BANK OF UGANDA

FINANCIAL STABILITY REPORT

ISSUE 14

JUNE
2022
 Purpose of the Financial Stability Report

The Financial Stability Report (FSR) outlines our assessment of the state of and main systemic risks to
financial stability. The Report, which is one of the key publications of the Bank of Uganda, is intended
to enhance awareness and understanding of financial system developments and vulnerabilities among
policymakers, financial market participants and the public.

It is published pursuant to the Bank of Uganda mandate, which is to promote price stability and a sound
financial system in support of socio-economic transformation. Financial stability means having a stable
financial system that is resilient to severe but plausible shocks and in which financial institutions,
markets and infrastructure carry out their normal function of intermediating funds between savers and
investors and facilitating payments. By extension, financial instability is a systemic disruption to the
intermediation and payments processes, which has damaging consequences for the real economy.

The Report provides our assessment of the condition, resilience and vulnerability of the financial
system. It assesses the impact of global and domestic macro developments on the financial health of
households and businesses and the effect on the ongoing performance of financial institutions. The
early detection of risks to the financial system is necessary to give policy makers sufficient lead-time to
take pre-emptive action to avert a systemic crisis.

The Report also highlights the link between risk assessment and the policy measures deployed to
mitigate key ongoing and emerging risks. These include strategic initiatives, actions taken to strengthen
the regulatory framework, the deployment of the Bank’s macroprudential policy tools to address the
build-up of systemic risks, and collaboration with other financial sector regulatory agencies to enhance
financial system resilience and development.

The Financial Stability Report is published at:

https://bou.or.ug/bouwebsite/FinancialStability/stabilityreport.html

This Report uses data available up to September 30, 2022.

Copyright © Bank of Uganda 2022

Address: 37–45 Kampala Road Comments and enquiries relating to this

Postal: P.O. Box 7120, Kampala Financial Stability Report may be directed to:

Tel: +256 414 258 441-6 Director, Financial Stability Department

Email: info@bou.or.ug Bank of Uganda
Web: www.bou.or.ug
ISSN print: 2079-6293
ISSN web: 2079-6307

2 FINANCIAL STABILITY REPORT – JUNE 2022

CONTENTS

PURPOSE OF THE FINANCIAL STABILITY REPORT 02

LIST OF FIGURES AND TABLES 04

GLOSSARY 06

FOREWORD AND ASSESSMENT OF FINANCIAL STABILITY 08

FINANCIAL STABILITY REPORT 2022 HIGHLIGHTS 10

1. THE MACRO-FINANCIAL ENVIRONMENT 12

2. PERFORMANCE OF THE BANKING SECTOR 21

3. PERFORMANCE OF FINANCIAL INFRASTRUCTURES AND OTHER FINANCIAL

37
CORPORATIONS

4. REGULATORY AND SUPERVISORY DEVELOPMENTS 46

5. OUTLOOK OF SYSTEMIC RISKS TO THE BANKING SECTOR 55

6. SPECIAL TOPIC: EFFECTS OF AN OPERATIONAL DISRUPTION ON THE

59
PAYMENTS SYSTEM

7. APPENDICES 68

FINANCIAL STABILITY REPORT – JUNE 2022 3

 List of Figures and Tables

Figure 1: Global economic growth (Percent) ........................................................................................ 13

Figure 2: Policy rates for select countries (Percent) ............................................................................. 13
Figure 3: EAC Partner States’ real GDP growth (Percent) ................................................................... 14
Figure 4: Annual changes in EAC region currencies against the USD (Percent) ................................. 14
Figure 5: EAC Partner States’ annual inflation rates (Percent) ............................................................ 14
Figure 6: EAC central bank policy rates (Percent) ................................................................................ 14
Figure 7: Annual GDP for Uganda (UGX trillion) .................................................................................. 18
Figure 8: Annual changes in PPI & CIEA (Percent) .............................................................................. 18
Figure 9: Movements in the UGX/USD exchange rate (UGX) .............................................................. 19
Figure 10: Trend and quarterly changes in offshore investor funds (UGX billion) ................................ 19
Figure 11: Yield curve for Uganda Government securities (Percent) ................................................... 19
Figure 12: Annual change in the Residential Property Price Index for GKMA (Percent)...................... 20
Figure 13: Total banking sector assets (UGX trillion) ........................................................................... 22
Figure 14: Herfindahl-Hirschman index of commercial banks’ assets .................................................. 22
Figure 15: Breakdown of commercial banks’ assets (UGX billion) ....................................................... 22
Figure 16: Commercial banks’ foreign currency assets and liabilities (Percent) .................................. 22
Figure 17: Annual credit growth (Percent) ............................................................................................ 23
Figure 18: Changes in commercial banks’ loans (UGX billion)............................................................. 23
Figure 19: SFIs’ NPL ratios (Percent) ................................................................................................... 26
Figure 20: Classification of commercial banks’ NPLs (UGX billion) ..................................................... 26
Figure 21: Performance of CRM loans (UGX billion) ............................................................................ 27
Figure 22: Annual changes in commercial banks’ deposits (Percent) .................................................. 29
Figure 23: Wholesale funding activity (UGX billion) .............................................................................. 30
Figure 24: Spreads between interbank rates and the CBR (Percent) .................................................. 30
Figure 25: SFIs’ liquidity ratios (Percent) .............................................................................................. 31
Figure 26: Annual changes in LCR components (Percent) .................................................................. 31
Figure 27: Decomposition of commercial banks’ earnings (UGX million) ............................................. 34
Figure 28: Average return assets by bank size (Percent) ..................................................................... 34
Figure 29: Aggregate core capital-to-RWA ratio (Percent) ................................................................... 35
Figure 30: Components of banks’ core capital (UGX billion) ................................................................ 35
Figure 31: Volume and value of transactions through UNISS .............................................................. 38
Figure 32: Participation of clearing and settlement systems by value of transactions (Percent) ......... 39
Figure 33: Participation of clearing and settlement systems by volume of transactions (Percent) ...... 39
Figure 34: Volume and value of cheque transactions ........................................................................... 39

4 FINANCIAL STABILITY REPORT – JUNE 2022

Figure 35: Volume and value of EFT transactions ................................................................................ 39
Figure 36: Volume and value of mobile money transactions ................................................................ 41
Figure 37: Calibration of the CCyB add-on ........................................................................................... 53
Figure 38: BOU systemic risk dashboard ............................................................................................. 55
Figure 39: Systemic risk cobweb .......................................................................................................... 56
Figure 40: Changes in composite systemic risk indicator (Percent) ..................................................... 56
Figure 41: Annualized banking sector resilience index with annual changes in sub-indices ............... 56
Figure 42: Annual changes in banking sector resilience index (Percent) ............................................. 56
Figure 43: Post-shock NPL ratio (Percent) ........................................................................................... 57
Figure 44: Post-shock core capital adequacy ratio (Percent) ............................................................... 57
Figure 46: Assumptions of simulated UNISS operational disruption .................................................... 62
Figure 47: UNISS payments network for June 2022 ............................................................................ 63
Figure 48: Topology of the UNISS network for June 2022 ................................................................... 63
Figure 49: Liquidity usage for June 2022 .............................................................................................. 64
Figure 50: Settled and unsettled values following the failure of bank 22 .............................................. 64

Table 1: EAC public debt to GDP (Percent).......................................................................................... 15

Table 2: Selected aggregate banking sector indicators for the EAC region as of end-June 2022
(Percent)................................................................................................................................................ 16
Table 3: Changes in commercial bank loans by sector (Percent) ........................................................ 24
Table 4: Changes in commercial banks’ NPLs by sector (Percent)...................................................... 26
Table 5: Annual banking sector profitability indicators (Percent) .......................................................... 33
Table 6: Summary of activity in Uganda’s electronic payment systems ............................................... 40
Table 7: SACCOs’ assets and funding structure (UGX billion) ............................................................. 42
Table 8: Selected financial soundness indicators for SACCOs (Percent) ............................................ 43
Table 9: Asset allocation by the retirement benefits sector (UGX billion) ............................................. 44
Table 10: Proposed increase in paid-up capital requirements .............................................................. 53

Appendix 1: Summary status of BOU macroprudential policy measures for financial stability ............ 68
Appendix 2: Selected financial soundness indicators for commercial banks (Percent) ....................... 69
Appendix 3: Commercial banks’ balance sheet (UGX billion) .............................................................. 70
Appendix 4: Commercial banks’ quarterly income statement, year-on-year figures (UGX billion) ....... 71
Appendix 5: Selected financial soundness indicators for credit Institutions (Percent).......................... 72
Appendix 6: Selected financial soundness indicators for microfinance deposit-taking institutions
(Percent)................................................................................................................................................ 73
Appendix 7: Selected financial soundness indicators for East African Community Partner States
(Percent)................................................................................................................................................ 74

FINANCIAL STABILITY REPORT – JUNE 2022 5

 Glossary

BCBS Basel Committee on Banking Supervision

BIF Burundi franc
BIS Bank for International Settlements
BOU Bank of Uganda
BUST Bottom-up stress testing
CAR Capital adequacy ratio
CBR Central bank rate
CCB Capital conservation buffer
CCyB Countercyclical buffer
CI Credit institution
CLAP Covid-19 Liquidity Assistance Program
COVID-19 Severe Acute Respiratory Syndrome Coronavirus 2 (SARS-CoV-2)
DSIB Domestic Systemically Important Bank
EAC East African Community
EFT Electronic funds transfer
ELA Emergency Liquidity Assistance
EMDEs Emerging markets and developing economies
EUR European Union euro
FIA Financial Institutions Act
FSR Financial Stability Report
GBP Great British pound sterling
GDP Gross domestic product
HQLA High-quality liquid assets
ICAAP Internal Capital Adequacy Assessment Process
IFRS International Financial Reporting Standards
IMF International Monetary Fund
IRA Insurance Regulatory Authority of Uganda
KES Kenyan shilling
LCR Liquidity coverage ratio
LTV Loan-to-value
MDI Microfinance deposit-taking institution
MNO Mobile network operator
MoFPED Ministry of Finance Planning and Economic Development
NPAT Net profit after tax

6 FINANCIAL STABILITY REPORT – JUNE 2022

NPL Non-performing loan
RHS Right-hand side
ROA Return on Assets
ROE Return on Equity
RWA Risk-weighted asset
RWF Rwanda Franc
SACCO Savings and credit cooperative organisation
SIPS Systemically Important Payment Systems
SFI Supervised Financial Institution
SLF Standing Lending Facility
TZS Tanzanian shilling
UGX Uganda shilling
UMRA Uganda Microfinance Regulatory Authority
UNISS Uganda National Interbank Settlement System
URBRA Uganda Retirement Benefits Regulatory Authority
USD/US$ US dollar
USE Uganda Securities Exchange
WEO World Economic Outlook

FINANCIAL STABILITY REPORT – JUNE 2022 7

 Foreword and Assessment of Financial Stability

This Report assesses the main risks to financial stability and analyses the performance and resilience
of Uganda’s banking system, financial market infrastructure, and other financial corporations.

