Over the years, Uganda’s banking and finance industry has experienced gradual evolution despite legal challenges and predictable market dynamics. This growth has been marked by the emergence of new and larger financial players, enhanced financial products and systems, and the introduction of improved regulations and guidelines. The driving forces behind this steady progress have been advancements in technology and the influence of globalisation, which mirror trends observed across other developing nations.

The banking sector in Uganda has been at the forefront of digital transformation, offering reliable and innovative digital financial products. Additionally, evolving stakeholder needs have motivated the industry to pursue exponential growth to keep pace with customer demands. These trends are reflective of Uganda’s broader economic expansion.

In 2024, the banking industry has continued along a similar growth trajectory to that observed in 2023, with comparable development trends emerging. As we look ahead, this article highlights key regulatory developments in Uganda’s banking industry that warrant attention.

Corporate Governance Regulations

Corporate governance remains a cornerstone of the Bank of Uganda’s five-year strategic plan for 2022–2027. As part of its efforts to embed a culture of robust corporate governance within financial institutions and other key players in the financial sector, the Bank of Uganda has introduced the Financial Institutions (Corporate Governance) Regulations 2024, which replace and revoke the Financial Institutions (Corporate Governance) Regulations of 2005. Additionally, the Bank has issued the Microfinance Deposit-Taking Institutions (Corporate Governance) Regulations 2024 to extend governance oversight to microfinance institutions.

The impetus for these regulatory changes stems from the recognition of the crucial role financial institutions play in the Ugandan economy. Given their position of trust, it is imperative that these institutions maintain strong corporate governance frameworks. Weak corporate governance has been identified as a major contributing factor to corporate failures within Uganda.

The new regulations introduce several key aspects of corporate governance. These include developing a comprehensive board charter, and maintaining a board with at least five directors vetted and approved by the bank, a majority of whom must be independent non-executive directors, and ensuring an odd number of members for decision-making efficiency. Institutions are also required to appoint a company secretary, implement a succession policy to address board vacancies, and develop a risk appetite statement tailored to the institution’s business and competitive environment.

Moreover, the regulations mandate the establishment of several board committees to enhance oversight. These include:

• an audit committee, composed of at least three independent non-executive directors and chaired by an individual with accounting or audit expertise;
• an asset liability management committee;
• a risk management committee, responsible for overseeing the institution’s overall risk strategy;
• a compensation committee; and
• a credit committee, tasked with supervising credit operations in alignment with the institution’s credit strategy.

These regulations reflect the key corporate governance principles previously outlined in the Bank of Uganda Consolidated Corporate Governance Guidelines 2022. With the enactment of the 2024 regulations, the provisions from the Consolidated Corporate Governance Guidelines now carry the force of law, ensuring enforceability and compliance across the financial sector.

Environmental, Social, and Governance (ESG) Framework

As part of its 2022–2027 strategic plan, the Bank of Uganda, in collaboration with the Uganda Bankers Association, launched the Environmental, Social, and Governance (ESG) Framework earlier this year. This initiative aims to promote sustainability within the banking industry and bolster the resilience of financial institutions. The framework’s primary objectives include supporting Uganda in achieving its sustainability goals, ensuring financial inclusivity and social welfare, embedding ESG considerations into the operations and policies of member banks, supporting the Bank of Uganda’s ambition of promoting sustainability practices within Uganda’s banking sector, and providing and communicating a strategic ESG framework, combining global best practices tailored to Uganda’s unique context.

The framework’s recommendations are designed to align with internationally recognised standards such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the International Sustainability Standards Board (ISSB), and are guided by the International Capital Market Association’s (ICMA) Green Bond Principles (GBP) and Social Bond Principles (SBP). Some of the recommendations were already implemented by legislation currently applicable in Uganda. The United Nations’ Sustainable Development Goals (SDGs), which cover various issues, ranging from hunger to poverty to inclusivity, also provided structure to the framework. The recommendations include:

• having a robust governance and oversight mechanism in place for the project evaluation and selection process, representation in the board for ESG-related considerations;
• incorporating ESG-related considerations into their existing policies, corporate governance guidelines, and/or committee charters to reflect the allocation of these responsibilities;
• establishing a cross-functional senior management team, inclusion of sustainability/responsible business in the code of conduct;
• implementing equal opportunities and diversity, equity and inclusion;
• integrating data privacy and transparency considerations;
• identifying, assessing, and defining the impact of ESG and climate-related risks (such as transition and physical risks) on existing risk profiles (such as credit, market, operational, etc) over short-term, medium-term, and long-term time horizons;
• incorporating trainings, as part of their underlying training framework, to upskill people and enhance their ability to navigate the ESG space and increase their E&S risk awareness;
• adopting procurement practices which guarantee transparency, integrity and fairness while ensuring that equal opportunities are given to prospective suppliers and vendors;
• incorporating ESG-related considerations into the existing vision and mission statement of the bank to establish a risk culture highlighting the bank’s commitment to ESG; and
• identifying the categories of eligible green and social projects for allocation of proceeds from green, social or sustainability bonds/loans.

The ESG framework requires a great deal of voluntary action and commitment from the financial institutions and the key stakeholders to drive sustainable economic development across the nation. Most of the international key players in the banking industry have already incorporated ESG principles at a group level and the effect has been trickling down to the subsidiaries or local companies in Uganda. By aligning these industry practices with this ESG framework, the sector’s ESG performance is expected to improve. A consistent, holistic approach in the implementation of the ESG framework will be essential in unlocking the banking industry’s full potential in the national socio-economic transformation.

