Uganda: FSAP UPDATE By Justine Bagyenda Executive Director Supervision, Bank of Uganda

Transcription

1 Uganda: FSAP UPDATE By Justine Bagyenda Executive Director Supervision, Bank of Uganda At The World Bank 2007 Finance and Private Sector Development Forum on Making Change Reasons, Obstacles Results April 25 26, 2007 World Bank Headquarters, Washington D.C 1

2 Agenda 1. Introduction 2. Uganda: Situation Analysis 3. Uganda Initial FSAP 2001: Overall Assessment 4. Uganda FSAP Update 2005: Overall Assessment 5. Post Update Perspective 6. Next Steps: Summary of FSAP Update Recommendations 2

3 Introduction The Financial Sector Assessment Programme (FSAP) is a major initiative undertaken by the World Bank and the IMF in response to the financial crises of the late 1990s. Was set up in May 1999 Initially as a 12 country pilot exercise to: (i) provide diagnoses to clients countries to facilitate early detection of financial sector vulnerabilities; (ii) identify financial sector development needs; 3

4 Introduction (contd) (iii) Support an improved and co-ordinated dialogue among the national authorities, the Bank and the Fund. As of October 2005, over 109 country assessments and 18 updates had been completed. 4

5 Uganda: Situation Analysis Uganda Turbulent Past Before 1987 Post 1987 Economic Growth Stagnation Recovery and buoyancy in growth Prices Hyperinflation Single digits and recently lower than 5% 5

6 Situation Analysis (contd) Before 1987 Post 1987 Financial Sector Unsustainable and Inflationary Liberalized Current Account Unsustainable Large deficits but funded through external inflows External Debt Unsustainable Large but benefiting from HIPC and other donor inflows Reforms Unsustainable Sustained 6

7 Objective of FSAP 2001 Help the Uganda authorities identify financial system strengths and weaknesses with a view to implementing an action plan to increase the system s contribution to economic development 7

8 Uganda Initial FSAP 2001; Overall Assessment Issues identified by FSAP 2001 (1) Signaling ability and high volatility of interest rates pose the risk of destabilizing the banking system. (2) Aborted Privatization of UCBL (largest bank) and continued statutory management by Bank of Uganda constituted serious challenges to the development of the financial system. (3) Violation of prudential rules and regulations by smaller banks. 8

9 Uganda Initial FSAP 2001; Overall Assessment (contd) (4) Undermined market discipline in the financial system: payment of uninsured deposits in the earlier closed banks. (5) Provision of liquidity support for extended periods by Bank of Uganda without adequate security. Led to significant losses during bank closures. (6) Improvements needed in transparency in monetary financial policies. 9

10 Uganda Initial FSAP 2001; Overall Assessment (contd) (7) The payment system s limited ability to withstand significant stresses. (8) Poor performance of NBFIs and development banks. (9) No microfinance laws and regulations. (10) Private Pensions system and the NSSF in particular not providing long term financial resources. (11) Lack of Regulations to implement the Insurance Statute of

11 Uganda Initial FSAP 2001; Overall Assessment (contd) (12) Uneconomically viable Stock Exchange. (13) Operations of Bank of Uganda s DFD exposed BOU to large credit and counterpart risks. Create a conflict vis-à-vis core monetary and supervisory responsibilities. (directed lending) 11

12 Uganda FSAP Update 2005 Why did Uganda ask for an update? (1) To help the Ugandan authorities assess the level of compliance with the recommendations made in FSAP 2001 that intended to address both stability and development concerns. (2) Provide factual updates on material recent developments with respect to observance of international standards in the banking sector since the publication of: (i) The Uganda Financial System Stability Assessment. 12

13 Uganda FSAP Update 2005 (contd) (ii) (iii) (iv) (v) (vi) (vii) Report on the observance of Standards & Codes Monetary and Financial Policy Transparency Banking Supervision Securities Regulation Insurance Regulation Corporate Governance Payment Systems 13

14 Uganda FSAP Update 2005 (contd) Why did Uganda ask for an update? (contd) (3)To identify possible areas of Technical Assistance which could be offered by IMF/WB e.g. To improve financial system efficiency and outreach To promote term financing and developing capital markets To enhance prudential sector stability and regulation To improve systematic liquidity management 14