Economic growth remains strong and preliminary estimates indicate that Uganda’s economy grew by
4.7 percent in the financial year (FY) 2021/22, which was higher than the growth rate of 3.5 percent
realized in FY2020/21, as recovery from the pandemic remains on course. However, there are
increasing downside risks to the global and domestic economic outlook. Emerging inflationary
pressures arising from supply-side effects and geopolitical tensions are leading central banks to tighten
monetary policy more aggressively than anticipated. Moreover, financial markets have recorded
increased uncertainty, with higher exchange rate volatility partly driven by capital outflows from
emerging markets, including Uganda. These factors are yet to play out fully, and the extent to which
economic activity will slow down in response to policy tightening remains uncertain. As a result, threats
to the financial system's stability have increased.

The banking system, on aggregate, remains resilient to severe but plausible emerging shocks, with
strong capital and liquidity buffers. Commercial banks’ aggregate core capital–to–risk-weighted assets
ratio was 21.4 percent as of end-June 2022, well above the prudential minimum of 12.5 percent,
including the capital conservation buffer of 2.5 percent that took effect in December 2021. However,
going forward, a few financial institutions that emerged from the pandemic with marginal capital and
liquidity buffers and some households and businesses are likely to come under stress from the rising
interest rate environment. In addition, the increasing adoption of digital channels for financial service
delivery continues to highlight the threats from cyber and technology risks. Financial institutions are,
therefore, encouraged to take a long-term perspective in the face of ongoing economic uncertainties by
making prudent lending decisions while ensuring credit access to the economy, enhancing operational
risk management, building capital and liquidity buffers, and investing in systems and governance to
enhance their resilience.

Bank of Uganda continued to enhance the prudential regulatory and policy frameworks to support the
financial system's stability, guided by our assessment of the risks and vulnerabilities. The Basel III
capital buffers became prudential requirements from December 31, 2021; implementation of the Basel
II supervision framework with the expansion of risk coverage from credit risk to market and operational
risks commenced from January 1, 2022; and the Emergency Liquidity Assistance (ELA) Facility was
implemented effective June 1, 2022. At the same time, the Bank of Uganda announced the winding
down of pandemic-era measures, including the extended credit relief measures for the education and
hospitality sectors and the restriction on the payment of dividends, which achieved their objectives.

8 FINANCIAL STABILITY REPORT – JUNE 2022

Overall, near-term risks to financial stability, emanating from the slowdown in global and domestic
economic growth and persistent inflationary pressures, remain relatively contained. Bank of Uganda
stands ready to implement remedial policy measures to address the emerging and evolving risks to the
soundness of the financial system.

Michael Atingi-Ego
Deputy Governor

FINANCIAL STABILITY REPORT – JUNE 2022 9

 Financial Stability Report 2022 Highlights and Summary

Overall, financial stability risks have increased.

Uganda’s annual economic growth improved to 4.7 percent in FY2021/22
from 3.5 percent in FY2020/21, continuing the recovery from the pandemic.
However, emerging downside risks to the global and domestic economic
outlook, including persisting inflationary pressures, are leading central banks
to aggressively tighten monetary policy. At the same time, portfolio outflows
have picked up and increased exchange rate volatility.

Despite these challenges, the financial system is well placed to

support the economy in the face of rising interest rates.
Banking institutions’ capital and liquidity buffers remained strong throughout
the year ended June 2022 to enhance resilience, boosted by improved
profitability and BOU macroprudential policy measures. Systemically
important payment systems have also remained stable and registered a
significant increase in activity.

While the banking system as a whole remains resilient, a few

banks could come under stress from the rising interest rates.
The ratio of non-performing loans to total loans rose marginally from 5.1
percent to 5.4 percent, and credit growth remains soft. Domestic funding
conditions tightened starting in December 2021 in response to aggressive
disinflationary monetary policy measures. This necessary policy response is
likely to elevate domestic wholesale funding interest rates and debt servicing
costs for households and businesses.

To boost the resilience of the financial system to emerging risks

and vulnerabilities, BOU implemented several regulatory
reforms.
BOU announced plans to increase the minimum paid-up capital requirement
for banking institutions, and the Basel III capital buffers came into effect on
December 31, 2021. The ELA facility was implemented effective June 1,
2022 for banks under liquidity stress. BOU is also enhancing risk
assessment through the bottom up stress testing exercise. Pandemic era
measures, including the targeted credit relief and restriction on dividend
payments, achieved their objectives and were wound down.

10 FINANCIAL STABILITY REPORT – JUNE 2022

Collaboration with other financial sector regulatory agencies.
BOU contines to collaborate with other domestic financial sector regulators to
monitor the stability of the financial system, share information and support
sector's development. The Financial Sector Crisis Management Plan is in
advance stages of completion, and a crisis simulation exercise will be held
later.

The outlook for the next year is that systemic risks will reduce
gradually as economic activity picks up and macro risks ease.
Stress tests by BOU indiate that the banking system remains resilient on
aggregate in the near term under several plausible scenarios. However, a few
banks with marginal capital may face challenges, especially once the planned
increase of minimum capital requirements kicks in.
BOU stands ready to implement additional prudential and regulatory
measures to address emerging risks and foster financial system stability.

FINANCIAL STABILITY REPORT – JUNE 2022 11

 1. The Macro-Financial Environment

1.1. Global Macroeconomic Developments

Strong and persistent inflationary pressures have necessitated continued monetary policy
tightening, dimming global economic growth prospects. In July 2022, the International Monetary
Fund (IMF) forecast global growth to slow to 3.2 percent in 2022 from 6.0 percent in 2021.This
represented a downgrade from 3.6 percent growth projected in April 2022, reflecting increasing
downside risks. The ongoing disinflationary monetary policy stance could, in a worst-case scenario,
further constrain global economic growth to 2.7 percent in 2023.1

Whilst most jurisdictions have now removed COVID-19 restrictions, and global supply chain issues that
built up at the height of the pandemic have started to ease, strong global inflationary pressures have
emerged. Higher inflation was partly sparked by Russia’s invasion of Ukraine in February 2022, which
sparked a large increase in global commodity prices.2 The supply shock caused by the aforementioned
invasion, combined with the lagged effects of the fiscal and monetary policy stimulus in developed
economies, led to a broad increase in inflationary pressures across most economies. The annual
headline inflation rate in the United States reached 9.1 percent in June 2022, while in the United
Kingdom, it rose 10.1 percent in July 2022. Inflation is also expected to peak at 9.5 percent in emerging

1
International Monetary Fund, World Economic Outlook Update, October 2022.
2
Bloomberg.com, Markets, July 2022

12 FINANCIAL STABILITY REPORT – JUNE 2022

market and developing economies (EMDEs) by end-2022. In response, after the low interest rate
pandemic environment, central banks have tightened monetary policy faster and more aggressively
than in previous tightening cycles to restore inflation to targets. These actions have also resulted in
tighter global financial conditions, outflow of offshore investors from EMDEs, investor uncertainty and
higher borrowing costs. This is exerting depreciation pressure on these countries’ currencies against
the US dollar, with adverse effects on their foreign currency international reserves and compounding
risks in their domestic financial markets.

These factors present headwinds to global and domestic economic growth. However, the impact will
depend on the speed with which inflation can be controlled. Going forward, these developments pose
adverse implications for the financial performance of households and enterprises and, by extension,
risks to the performance of the financial system.

Figure 1: Global economic growth (Percent) Figure 2: Policy rates for select countries
(Percent)
10
30
5
20

0 10
2017 2018 2019 2020 2021 2022 2023
(P) (P) 0
-5
Jun 20 Nov 20 Apr 21 Sep 21 Feb 22 Jul 22
China India
-10 Russia United Kingdom
World
Advanced economies United States Uganda
EMDEs
Source: IMF
Source: IMF

1.2. Macroeconomic Developments in the East African Region

█ Overview of regional macroeconomic conditions

The East African Community (EAC) – comprised of Burundi, the Democratic Republic of Congo,
Kenya, Rwanda, South Sudan, Tanzania, and Uganda – registered strong economic recovery
from the COVID-19 pandemic, with the average GDP increasing by 6.4 percent in 2021from a decline
of 1.1 percent in 2020. Growth was partly driven by expansionary monetary and fiscal policy measures
that were pursued by most EAC Partner States during recovery from the pandemic. However, the
adverse global shocks and macroeconomic conditions that started in early 2022 spilt into the EAC,
affecting macroeconomic conditions, including elevated inflationary pressures compounded by adverse
weather conditions in the region.3 These challenging economic and macro-financial conditions threaten

3 The Democratic Republic of Congo (DRC), which joined the East African Community in March 2022, has not been included in
this analysis.

FINANCIAL STABILITY REPORT – JUNE 2022 13

 to disrupt the region’s growth momentum, with GDP growth projected to reduce to 5.0 percent in 2022.4

Figure 3: EAC Partner States’ real GDP growth Figure 4: Annual changes in EAC region currencies
(Percent) against the USD (Percent)

12 12
10
8
8
6 4
4
0
2
0 -4
-2 2018 2019 2020 2021 2022 (P)
-8
-4 Jan-18 Oct-18 Jul-19 Apr-20 Jan-21 Oct-21 Jul-22
-6 USD/UGX USD/KES USD/RWF
Burundi Kenya Rwanda
Tanzania Uganda USD/BIF USD/TZX
Source: BOU staff computations
Source: IMF

Figure 5: EAC Partner States’ annual inflation rates Figure 6: EAC central bank policy rates (Percent)
(Percent) 12

25 10
Burundi Kenya
20 8
Rwanda Tanzania
Uganda 6
15
4
10
2
5
0
0 2018 2019 2020 2021 Aug 22
Jul-18 Mar-19 Nov-19 Jul-20 Mar-21 Nov-21 Jul-22
-5 Burundi Kenya Rwanda
Tanzania Uganda
-10
Source: IMF Source: EAC Partner States

While inflows of foreign capital had picked up after the pandemic, the global economic uncertainties
and heightened inflationary pressures have propelled the outflow of foreign capital from the EAC,
leading to tighter funding conditions in the domestic financial markets and heightened depreciation
pressure on the domestic currencies, especially starting in the quarter ended June 2022 (Figure 4).
Between June 2021 and June 2022, the EAC countries’ currencies depreciated against the US dollar,
in the range of 0.5 percent (TZS) to 8.8 percent (KES), which was higher compared to the prior year to
June 2021 changes in the range of -5.3 percent (UGX) to 5.3 percent (for RWF).

Limited trade relationships and financial linkages between the EAC countries and Russia and Ukraine
largely shielded the EAC from the direct impact of the Russia-Ukraine conflict. However, EAC countries

4 International Monetary Fund, World Economic Outlook Data, July 2022

14 FINANCIAL STABILITY REPORT – JUNE 2022

were affected by the spillover effects from the conflict, mostly manifesting in heightened food and fuel
inflation. The annual headline inflation rose to 20.4 percent and 19.6 percent in Rwanda and Burundi,
respectively, in August 2022, while Tanzania still had the lowest annual inflation, only reaching 4.6
percent in August 2022. EAC central banks have gradually tightened monetary policy to curb inflation.
Uganda raised the Central Bank Rate (CBR) from 6.5 percent in June 2021 to 7.5 percent in June 2022
and 9.0 percent in August 2022.

