Overview of Ugandan Housing Finance
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Public Disclosure Authorized Making Finance Work for Uganda December 2009 Public Disclosure Authorized Public Disclosure Authorized The World Bank Financial and Private Sector Development Africa Region Public Disclosure Authorized Acknowledgments This report was produced by a team led by Michael Fuchs and Ravi Ruparel of the Financial and Private Sector Development Unit of the Africa Region of the World Bank. Team members included Andrew Lovegrove, Robert Cull, Faith Stewart, Carlo Corazza, Csaba Feher, Simon Walley, Kameel Virjee, Rajesh Advani, Moses Kibirige, Rekha Reddy, and Edward Al-Hussainy. The team received significant support from the Bank of Uganda‘s Banking Supervision and Research Departments. The team wishes to express its sincere appreciation to the Ugandan authorities and private sector officials for their excellent cooperation. The team‘s analysis was enriched by discussions with officials and authorities from the Bank of Uganda, the Ministry of Finance Planning and Economic Development, the Uganda Stock Exchange, the Capital Markets Authority, the Uganda Bankers Association, commercial banks, the Privatization and Utility Sector Reform Project, the National Water and Sewerage Corporation, the Uganda Electricity Transmission Company, Limited, and other public and private sector institutions. Table of Contents Executive Summary ........................................................................................................... i Summary of Key Recommendations .............................................................................. vi 1. Introduction ................................................................................................................... 1 Part 1: Improving Access to Financial Services 2. Expanding Access through the Banking System ........................................................ 5 3:.Developing Rural and Agricultural Finance ............................................................ 25 4. Improving Payments and Remittances Systems ...................................................... 39 Part 2: Improving the Supply of Term Finance 5. Reforming the Uganda Pension System .................................................................... 55 6. Developing the Housing Finance Market ................................................................. 66 7. Increasing the Private Financing of Infrastructure ................................................. 79 Annexes Annex A: References....................................................................................................... 90 AnnexB: Banking Sector Efficiency .............................................................................. 92 Annex C: Overview of Water Sector Infrastructure ................................................. 112 Annex D: Overview of Electricity Sector Infrastructure .......................................... 123 Annex E: Overview of Roads Sector Infrastructure ................................................. 137 Annex F: Overview of Airports Sector Infrastructure .............................................. 140 Abbreviations and Acronyms AML/CFT Anti-Money Laundering/Combating the Financing of Terrorism BOU Bank of Uganda BOURD Bank of Uganda Research Department CEM Country Economic Memorandum CMA Capital Markets Authority CPSS Committee on Payment and Settlement Systems CRB Credit Reference Bureau DvP Delivery versus Payment EADB East Africa Development Bank EFT Electronic Funds Transfer ESW Economic & Sector Work FIA Financial Institutions Act FIRST Financial Sector Reform and Strengthening Initiative FSAP Financial Sector Assessment Program GoU Government of Uganda IFC International Finance Corporation IFRS International Financial Reporting Standards MDI Microfinance Deposit Taking Institution MFI Microfinance Institution MoFPED Ministry of Finance, Planning and Economic Development MSME Micro, Small, and Medium-Size Enterprises MTN Medium-Term Note MTO Money Transfer Operator NDP National Development Plan NBFI Nonbank Financial Institutions POS Point of Sale PSCPII Private Sector Competitiveness Project II RSDP Road Sector Development Program RSP Remittance Service Provider RTGS Real Time Gross Settlement SACCO Savings and Credit Cooperatives UBA Uganda Bankers Association UCSCU Uganda Credit and Savings Cooperatives Union UGS Uganda Shillings USD US Dollars USE Uganda Stock Exchange Executive Summary Background i. The Ugandan financial system stands at a crossroad. It performs a number of crucial tasks, such as banking for medium to large corporations, and effectively providing payments and savings services to sizeable segments of the population. However, much remains to be done to increase the depth and breadth of the financial sector in order to contribute to both higher economic growth and increased poverty reduction. Countries with higher levels of financial development experience better resource allocation, higher GDP per capita growth, and faster rates of poverty reduction. Thus, achieving a sustainable increase in financial deepening remains an important goal for Uganda‘s development agenda. ii. The majority of the Ugandan population lack financial services. Despite considerable progress in the expansion of Uganda‘s financial services, 62 percent of Ugandans (about 18.1 million people) are unserved by any kind of financial institution, formal or informal. Uganda suffers from a low savings rate, low levels of lending, high costs, and high margins. While liquidity within the system is considerable, banks prefer to invest in treasury securities rather than servicing a broader segment of the enterprise sector. iii. The local market for term finance remains underdeveloped. While the financial system is able to provide bank financing for segments of the enterprise sector, financing for maturities longer than about seven years is largely unavailable. This is a major constraint to the financing of much-needed infrastructure investment and severely curtails the development of finance for the housing market. The dearth of investment in infrastructure has repeatedly been identified as a major constraint to economic development. Objectives iv. The objective of this report is to contribute to the continuing policy dialogue on financial sector development. It is intended that the analysis and recommendations from this report will contribute towards the preparation and implementation of the National Development Plan (NDP) and the implementation of the Financial Markets Development Plan. v. The Making Finance Work for Uganda report was produced as a result of the studies undertaken in Uganda during 2008 and 2009. The specific topics for the studies were identified in consultation with the Ugandan authorities as areas of particular relevance in following up on the FSAP Update (2005) and the Country Economic Memorandum (CEM, 2007). The report is part of a broader working paper i series that complements the broader review of the financial policy agenda provided in Making Finance Work for Africa (Honohan and Beck 2007). vi. This report has two parts: “Improving Access to Financial Services” and “Improving the Supply of Term Finance.” Thus it continues the approach of Making Finance Work for Africa which took a panoramic view of Africa‘s financial systems, both at the large scale (―finance for growth‖) and the small scale (―finance for all‖). The first part of this report focuses on three ways of improving access: expanding access though the banking system, developing rural and agricultural finance, and improving payments and remittances systems. The second part looks at three ways of improving the supply of term finance: reforming the pension system, developing the housing finance market, and increasing the private financing of infrastructure Part 1: Improving Access to Financial Services a. Expanding Access through the Banking System vii. Uganda’s banking sector is sound, but inefficient. Banks are well capitalized and the nonperforming loans ratio is low. Deposit levels are growing but still low as well. Despite growth in asset levels, this remains a low intermediation banking system. viii. There are a number of constraints to expansion of lending. These constraints can be grouped into two main categories: (i) legal and regulatory constraints, and (ii) information and capacity constraints. Some of the key constraints include: insufficient support for creditor rights, excessive provisioning requirements, and difficulties in obtaining land title information. ix. The report suggests both policy reforms and institutional reforms. These include reviewing unnecessarily restrictive bank regulations and supervisory practices, introducing a small-claims procedure system for resolution of commercial disputes, expanding the scope of the credit reference bureau to include collection of data on nonbank payments, completing computerization of the land and company registries, and strengthening the court system by installing computerized case management. b. Developing Rural and Agricultural Finance x. Access to finance in rural areas is limited. According to a 2006 Finscope survey, 62 percent of Uganda‘s population has no access whatsoever to financial service. The divide between urban and rural areas is significant, with 52 percent of the urban population and 65 percent of the rural population unserved. The government is implementing a Rural Financial Services Strategy that involves having a strong Savings and Credit Cooperative‘s (SACCOs) in every sub county. However much remains to