FINANCIAL INSTITUTIONS MANAGEMENT.

a) Give a detailed account of how the following institutions are managed regarding; licensing
them, branching, nature of business, and liquidation.
i) Commercial banks
ii) Insurance companies
iii) Savings and Credit institutions.

Introduction
The financial sector is categorised in a tiered framework where institutions
are classified as:
Tier 1: Commercial Banks,
Tier 2; Credit Institutions,
Tier 3: Microfinance Deposit Taking Institutions (MDIs) and
Tier4; Non Deposit taking financial institutions such as Credit only
NGOs, SACCOs and MFIs.
The Tiered Structure
The regulatory and supervisory framework for Financial institutions in Uganda is
formulated under a tiered approach. The tiered approach reflects the concept
of microfinance as a line of business.

It is conducive to the development of a

sound microfinance sector and it does not constrain the numerous valuable
microfinance activities in the country.

It gives room for more flexibility in

microfinance business and identified four categories of institutions that can do

microfinance business in Uganda. It incorporates the fact that it may be
necessary to regulate different intermediaries in a different manner. The
institutions can graduate from one tier to another but only upwards and
subject to meeting the regulatory requirements under that tier.

a)

Category 1 (Tier 1)
The first category of institutions is composed of banks. Banks
are licensed under the provisions of the Financial Institutions
Act 2004. Microfinance is treated as a new financial product
in their lending portfolio.

Currently, a few banks are

engaged in microfinance business.

Minimum paid in

capital for banks is at shillings 4 billion (almost US$2 million)

since January 2003. Banks are required to segregate the micro

finance loan portfolio and also subject it to the regulation of
asset quality issued under the Micro Finance Deposit-Taking
Institutions Act (MDI) Act 2003.

b)

Category II (Tier II)

The second category is composed of credit institutions (do not
take demand deposits). Also licensed under the provisions of the
Financial Institutions Act 2004.
Microfinance business is a new product in the lending portfolio.
Presently, one credit institution is engaged in microfinance business.
Minimum paid up capital for a credit institutio n is Shs1 billion
(equivalent to about US$500,000) since January 2001.

c)

Category III (Tier III)

These are Micro Finance Deposit Taking Institutions (MDIs)
regulated under Microfinance Deposit Taking Institutions Act
2003. Minimum paid in capital required is Shs500 million which is
equivalent to about US$250,000.

d)

Category IV (Tier IV)

The fourth category of institutions comprises of non-deposit taking
institutions or credit-only institutions e.g. NGOs, savings and credit
associations, member-based organizations mobilizing subscriptions,
cooperatives, etc.

Bank of Uganda does not

institutions. Consultation

is

taking

place

regulate
between

these
the

stakeholders and the Ministry of Finance, Planning and Economic

Development on the best way forward to regulate this group.

The Tiered Regulatory Framework

Criteria

Banks

Deposit-

Regulated

taking

and

Yes under

BoU

FIA 2004

Credit Inst.

Yes under
FIA 2004

BoU

Micro
Deposit

Yes Under

Taking

MDI Act

Institutions

2003

BoU

(MDIs)

Non-BOU Regulated

No

Umbrella
Body

Institutions
Micro finance is a product cutting across all tiers.

The tiered approach encourages broadening and deepening of the financial

system and promotes the concepts of financial inclusion and sustainability.
NBFI department is one of three departments in Supervision Function and
derives its supervisory and regulatory mandate from the Micro Finance
Deposit-taking Institutions Act 2003, Financial Institutions Act 2004, Foreign
Exchange Act 2004 and the respective accompanying Regulations.

Management and Supervision of SACCOs

Role of the NBFI Department
The department monitors and supervises Credit Institutions, Microfinance
Deposit-taking Institutions, Forex Bureaus and Money Remitters, National
Social Security Fund (NSSF), Deposit Protection Fund and Credit Reference
Bureau (CRB). The supervised financial institutions (SFI) are subject to
periodic risk-based full-scope on-site examinations and Off-site monitoring
through the analysis of the financial mandatory statutory returns of data
submitted to BOU on a regular basis. The on-site and off-site sections work
closely towards the realization of the departments strategic objectives of
enhancing

the

Non-Banking

Financial

Institution

(NBFI)

sub-sectors

soundness, stability and strengthening supervision.

