Remarks by Dr Michael Atingi-Ego, Deputy Governor, Bank of Uganda at the Conference on Reshaping the tax system to support the Financial Sector Development Strategy (FSDS) Kampala, Uganda, 14th–15th December 2022 The two-day conference was convened by Uganda's Ministry of Finance, Planning and Economic Development, and co-hosted by ICTD's DIGITAX Research Programme and TaxDev.

1. Remarks
Michael Atingi-Ego
Deputy Governor
The Bank's Role in Financial Sector Development
& Promoting Financial Inclusion
Sheraton Hotel
14 December 2022

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Permanent Secretary/Secretary to Treasury, Ministry of Finance, Planning and
Economic Development (MoFPED)
Commissioner General, Uganda Revenue Authority
Chief executives of regulatory agencies
Chief executives of financial institutions
Development partners
Distinguished presenters and panellists
Ladies and gentlemen.
Good morning to you all.
I thank Mr Ramathan Ggoobi, PS/ST, for inviting me to participate in this
conference on reshaping the tax system to support the financial sector development
strategy (FSDS).
I am pleased to make some remarks on "The Bank's role in financial sector
development and promoting financial inclusion". First, I will address the Bank of
Uganda (BoU)'s role in financial sector development and then cover its role in
promoting financial inclusion.
The financial system promotes economic growth and development by mobilising,
structuring, and allocating savings to productive enterprises in the real economy.
Ideally, the central bank fosters progress by ensuring price stability and the
financial system's safety and soundness through effective regulation and
supervision.
Given that the banking sector dominates Uganda's financial system, an efficient and
effective banking system is critical for powering enterprise and the smooth
functioning of the economy.
Let me start with a background to Uganda's financial sector, showing that the
Bank's role has evolved from suboptimal to increasingly more supportive of
financial sector development and financial inclusion over time.
In the early 1990s, the banking sector comprised a few foreign banks, Government
owned banks, and some private locally owned banks that concentrated on financing

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manufacturing, agriculture, and trade.
The BoU officially determined the level and structure of interest rates before the
economic reforms of the 1990s. Unfortunately, the economy experienced financial
repression because the real interest rate was negative. After all, the nominal interest
rates were far below the inflation rate for most of the 1970s and 1980s. For
example, annual inflation averaged around 100% in the 1980s, while nominal
lending rates for commerce and time deposit accounts averaged 31% and 24%,
respectively.
Prudential regulation and supervision were weak and rudimentary. The prevailing
law, i.e., the 1969 Banking Act, had several gaps. It authorised the minister of
finance to license banks. The central bank would not take any prudential regulation
stance without seeking permission from the minister.
To strengthen the financial sector, the Government of Uganda undertook several
reforms starting in the early 1990s, supported by the World Bank. The broad
objectives were to: improve monetary policy formulation, boost deposit
mobilisation, stimulate competition in financial markets, enhance the efficiency
with which financial services were provided and financial resources allocated,
restructure insolvent banks, and improve prudential regulation and supervision,
among others.
The interventions covered three main areas: (i) institutional reforms to the BoU and
the public sector banks, (ii) legislative changes to the banking laws and the BoU
Act, and (iii) economic liberalisation covering both interest rates and exchange
rates.
Without delving deeply into the individual reforms, suffice it to say that they
unshackled the financial sector from constraining command controls, thereby
freeing it to intermediate savings and investments more effectively.
For example, legal reforms such as the BoU Statute and the Financial Institutions
Statute of 1993 unleashed the BoU to manage monetary and supervisory policies
based on professional technical analysis and expert judgement.

