Excessively Heavy-Handed Regulation Stifles Innovation in Banking Sector

In a market-oriented economy, the responsibility for sound management, including proper risk management, must lie with banks themselves, rather than relying solely on regulators to ensure their stability and safety.

Uganda’s Financial Institutions Act: A Key Framework for Corporate Governance

The Financial Institutions Act (FIA) of Uganda emphasizes the importance of good corporate governance in financial institutions. The act was supplemented by a set of corporate governance regulations issued by the Bank of Uganda (BOU) in 2005, which were influenced by guidelines published by the Basel Committee on Banking Supervision.

Key Themes of Corporate Governance Regulations

The BOU’s corporate governance regulations focus on four key themes:

• Fiduciary responsibilities of the Board of Directors
• Independent oversight of bank management
• Risk management
• The need for independent audit functions

Each of these themes is crucial to ensuring that banks operate efficiently and safely.

Fiduciary Responsibilities

The BOU’s corporate governance regulations emphasize the importance of:

• The Board of Directors taking ultimate responsibility for a bank’s performance and operations
• Leading from the top, setting strategic policies, and establishing corporate values that prohibit corruption and conflicts of interest
• Individual director accountability, with each director responsible for reporting any doubts about a bank’s ability to meet its obligations to creditors or operate as a going concern in the future

Independent Oversight

The BOU stipulates that at least half of a bank’s directors must be non-executive directors who do not participate in day-to-day operations, ensuring that the Board can exercise effective oversight over management.

Risk Management

• The Board is responsible for formulating effective risk management policies and procedures
• Two sub-committees are required: a Risk Management Committee and an Asset Liability Management Committee

Independent Audit Functions

The BOU emphasizes the need for:

• Internal auditors to ensure that financial statements accurately reflect a bank’s true financial position
• Each bank must have an internal auditor who is independent of management and reports to the audit committee of the Board
• External auditors to provide an additional layer of assurance

Conclusion

In conclusion, banks play a unique role in a modern market-oriented economy, and it is unrealistic to expect that bank regulation alone can guarantee their efficient and safe operations. Good corporate governance is as equally important for sound and efficient bank management as bank regulation. By prioritizing these principles, Uganda’s banking sector can thrive, contributing to economic growth and stability.