The department implements micro prudential supervision, which focuses on
the financial soundness of each individual SFI with the aim of detecting risks
to the stability of the NBFI sub-sector and finding approaches to mitigate
them. Identifying risks to the NBFI sub-sector involves drawing on a wide
range of sources, including statutory returns, consumers directly contacting
the department and monitoring markets and the economy.
The Credit Reference Bureau (CRB) currently operated by Compuscan CRB
Limited started 4 years ago and has since registered over 780,000 borrowers
through issuance of financial cards. In addition, 546 branches of Participating
Institutions are installed on the CRB system and the number of credit
enquiries made on the bureau has grown to 1,036,422 averaging 40,00050,000 per month. The benefits of credit information sharing include:
reducing information asymmetry between lenders and borrowers; instilling
discipline and a good credit culture to borrowers to ensure they are not over

indebted; there are also long-term benefits such as reduction in lending rates
and reduction of Non- performing Asset ratios of lending institutions.
The CRB market was opened up to competition on October 1, 2012 for any
other potential provider who meets the eligibility criteria.
The tiered structure guides the conclusions on how to regulate savings and
credits. A core principle is that the benefits should exceed the costs of
regulation (to the MFI as well as the regulator). Saving products for the public
can legally be offered only by financial institutions in Tiers 1, 2 and 3 that are
licensed by BOU. BOU provides prudential supervision to verify the
compliance of these institutions with specific regulations that are intended to
assure their financial soundness and the safety of the savings. While such
supervision is costly, it is justified by the public benefit of ensuring the
stability of the financial system and the safety of savings, which in turn
facilitate growth of the Ugandan economy.
Extending this logic to Tier 4, however, is not straightforward because of the
conditions under which some mobilise savings, the focus of many on credit
only, and their small, decentralised nature. Registered SACCOs can legally
take savings from and lend to their member-owners. Members of SACCOs
(and small informal savings and credit groups) are considered to have
primary responsibility for the management of their funds, making it
extremely important that they have adequate internal controls and
governance structures - which regulations governing the registration of
SACCOs and requiring an annual audit are intended to ensure. Furthermore,
many NGO MFIs take only compulsory savings as part of their microfinance
methodology. These are not prohibited of long as they are held only as
security

(or

loan

insurance

funds)

and

not

used

for

lending

(intermediated). In this volume, the term savings refers usually to

deposits that are taken from the public (rather than members) and are
intermediated as loans. Thus, the primary issue for regulation of Tier 4 FIs is

to ensure that they do not mobilise and intermediate savings from the public.
Concerning credit, the number of institutions is too great for direct
supervision to be cost-effective. Therefore, the Subcommittee considered
two positive approaches. One is for MFIs of a common type to subscribe to a
self-regulatory framework or code of conduct that defines standards, in
particular for credit procedures and dealing with the public. Another
(complementary) approach is to empower the consumers of financial
services to understand both their rights and their responsibilities. Consumers
making informed decisions will drive MFIs to improve the quality of their
products. Effective implementation of such a framework would indirectly
result in negative sanctions by educated consumers for those MFIs that fail
to live by the standards or to join branded self-regulatory bodies.
A key implication of the above findings is that, for the vast majority of Tier 4
MFIs and their clients, the critical issue is capacity building rather than
regulation per se. No amount of external supervision can substitute for good
governance, internal controls, and proactive members who are aware of their
rights and responsibilities in SACCOs and other member-based groups.
Furthermore, even basic monitoring of the performance of MFIs requires
significant improvements in the current ability of most of them in terms of
accounting, auditing, management information systems, and reporting.
Likewise, codes of conduct and regulations for disclosure are effective only to
the extent that consumers understand them and how to exercise their rights.
An important principle for designing a strategy for both regulation of MFIs
and building their capacity to comply is that supervision should be separated
from providing capacity building. Effective external supervision requires
independence and avoidance of conflict of interest with promotional roles.
On the other hand, monitoring and self-regulation may, to some extent, be
carried

out

alongside

capacity

building

given

as

an

incentive

for

performance, as long as this is exercised separately from the responsibility

for licensing and registration.

