Formal banking participation in Uganda remains critically low, with only 35.5% (about 16 million) of Ugandans having access to bank accounts, many through their membership in formal savings groups. This statistic is particularly concerning given the 24 million total bank accounts, of which a staggering 98% have balances of $2,600 (Shs 9.6m) or less, according to the Deposit Protection Fund, as highlighted in the 2024 Investment Climate Statements: Uganda. The recent census, which is the largest peacetime national operation, revealed that Uganda’s population has surged by 11.3 million since 2014, growing from 34.6 million to 45.9 million. That means 16 million, or 35.5, percent Ugandans have access to bank accounts.
The prevalence of multiple bank accounts among some Ugandans and companies masks the reality of banking penetration in the country. This low level of formal banking participation underscores a significant challenge for financial inclusion, a crucial element for sustainable economic development. The rise of mobile money accounts, totaling 43 million, reflects the reliance on alternative financial services for basic low-value transactions, indicating a gap in the traditional banking sector’s reach and accessibility.
Uganda’s banking and financial sector, while generally healthy, faces persistent issues with non-performing loans (NPLs). According to the Bank of Uganda’s Financial Soundness Indicators, the non-performing loan rate stood at 5.73% at the end of June 2023, an increase from 5.32% in June 2022. This rise in NPLs signals underlying economic vulnerabilities and challenges within the lending practices of banks.
The banking sector comprises 25 commercial banks, with the top six banks controlling at least 62% of the sector’s total assets, valued at $12 billion, notes 2024 Investment Climate Statements: Uganda. This concentration of assets among a few banks could imply limited competition, potentially affecting the quality and pricing of banking services available to consumers. The Bank of Uganda (BOU) regulates the sector and allows foreign banks to establish branches in the country, which could enhance competition and service diversity.
To fortify the banking sector against economic shocks, the BOU increased the minimum capital requirements for banks from $6.5 million to $40 million. New banks entering the Ugandan market must meet this requirement, and existing banks must comply by June 30, 2024, the report notes. This significant increase in capital requirements aims to ensure that banks have a solid financial base to absorb potential losses. However, this move has led at least two commercial banks to apply to downgrade to the second tier of regulated banks due to the higher capital threshold. Additionally, a local Ugandan commercial bank was acquired by a larger foreign bank, indicating consolidation trends within the sector.
The BOU employs risk-based supervision, requiring banks to bolster their capital based on the risk levels of their lending activities. This regulatory approach is designed to promote prudent risk management and enhance the stability of the financial system. Furthermore, the BOU regulates mobile money service providers and financial technology companies under the National Payment Systems Act, of 2020, reflecting the increasing importance of fintech in Uganda’s financial landscape.
In February 2024, the Financial Action Taskforce (FATF) removed Uganda from its “Grey List” after the country demonstrated improvements in its Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) policies. This development is a positive step for Uganda, potentially enhancing investor confidence and the overall integrity of the financial system.
The low level of formal banking participation, coupled with the high rate of non-performing loans, presents both challenges and opportunities for Uganda’s financial sector. Addressing these issues requires concerted efforts to enhance financial inclusion, improve credit risk management, and foster a competitive and resilient banking environment. As Uganda navigates these complexities, the regulatory measures and market dynamics will play a crucial role in shaping the future of its banking and financial sector.