Public debt in the EAC region increased significantly during the period under review, partly due to
increased public spending pressure to propel economic recovery from the pandemic, while revenues
remained subdued following the pandemic shock. The higher public debt levels raise concerns about
debt sustainability and its effect on financial sector performance.

Going forward, tighter financing conditions in the EAC region will likely raise borrowing costs, affect
private and public sector investment, and potentially risk financial distress for households, enterprises,
and governments. The fiscal space, already constrained by high levels of public debt, could narrow
further if spending pressures to curb the impact of rising fuel and food prices continue to build up.

Table 1: EAC public debt to GDP (Percent)

Jun-20 Jun-21 Jun-22 Sep-22

Kenya 32.8 33.1 66.2 66.2
Tanzania 40.8 45.4 55.1 55.7

Uganda 35.6 47.0 49.1 48.1

Source: EAC Partner States’ Central Banks

█ Stability and performance of the banking sector in the region

The EAC Partner States’ banking systems continued to grow in the year to June 2022, maintaining
strong capital and liquidity buffers that have provided a cushion against macro-financial shocks and
supported continued intermediation for economic growth.

The EAC aggregate banking institutions’ total assets grew by 8.9 percent in the year to June 2022 to
reach USD 90.5 billion from USD 83.1 billion as of June 2021. Credit conditions, although hampered by
slowed economic activity, remained strong in the EAC in the year to June 2022. Uganda, Kenya,
Tanzania, Burundi, and Rwanda registered private sector credit growth rates of 12.2 percent, 12.3
percent, 50.5 percent, and 16.1 percent, respectively, in the year to June 2022. The region’s banking
sector continued to manage the effects of the external shocks on credit quality prudently, resulting in
marginal changes in non-performing loans (NPLs) during the review period. The ratio of NPLs to loans
(NPL ratio) reduced for Tanzania, Burundi, and Rwanda from 9.3 percent, 4.8 percent, and 5.7 percent
to 7.8 percent, 2.5 percent, and 4.3 percent, respectively. Kenya and Uganda registered marginal
increases in the NPL ratio from 14.0 percent and 4.8 percent to 14.7 percent to 5.3 percent, respectively.
The rate of credit defaults may have been significantly higher but was curbed by the decisive measures

FINANCIAL STABILITY REPORT – JUNE 2022 15

 implemented by Partner States central banks to mitigate the impact of the pandemic through the
extension of credit relief measures.

On aggregate, the profitability of the banking sector in the region moderated during the year to June
2022, owing primarily to losses on credit facilities that were restructured during the pandemic period.
The average return on assets (ROA) improved for Kenya and Tanzania from 2.7 percent and 2.4
percent to 3.1 percent and 4.1 percent, respectively, between June 2021 and June 2022. The ROA
remained unchanged at 2.7 percent for Uganda, while Burundi and Rwanda registered reductions from
1.7 percent and 3.6 percent to 1.5 percent and 2.8 percent, respectively.

Financial institutions in the region remained resilient, with capital and liquidity positions largely above
the required regulatory minimum positions. Capital adequacy in the region’s banking sector was
satisfactory during the period under review, as the aggregate core capital-to-risk weighted assets ratios
(core CAR) were well above the regional recommended minimum of 10 percent at 24.0 percent, 16.1
percent, 22.1 percent, 19.1 percent, and 21.4 percent for Burundi, Kenya, Rwanda, Tanzania, and
Uganda, respectively. Following a period of relative stability in 2021 and into the first quarter of 2022,
liquidity conditions in the region weakened due to spill-over effects from the global economy cited in the
previous section. All Partner States except Rwanda reported reductions in the ratio of liquid assets to
deposits (liquidity ratio), a key measure of liquidity risk whose regional recommended minimum level is
20 percent. The liquidity ratios for Burundi, Kenya, Tanzania, and Uganda reduced from 14.0 percent,
54.8 percent, 38.3 percent, and 51.5 percent to 11.6 percent, 52.7 percent, 24.4 percent, and 46.5
percent, respectively. In comparison, Rwanda’s ratio improved from 38.1 percent to 40.7 percent.

Table 2: Selected aggregate banking sector indicators for the EAC region as of end-June 2022 (Percent)

Burundi Kenya Rwanda Tanzania Uganda

Annual private sector credit growth 50.5 12.3 16.1 19.4 12.2
Core capital to risk-weighted assets 24.0 16.1 22.1 19.1 21.4
NPLs to loans 2.5 14.7 4.3 7.8 5.3
Average return on assets 1.5 3.1 2.8 4.1 2.7
Liquid assets to total deposits 11.6 52.7 40.7 24.4 46.5
Source: EAC Partner States central banks

█ BOX 1: Status of COVID-19 policy measures for the EAC banking sector

During the year to June 2022, EAC Partner States progressively removed fiscal, monetary,
and macroprudential measures that had been deployed to mitigate the effects of the
pandemic. As of the end of June 2022, the status of the said measures was as follows.

a) Credit risk mitigation: The broad credit relief programs implemented in Rwanda, Tanzania,
Uganda, and Kenya expired in 2021, although Uganda extended targeted measures for tourism
and education until September 30, 2022, as these sectors emerged as the most affected by the

16 FINANCIAL STABILITY REPORT – JUNE 2022

 pandemic. In Tanzania, the Bank of Tanzania reduced the risk weights on specific loan types to
boost credit to the private sector.

b) Capital preservation: While Rwanda’s restrictions on dividend payout had expired by end-June
2022, Kenya and Uganda maintained similar directives but required banks to provide satisfactory
internal capital assessment process (ICAAP) reports depicting resilience to a range of potential
shocks in the prevailing macroeconomic environment before paying the dividends. Burundi
directed banks to retain 65 percent of profits as reserves.

c) Liquidity support: Kenya, Rwanda, and Tanzania central banks reduced the minimum cash
reserve requirement to boost liquidity. In Uganda, the COVID-19 Liquidity Assistance Program
(CLAP) expired on June 1, 2022. In Tanzania, the Bank of Tanzania reduced the discount rate
to lower borrowing costs, limited the interest rate paid to mobile trust accounts, increased daily
transaction limits for customers, and continued to offer reduced haircuts on government
securities and special loans to improve liquidity levels.

d) Fiscal interventions: Rwanda launched the second phase of the Economic Recovery Fund
(ERF), aimed at increasing access to finance to further support economic recovery mostly
through investments. In Uganda, the government launched the Small Business Recovery Fund
in November 2021 to provide credit to small businesses adversely impacted by the COVID-19
pandemic but show potential for recovery if provided with the right financial support.

Overall, these measures have met their intended objectives by enabling banks and borrowers to
absorb the pandemic shock, improving the quality of bank assets, and supporting economic recovery
through continued credit intermediation and other liquidity facilities.

1.3. Domestic Macroeconomic and Financial Conditions

█ Developments in the real economy

Uganda’s economy continued to recover, with the gross domestic product (GDP) estimated to
have increased by 4.7 percent during the year ended June 2022, a significant improvement
compared to 3.5 percent growth in FY2020/21.5 The full reopening of the economy in January 2022
from the pandemic-related restrictions fostered better growth momentum with recovery in domestic
economic activity, with growth largely driven by services and industry sectors, as highlighted in Figure
7.

5 Uganda Bureau of Statistics, Revised Annual GDP 2021/22 Press Release, September 2022.

FINANCIAL STABILITY REPORT – JUNE 2022 17

 Figure 7: Annual GDP for Uganda (UGX trillion) Figure 8: Annual changes in PPI & CIEA (Percent)

100 12 25
PPI
10 CIEA
20
8
50 6 15
4
10
2
0 0 5
2016/17 2017/18 2018/19 2019/20 2020/21 2021/22
Agriculture Industry
Services Taxes 0
GDP growth (%, rhs) Dec-20 Jul-21 Feb-22 Sep-22
Source: Uganda Bureau of Statistics Source: BOU

However, a slowdown in global economic growth and heightened inflationary pressures, with risks
skewed to the downside, threaten the domestic economic outlook. The Composite Index of Economic
Activity (CIEA) grew by 5.1 percent in the year to June 2022 compared to 9.8 percent in the twelve
months to June 2021, while the Producer Price Index (PPI) grew by 22.8 percent in the year to June
2022 from a 9.8 percent growth in June 2021, reflecting the increase in marginal production costs due
to the global supply chain constraints. Partly reflecting these adverse developments, BOU, in August
2022, downgraded its forecast for domestic growth for 2022 to a range of 2.5–3.0 percent, from the
April 2022 forecast of 5.5–6.0 percent6.

Domestic inflation started to rise during the period under review, with annual headline and core inflation
rising from 2.0 percent and 2.7 percent in June 2021 to 6.8 percent and 5.5 percent in July 2022, and
9.0 percent and 7.2 percent in August 2022, respectively. To curb the inflationary pressures, BOU
tightened the monetary policy stance, rapidly increasing the Central Bank Rate (CBR) from 6.5 percent,
which subsisted from June 2021 to May 2022, to 7.5 percent in June 2022 and then to 9.0 percent in
August 2022.

Despite the recent increase in policy rates and worsening economic outlook, there are few indications
of widespread difficulties for household loan behaviour. The NPL ratio for personal and household loans
in the banking sector has continued to decline and was 2.94 percent in June 2022, relative to the
aggregate NPL ratio of 5.4 percent. Similarly, NPL ratios for business sectors have only risen
marginally. However, the slower growth momentum, heightened inflationary pressure and necessary
tightening of monetary policy could increase debt servicing costs and lead to wider defaults and
significant losses for the banking system.

█ Domestic financial markets

Between June 2021 and June 2022, offshore investments in Uganda increased by 15.5 percent from

6 Bank of Uganda, Monetary Policy Statement, August 2022.

18 FINANCIAL STABILITY REPORT – JUNE 2022

UGX 3,265.8 billion to UGX 3,771.8 billion, as the inflow of investors increased after the pandemic.
However, with the uncertainties in global growth and geopolitical tensions in early 2022, Uganda
recorded an outflow of foreign capital. Subsequently, during the quarter that ended September 2022,
the offshores investors' balances – including Government of Uganda (GOU) treasury securities holdings
and deposits with banks – reduced by 21.1 percent to UGX 2,977.4 billion. Their deposits declined 43.6
percent to UGX 668.6 billion, and treasury securities holdings by 10.8 percent to UGX 2,308 billion.
Also, the offshore investors’ activity in the SWAP market reduced, with their net swaps payable in
Uganda shilling decreasing by 61.7 percent from UGX 893.4 billion to UGX 341.7 billion over the quarter
ended September 2022.