Who Should Regulate

The findings above provide some preliminary guidelines as to who might
suitably exercise different types of regulatory responsibilities. The regulation
of public savings demands a strong, independent statutory authority, such as
BOU. On the other hand, the high costs of supervising numerous,
decentralised MFIs mean that primary responsibility for oversight in small
member-based SACCOs and CBOs must rest with the members themselves informed, to the extent possible, by audit requirements and consumer
education. It is in the middle ground between the latter and those clearly
falling under BOU that the thorny, and as yet unresolved, issues arise: who
should be responsible for overseeing large SACCOs and for ensuring that
SACCOs comply with basic audit and governance requirements?
Regulation of credit is only at the drawing board stage, although there is
growing

interest

both

among

Government

officials

and

some

other

stakeholders in establishing regulations for transparency and disclosure in

lending. Whether this would be backed by legal requirements with a body
designated or created to enforce them, or simply embedded into selfregulatory frameworks remains to be seen. Enforcement will inevitably be
problematic due to the enormous size and variety of Tier 4 credit providers.
The capacity of regulators is also an important issue: one principle is not to
issue regulations that one cannot enforce.
BOU has undertaken substantial capacity-building efforts over more than two
years to prepare for supervision of a limited number of MDIs. Recognising the
much greater problems in dealing with the large number of Tier 4 MFIs, the
volume outlines the need for capacity building also for the potential
regulators. A well-designed strategy will balance the nature and extent of
supervision

required

with

the

capacity

of

the

potential

regulators,

recognising that the costs of regulatory failure are usually much higher in the

case of strict prudential supervision requirements than for voluntary selfregulatory mechanisms.
There has been a wide consensus that government should be the regulator
of the last resort, i.e., that option (1) above should be considered only if any
other would fail to achieve the desired objectives. The idea of regulation by
an independent agency (option 2) has so far not been discussed explicitly,
due to strong reservations regarding establishing a new regulatory body
from scratch and to the absence of either a legal basis or interest from
BOU to become engaged with SACCOs at this stage.
Hence, the subcommittees discussion has focused on options (3) and (4).
Three national apexes can be taken into consideration for a regulatory role:
AMFIU, UCA and UCSCU are all private sector, voluntary member-based and
member-driven organisations. The Association of Microfinance Institutions of
Uganda (AMFIU) is the national apex of MDIs and MFIs, and the voice of the
MF-industry in Uganda as a network open to all stakeholders. Its
membership covers microfinance providers from all four tiers, and from all
categories within Tier 4. The co-operative apexes, Uganda Co-operative
Alliance (UCA) and Uganda Credit and Savings Co-operative Union (UCSCU),
are AMFIU-members. By collecting, analysing and sharing information on
performance and other data, by disseminating of and capacity building
towards sound practices and by establishing consumer education, AMFIUs
strategic goal is to establish its membership as a quality mark throughout
the MF-industry. Thus, its mission includes self-regulatory functions of
monitoring and setting standards, though not supervision of the operations
of its members.
UCA promotes the general welfare of co-operatives in Uganda as the
apex body for all co-operative organisations, providing advocacy, resource
mobilisation and capacity building to its members. Among its members are
over 700 SACCOs. UCSCU is the apex specifically for registered SACCOs, of

which over 500 have become members. UCSCU is committed to the

development of safe and sound SACCOs countrywide. It monitors the
performance of its members and assists them to build capacity to maintain
and use financial management tools.
Table 2.1

Savings and Credit Services Permitted by Category of

Legal Status.
Category of Institution by Legal Status

Services

Formal

Semi-formal

Provided

(licensed by

(Tier 4) (regis-

BOU) Tiers 1,

tered, but not

2&3

licensed by

Informal

BOU)
Savings &

Financial

Credit

Institutions Act Societies

(Tiers 1 & 2) ;
MDI Act (Tier 3)

Co-operative

Small, local
member-based

Statute

groups (e.g.,

(SACCOs)

ROSCAs,

Credit

n.a.