Regulation of Digital Lending

In January 2024, the Uganda Microfinance Regulatory Authority (UMRA), the statutory body that regulates tier 4 microfinance institutions and money lenders, issued guidelines regulating digital lending in Uganda. The guidelines, referred to as the “Tier 4 Microfinance Institutions and Money Lenders Digital Lending Guidelines” (the “Guidelines”), provide for the licensing and governance of digital credit providers, among other aspects. Under these Guidelines, digital credit is defined as a credit facility or arrangement where money is lent or borrowed through a digital channel while a digital credit provider is defined as a tier 4 microfinance institution or money lender providing credit using digital channels, digital credit business is defined as the business of providing credit facilities or loan services through a digital channel, while a digital channel is defined as internet/mobile devices, computer devices, applications or any other digital system as may be prescribed by UMRA. 

The Guidelines prohibit a digital credit provider from establishing or engaging in digital credit business without a licence issued by UMRA in accordance with the Act, Regulations and Guidelines. The Guidelines also mandate digital credit providers to extend credit to customers in accordance with their established credit policies and any other requirements prescribed by UMRA. Digital credit providers must disclose the terms and conditions for extension of credit to their borrowers before the transaction. The terms and conditions should include the fees, charges, penalties, relevant interest rates to be charged (on a reducing balance or not), the date on which the amount of credit and all interest, charges or fees are due and payable, and any consumer liabilities or obligations relating to a product or service a customer is interested in. The Guidelines also set restrictions on digital credit providers in so far as they can charge an interest penalty that does not exceed half the initial interest at the time of offering a loan.

These Guidelines are intended to streamline the provision of services and products via digital channels and provide consumer protection for borrowers often targeted by exploitative digital lenders.

Banking Industry Guidelines on Mitigation of Fraud

The Uganda Bankers Association (UBA), the umbrella organisation for licensed commercial banks supervised by the Bank of Uganda, issued the banking industry guidelines on mitigation of fraud, representing the industry’s vision and commitment to a safer and secure financial environment. Throughout the years, banking fraud has been prevalent and pervasive. Banking fraud has long plagued the sector, exacerbated by the rapid advancement of technology, the shift toward digital solutions, weak internal controls, and gaps in the legal framework. Fraud poses significant risks to financial institutions, including operational disruption, reputational damage, and diminished public confidence, leading in some cases to the closure of institutions. Recognising these threats, the UBA has sought to establish a comprehensive framework to guide financial institutions and stakeholders in mitigating fraud.

These guidelines are anchored on five pillars:

• empowering customers and end users (financial and digital literacy);
• promoting integrity among banking and financial sector staff and partners;
• enhancing standards, systems, processes and fostering more collaboration among financial institutions and other partners;
• working closely with key domestic anti-fraud stakeholders/agencies; and subscribing to and collaborating with international anti-fraud agencies.

The Bank of Uganda, in support of these guidelines, has urged financial institutions to strengthen their risk management systems and also encourage periodic assessment due to the evolving nature of fraud. These guidelines may not provide a complete solution to fraud, but they mark a critical step in combatting fraud in the banking industry.

Consumer Protection

With the diversification of financial products and services in Uganda and the world at large, there has been increased demand by stakeholders for consumer protection. The development of financial products and services has evolved rapidly, shifting from traditional channels to digital channels, with digital financial products and services gaining more traction. The digital transformation has reshaped financial services, leading to the emergence of new markets, digital products, services, investment vehicles and efficient delivery channels.

Now more than ever, consumer protection is a crucial element in boosting confidence and trust in the industry. The Bank of Uganda and other financial regulatory bodies have made several efforts to create a comprehensive consumer protection system to boost confidence and trust in the banking and finance industry. The Financial Consumer Protection Guidelines (FCPGs) were introduced by the Bank of Uganda in 2011, but enforcement of these guidelines has proved to be a challenge due to the low level of consumer awareness. Scrutiny has always been given to the larger banks in the banking industry; however, with the exponential advancement of technology, including artificial intelligence, the increase in fintech companies, financial products and services, as well as fraud, regulators are expected to intensify their scrutiny of all players in the banking and finance industry.

Closure of Banks for Failure to Meet Minimum Capital Requirements

Following the revision of the Financial Institutions (Revision of Minimum Capital Requirements) Instrument 2022 by the Bank of Uganda, financial institutions were required to have a minimum paid-up capital of UGX150,000,000,000 (approximately USD39,605,580, while non-bank financial institutions were required to have a minimum paid-up capital of UGX25,000,0000,000 (approximately USD6,600,000) invested in liquid assets in Uganda by 30 June 2024.

As predicted, the banking industry has witnessed the closure of two tier II institutions by the Bank of Uganda for failing to meet minimum capital requirements and other related issues. The industry has also witnessed other commercial banks downgrading their licences to meet the minimum capital requirements. This proactive stance by the Bank of Uganda reiterates its commitment to protecting consumers and other key stakeholders in the banking industry and it reflects a healthy banking system.

Conclusion

While the recent regulatory developments have increased compliance demands on the banking industry, they are essential for reinforcing the sector’s resilience and ensuring its long-term stability. These measures highlight the regulators’ dedication to fostering a stable and progressive banking environment, capable of adapting to the rapid pace of technological and global changes. In this evolving landscape, the banking industry must remain vigilant, staying abreast of new laws and regulations to navigate the challenges and opportunities ahead effectively.