BANKING IN UGANDA

Government-owned institutions dominated most banking in Uganda. In 1966 the Bank of Uganda, which controlled currency issue and managed foreign exchange reserves, became the Central Bank. The Uganda Commercial Bank, which had fifty branches throughout the country, dominated commercial banking and was wholly owned by the government. The Uganda Development Bank was a state-owned development finance institution, which channeled loans from international sources into Ugandan enterprises and administered most of the development loans made to Uganda. The East African Development Bank, established in 1967 and jointly owned by Uganda, Kenya, and Tanzania, was also concerned with development finance. It survived the breakup of the East African Community and received a new charter in 1980. Other commercial banks included local operations of Grindlays Bank, Bank of Baroda, Standard Bank, and the Uganda Cooperative Bank.
During the 1970s and early 1980s, the number of commercial bank branches and services contracted significantly. Whereas Uganda had 290 commercial bank branches in 1970, by 1987 there were only 84, of which 58 branches were operated by governmentowned banks. This number began to increase slowly the following year, and in 1989 the gradual increase in banking activity signaled growing confidence in Uganda's economic recovery.
BANK OF UGANDA
The Bank of Uganda was established on 16 May 1966 as the bank of issue, undertaking the function previously served by the East African Currency Board in Nairobi. The government-owned Uganda Commercial Bank (UCB) provided a full commercial banking service, complementary to and in competition with other commercial banks in the country. Uganda was rocked by a banking scandal in 1989. Lack of public confidence in the system was compounded by a prolonged period of high inflation, which caused rapid erosion in the value of money, and by the liquidity and insolvency problems of some banks. These problems remained unresolved through the 1990s.
In 1998, the financial sector included the Bank of Uganda together with 18 commercial banks, 2 development banks. In addition to the UCB, major commercial banks included Crane Bank Limited, Stanbic, Bank of Baroda, Standard Chartered Bank, Nile Bank, and Barclays Bank. The Uganda Development Bank is a government bank that channels long-term loans from foreign sources to Ugandan businesses. The East African Development Bank, the last remnant of the defunct East African Community, obtains funds from abroad for Kenya, Tanzania, and Uganda.
The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $517.6 million. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $938.8 million. The discount rate, the interest rate at which the central bank lends to financial institutions in the short term, was 9%.
The government supported the establishment of a stock exchange in Kampala, and it inaugurated the Capital Markets Authority in 1995/96. The initial stage of capital market development concentrated on the interbank market and the sale of Treasury bills, which the Bank of Uganda started selling in 1992 at weekly auctions. The exchange was officially opened in 1997, but in 1999, had not been active since inception
Uganda's formal financial system is improving after undergoing a significant shakeout. The system includes Uganda's central bank (the Bank of Uganda, or BOU) sixteen commercial banks, and two development banks. Basic problems leading to the shakeout included insider lending, loose supervision, and excess supply. Significant banking oversight lapses occurred, and the BOU has sought to build its capacity for review of commercial banking operations. The Uganda commercial bank was sold to stanbic bank of South Africa. New investors allowed entry into the sector must offer completely new financial services or take over existing banks. A deposit insurance fund with contributions from the GOU and banks has been put in place to protect depositors. The soundness of this fund is unknown.
Up to the early 1990s, Uganda’s financial structure was characterised by government controls and instability, leading to financial repression and lack of development in the sector. The sector was, as a consequence, dominated by commercial banks, which are mainly concentrated in urban areas. Financial intermediation was restricted to the mobilisation of short-term savings and advancing credit to low-risk businesses with quick returns. In 1993, The Bank of Uganda Statute and The Financial Institutions Statute were passed by Parliament, requiring, among other things, commercial banks operating in Uganda to have a minimum paid up capital of Uganda shillings (Ushs) 500,000 (for the locally-owned banks) and Ushs 1bn (for the foreign-owned banks). The new capital requirements were made effective from the end of December, 1996. Between 1998 and 1999, however, four commercial banks (three of them locally owned), were closed because of insolvency originating from a number of causes. It is not clear whether the new capital requirements played a part in setting off or precipitating the crisis. The results of this study show that whereas there was impressive improvement for the banking system as a whole, it seems that these new guidelines had a different impact on foreignowned and locally-owned commercial banks. Performance of the foreign banks remained quite steady or even rapidly improved while the local banks suffered massive declines in their profitability and accumulated more non-performing loans.
Keywords: Banking crisis, Financial repression, Uganda, Uganda shillings