Financial Institutions Risk Management Framework in Uganda Under Threat

Kampala, Uganda - In a warning to financial institutions in Uganda, Governor of the Bank of Uganda, Prof Emmanuel Tumusiime-Mutebile, has expressed concerns over the country’s risk management framework, citing the increasing incidence of frauds and inadequate corporate governance practices.

Traditional Risk Management Approaches No Longer Suffice

Speaking at the Banking Industry Stakeholders’ Roundtable Forum in Kampala last week, Prof. Mutebile emphasized that while rapid innovations in the banking sector have presented major opportunities for financial institutions, they also entail complex and variable risks that challenge traditional approaches to risk management.

The Need for Improved Financial Risk Management Capabilities

“What needs to be done is for banks to improve their financial risk management capabilities in order to survive,” Prof. Mutebile said. “The situation is exacerbated by technological advancement and deregulation which have come with new arrays of banking risks.”

Key Challenges Facing Financial Institutions

Prof. Mutebile highlighted several key challenges facing financial institutions, including:

• Fraud: A derivative risk that can occur due to gaps in internal controls or compromised monitoring mechanisms.
• Inadequate Corporate Governance Practices: The need for good corporate governance and the role of the board of directors in setting the tone at the top.
• Internal Weaknesses: The need for enhanced risk profiling of customers and investment in employee training.

Bank of Uganda’s Response

To mitigate these risks, the Bank of Uganda has:

• Issued Revised Risk Management Guidelines: Emphasizing the importance of good corporate governance and the role of the board of directors.
• Increased Oversight Surveillance Capacity: Through new methodologies of risk-based supervision.
• Introduced the Credit Reference Bureau (CRB): Urging all Supervised Financial Institutions (SFIs) to ensure that their borrowers register with the database.

Call for Action

Prof. Mutebile also called on banks to rethink their strategy of elevating the level of scrutiny on employees, highlighting the need for:

• Punitive Legislation: Enactment of laws like the Anti-Money Laundering Bill that provides for the seizure of illicit assets.
• Specialized Financial Investigative Sections of Police: To combat fraud.
• National Identification Card: Reviving the project to facilitate identification of customers.

Conclusion

The Governor’s warning serves as a reminder of the importance of good risk management practices in Uganda’s financial sector. As the banking industry continues to evolve, it is crucial that financial institutions prioritize risk management and corporate governance to ensure sustainability and stability.