These sentiments increased exchange rate volatility and shilling depreciation (Figure 9) and contributed
to higher wholesale funding costs. Notably, over the year ended June 2022, the Uganda shilling
depreciated against the US dollar by 5.6 percent compared to an appreciation of 4.6 percent in the year
to June 2021. It depreciated further by 2.6 percent during the quarter to September 2022. The 7-day
interbank rate increased from 7.15 percent in June 2021 to 8.24 percent in June 2022 and 11.9 percent
in October 2022. The projection is that if interest rates continue to rise or remain elevated in response
to tighter monetary policy, banks will continue to face a challenging funding environment that could
stress their liquid assets.

Figure 9: Movements in the UGX/USD exchange Figure 10: Trend and quarterly changes in offshore
rate (UGX) investor funds (UGX billion)

3900 100 5,000

USD/UGX 1,500 4,000
3800 Volatility (RHS, %) 80
3700 500 3,000
60 2,000
3600 -500
40 1,000
3500
-1,500 0
3400 20 Jun- Jun- Jun- Jun- Jun- Jun-
17 18 19 20 21 22
3300 0 Swaps Treasuries
FX deposits UGX deposits
Total exposure (RHS)

Source: BOU

Figure 11: Yield curve for Uganda Government securities (Percent)

20

15

10

5 Jun-21 Jun-22 Sep-22

0
3M 6M 1Y 5Y 10Y 15Y 20Y
Source: BOU

FINANCIAL STABILITY REPORT – JUNE 2022 19

 █ Developments in the real estate market

The real estate market remains relatively stable, though recovery remains slow from the pandemic
downturn, with indicators showing that vacancy rates in the commercial real estate sector remain high.
Stability in the real estate market is crucial, as most banks’ lending is collateralized with real estate, and
it also constitutes a significant asset holding for other financial institutions and households.

The Residential Property Price Index (RPPI) indicates that property prices in the Greater Kampala
Metropolitan Area decreased by 1.5 percent in the year ended June 2022 in comparison to an 8.1
percent rise in the year ended June 2021. The prudential loan-to-value (LTV) limit of 85 percent on
residential mortgages and land purchase loans by banking institutions set by BOU in 2020 continues to
effectively shield households and ensure that recent borrowers can absorb declines in house prices
without falling into negative equity and absorb rising interest rates. However, the most exposed
borrowers are those who took out loans at high LTVs before the limit was instituted.

Figure 12: Annual change in the Residential Property Price Index for GKMA
(Percent)

15
10
5
0
Jun-15 Mar-17 Dec-18 Sep-20 Jun-22
-5
-10
-15
Source: UBOS

1.4. Conclusion

The global and domestic economic outlook remains uncertain and tilted to the downside due to tight
financial conditions, persisting elevated inflation and geopolitical tensions, which could affect consumer
and investor confidence. Nonetheless, Uganda’s economy remains largely resilient to the current
external shocks, and BOU projects the economy to grow in the range of 5.0–5.3 percent in FY2022/23.
The ability of households and enterprises to absorb the ongoing macro-financial risks will have
implications for financial sector performance and resilience.

20 FINANCIAL STABILITY REPORT – JUNE 2022

2. Performance of the Banking Sector

2.1. Structure of the Banking Sector

As of June 2022, Uganda’s banking sector comprised 25 commercial banks, 4 credit institutions (CIs),
and 4 microfinance deposit-taking institutions (MDIs). Total banking sector assets stood at UGX 45.8
trillion, of which commercial banks accounted for 97.4 percent. The banking sector remains highly
concentrated, though this has reduced in the last two years, as shown by the Herfindahl-Hirschman
index7 (Figure 14). The market share of assets held by the largest five commercial banks – Absa Bank,
Centenary Rural Development Bank, dfcu bank, Stanbic Bank, and Standard Chartered Bank – which
are also designated as domestic systemically important banks (DSIBs) for 2022, reduced from 61.0
percent as of June 2021 to 58.6 percent as at end-June 2022. To mitigate the potential systemic risks
the DSIBs pose, BOU continues implementing higher regulatory capital and supervisory requirements
for them as prescribed in the BOU DSIB identification and regulation framework and the Financial
Institutions (Capital Buffers and Leverage Ratio) Regulations 2020.

7
The Herfindahl-Hirschman index (HHI) is a measure of market concentration and competition among firms in an industry. It is
calculated by squaring the market share of each firm and summing them up. The higher the HHI, the more concentrated and less
competitive the market is.

FINANCIAL STABILITY REPORT – JUNE 2022 21

 Figure 13: Total banking sector assets (UGX trillion) Figure 14: Herfindahl-Hirschman index of
70 30 commercial banks’ assets
MDIs
60 CIs 1,200 15
25
Commercial Banks
50 Aggregate growth (RHS, %) 10
20 1,000
40 5
15
30 800 0
10
20 -5
5 600
10 HHI -10
0 0 Annual change (%, RHS)
400 -15
Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-13 Jun-16 Jun-19 Jun-22
Source: BOU

The growth of the banking sector picked up during the year to June 2022, in line with the economy's
continued recovery from the pandemic effects. However, the momentum was partly affected from early
2022 by global and domestic inflationary pressures and tightening financial conditions. Aggregate
commercial bank assets grew by 12.1 percent over the year from UGX 39.8 trillion in June 2021 to UGX
44.6 trillion as of end-June 2022. Similarly, the aggregate assets for the CIs and MDIs rose by 9.4
percent and 5.7 percent to UGX 445.3 billion and UGX 753.4 billion, respectively.8

The increase in banks’ assets was mainly due to investments in Government securities, which rose by
18.3 percent. This trend occurred with a slowdown in lending activity due to concerns about asset quality
in the challenging economic conditions. In other words, while the banks’ increasing investment in
Government securities boosts their high-quality liquid assets (HQLA), it underscores increasing risk
aversion to private sector lending, affecting economic growth. On the funding side of the balance sheet,
the banking sector relied mostly on retail customer deposits as a stable funding source, constituting
84.2 percent of total liabilities. The commercial banks’ aggregate retail deposits grew by 12.3 percent
from UGX 27.7 trillion in June 2021 to UGX 31.1 trillion in June 2022.

Figure 15: Breakdown of commercial banks’ assets Figure 16: Commercial banks’ foreign currency
(UGX billion) assets and liabilities (Percent)

50 50
40
30 40

20
30
10
0 20
Forex assets to total assets
Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Forex liabilities to total liabilities
Other assets Loans
Loans to fin. institutions Placements w/ fin. institutions 10
Government securities BOU securities Jun-18 Jun-19 Jun-20 Jun-21 Jun-22
Balances w/ BOU Notes & coins

Source: BOU

8 The changes under CIs exclude Post Bank (U) Limited which upgraded to a commercial bank in December 2021.

22 FINANCIAL STABILITY REPORT – JUNE 2022

It should be noted that the banking sector’s balance sheet exposure to foreign exchange rate risk
decreased in the year to June 2022. The ratios of foreign currency-denominated assets to total assets
and foreign currency-denominated liabilities to total liabilities decreased from 27.8 percent and 36.0
percent to 26.4 percent and 33.5 percent during this period, respectively. The reduction in the share of
foreign currency-denominated assets and liabilities reflects the impact of the gradual reversal of funds
held for foreign counterparties and the slowdown in lending by banks.

2.2. Lending Activity and Asset Quality

█ Credit growth

Lending by banks picked up but remained soft and below pre-pandemic levels. The SFIs’ aggregate
credit increased by 9.2 percent from UGX 17.6 trillion to UGX 19.3 trillion over the year ended June
2022, an improvement compared to 7.3 percent growth registered in the prior year to June 2021.
However, it should be noted that part of the growth in lending is attributed to the capitalization of interest
on restructured loans and revaluation effects on foreign currency-denominated loans following the
depreciation of the Uganda shilling during the year ended June 2022. Of the UGX 2.3 trillion increase
in loans, net capitalized interest on restructured loans accounted for UGX 930.1 billion (compared to
UGX 588.9 billion in the prior year to June 2021), mostly on loans restructured under the COVID-19
credit relief measures (CRM) program; and UGX 258.8 billion of the increase related to upward
revaluation of foreign currency loans due to depreciation of the shilling in the year to June 2022.

Figure 17: Annual credit growth (Percent) Figure 18: Changes in commercial banks’ loans
(UGX billion)
30 120
Total SFIs loans
1,200 16
25 CBs
MDIs 80
CIs - RHS 800 12
20
40 400 8
15

10 0 4
0
5 -400 0
Jun-18 Jun-19 Jun-20 Jun-21 Jun-22
-40
0 Net revaluations
Net recapitalised interest
-5 -80 Net extensions
Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Annual growth rate (RHS, %)

Source: BOU

Breaking down credit growth by SFI sub-sectors, commercial banks’ gross loans and advances
increased by 12.2 percent (or UGX 2.0 trillion) from UGX 16.6 trillion in June 2021 to UGX 18.6 trillion
in June 2022, which was better than 6.9 percent growth in the previous year to June 2021. Relatedly,
the aggregate MDIs loans were UGX 420.5 billion as of end-June 2022, reflecting an annual increase

FINANCIAL STABILITY REPORT – JUNE 2022 23

 of 7.1 percent, compared to the prior year’s decrease of 0.6 percent. The CIs sub-sector’s aggregate
stock of loans grew marginally by 1.9 percent to UGX 249.2 billion in the review period, however, lower
than the 20.2 percent growth in the prior year.9

Table 3: Changes in commercial bank loans by sector (Percent)

Stock
Annual changes (Percent) (UGX
billion)
5-year
Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jun-22
average
Agriculture 11.2 19.8 14.7 12.2 1.5 7.9 2,105.0
Mining -2.5 18.6 -10.6 -43.9 14.3 9.2 52.8
Manufacturing 11.8 9.8 20.5 -1.9 9.0 21.3 2,517.5
Trade 7.8 12.5 10.7 0.7 4.1 11.0 3,013.9
Transport & communication 8.5 -12.2 -8.6 44.3 4.6 14.3 1,038.4
Construction & real estate 11.7 8.7 11.0 16.9 7.4 14.6 3,923.9
Utilities 7.2 28.1 0.0 -0.9 18.0 -9.3 288.8
Business services 12.4 5.5 28.9 15.1 -5.9 18.4 798.5
Community & social services 39.2 27.6 -5.9 178.2 3.3 -7.0 1,148.9
Households 12.7 13.8 7.7 5.8 18.2 17.8 3,669.5
Source: BOU

By economic sector, the pickup in bank credit growth during the year was registered across all major
economic sectors except in the utilities and social services sectors, where credit declined by 9.3 percent
and 7.0 per cent respectively. Notably, borrowing by households, the manufacturing and trade sectors
recovered after contracting considerably in the early stages of the pandemic. In contrast, the pick-up in
agricultural loans in the first half of 2022 fizzled out towards June 2022, reflecting the impact of the long
dry season on banks’ credit standards for the sector.

The real estate sector remains the dominant beneficiary of the commercial banks’ gross credit,
accounting for 21.1 percent of the total loan book. The prominence of the real estate sector in banks’
lending underscores BOU’s prudential loan-to-value (LTV) limit of 85 percent on residential mortgages
and land purchases, aimed at mitigating risks related to volatility in real estate prices and valuations on
exposure to real estate. Box 2 expounds on BOU’s LTV policy stance.

