Risk Management in Financial Institutions: A Call to Action for Uganda’s Banking Sector

The Evolving Landscape of the Banking Sector

In the past decade, the rapid pace of innovation and internationalization of financial flows has transformed the banking sector beyond recognition. This new environment presents major opportunities for banks, but it also poses complex and variable risks that challenge traditional approaches to risk management.

A Call to Action from the Governor of the Bank of Uganda

Speaking at a recent Banking Industry Stakeholders’ Roundtable Forum in Kampala, Prof Emmanuel Tumusiime- Mutebile, Governor of the Bank of Uganda, emphasized the need for financial institutions to improve their risk management capabilities in order to survive. He highlighted the importance of:

• Revisiting banks’ appetite for taking on high risks in anticipation of high returns
• Striking a balance between risk and potential returns to shareholders and safety of depositors’ funds
• Ensuring an adequate legal framework and national identification system

The Bank of Uganda’s Revised Guidelines

The Bank of Uganda has issued revised guidelines for supervised financial institutions (SFIs), emphasizing the importance of:

• Good corporate governance
• The role of the board of directors in setting risk management tone at the top

Additionally, the bank is increasing its oversight surveillance capacity through new methodologies of risk-based supervision, including periodic off-site and on-site examinations.

Mitigating Risks in the Banking Sector

To mitigate risks in the banking sector, the Bank of Uganda has introduced the Credit Reference Bureau (CRB) and urges all SFIs to ensure that their borrowers register with the database. This initiative aims to:

• Enhance credit assessment and management
• Reduce default risk
• Improve financial stability

The Way Forward for Improving Risk Management in the Banking Sector

Improving risk management in the banking sector involves both internal and external measures. Internally, banks should:

• Elevate scrutiny on employees through “Know Your Employee” initiatives
• Enhance customer due diligence
• Invest in employee training
• Exhibit high standards of good corporate governance

Externally, the government has a crucial role to play by:

• Enacting punitive legislation, such as the Anti-Money Laundering Bill, that provides for the seizure of illicit assets
• Creating specialized financial investigative sections of police
• Reviving its project of establishing common infrastructure like national identification cards to facilitate customer identification

Conclusion

In conclusion, the governor emphasized the need for a twofold approach to improve risk management in Uganda’s banking sector, involving both internal and external measures. By working together, financial institutions and regulatory authorities can mitigate risks and maintain a strong and vibrant financial sector.