Moneylenders

Non-registered
only Act

individual

moneylenders
NGO
Registration
Statute
Company Law

External Regulation
Two types of regulation external to a financial institution (i.e., established by
the Government or the industry) can be distinguished: (a)

Prudential

regulation refers to requirements intended to ensure the soundness and

safety of financial institutions, under the authority of financial legislation and
the Central Bank (which usually supervises licensed institutions, though it
can in principle delegate supervisory responsibilities to another agency if
appropriate); (b) Non-prudential regulation involves rules and guidelines
regarding acceptable behaviour and business practices in the delivery of

financial products or the operation of the financial institutions, which may be

established and enforced either by a government agency or a nongovernmental organisation (self-regulation refers to a situation in which an
association or apex institution exerts control over its membership and their
behaviour, including requirements to follow sound accounting principles,
disclose fees and interest rates, provide information, and follow agreed
codes of conduct).
Internal regulation
Perhaps the most important type of regulation for Tier 4 MFIs, for which
enforcement by external bodies is impractical or at best infrequent, is
internal - embodied in the bye-laws or articles of association and the
operating procedures of the institution. These include internal controls that
enable management to detect fraud, transparently administered loan
eligibility criteria and decision-making, and governance structures that
involve members in oversight of the management of SACCOs . In NGOs and
companies, board members and (if applicable) shareholders play a strong
role in guaranteeing a strong internal governance structure. In practice,
however, internal controls are most effective if backed by some external
oversight or enforcement mechanism (e.g., ensuring availability of annual
audit or annual general meet-ing).

Way Forward
The major focus for going forward is on establishing an orderly system of
progression to different levels of regulation, differentiating between:

(a)

Size, with increasing regulatory requirements as institutions become

larger players in the financial system;

(b) Product: Providing credit only (with consumer protection being the main
issue), vs. taking and intermediating savings from the public (where
protection of peoples savings warrants public setting and enforcement of
standards);
(c) Ownership: Member-based organisations (where,

in

principle,

members bear responsibility for internal controls and self-regulation) and

those serving the general public.
In general, external supervision is not warranted for creditonly MFIs
(including those that take compulsory deposits that are held as security
against loans), although their credit products may be subject to (nonprudential) regulations and voluntary codes of conduct.
A more difficult issue is the role of public authorities in restricting and
supervising the mobilisation of savings for the purpose of making loans.
While in principle there is a public interest in safeguarding the savings of the
poor, Ugandas current policy is that small 11 Nevertheless, enforcement of
the prohibition against intermediating savings from the public and of nonprudential regulations would require monitoring and intervention by (or
recourse to) an external authority.
As SACCO size increases, however, the increasing scale of members savings
being mobilised, and the decreasing effectiveness of internal oversight by
members, bring them closer to the category of deposits from the public and
make potential risks of loss or mismanagement a matter of public concern.
Hence, the challenge with respect to Tier 4 MFIs, especially SACCOs, is to
establish thresholds at which more stringent requirements should be applied,
and to build the capacity both of the MFIs to comply and of regulatory bodies
to enforce.

Basic principles for moving forward, on which substantial consensus has

emerged, include: (a)

Focus regulatory efforts on MFIs that take and

intermediate deposits; (b) Avoid prudential regulation of MFIs engaged only

in credit activities with or without mandatory savings held as security); any
efforts to regulate credit should be system-wide and centered on credit as a
product, not on institutions;
(c) Before imposing external regulatory requirements, consider whether
the benefits justify the costs, including
both (i) the direct costs to the organisation charged with enforcing the
regulations and (ii) the staff time and other

costs to the MFI involved in

complying with the regulations;

(d)

There

should

regulation (BOU),

be
but

unitary

some

regulatory

authority

for prudential

supervisory functions could in principle be

delegated to other agencies;(e) Prudential supervision of SACCOs should be

done by a specialised financial authority, rather than by the government
agency responsible for registering and promoting all co-operatives;(g)
Consolidation and mergers of Tier 4 MFIs could help reduce the number and
increase the size and capacity of MFIs subject to regulation.
Three types of MFIs can be found in the sector: SACCOs, tier four MFIs other
than co-operatives (referred to as non-coop MFIs) and money-lenders (the
last category comprises not only institutions, but also individuals). Moneylenders should not be regarded as tier four MFIs unless they are registered
either as NGO or as a company.
International experience and the theory on financial regulation clearly show
that all three types of MFIs need and should not be prudentially regulated by
the central bank. Unlike tier one, two and three institutions, they do not
intermediate public deposits. A possible exemption to this rule might be, at
least in the medium term, very large SACCOs.

