Plenary Session on Financial Services and Economic Development in Africa: Uganda's Experience with Financial Sector Reform and Lessons for Africa

Uganda started financial sector reforms in the early 1990s as part of the broader objective of a shift to market-determined prices and private sector led growth. It was hoped that liberalisation of interest rates combined with a reduction in the participation of government in ownership would promote efficiency in the allocation of resources and promote competition within the sector. The implementation of the initial reforms was slow as there was tension between the broad objective and a residual constituency in support of the role of the state in allocation of resources, facilitating outreach of services to the poor and rural areas, and in setting of prices, especially for interest rates. However, there were other issues of sequencing associated with the reform that were not fully appreciated at the start of the reform. In particular, Uganda opted for a parallel process of implementing reforms in both the commercial and central banking segments of the financial system. This presented a challenge in effective supervision and regulation of licensed institutions. This was further complicated by the transition from a shared role in regulating and licensing of financial institutions between the Ministry of Finance and the Central Bank. The experience of Uganda is quite rich and provides key lessons for a country embarking on a reform of the financial system. The reforms have in a large degree eliminated segmentation arising from distortions from government interference in the price setting mechanism. Significant progress has been recorded overtime on a number of financial indicators including reducing the risk of bank failure. However, the strengthening of a financial system alone does not necessarily provide an efficient and competitive financial system. Liberalisation needs to be complemented by a programme of strengthening the regulatory capacity and framework plus strengthening institutions that support financial reforms such as land registry, commercial courts and credit reference bureaux if the objective of a strong and efficient financial sector is to be achieved. Large margins on interest rates remain, and competition and provision of long-term lending have remained largely elusive. The sale of state-owned bank also presented challenges in its implementation, resulting in a costly and lengthy process. In spite of the challenges in implementation of the reforms, the sector is in a far stronger position when compared with the pre-reform period. Copyright The author 2007. Published by Oxford University Press on behalf of the Centre for the Study of African Economies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.