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Does Uganda's financial service sector need six regulators?

By Faridhah Kulabako

Added 6th July 2017 11:21 AM

Consolidation seeks to eliminate regulatory gaps, increase protection of financial services consumers and cut administrative costs.

Does Uganda's financial service sector need six regulators?

Consolidation seeks to eliminate regulatory gaps, increase protection of financial services consumers and cut administrative costs.

PIC: Members of the New Vision SACCOS leadership during last year's annual general meeting. SACCOS, following the approval of a new law, will now be managed by Uganda Microfinance Regulatory Authority


While many global economies are merging the financial services regulatory bodies to eliminate regulatory overlaps and increase consumer protection by creating leaner or a single entity, Uganda seems to be moving in the opposite direction.

For instance, Kenya approved the draft Financial Services Authority (FSA) Bill, 2016, in April to merge the functions of four financial regulatory bodies; the Capital Markets Authority Kenya, the Insurance Regulatory Authority, the Retirement Benefits Authority and the SACCOS Societies Regulatory Authority.

Consolidation seeks to eliminate regulatory gaps, increase protection of financial services consumers and cut administrative costs. The US, UK, Japan, Australia, Germany, Denmark, Sweden, South Korea, Singapore, Bahrain and Norway have a consolidated financial services regulatory sector.

Uganda, on the other hand, plans to increase the number of financial services regulators to six by creating the Uganda Microfinance Regulatory Authority to regulate Tier 4 financial institutions — non-deposit taking microfinance institutions, Savings and Credit Co-operative Organisation Societies (SACCOS), community savings groups and money lenders.

The announcement to create a regulatory authority for microfinance institutions was made in April following the approval of the Microfinance and Money Lenders Act, 2016.

The authority is expected to come into effect in the 2017/18 financial year. There are currently six financial services regulatory authorities including Bank of Uganda (BOU) — which regulates commercial banks and microfinance deposit taking institutions; the Insurance Regulatory Authority Uganda (IRA-U) — which regulates the insurance services industry and the Capital Markets Authority (CMA) for capital markets.

The others are the Uganda Retirement Benefits Regulatory Authority (URBRA), which regulates the pensions sector and the Financial Intelligence Authority (FIA), which deals in the enforcement of antimoney laundering law and regulations and counter terrorist financing.

Need for consolidation

Japheth Katto, a corporate governance expert, says consolidation is important for a relatively small financial market like Uganda to increase cost efficiency, especially on staff and infrastructure, facilitate seamless flow of information and boost efficiency in delivering investor education.

"Uganda needs a model which has two regulators — one for banks and another for non-banks. Many of the regulators we have today are not self-financing and are looking for funding from government. There are also duplications.

"For instance, fund managers are regulated by both CMA and URBRA. From a regulated entity's perspective, reporting becomes complex if a firm is involved in different sectors and costly too," Katto says.

He explains that there were proposals for Uganda to review the structure at the time of the establishment of the pensions regulator to have only two regulatory bodies, including a nonbank financial services regulator that would bring capital markets, pensions and eventually insurance under one roof, but it did not get support.

The proposal was, however, rejected by a section of stakeholders. He adds that integration is also preferred by market practitioners because they deal with one regulator and this avoids regulatory arbitrage, overlap and improves accountability and transparency of financial regulation.

He believes that multiple regulatory bodies with different regulatory approaches weaken regulation, invites arbitrage and prevents any single regulator from having a clear picture of the overall financial system. With a consolidated regulator, however, uniform standards can be applied to all sub-sectors hence eliminating the motivation for arbitrage.

Even where the consolidated regulator has different departments regulating different sub-sectors, the scope for information flow between the departments is much higher in terms of both quality and quantity.

Consolidation of the global financial services sector was informed by the 2008 global financial crisis that forced countries to review their regulatory models to build strong financial service sectors that can withstand risks.

Katto says every country should periodically review its financial services regulatory model to check if it is still fit for purpose given the dynamic and ever changing economic and financial environment.

Bernard Musekese Wabukala, an economist and lecturer at Makerere University Business School, also alludes to the high operational costs in form of amount of resources required to run the institutions, compliance costs to the respective regulatory instruments as well as discouraging investments from potential investors due to high compliance costs.