█ Box 2: Update on the loan-to-value (LTV) ratio limit

Bank of Uganda maintained the loan-to-value (LTV) ratio limit at 85 percent from June 2021 to June
2022. The LTV limit applies to residential mortgages and land purchase loans in both local and foreign
currency.

▪ This measure is designed to mitigate potential excessive household leveraging and SFIs’ risk
exposure to potential adverse movements in real estate prices.

9 PostBank (U) Limited upgraded from a credit institution to a commercial bank in September 2021.

24 FINANCIAL STABILITY REPORT – JUNE 2022

 ▪ Minimizing risks to the financial system from adverse movements in the real estate sector is
important because a significant portion of credit extended by SFIs is collateralized with real
estate property, with direct lending to the real estate sector (mortgages, building, and
construction) constituting the largest exposure for commercial banks, averaging 21.8 percent
of gross loans over the past 10 years. Furthermore, real estate property is a major investment
asset class held by households and other financial institutions.
▪ By reducing borrowing of households with low deposits, the LTV restrictions ensure that
recent borrowers will be better able to absorb any adverse changes to house prices without
falling into negative equity, and they are more likely to absorb the impact of rising interest
rates, as banks have adjusted the criteria for assessing loan applications and serviceability.
▪ Despite limited signs of stress, some households remain vulnerable to volatility in house
prices. The borrowers most exposed to reduction in or negative equity are those who took
out loans before the LTV limit was set in 2020. The trend of the Residential Property Price
Index (RPPI) points to increases in the potential loss-given-default (LGD) relative to credit
exposure and elevates probabilities of default (PD), which is a carryover from the COVID-19
period that could be accentuated by ongoing macro shocks.
▪ So far, indicators show that the LTV cap has effectively alleviated the banking institutions’
risk exposure as the real estate market remains subdued in the wake of the pandemic. The
cap remains in effect as real estate indicators show that the sector is yet to regain stability
from the impact of the pandemic.10

█ Asset quality

Indicators show that banks’ loan quality worsened moderately during the year to June 2022. The stock
of SFIs’ NPLs increased by 15.5 percent during the year ended June 2022, from UGX 894.0 billion in
June 2021 to UGX 1,032.7 billion in June 2022, compared to a decline of 11.8 percent in the prior year
to June 2021. This trend reflected the slowdown in global and domestic economic growth and the
emerging adverse financing conditions, which weighed down borrowers’ capacity to meet their credit
obligations. Furthermore, the change in NPLs partly indicates proactive prudent recognition of some
loans that are still under the CRM program as they exhibit signs of permanent impairment due to the
impact of the pandemic and portend further increases in loan losses for SFIs. The commercial banks’
NPLs increased by 24.6 percent from UGX 793.0 billion to UGX 988.4 billion, and the aggregate NPL
ratio rose from 5.1 percent in June 2021 to 5.4 percent in June 2022. The reduction in NPLs under CIs
and MDIs was mainly due to the write-off of bad loans.

As of end-June 2022, the share of commercial banks’ NPLs classified in the doubtful category was 41.0
percent of NPLs, up from 22.6 percent in June 2021, while the share of loss loans increased from 18.0
percent to 19.8 percent. This, coupled with rising NPL stock, resulted in specific provisions for bad loans

10 Refer to the Residential Property Price Index (RPPI), published quarterly by the Uganda Bureau of Statistics.

FINANCIAL STABILITY REPORT – JUNE 2022 25

 increasing from UGX 309.3 billion to UGX 470.9 billion, and the ratio of specific provisions to NPLs
reduced from 47.3 percent to 43.4 percent. Cognizant of the increasing NPLs, SFIs continued to
prudently write off bad loans in the year, with UGX 435.2 billion written off during the year to June 2022
compared to UGX 301.5 billion in the prior year, and they also intensified recovery efforts on bad debts.

Figure 19: SFIs’ NPL ratios (Percent) Figure 20: Classification of commercial banks’
25 NPLs (UGX billion)

1,600 600
Total SFIs NPL ratio Loss
20
CBs NPL ratio Doubtful 500
CIs 1,200 Substandard
15 Annual write-offs (RHS) 400
MDIs
800 300
10
200
5 400
100

0 0 0
Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22

Source: BOU

Commercial banks’ NPLs increased across most sectors, and loan defaults denominated in foreign
currency remain high. Specifically, NPLs increased in all sectors except in the mining, manufacturing,
social services, and household sectors, where NPLs reduced by 67.7 percent, 50.9 percent, 15.3
percent, and 18.0 percent, respectively, over the year. In the same way, individual bank NPLs have
remained elevated, further emphasizing the impact of the pandemic on systemic soundness.

Table 4: Changes in commercial banks’ NPLs by sector (Percent)

Stock
Annual changes (Percent) (UGX
billion)
5-year Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jun-22
average
Agriculture 70.1 6.0 -4.9 14.9 -54.9 21.6 98.8
Mining 411.2 -80.4 -86.7 310.2 53.2 -67.7 1.2
Manufacturing 131.7 -43.7 132.3 -19.5 2.8 -50.9 21.1
Trade 20.0 6.5 -31.6 181.7 -22.3 6.0 192.1
Transport & communication 72.7 -71.1 1.4 -12.1 14.1 73.6 35.6
Construction & real estate 32.7 -22.0 -1.8 155.7 3.1 78.2 380.9
Business services 67.9 -56.1 -40.1 42.9 13.4 123.6 63.5
Community & social services 130.3 229.2 23.5 -23.0 14.3 -15.3 24.2
Households 26.0 -24.5 1.5 98.3 0.8 -18.0 108.0
Source: BOU

Going forward, a slowdown in economic growth and rising interest rates are expected to affect
borrowers’ ability to meet their debt obligations and their borrowing appetite for consumption and
investment. This may increase SFIs’ credit risk exposure, with higher potential NPLs and subdued credit

26 FINANCIAL STABILITY REPORT – JUNE 2022

extension, and consequently affect economic recovery. Therefore, the outlook is for credit conditions in
the banking sector to worsen in the short- to medium-term until macro-financial conditions improve to
support financial intermediation and sustainable debt servicing. Nonetheless, BOU will monitor the
economic situation regularly to take timely and proactive action to support credit growth.

█ Box 3: Update on the BOU Credit Relief Measures (CRM) Program

At the onset of the Covid-19 pandemic in April 2020, BOU instituted the Credit Relief Measures
(CRM) program and later extended targeted credit relief for the education and hospitality sectors that
remained under partial lockdown longer. Given the gradual recovery from the pandemic, the
resumption of economic activity, and the reduced demand for targeted credit relief, the program will
end in September 2022. Indicators show that the program achieved its objectives, effectively
mitigating the exposure of borrowers and banks that the pandemic would negatively impact.

a) Performance of the CRM Program

• During the year ended June 2022, UGX 234.0 billion was extended in credit relief, bringing the
cumulative total credit relief approved and granted by SFIs for borrowers to UGX 7.2 trillion from
UGX 7.0 trillion at the same time last year.

Figure 21: Performance of CRM loans (UGX billion)

7,000 14
2+ restructures
6,000 1st restructure 12
Past-due restructured loans to gross loans (%, RHS)
5,000 10

4,000 8

3,000 6

2,000 4

1,000 2

0 0
Aug-20 Nov-20 Feb-21 May-21 Aug-21 Nov-21 Feb-22 May-22

• The stock of loans that remained under the CRM program reduced to UGX 2.2 trillion by end-
June 2022 (11.5 percent of gross loans) from UGX 3.3 trillion as at end-June 2021.

• The asset quality of loans still under CRM remains a concern, although the value of past due
CRM loans reduced from UGX 1,481.2 billion to UGX 978.2 billion over the year, reducing the
ratio of past due restructured loans to gross loans from 8.4 percent to 5.1 percent. Notably, this
portends permanent impairment due to the impact of the pandemic and suggests a further
increase in NPLs in the short- to medium-term, especially as the CRM program ends.

FINANCIAL STABILITY REPORT – JUNE 2022 27

 • Nevertheless, solvency stress tests conducted by BOU indicate that most SFIs are resilient to
potential deterioration from CRM loans.

b) Unwinding of the CRM program

• On the balance of risks, BOU ended the broad-based CRM program on September 30, 2021, to
mitigate potential distortionary effects on the banking sector from prolonged use of the CRM that
may have disincentivized loan repayment and resulted in unsustainable debt levels. Also, some
loans were permanently impaired by the pandemic while the CRM program delayed the inevitable
recognition of this exposure; therefore, it was important for SFIs to embark on provisioning
proactively and prudently for and write-off of such bad loans.

• Nevertheless, BOU extended targeted credit relief to the education and hospitality sectors that
had remained under partial lockdown for a longer period, for a further twelve months, to
September 30, 2022. All relief granted before the deadline will be valid for the relief period of up
to twelve months.

c) BOU policy actions to mitigate the risks from the end of the CRM

To mitigate potential regulatory and policy challenges following the unwinding of the overall CRM
program, BOU undertook the following measures.

• Engaged SFIs to continue providing targeted credit relief to eligible borrowers under the
education and hospitality sectors before the expiry on September 30, 2022.

• Required SFIs to revert to full compliance with the credit classification and provisioning rules
under the Financial Institutions Act (FIA) 2004 and MDI Act 2003 following the end of the CRM
program. BOU also advised SFIs to improve credit risk management, including capacity
enhancement to manage impaired loans, proactive and prudent provisioning for impaired loans,
and to conduct forward-looking capital and liquidity planning to absorb any evolving shocks and
risks.

• BOU developed an early warning and intervention system (EWIS) framework that enhances
BOU’s supervisory framework and resolution policy with clearly defined early intervention
triggers. The framework will facilitate the ongoing monitoring of SFIs and early identification of
institutions that may face challenges after the CRM expires.

2.3. Liquidity and Funding Conditions

█ Retail funding

Deposit mobilization by commercial banks improved, supported by relatively stable economic conditions
in the earlier part of the year to June 2022. Total deposits grew by 12.3 percent from UGX 27.7 trillion
to UGX 31.1 trillion, compared to 8.7 percent in the year to June 2021. Deposit growth was driven
mainly by shilling-denominated deposits, which increased by 14.9 percent to UGX 10.3 trillion compared

28 FINANCIAL STABILITY REPORT – JUNE 2022

to foreign currency deposits whose annual growth slowed from 6.1 percent to 5.3 percent during the
review period. The slowed growth in foreign currency deposits partly reflected the reversal of funds held
for offshore investors. By deposit type, demand and savings deposits grew by 14.9 percent and 15.7
percent, respectively, whereas growth in time deposits reduced from 5.6 percent as at end-June 2021
to 2.0 percent in June 2022. Consequently, the proportion of savings and time deposits in total deposits
dropped from 43.3 percent to 42.0 percent over the year ended June 2022.