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Monetary policy targeted average annual inflation of 5% through open market
operations, and bank supervision moved from a box-ticking exercise of compliance
checks to risk-based supervision with minimal forbearance.
The Financial Institutions Act of 2004 further strengthened the licensing,
supervision, and closure of regulated financial institutions, which was fully
delegated to the BoU. And the BoU executes this role following international best
practices such as the Basle Core Principles of Banking Supervision.
Market-determined pricing ended financial repression and allowed differentiated
allocation of credit reflecting diverse risk profiles. In addition, exchange rate
liberalisation ended the "kibanda" black market, and pricing matched the demand
and supply of forex, eliminating the time-wasting queues for window 1 and 2
rationing.
Broadly, the reform program yielded positive outcomes for the financial sector,
including the following.
First – on inflation. Over the past three decades, inflation in Uganda has been
relatively low compared to the rates observed in 1980s and early 1990s. Core
inflation declined steadily to single digits averaging around 5%, except for the
shocks of 2011 – 2012, following which the BoU modernised its monetary policy
framework by adopting inflation targeting in 2011.
The BoU maintained inflation in low single digits until the recent spike, which
resulted from Covid-19 pandemic-related supply chain disruptions exacerbated by
the outbreak of the Russia-Ukraine war, China's zero Covid policy, and domestic
drought. For context, the annual headline and core inflation rose to 10.6% and 8.8%
in November 2022 from 2.7% and 2.3% in January 2022, respectively.
Accordingly, the BoU has adjusted monetary policy by raising the central bank rate
(CBR) to reign in the inflationary pressures. As a result, there are indications that
the momentum of price pressures has tapered off.
Second – on lending rates. Persistently high lending interest rates increase business
costs and crowd out some sectors whose rate of return may be lower, yet they are
critical for economic growth and employment, e.g., the agricultural sector.

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Moreover, from the financial inclusion perspective, expensive loans impede
individuals' resilience to adverse shocks. For example, recent findings from the
Financial Capability Survey in 2020 revealed that 16% of Ugandans could not
sustain their lifestyle using their savings for more than a week in the event of loss
of income, as was the case with the lockdown. Affordable credit would enable
consumers to smoothen their expenditures during good and hard times.
Lending rates have declined gradually from an average of 38% in 1992 to an
average of 18.5% in 2021. Despite the decline, our lending rates are still high
compared to the EAC partner states. For example, in Kenya, Tanzania, and
Rwanda, average lending rates stood at 12%, 16.6%, and 16.2%, respectively, in
2021. Stubborn structural challenges such as the high cost of capital, costly
operations, and information asymmetry, among others, persist and need tackling.
Third – on financial stability. The BoU continued to strengthen its supervisory
regime through risk-based supervision to safeguard the interests of depositors and
the safety and soundness of the financial system.
Consequently, the banking sector remained resilient, with the supervised financial
institutions holding strong capital and liquidity buffers as of December 2021. In
2021, commercial banks' aggregate net profit after tax increased by 26.9% to UGX
1,073.9 billion from UGX 846.2 billion in the previous year, supported by 24.4%
and 7.9% increases in interest income from Government securities and loans,
respectively. These developments have ensured that the sector could withstand
shocks such as the impact of the Covid-19 pandemic and the Russia-Ukraine
conflict.
A resilient financial sector offers the bedrock for financial innovation as it allows
the private sector to take calculated risks backed by sufficient equity so as not to
put depositor funds at risk. And in the past decade, we have seen significant growth
in financial innovation. As a result, new products have emerged, including
bancassurance, mobile banking, internet banking, increased card payments, and
Islamic banking products are imminent, among others.
For example, in the year ending June 2022, the number of active users of internet
banking increased by 17.7% from 0.7 million in June 2021 to 0.8 million in June

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2022. Internet banking transactions more than doubled, reflecting a 225% growth
from 1.2 million transactions to 3.9 million transactions over the same period,
while transaction values nearly doubled from UGX 13.4 trillion to 24.4 trillion.
Similarly, the mobile banking transaction volume increased by 51% from 5.5
million to 8.3 million over the same period, while the values increased by 147.8%
from UGX2.3 trillion to 5.7 trillion. Again, these innovations reflect the resilience
supported by prudent macroprudential policy over the years.
On a cautionary note, however, we ought to be mindful of the threats that come
with financial innovations powered by the technology revolution, such as cyber
security and data privacy exposures. We have witnessed numerous cases of cyber-
attacks, which have disrupted operations with significant adverse effects on
shareholder value and service delivery in the case of the public sector.
The BoU will continue monitoring the banking sector closely to ensure that banks
are well-capitalised, with sufficient buffers to withstand any adverse shocks, such
as the recent covid pandemic and escalation of geopolitical risks. In addition, we
shall regularly conduct stress tests on the banking sector to pick up the early
warning signal of potential distress so as to administer prompt corrective measures.
The pandemic reinforced the need to challenge our assumptions continuously and
shore up the capital buffers to enable supervised institutions to absorb shocks while
maintaining financial soundness. Accordingly, the BoU is revising the minimum
paid-up capital requirements to incentivise shareholder commitment, increase
resilience to shocks, enhance capacity to field extensive credit facilities in tandem
with the expanding economy, and converge with regional peers.
Mindful of the emerging risks to the financial sector from the raging climate
change, the BoU is promoting sustainability in the financial system. Through the
recently launched BoU strategic plan for 2022 to 2027, we are taking the lead with
the environmental, social and governance (ESG) agenda.
We shall be working with the supervised financial institutions to incorporate
environmental sustainability into their operations to enrich their focus from just
shareholder value creation to include environmental sustainability.