All the regulatory authorities in Uganda are either still dependent on public resources or partially supported. For instance, the FIA and URBRA are still relying on government financial support.

The funds are got from the consolidated fund. Others like the IRA-U and CMA are partially funded from government's consolidated fund. Thus, integration will increase cost efficiency because a consolidated regulator will only have one set of service departments such as administration, finance and human resources, hence reducing on staff and other overhead costs.

Where there are overlaps in registration and licensing, consolidation will also bring cost reductions and efficiency gains by allowing regulated entities to have a one-stop licensing procedure as opposed to multiple registrations.

Taking Kenya's case for instance, at least three chief executives of the three authorities to be merged, three chairmen and several members of the board of the present regulators shall inevitably be in limbo. Further, members of the current three tribunals will be merged, leading to more casualties in terms of responsibilities.

Even for the staff, it will become essential to rationalise to adapt to the new regime of shared services with respect to human resources, and ICT and accounting services. Musekese adds that consolidated regulation enhances the mirroring of the structure of regulation to the structure of the industry by creating conglomerates covering banking, insurance, securities and pension.

Alpha Capital managing director Stephen Kaboyo also notes that Uganda will, at one point, be forced to consolidate because increased integration of banking, securities, pensions and insurance markets is one of the emerging developments in the financial landscape that must be embraced by economies to increase transparency.

He further explains that increased integration of the financial services sector has called for closer scrutiny on how best the inter-linkages can be supervised to increase efficiency and effectiveness, eliminate duplicated support functions and lower the cost supervision by merging the multiple regulators .

Additionally, Kaboyo says the creation of large financial conglomerates and cross border entities has also added to the need to unify supervision to avoid regulatory gaps and arbitrage. Kaboyo adds that a consolidated regulator would be able to understand and monitor risks across the subsectors and develop policies to address the risks facing the entire conglomerate.

He, however, explains that if not well articulated, it could be difficult to achieve economies of scope, consolidation of supervision if the regulations across the financial services sectors are not harmonised.

Not necessary now

Fred Muhumuza, an economist, says it is too early to consolidate Uganda's financial services industry, explaining that the different financial regulatory bodies have specialised structures of operation and specialised roles that cannot be done by a single regulator.

"All these bodies have specialised roles, for instance the capital markets is long term and you need a regulator to develop that; have another regulator to deal with the pensions sector. The Central Bank does not want to take on too much because the financial sector is already very vibrant, volatile and risky," he says.

He, however, adds that there is need for co-ordination within the financial services sector to ensure effective regulation and supervision. "Global economies are harmonising and Uganda will also at one point be required to harmonise but not now," Muhumuza says.

The globalisation of the financial system calls for a more collaborative regulatory regime for the financial system, meaning that the fragmented regulatory regime for a small market may work against it by discouraging capital inflows in form of investment.

The Uganda Insurers' Association chief executive officer, Miriam Magala, also says Uganda's financial services industry is still young to be consolidated as most sectors are still developing expertise. She, however, says there is need to harmonise supervisory roles in the financial services sector to avoid duplication and reduce compliance costs. Currently, an insurance company offering pension services and products is supervised by three entities including IRA, URBRA and CMA.

Magala, however, adds that within seven to 10 years from now, the Uganda market should be ready for consolidation.

Disadvantages of consolidation

According to Japheth Katto, a corporate governance expert, consolidation leads to loss of specialisation and could also slow down the development of some sectors, where special focus is needed.

There is also danger of regulation of the dominant sector overriding the others, resulting in the smaller sub-sectors, which may require more flexibility, not getting the attention they require to develop.

Economist Muhumuza on the other hand says consolidation may undermine overall effectiveness of supervision if the unique characteristics of the sub-sectors are not recognised. Additionally, he says operations may become so broad based that they deny managers a chance to understand specific subsectors.

A consolidated regulator creates a monopoly which may give rise to inefficiencies and sub-optimal resource allocation associated with monopolies. However, experts say the advantages of consolidating outweigh the disadvantages and that Uganda's financial services industry will grow stronger and faster under a consolidated regime than the current structure.

(Adopted from the New Vision of June 29, 2017)



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