The cost of retail deposits for the banking institutions remained largely accommodative, reflecting the
pickup in deposit inflows. The weighted average interest rate on shilling deposits stood at 2.1 percent
for June 2022, unchanged from June 2021. Relatedly, the weighted average interest rate on foreign
currency deposits only increased marginally from 1.2 percent in June 2021 to 1.3 percent in June 2022.

Figure 22: Annual changes in commercial banks’ deposits (Percent)

40
Deposits Shilling FX
30

20

10

0
Jun-18 Jun-19 Jun-20 Jun-21 Jun-22

Source: BOU

█ Wholesale funding

While the banking sector mainly relies on retail deposits for stable funding, banks often leverage
wholesale funding for short-term liquidity needs. For most of the year under review, the wholesale
funding conditions were relatively accommodative. However, they tightened in the last quarter of
FY2021/22 as domestic and global monetary policy authorities aggressively pursued disinflationary
monetary policy measures, with consequent increases in wholesale funding interest rates, partial
reversal of foreign capital flows, and shilling depreciation pressure.

Over the year, the average interbank overnight and 7-day interest rates increased from 6.6 percent and
7.3 percent in June 2021 to 8.0 percent and 8.2 percent in June 2022. The average spread between
the 7-day swap implied rate and the CBR increased from 1.0 percent during the year ended June 2021
to 1.3 percent during the year ended June 2022, as policy rates increased. The volume of interbank
market transactions decreased from UGX 24,578.6 billion for the year ending June 2021 to UGX
23,606.1 billion during the year ending June 2022. Some banks sought the Standing Lending Facility
(SLF) from BOU to UGX11,398.4 billion from August 20, 2021, to September 26, 2022, underscoring
the tight funding conditions in the interbank and swap markets. On a positive note, none of the SFIs
exhibited signs of liquidity stress that would necessitate access to the Emergency Liquidity Assistance
(ELA) facility, which was operationalized in June 2022.

FINANCIAL STABILITY REPORT – JUNE 2022 29

 Figure 23: Wholesale funding activity (UGX Figure 24: Spreads between interbank rates and the
billion) CBR (Percent)

30,000 5 30
7-day Interbank - CBR spread
Interbank Swaps SLF
25,000 4 7 day Implied SWAP rate-CBR spread
(RHS) 20

20,000 3
10
15,000 2
0
10,000 1

-10
5,000 0

0 -1 -20
Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jan-20 Sep-20 May-21 Jan-22 Sep-22
Source: BOU

█ Assessment of liquidity risk

On aggregate, the banking sector has maintained strong liquidity buffers, backstopped by BOU
prudential measures, which has enhanced the banking sector’s resilience to liquidity risk. All liquidity
indicators for commercial banks, credit institutions, and MDIs were satisfactory in the year to June 2022.

The move by banks to increase investment in treasury securities, in addition to other assets such as
cash, central bank reserves, and deposits with other banks, boosted their liquidity buffers.
Consequently, commercial banks’ aggregate liquid assets grew by 1.3 percent from UGX 14.3 trillion
to UGX 14.5 trillion over the year to June 2022. However, the ratio of liquid assets to deposits (liquidity
ratio) decreased from 51.6 percent to 46.5 percent, reflecting a proportionately larger increase in
deposits over the year. The aggregate liquidity coverage ratio (LCR), which measures banks’ ability to
withstand a 30-day liquidity stress, decreased from 240.3 percent to 184.4 percent over the year ended
June 2022, but remained above the 100 percent prudential minimum. This trend was due to some banks
drawing down part of their HQLA, and partly due to an increase in expected net cash outflows, amidst
the tightening financing conditions. CIs’ aggregate ratio of liquid assets to deposits increased from 53.7
percent to 54.9 percent during this period, well above the 20 percent minimum prudential requirement.
Looking forward, the main risk to banks’ liquidity is the potential deterioration in credit risk, affecting
inflows from loan repayment, and further tightening of financing conditions that may necessitate
liquidation of HQLA.

30 FINANCIAL STABILITY REPORT – JUNE 2022

 Figure 25: SFIs’ liquidity ratios (Percent) Figure 26: Annual changes in LCR components
(Percent)
80
200 500
70 HQLA
160 Net cash outflows
LCR (RHS) 400
60 120

80 300
50
40 200
40
0
30 CBs CIs MDIs 100
-40

20 -80 0
Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22
Source: BOU

█ Box 4: Update on BOU measures on liquidity and funding conditions

• Unwinding of the COVID-19 Liquidity Assistance Program (CLAP)

The CLAP facility ended in May 2022. The CLAP was instituted by BOU in July 2020 to provide
exceptional liquidity assistance to SFIs that faced liquidity pressures and to ensure they continued
providing financial services.

▪ At the onset of the pandemic, funding and liquidity conditions in the banking sector tightened
considerably. This partly reflected uncertainty in the funding and interbank markets, where
participants were concerned about counterparty credit risk.
▪ Whilst no bank accessed the CLAP, indicators show that the availability of the facility
successfully facilitated a quick restoration of confidence in the domestic financial markets in
2020 and through the pandemic period. This led to easing counterparty risk concerns, enabling
liquidity intermediation in the domestic financial markets to proceed despite the pandemic shock.
▪ SFIs maintained strong liquidity buffers, as follows. The commercial banks and CIs’ liquidity
ratios trended above the regulatory minimum of 20 percent throughout the pandemic period
(between March 2020 and June 2022) with an average of 49.0 percent and 55.3 percent,
respectively, while the average liquidity ratio for the MDIs over the same period was 70.0
percent, well above the 15 percent regulatory minimum. The consolidated LCR for commercial
banks also trended above the 100 percent benchmark at an average of 261.0 percent between
March 2020 and June 2022.

Going forward, with the winding down of the CLAP, BOU commenced the implementation of the
Emergency Liquidity Assistance (ELA) Facility in June 2022 as the Lender of Last Resort (LoLR)
function to support viable financial institutions that may face liquidity stress. More details about the
ELA are provided in Chapter 4 of this Report.

FINANCIAL STABILITY REPORT – JUNE 2022 31

 • TradeClear Uganda

In a concerted effort to advance Uganda’s financial system, BOU and Frontclear, in a 2019
memorandum of understanding (MoU), undertook to support the development of the domestic
interbank market. The MoU prioritized three key areas: a legal and regulatory review of the
enforceability of the International Swaps and Derivatives Agreement (ISDA) and Global Master
Repurchase Agreement (GMRA), piloting a money market development framework diagnostic tool,
and TradeClear – Frontclear’s umbrella guarantee product in Uganda. In June 2022, the umbrella
guarantee facility called TradeClear Uganda was launched. Below are the expected benefits of the
facility.

• The facility is expected to dislodge the logjam of market segmentation in the interbank money
market and deepen interbank activity and efficiency.

• The umbrella guarantee facility will improve market trading and reduce counterparty credit risk
such that all banks across all market segments can maintain access to interbank funding and
risk management instruments.

• The facility will also cover the risk of interbank default; if a borrowing bank fails to pay the lender
in a secured transaction, Frontclear will stand ready to pay back the funds advanced by the
lender.

2.4. Banking Sector Profitability

A profitable banking system fosters financial stability, as bank profits underpin their capital base and
ability to withstand shocks and continue lending even in challenging economic periods. During the year
to June 2022, the banking industry's profitability remained strong, driven by good profit margins and
cost-efficiency measures. The aggregate net profit after tax (NPAT) for all SFIs came to UGX 1,148.4
billion in this period, of which commercial banks accounted for 98.3 percent. The commercial banks’
aggregate NPAT increased by 12.5 percent to UGX 1,129.1 billion from UGX 1,002.9 billion in the year
to June 2021. Three banks were loss-making for the year, but this improved compared to nine banks
that registered losses in the prior year to June 2021. MDIs also registered improved profitability with an
aggregate NPAT of 13.7 percent increase from UGX 15.5 billion to UGX 17.6 billion. However, CIs’
NPAT reduced by 86.8 percent from UGX 12.1 billion to UGX 1.6 billion over the same period.

The growth in the commercial banks’ aggregate NPAT was largely attributed to an increase in interest
income by 10.7 percent from UGX 3,418.4 billion in the prior year to UGX 3,783.9 billion for the year
ended June 2022. Interest income was largely driven by an increase of 16.3 percent in income from
treasury securities. Interest expenses grew by only 2 percent from UGX 780.5 billion to UGX 796.8
billion mostly due to domestic placements. Non-interest expenses grew by 7.8 percent from UGX 2,381
billion to UGX 2,566.2 billion, largely due to staff expenses. Commercial banks’ provisions for bad loans
increased by 48.0 percent from UGX 318.7 billion in the prior year to UGX 471.8 billion for the year

32 FINANCIAL STABILITY REPORT – JUNE 2022

ended June 2022, representing increased prudent and proactive provisioning to rid the banks’ loan book
of impaired loans.

Table 5: Annual banking sector profitability indicators (Percent)

Indicator Institution type Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22

NPAT (UGX billion) Commercial 131.7 211.5 214.4 208.7 303.1 329.9
banks
Credit institutions -0.7 3.2 4.8 -0.7 -2.7 -1.4
MDIs 21.2 92.0 114.3 24.3 75.2 -33.3
Return on assets Commercial 1.7 2.8 2.7 2.6 2.7 2.7
banks
Credit institutions -0.6 2.2 2.0 -0.3 -1.0 -1.3
MDIs 2.8 3.1 3.3 -1.4 -2.3 3.8
Cost to income Commercial 81.6 72.8 72.9 74.3 71.7 72.1
banks
Credit institutions 102.3 88.2 89.8 101.0 103.9 104.9
MDIs 88.1 87.5 86.7 103.2 108.0 82.5
Cost of deposits Commercial 3.1 2.5 2.3 2.5 2.4 2.1
banks
Credit institutions 4.1 3.3 3.9 4.1 4.2 6.9
MDIs 88.1 87.5 86.7 103.2 108.0 82.5
Source: BOU

The average return on assets (ROA) increased marginally to 2.68 percent for the year ended June 2022
from 2.65 percent for the year ended June 2021, while the return on equity (ROE) was unchanged at
15.5 percent. NPAT grew at a slightly higher rate than the growth in total assets, explaining the marginal
increase in ROA. Delving into the industry performance, DSIBs outperformed both the medium and
small-sized banks during the review period. However, there was a notable declining trend in their ROE
and ROA. DSIBs reported an aggregate NPAT of UGX 231.8 billion, accounting for 70 percent of the
industry’s NPAT reported in June 2022, a 3.1 percent decline in the NPAT reported by DSIBs and
respective proportion (74 percent) reported in the previous year. Peer analysis of the banks’ ROA shows
that the small banks’ profitability continued to improve while that of the larger banks decreased (Figure
28).11

11 For this report, the peering of the commercial banks is based on nominal asset size as at end June 2022: with large banks
having assets greater than or equal to UGX.1.0 trillion; medium-sized banks having assets greater than or equal to UGX.500
billion but less than UGX.1.0 trillion; and small banks having assets less than UGX.500 billion for.