The study concludes that tier four MFIs should be subject to non-prudential
regulation focusing on performance monitoring. Such a regulatory system
would neither be pure self-regulation nor direct government regulation, but
self-regulation backed by statutory powers of government agencies.
The following are recommendations with regard to institutions in tier four:
(a) SACCOs: Preferably, SACCOs are brought under the Ministry of Finance.
Even if the decision is taken to leave them under the current Ministry (MTTI),
supervisory tasks could be delegated to an existing umbrella body (such as
UCA or UCSCU), while some statutory powers (e.g. to deregister errant
members) and the authority to conduct on-site inspections would remain
with the Ministry.
(b) Non-Coop MFIs: Our findings suggest that neither the NGO Board nor the
Registrar of Companies is well positioned to effectively monitor non-coop
MFIs. Supervision should therefore be delegated to a Self-Regulatory
Organisation (SRO). As for the power to close down non-complying members,
this could either remain with a government agency or also be delegated to
the SRO. It would be essential to have mandatory membership with the SRO
to ensure the effectiveness of this approach. Rules and a code of practice of
the SRO are to be approved by a government agency. The government could
also be represented on the Board of the SRO. At least as an interim solution,
a specialised department in AMFIU could take over the role as SRO.
Possible Mechanisms to Regulate Saccos
To implement these recommendations, the following laws would have to be
amended:
(a) NGO Statute and Companies Act: In both laws, a provision would be
included that companies or NGOs engaged in microcredit business must be
registered with an SRO and that a still to be specified government agency is
authorised

to make microfinance-specific regulations

under this

Act.

Furthermore, the NGO Statute should confer corporate status to non-coop

MFIs so that double registration under the Companies Act is no longer
required.
(b) Co-operative Societies Statute: Specific sections on SACCOs would be
added to the Act, even better were the introduction of a separate Act for
SACCOs. A provision has to be included to delegate some supervisory power
to an existing umbrella body, approved by the Ministry. In the medium term,
larger SACCOs (in terms of number of members or volume of deposits) would
be brought under the purview of the central bank.
(c) Money-Lenders Act: The Act would be repealed. For this sector, the focus
would lie on consumer education and an effective complaint mechanism for
aggrieved customers.

Conclusion
Discussion of regulation often tends to focus on institutions, because they
are what are licensed or registered. The rationale for supervision of financial
institutions is based on protecting the financial system and the savings of
depositors. This means that, in designing a regulatory system, distinctions
may be made between the treatment of savings and credit products,
regardless of the institution providing the service. In this context, financial
institutions can be categorised according to how they are (or are not) legally
constituted to engage in savings and/or credit activities, as follows :
(a) Formal institutions = those licensed to engage in financial activities
(under FIS and MDI Acts);
(b) Semi-formal institutions = those

not explicitly licensed to carry out

financial activities, but registered, and engaging in legal financial activities

[which may have

some

regulatory

requirements

associated

with

registration, even though not under BOU supervision e.g., annual audit
requirement for SACCOs] ;
(c) Informal institutions = neither registered nor licensed, but engaging in
financial activities.

References
Bikki Randhawa, and William F. Steel (World Bank Africa Region Financial
Sector Group and Financial Sector Operations and Policy Department,
Africa

Region

Working

Paper,

2005).

downloaded

from:

www.worldbank.org/afr/findings.
Micro Finance Deposit-Taking Institutions Act (MDI) Act 2003. Laws of
Uganda, UPPC, Entebbe
The Financial Institutions Act 2004. Laws of Uganda, UPPC, Entebbe