15 FSAP UPDATE 2005 Significant changes made between FSAP2001 and FSAP 2005 The privatization of UCBL to a reputable banks thus removing one of the key stability risks that faced the system at the time of FSAP The clean up of some small weak banks from the banking system. Substantial improvements to the banking supervision with the introduction of a risk-based approach and passage of FIA Presence of banks that appear to be well capitalized, profitable and resilient. 15

16 Post-Update Perspective Banking system is sound but continues to play a limited role in supporting economic development i.e. (i) (ii) (iii) iii) Financial intermediation continues to be low in both relative and absolute terms. The banking system is still small, faces relatively high costs and offers a limited array of products most of which are limited to the short-end of the maturity curve. Institutions that could provide long term savings and investment such as pensions funds, insurance companies, capital markets continue to face serious challenges. Institutions that could provide long term savings and investment such as pensions funds, insurance companies, capital markets continue to face serious challenges. 16

17 Next Steps:- Summary of Key FSAP Update Recommendations ST short-term, MT medium to long term To improve financial system efficiency and outreach Accelerate licensing and establishment of a credit reference bureau (ST) (in advanced stages) Improve disclosure and transparency of interest and account related bank charges (ST) (Done) Accelerate rehabilitation of the land and companies registry (MT) (ongoing) Overhaul the corporate insolvency regime and supporting taxation framework, including the passage of a new insolvency legislation that gives creditors the right to commence bankruptcy procedures (MT) Strengthen institutional capacity of Commercial Court and of Official Receiver (MT) (on-going) 17

18 Next Steps:- Summary of Key FSAP Update Recommendations (contd) To improve financial system efficiency and outreach (contd) Focus government capacity building efforts on regulated institutions and high performing Tier 4 entities (MT) (on-going) Expand access to the payment system to Tier 2 and 3 institutions (MT) License Tier 3 institutions in compliance with the principles set out in the MDI Act (On-going) Be open to new Tier 1 entrants if they are professional and innovative (On-going) 18

19 Next Steps:- Summary of Key FSAP Update Recommendations (contd) To promote term financing and developing capital markets Restructuring governance of NSSF, including the hiring of independent professional board members (ST) (Done) Expeditious assignment of an incentive based management contract and partial sale of UDBL combined with the DFD of BoU (ST) (Done) Increase private participation in HFCU, minimizing the involvement of government and NSSF (ST)(In process) As soon as the regulatory authority for pensions is established and functional, rescind the monopoly status of the NSSF (MT) (In process) Verify the arrears of the public service pensions scheme and undertake actuarial evaluation with a view to establishing a contributory trust fund (MT) Provide future donor support to term financing, such as the EIB facility at market rates (MT) 19

20 Next Steps:- Summary of Key FSAP Update Recommendations (contd) To enhance prudential sector stability and regulation Issue investment regulations for insurance companies (ST) (On-going) Establish DIF as a separate legal entity without creating a separate institution outside BoU (MT) (In process) Invest DIF assets in safe but high return securities, such as government paper (Done) 20

21 Next Steps:- Summary of Key FSAP Update Recommendations (contd) To improve systemic liquidity management Find a mechanism for decoupling the bank rate from the rediscount rate so as to signal the monetary policy stance (ST) Consider carefully the consequences of shifting project accounts to the BoU (ST) (Done) Continue to improve liquidity forecasting, which involves both the BoU and MoF (ST) (On-going) Develop a comprehensive strategy for government debt management (MT) (On-going) 21

22 Next Steps:- Summary of Key FSAP Update Recommendations (contd) To strengthen AML/CFT Expeditiously enact AML/CFT legislation that meets FATF Recommendations (ST) (In-process) Take appropriate resource and assessment steps for a phased implementation of the AML legislation including resources to establish an FIU, enable BoU to carry out AML inspections, enable Director of Public Prosecutions, Law enforcement, and Intelligence resources to meet responsibilities (MT) (In-process) 22

23 THANK YOU 23