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Furthermore, we advocate the evolution of financial sector business models to
acknowledge that ESG is "the business of business" because the sustainability of
businesses is only possible with environmental and social sustainability.
Not forgetting governance, the BoU shall continue working with the other
regulators through the Financial Sector Stability forum to ensure overall financial
system stability.
Some say that change is the only constant, or as the Bible says in Romans 12:2
"And be not conformed to this world: but be ye transformed by the renewing
of your mind, that ye may prove what is that good, and acceptable, and
perfect, will of God", ((NKJ version). Likewise, we are all called to be
progressive, dynamic, and adopt design thinking in our business models to innovate
solutions and services that meet the needs of those at the bottom of the pyramid. In
this way, working towards full financial inclusion is an act of faith by which we
honour our duty to fellow humans and God.
Now, let me take a leaf from the ongoing soccer World Cup and turn to the second
half of my remarks by reflecting on the BoU's role in promoting financial inclusion.
The BoU embarked on overt promotion of financial inclusion in 2009 to harness
the capacity of financial inclusion in enhancing monetary policy transmission to
support economic growth.
At that time, only 28% of the population was financially included, with 21% using
banking services (FinScope 2009). In the same year, the BoU issued the first "No
Objection" letter to Stanbic Bank to partner with MTN Uganda to provide mobile
money services in Uganda.
Cognizant of the need for a coordinated framework for implementing financial
inclusion initiatives, the BoU launched a financial Inclusion project in 2011 based
on four pillars, i.e., financial literacy, financial consumer protection, financial
innovations and financial services data and measurement. These were the first
proactive explicit steps towards enhancing financial inclusion.
In 2013, BoU issued Mobile Money Guidelines and started coordinating the
implementation of financial literacy with the launch of the Strategy for Financial
Literacy 2013-2017.

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In 2016, the Financial Institutions Act was amended to allow for agent banking,
bancassurance, and Islamic banking. Financial institutions started onboarding
agents in late 2017 after the passing of the implementing regulations.
Around the same time, the Agent Banking Company launched its shared platform
to promote the interoperability of agents serving the different banks. As a result,
approximately 29,000 countrywide bank agents actively provide financial services
beyond the traditional brick-and-mortar branches. Agent banking has proven
pivotal in mobilising bank deposits.
For illustration, in the year ending June 2022, the transaction volume rose by 50%
from 5.6 million in the twelve months ending June 2021 to 8.6 million in June
2022. Similarly, the transaction values posted a significant increase of 27.6% from
UGX 7.6 trillion in June 2021 to UGX 9.7 trillion in June 2022.
In 2017, BoU and MoFPED launched the National Financial Inclusion Strategy
(NFIS) 2017-2022, whose implementation ended in September 2022, to streamline
the national financial inclusion agenda, with BoU serving as the Secretariat.
The NFIS was anchored on several pillars, i.e., (i) reduce financial exclusion and
access barriers to financial services; (ii) develop the credit infrastructure for
growth; (iii) build out the digital infrastructure for efficiency; (iv) deepen and
broaden formal savings, investment & insurance usage; and (v) protect and
empower individuals with enhanced financial capability.
Significant achievements have been made against the above pillars. For example,
access to financial services has improved significantly from 152 access points per
10,000 adults in June 2021 to 230 access points per 10,000 adults in June 2022.
The credit infrastructure has also improved, with more innovation expected
following the recent gazetting of the Credit Reference Bureau Regulations. This
will open up the credit reference market to accredited institutions. At the same
time, the digital infrastructure continues to grow, supported by the NPS regulatory
framework and other ongoing initiatives.
With support from the Development partners, the development of the second NFIS
2022 - 2027 has already commenced. In 2019, BoU and stakeholders developed the