FINANCIAL STABILITY REPORT – JUNE 2022 33

 Figure 27: Decomposition of commercial banks’ earnings Figure 28: Average return assets by bank
(UGX million) size (Percent)

4
1,500

1,000 3
500
2
0

-500 1
-1,000
Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 0
Provisions for Bad Debts
Non-interest Expenses -1
Interest Expenses Jun Jun Jun Jun Jun
Other Income 2018 2019 2020 2021 2022
Foreign Exchange Income
Charges, Fees and Commissions Small ROA Medium ROA
Interest Income – Other
Interest Income – Govt Securities Large ROA Industry ROA
Interest Income – Advances
Source: BOU

2.5. Capital Adequacy in the Banking Sector

Banks continue to build their capital levels on solid profitability, with most banks retaining earnings in
anticipation of upcoming increases in capital requirements and enhancing resilience to potential shocks.
Banks’ total capital and core capital increased by 13.8 percent and 14.1 percent to UGX 6.9 trillion and
UGX 6.5 trillion, respectively, over the year ended June 2022. However, total risk-weighted assets
(RWA) increased faster by 17.5 percent to UGX 30.1 trillion contemporaneously. Consequently, the
commercial banks’ aggregate core capital–to–RWA ratio (core CAR) reduced from 22.1 percent to 21.4
percent over the year ended June 2022 but remained well above the prudential minimum of 12.5 percent
that includes the capital conservation buffer (CCB) of 2.5 percent that took effect in December 2021.
Similarly, CIs posted a reduction in their aggregate core CAR from 15.8 percent to 12.4 percent, while
the MDIs registered a marginal increase from 38.2 percent to 38.6 percent. It should be noted that with
the lifting of the COVID-19 restrictions on payment of dividends effective May 31, 2022, BOU
subsequently approved payment of dividends by a few SFIs out of their accumulated retained earnings,
amounting to UGX 321.1 billion by end-June 2022.

34 FINANCIAL STABILITY REPORT – JUNE 2022

 Figure 29: Aggregate core capital-to-RWA ratio Figure 30: Components of banks’ core capital
(Percent) (UGX billion)

30 50 10

8
25
40
6
20
30 4
15 2
20
10 0
CBs Jun 18 Jun-19 Jun-20 Jun-21 Jun-22
CIs 10 Profit – Loss (current year)
5 MDIs (RHS) Other Reserves/Surbodinated Debt
Retained Reserves
0 0 Share Premium
Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Paid-up-Capital

Source: BOU

All SFIs, except for two credit institutions, complied with the capital adequacy requirements. Also, the
aggregate banks’ leverage ratio stood at 11.8 percent in June 2022, compared to 11.6 percent in June
2021, with all but two meeting the regulatory minimum leverage ratio of 6.0 percent prescribed under
the Financial Institutions (Capital Buffers and Leverage Ratio) Regulations 2020.

All five DSIBs met the regulatory capital adequacy requirements, including the CCB and their respective
systemic risk buffers, where one DSIB is at 1 percent, and the other four are at 0.5 percent of RWA.
For 2022, BOU designated five banks—Absa Bank, Centenary Rural Development Bank, DFCU Bank,
Stanbic Bank, and Standard Chartered Bank—as DSIBs, under the Financial Institutions (Capital
Buffers and Leverage Ratio) Regulations 2020.

In January 2022, BOU set the countercyclical buffer (CCyB) at 0.0 percent, and this level remained
unchanged as of end-June 2022, cognizant of the prevailing economic conditions and the credit cycle
that did not necessitate adjusting the requirement. BOU continues to engage the banks with shortfalls
in capital adequacy requirements to restore their capital positions to withstand evolving risks.

█ Box 5: Lifting of the restriction on payment of dividends and other discretionary payments

In May 2022, BOU ended the COVID-19 market-wide restriction on payment of dividends and other
discretionary payments by SFIs.

▪ The abovementioned measure was instituted in April 2020, where SFIs were directed to defer
payment of all discretionary distributions, including dividends and bonuses, to preserve capital
and enhance resilience to potential losses from the pandemic.

FINANCIAL STABILITY REPORT – JUNE 2022 35

 ▪ This was a correct move that successfully enabled SFIs to build up capital buffers organically
with the retention of more earnings, thereby strengthening their loss absorbency capacity,
resilience to pandemic-related shocks, and capacity to support the economy.
▪ With the lifting of the restriction, BOU approved the payment of a total of UGX 321.2 billion in
dividends by SFIs by the end of June 2022.
▪ Furthermore, in a bid to ensure that banks remain resilient to pandemic-induced losses and
emerging shocks, BOU implemented two regulatory reforms that have entrenched the
requirement for SFIs to build up capital buffers, that is, implementation of the Basel II
supervision framework that took effect in January 2022 and the introduction of Financial
Institutions (Capital Buffers and Leverage Ratio) Regulations effective December 31, 2021,
that introduced additional capital requirements for a wider range of risks.

Going forward, the payment of dividends remains subject to BOU approval, and every SFI that seeks
to pay dividends is required to:

(i) Be compliant with the requirements of the Financial Institutions Act 2004 and MDI Act 2003;
(ii) Comply with the Basel II capital requirements and demonstrate that it has adequate capital
buffers to absorb potential shocks by submitting a satisfactory forward-looking Internal Capital
Adequacy Assessment Process (ICAAP) report that considers the ability to withstand a range
of macroeconomic risks and
(iii) Comply with the Financial Institutions (Capital Buffers and Leverage Ratio) Regulations, 2020.

BOU’s approval takes into consideration the prevailing macroeconomic conditions and outlook.

36 FINANCIAL STABILITY REPORT – JUNE 2022

3. Performance of Financial Infrastructures and Other
Financial Corporations

3.1. Developments in FMIs

Financial market infrastructures (FMIs) are the systems through which payments, securities, derivatives
and other financial transactions are cleared, settled and/or recorded. This includes financial market
transactions and payment for goods and services. FMIs’ fundamental importance to the stable operation
of the financial system makes it critical that they operate with minimal risk, are reliable with limited
disruption, and are proactively regulated. Thus, FMIs require strong risk management standards and
operational and financial resilience. This section describes the performance of Uganda’s FMIs for the
year ending June 2022 and highlights the key developments in this period.

Uganda’s FMI landscape is evolving, with ongoing changes in functionality, players, risks, and
regulatory framework. At the end of June 2022, Uganda’s key payment systems infrastructures included
the Uganda National Interbank Settlement System (UNISS) – Uganda’s Real Time Gross Settlement
(RTGS) system, the Automated Clearing House (ACH), and an electronic Central Securities Depository
(CSD) for treasury securities. Digital channels for delivering financial services are increasingly important
and changing how Ugandans interact with and access financial services, including mobile money, chip-
and-pin cards, internet banking services, and cross-border money remittance. Over recent years,
Uganda’s major FMIs have continued to exhibit high availability and resilience despite the significant
impacts of the pandemic and the rising risk of operational disruption from cyber threats.

█ Clearing and settlement systems

The clearing and settlement systems operated without significant disruption during the period ended
June 30, 2022, except for two incidents in March and April 2022. Both incidents were quickly resolved,
and normal operations continued as scheduled. All clearing and settlement systems, except cheques,
registered growth in the value of transactions during the period ending June 30, 2022. During this
period, UNISS processed 1.5 million transactions worth UGX 547.9 trillion, up by 40 percent and 12
percent from 1.1 million transactions and UGX 487.5 trillion, respectively, in the previous year to June
2021. The value of EFT transactions increased by 12.8 percent to UGX 41.7 trillion. The decrease in
the value of cheque transactions was notable in the quarters ending March 2022 and June 2022 after
a directive was issued by BOU to reduce the limits on the value of cheque payments from UGX 20.0
million to UGX 10.0 million effective January 15, 2022, to promote the use of electronic payments.

FINANCIAL STABILITY REPORT – JUNE 2022 37

 Figure 31: Volume and value of transactions through UNISS

650
1600
550 Value(trillion) Volume
Value (UGX trillion)

Volume ('000s)
450 1100
350
250 600
150
50 100
Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22
Source: BOU

Regarding the share of transactions, UNISS represented 92.0 percent and 10.0 percent of the total
value and volume of transactions, respectively. Electronic fund transfers (EFTs) represented 82.0
percent of the total volume and 7.0 percent of the total value of transactions. Cheques represented only
8.0 percent and 1.0 percent in total transaction volume and value, respectively.

█ Box 6: Mitigating risks from disruption of UNISS

The importance of Uganda’s largest payment system, UNISS, to the financial sector makes it critical
that it operates with minimal disruption. This requires ongoing risk assessment and proactive
regulation. In this regard, during the year to June 2022, BOU undertook a study to assess the impact
of an operational disruption in UNISS, focusing on the networks therein, the resilience of the system
and the appropriateness of liquidity levels under tightened liquidity conditions. Chapter 6 of this
Report presents the study's highlights and the policy implications.

In summary, the study results pointed to several implications for systemic risk, including:

▪ Presence of a high degree of clusters among the banks in the network, which could lead to
contagion risk in the system, in the event of a disruption. This is especially critical, given that
some smaller Tier II and Tier III banks access UNISS through larger banks.
▪ Evidence of receipt-reactive behaviour12 in which some banks delay to process incoming
payment requests as they wait to receive outgoing payments effected by other banks, which
affects efficiency.
▪ The results also confirmed the systemic importance of a few banks forming the UNISS network's
core.

In response to the study results and the policy implications therein and in a bid to enhance the
resilience of UNISS, BOU adopted the following measures.

12 Receipt-reactive behaviour is the tendency of banks to hold onto incoming payments until they receive an
outgoing payment, rather than releasing the incoming payment immediately. This behaviour can lead to a buildup
of liquidity needs and can be detrimental to the smooth functioning of the payment system.

38 FINANCIAL STABILITY REPORT – JUNE 2022

 ▪ First, BOU will explore enhancing collateral rules for intraday credit, to ensure that banks that
fail to settle consistently will be required to provide collateral for the intraday lending facility (ILF)
on a case-by-case basis to improve liquidity levels.
▪ To reduce receipt-reactive behaviour, which affects the efficient transmission of liquidity in the
system, BOU will engage banks to address any structural factors that may prevent real-time
input of payments.
▪ To address clustering risks, BOU will grant direct access to UNISS to all Tier I, Tier II and Tier
III banks that process 1.5 percent or more of the transactions therein, on condition that they
apply for and are able to meet the costs related to UNISS.
▪ Finally, BOU will continue enhanced regulatory oversight over the systemically important banks
at the UNISS network's core.

Figure 32: Participation of clearing and settlement Figure 33: Participation of clearing and settlement
systems by value of transactions (Percent) systems by volume of transactions (Percent)

Cheques, 1% Cheques, UNISS,

EFTs, 7%
8% 10%

UNISS, 92% EFTs,

82%

Figure 34: Volume and value of cheque transactions Figure 35: Volume and value of EFT transactions
3 500 14 4000
Cheque Value EFT Value
Cheque Volume 12 EFT Volume
2.5
400
Value (UGX trillion)
Value (UGX trillion)

3000
Volume ('000s)

10
Volume ('000s)

2
300 8
2000
1.5
6
200
1 4
1000
100 2
0.5

0 0
0 0 Sep- Jun- Mar- Dec- Sep- Jun-
Sep-18 Jun-19 Mar-20 Dec-20 Sep-21 Jun-22 18 19 20 20 21 22

Source: BOU

FINANCIAL STABILITY REPORT – JUNE 2022 39

 █ Electronic payment systems

As consumer behaviour evolves and customers’ preferences shift towards cashless payments, digital
channels for delivering financial services, including internet and mobile banking, have become crucial.

