, but this has been a subject of discussion. Fintech in general is now regulated by the new National Payments Systems Act 2020.

The rates of inclusion of Uganda’s population within the financial system and access to mainstream financial services are still low. Banks should continue to focus on remedying this, in order to allow for further growth of the sector.