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Strengthening Financial Stability in Uganda

Program Development Objective (PDO)

The objectives of this project are (a) to strengthen the legal, regulatory, institutional, and supervisory frameworks of Uganda’s financial sector and (b) to improve the stability of to Uganda’s financial sector.

Background

The banking system in Uganda is sound and well capitalized. However, given the fast pace of credit growth in Uganda in the past several years, along with increasing nonperforming loans, the country’s financial system is facing increasing risks. Overall, this project aims to contribute to the overall stability of the Ugandan financial sector, specifically through strengthening the legal, regulatory, and supervisory systems of the sector’s key pillars. Those pillars are the deposit insurance system, the pensions sector, and the insurance sector. 

Activities

The envisaged support program will be comprised of the following four components:

Component 1: Supporting identification of systemic risk 
This project team will assist the Bank of Uganda (BoU) in enhancing its capacity to monitor detect systemic threats to financial stability. The BoU has expanded its analytical toolkit; however, additional tools will enable the bank to anticipate its risks more conclusively. The project team will help develop analytical tools, among them the cobweb model, the contagion matrix, and the real estate price index.

Component 2: Strengthening financial sector safety nets 
The project team will assist the BoU in reviewing and strengthening its plans for managing financial crises. The team will also work with the BoU to strengthen its framework for resolving banking crises in a manner that promotes financial stability and that results in the overall lowest cost to Ugandan society. Last, the team will assist the BoU in establishing an Emergency Liquidity Facility.

Component 3: Strengthening oversight and expanding coverage of pensions
The project team will provide assistance to Uganda’s pension regulator, the Uganda Retirement Benefits Regulatory Authority, in strengthening regulation and oversight of the country’s pension sector and in expanding pension coverage. Activities will include (a) developing further regulations, most notably around governance, risk management, and reporting; (b) preparing extensive oversight responsibility for passage of the Retirement Benefit Sector Liberalization Bill; and (c) assessing the feasibility of expanding pension coverage to informal sector workers and of developing informal workers’ financial awareness of pensions. 

Component 4: Strengthening regulation and supervision of the insurance sector
The project team will help draft the insurance policy, develop pertinent insurance regulations for the Insurance Act, and build the capacity of the Insurance Regulatory Authority of Uganda (IRA)
to implement the new regulations for risk-based supervision and insurance industry reporting.

Expected Outcomes

The main expected outcomes for these components are as follows:

1.  Enhancing the capacity of the BoU to monitor financial stability, as illustrated by the integration of
     the cobweb model, the contagion matrix, and the real estate price index in the BoU’s Financial
     Stability Report.

2.  Strengthening financial sector safety nets by (a) increasing effectiveness of deposit insurance
     system and (b) strengthening the capacity of the BoU to respond to financial crises or bank
     failures in line with international principles

3.  Strengthening oversight and expanding coverage of pensions by strengthening legal, regulatory,
     and supervisory frameworks for pension funds in line with the principles of the International
     Organisation of Pension Supervisors

4.  Strengthening regulation and supervision of the insurance sector by strengthening legal,
     regulatory, and supervisory frameworks for the insurance sector in compliance with the principles
     of the International Association of Insurance Supervisors