FINANCIAL REPRESSION AND FINANCIAL REFORM IN UGANDA

Topics: Bank, Inflation, Financial services Pages: 35 (8424 words) Published: March 20, 2014
FINANCIAL REPRESSION AND FINANCIAL REFORM IN UGANDA
Martin Brownbridge

Summary
The banking system in Uganda is among the weakest in Sub-Saharan Africa. Its liabilities comprise less than 10 per cent of GDP, it is highly oligopolistic and inefficient in performing many basic banking functions, and the largest bank and several smaller banks are insolvent. The financial policies of the pre-reform period aimed to control banking markets, ostensibly for developmental and other non commercial objectives. These policies had very damaging effects on the banking system. Financial repression deterred the public from holding bank deposits. A large government owned bank was operated with very little regard for commercial principals and accumulated a massive portfolio of bad debts as a result. The role of the foreign banks, which at least provided a basic, if limited, range of banking services, was sharply curtailed when they sold most of their branches to the public sector banks. The neglect of prudential regulation allowed mismanagement to become widespread, not just in the government banks but also among some of the newer banks established in the late 1980s by the private sector.

The financial sector reforms of the 1990s are intended to remedy the consequences of the previous two decades of misguided financial policies. The second contention of this paper is that these objectives are likely to prove very difficult to attain because of the scale of the problems which the banking sector inherited from the pre-reform era, and especially because of the dominant market position of the public sector banks.

The author is a former IDS Research Officer. At the time of publication (June 1996) he was working for UNCTAD (Division for Least Developed Countries) in Geneva, Switzerland.

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FINANCIAL REPRESSION AND FINANCIAL REFORM IN UGANDA1
Martin Brownbridge

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INTRODUCTION

The banking system in Uganda is among the weakest in Sub-Saharan Africa. Its liabilities comprise less than 10 per cent of GDP, it is highly oligopolistic and inefficient in performing many basic banking functions, and the largest bank and several smaller banks are insolvent. The problems of the banking system are attributable to the financial policies pursued by successive governments between the mid 1960s and the late 1980s, combined with the severe economic crisis, civil conflicts and acute political instability, which afflicted Uganda during this period. Since 1991 the government has begun implementing financial sector reforms with the objective of redressing these weaknesses. The reforms include the liberalisation of financial markets, restructuring distressed banks and strengthening prudential regulation. The financial policies of the pre-reform period aimed to control banking markets, ostensibly for developmental and other non commercial objectives. One of the contentions of this paper is that these policies had very damaging effects on the banking system. Financial repression deterred the public from holding bank deposits. A large government owned bank was operated with very little regard for commercial principals and accumulated a massive portfolio of bad debts as a result. The role of the foreign banks, which at least provided a basic, if limited, range of banking services, was sharply curtailed when they sold most of their branches to the public sector banks. The neglect of prudential regulation allowed mismanagement to become widespread, not just in the government banks but also among some of the newer banks established in the late 1980s by the private sector. The financial sector reforms of the 1990s are intended to remedy the consequences of the previous two decades of misguided financial policies; in particular to boost deposit mobilisation, stimulate competition and enhance efficiency in financial markets, tackle financial distress and ensure prudent management of banks. The second contention of this paper is that these objectives are...

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