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second strategy for financial literacy in Uganda 2019 -2024. The review of the
earlier strategy revealed that financial literacy levels in Uganda had improved.
In addition, BoU has trained about 2,000 financial literacy trainers that act as
agents in enhancing financial literacy outreach. The Bank has also developed core
financial literacy messages for financial literacy activities. The ongoing evaluation
of the NFIS has indicated that financial literacy is still a priority, with a bias
towards digital literacy.
In 2020, the National Payment Systems Act 2020 was passed, and its implementing
regulations were gazetted in 2021. Accordingly, the BoU has licensed 21
institutions as payment system providers, payment system operators and/or issuers
of payment instruments.
A key aspect of the NPS regulatory framework is the regulatory sandbox, which
aims to promote innovation and product testing under a live but controlled setting
with regulatory oversight. The sandbox supports product innovation which aids
competition and enhances customer experience.
According to the World Bank Global Findex Report 2021, financial inclusion
stands at 66% compared to 59% in 2017, with mobile money as a key driver. The
report showed that mobile money services increased the value of remittances by
36% and were associated with a 13% increase in per capita consumption. However,
the same report indicated that 41% of Ugandans could not access financial services
due to the distances involved in reaching the access points.
Whereas financial inclusion has progressed significantly, several barriers remain,
key among which are the high transaction costs. On net, a mobile money
transaction costs between UGX 30 to 1,250 for sending, UGX 330 - UGX 20,000
for withdrawing, and UGX 160 to UGX 6,300 for payment of utilities inclusive of
taxes.
Interoperability costs range from UGX 330 to UGX 20,000. Furthermore, the
charges are regressive, with the vulnerable poor, who constitute the majority of
users by transaction count, bearing their heaviest burden.

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Statistics indicate that approximately 90% of mobile money transactions are in the
low-value category of UGX 0 – UGX 50,000. We still have a lot of work to bring
affordable services closer to the people and include the masses outside formal
financial services.
I am glad that MoFPED commissioned DIGITAX to study the taxation of the
financial sector. Conventional wisdom says that a progressive tax regime is ideal.
Nevertheless, we look forward to discussing the recommendations that will address
some of the teething challenges that have dogged the accelerated adoption
promotion of digital financial services in Uganda.
Ladies and gentlemen, allow me to mention some of the recent and ongoing
initiatives by BoU aimed at promoting financial inclusion:
a) BoU, the MoFPED, and development partners are fast-tracking the project for
establishing a national payments switch to promote interoperability, thereby
reducing the cost structure of payment service providers.
b) Amendment of agent banking regulations to ease the process of onboarding
bank agents is underway.
c) The MDI Act 2003 is being amended to allow MDIs to onboard agents, Islamic
banking, and bancassurance services. It is important to note that MDIs serve the
bottom-of-the-pyramid consumers. This reform will enhance rural outreach as
well as lower the cost of operations.
d) BoU recently issued the NPS Consumer Protection Regulations under the NPS
Act 2020 to strengthen consumer empowerment in digital financial services and
improve complaints resolution.
e) Promotion of innovations through the regulatory sandbox. BoU has received
applications from FinTechs in various areas that promote financial inclusion.
f) Development of the second NFIS, 2023-2027, has been kickstarted with support
from Financial Sector Deepening Uganda.
g) Under the auspices of the Financial Sector Forum, a sector-wide crisis
management plan is under development.
h) The BoU is conducting research on the streamlining of operations for
development banks as well as mortgage refinance institutions, which have the
potential to deepen the financial markets further.

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Let me conclude by reiterating that BoU is committed to financial sector
development and the promotion of financial inclusion. Indeed, we recently recast
our mission to "To Promote Price Stability and a Sound Financial System in
Support of Socio-economic Transformation in Uganda" to tie out deliverables to
their impact more closely.
Finally, allow me to thank the Bill and Melinda Gates Foundation for funding the
DIGITAX program, which will yield fruitful recommendations for this conference.
I also commend the MoFPED for convening this vital conference.
I wish you all fruitful deliberations.
Thank you for listening to me.
God Bless!