The use of electronic payment systems continued to increase during the year ended June 30, 2022.
The total value of internet fund transfers rose by 98.9 percent from UGX 39.0 trillion to UGX 77.6 trillion.
Similarly, ethe value of mobile banking fund transfers increased significantly by 164.9 percent from UGX
2.4 trillion to UGX 6.3 trillion. The number of active internet and mobile banking users also increased
by 31.4 percent and 10.9 percent, respectively, during the period under review. Funds transferred
through credit cards increased by 60.7 percent, while the volume of transactions transferred through
point-of-sale (POS) terminals increased by 10.4 percent. The growth in digital payments was mainly
driven by the economy's recovery following the easing of COVID-19 restrictions and increased
competition from new electronic money players. The increased demand for convenience and speed in
modes of payment is expected to continue driving the growth of digital payment services.

Table 6: Summary of activity in Uganda’s electronic payment systems

Indicator Jun-21 Jun-22 Change (%)

Number of active cards (million) 2.7 3.3 22.0
Debit cards Volume of payments (million) 4.9 6.1 23.5
Value of payments (UGX billion) 1,561.1 1,256.7 -19.5
Number of active cards 10,719.0 9,281.0 -13.4
Credit cards Volume of payments 168,879.0 265,817.0 57.4
Value of payments (UGX billion) 41.3 66.4 60.7
Point-of-sale Volume (million) 3.6 3.9 10.5
Value (UGX billion) 821.9 707.1 -14.0
Number of active users 849,327.0 1,115,766.0 31.4
Internet banking Volume of fund transfers (million) 1.9 4.6 144.5

Value of fund transfers (UGX trillion) 39.0 77.6 98.9

Number of active users (million) 1.4 1.5 10.9

Mobile banking Volume of fund transfers (million) 1.9 3.3 74.7
Value of fund transfers (UGX trillion) 2.4 6.3 164.9
Source: BOU

█ Mobile money payments

Mobile money services, which contribute significantly to the share of payments transactions from small
businesses and households, continued to grow during the period ended June 30, 2022. The volume of
transactions grew by 22.0 percent from 3.9 billion during the period ended June 30, 2021, to 4.8 billion,
the value of transactions grew by 38.0 percent from UGX 113.4 trillion in 2021 to UGX 156.0 trillion.
Registered customers increased by 10.0 percent from 366.5 million in 2021 to 405.8 million in 2022.
With increased innovation from telecommunication companies and growing competition among mobile

40 FINANCIAL STABILITY REPORT – JUNE 2022

network operators, mobile money services are likely to increase, contributing to financial inclusion and
deepening the financial sector.

Overall, while FMIs have grown and operate effectively and stably, BOU continues to use the powers
under the National Payment Systems Act 2020 to ensure that Ugandan FMIs have sound risk
management frameworks, including those required to mitigate cyber risk and appropriate governance
arrangements.

Figure 36: Volume and value of mobile money transactions

200 6,000
Value of (UGX trillions)
Volume of transactions(millions) 5,000
Value (UGX trillion)

150

Volume (million)
Volume of registered customers
4,000

100 3,000

2,000
50
1,000

0 0
Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22
Source: BOU

3.2. Tier IV Microfinance Institutions (SACCOs)

█ Sector growth

Tier IV savings and credit cooperative organizations (SACCOs) that are regulated by the Uganda
Microfinance Regulatory Authority (UMRA) grew significantly both in number and assets during the year
to June 2022. As a result, the number of SACCOs under UMRA rose from 26 in June 2021 to 60 as of
end June 2022.13 The total assets of SACCOs increased from UGX 59.2 billion to UGX 261.3 billion in
the year to June 2022, partly reflecting the increase in regulated institutions as well as a pickup in loans,
which grew from UGX 115.9 billion to UGX 215.4 billion. This trend in loan growth is expected to
continue over the next year, especially as SACCOs may represent an alternative source of credit to
banking institutions in the prevailing high-interest rate environment. Liquid assets increased by 127.7
percent to UGX 24.1 billion in the year to June 2022. However, this remains low relative to deposits and
loans and indicates elevated risk appetite by players in the sub-sector.

13Other entities regulated by UMRA include non-deposit-taking microfinance institutions and money lenders, but these are not
analyzed in this Report.

FINANCIAL STABILITY REPORT – JUNE 2022 41

 Table 7: SACCOs’ assets and funding structure (UGX billion)

Dec-20 Jun-21 Dec -21 Jun -22

ASSETS:
Total assets 58.8 58.2 153.0 261.3
Loan portfolio 43.7 44.3 115.9 215.4
Liquid assets 12.0 10.6 20.6 24.1
FUNDING STRUCTURE:
Share capital 16.5 16.7 32.1 44.7
Core capital 27.4 28.1 54.0 74.7
Deposits liabilities 23.4 22.6 77.6 116.2
External borrowing 5.9 5.5 10.6 43.6
Source: UMRA

█ Funding structure

As of end-June 2022, SACCO assets were largely funded by members’ deposit liabilities, accounting
for 44.5 percent of their total liabilities. Members’ deposits grew from UGX 22.6 billion to UGX 116.2
billion between June 2021 and June 2022. An increase in confidence in the subsector and recovery
from the effects of the COVID-19 pandemic partly explains this. Funding from external borrowings by
SACCOs also rose significantly from UGX 5.5 billion to UGX 43.6 billion.

█ Assessment of risks

Regarding credit risk, although UMRA has not set a prudential limit for the ratio of NPLs to total loans
(NPL ratio) as a measure of credit risk, they recommend a minimum ratio of 5 percent for their regulated
entities. As of end-June 2021, the NPL ratio for SACCOs was 21.0 percent, down from 32.5 percent in
June 2021. The reduction in the NPL ratio was due to a larger-than-proportionate increase in loans
(386.1 percent) compared to NPLs, which rose by 214.1 percent from UGX 14.4 billion in June 2021 to
UGX 45.2 billion in June 2022.

On liquidity risk, there was a notable decline in SACCOs’ liquidity conditions, likely reflecting increased
loan defaults from the legacy of the pandemic period, coupled with accelerated loan growth to meet the
increasing demand. The aggregate ratio of liquid assets to total deposits and short-term liabilities
(liquidity ratio) reduced from 47.0 percent to 16.7 percent between June 2021 and June 2022, remaining
marginally above the prudential limit of 15.0 percent. The SACCOs’ liquidity ratio reduction largely
explains the increase in external borrowing to meet liquidity demands. UMRA continues encouraging
SACCOs to offer attractive savings rates to boost deposit growth.

Although SACCOs’ aggregate core capital improved during the year to June 2022, the aggregate ratio
of core capital to total assets reduced from 35.3 percent to 28.6 percent, owing to much faster growth
in their assets. In the short term, SACCOs will have to boost their capital buffers to increase their

42 FINANCIAL STABILITY REPORT – JUNE 2022

resilience against further loan defaults, especially as the sub-sector may have relaxed their lending
standards to meet demand.

Table 8: Selected financial soundness indicators for SACCOs (Percent)

Minimum Dec-20 Jun-21 Dec-21 Jun-22

Capital adequacy Core capital to total assets 10.0 46.7 48.2 35.3 28.6
Institutional capital to total
8.0 18.6 19.6 14.3 11.5
assets
Asset quality NPLs to gross loan portfolio 5.0 30.6 32.5 36.5 21.0
Liquid assets to total deposit
Liquidity 15.0 51.2 47.0 35.9 16.7
and short-term liabilities
External borrowing to total
25.0 10.0 9.5 12.9 16.7
assets
Source: UMRA

█ Outlook for Tier IV microfinance institutions

Overall, Tier IV microfinance institutions remained financially resilient despite the legacy effects of the
COVID-19 pandemic. However, a few institutions are likely to continue facing liquidity challenges due
to high NPLs and increased demand for microfinance loans. To increase the sector’s resilience against
inherent and emerging risks, UMRA is developing an enhanced supervision framework and is working
on establishing a SACCO savings protection fund.

3.3. The Retirement Benefits Sector

The retirement benefits sector’s total portfolio increased by 9.1 percent in the year ended June 2022
from UGX 17.9 trillion to UGX 19.5 trillion, slower than 17.5 percent in the previous year to June 2021.
Of the sector’s assets, the National Social Security Fund (NSSF) accounted for 86.1 percent or UGX
16.8 trillion, while voluntary occupational schemes made up 13.3 percent or UGX 2.6 trillion.

Increased contributions and investment income mainly supported the sector’s growth. Contributions
and investment income amounted to UGX 540 billion and UGX 528 billion, respectively, in the period
ended June 2022. Total withdrawals reduced to UGX 357 billion during the quarter from UGX 455 billion
in the quarter ended March 2022 when mid-term access benefits pay-outs by NSSF were launched.

█ Assessment of risks

a) Market risk

The sector’s profitability was affected by price declines for most stocks held during the year under
review, especially on the Nairobi Stock Exchange. In the period leading up to June 2022, the sector
registered an unrealized loss of UGX 151 billion, attributed to mark-to-market value losses in equities
during the quarter ending June 2022. This was attributed to geopolitical tensions from the Russia-
Ukraine war, and the uncertainty of the Kenya election, which led to panic sales as investors fled to

FINANCIAL STABILITY REPORT – JUNE 2022 43

 safer investments. However, the increase in average yields across the tenors resulting from rising
interest rates meant that the re-investment risk for schemes was controlled.

b) Operational risk and management

The Uganda Retirement Benefits Regulatory Authority (URBRA) carried out offsite analyses of
supervised schemes during the year to June 2022. It noted weaknesses and vulnerabilities in the
schemes’ risk management and governance controls. URBRA continues to enhance monitoring of the
performance of schemes to ensure prudence in management to protect members’ benefits.

Table 9: Asset allocation by the retirement benefits sector (UGX billion)

Jun-20 Jun-21 Jun-22

Total investments (UGX billion) 15,207 17,867 19,501

Asset class Proportion (%) Proportion (%) Proportion (%)

Cash and demand 0.4 0.8 1.4
Fixed deposit 2.2 2.1 1.4
Other fixed income* 0.6 0.4 0.8
Government securities 75.9 74.5 76.2
Quoted equities 12.4 13.3 12.8
Unquoted equities 2.4 2.2 0.9
Immovable property 6.1 6.6 6.4
Other investments** 0.1 0.1 0.1
Source: URBRA

3.4. Update on FSSF Activities

BOU continues to work with the Financial Sector Stability Forum (FSSF) to promote the soundness and
development of the financial sector. The FSSF brings together Uganda’s financial sector regulatory
agencies including Bank of Uganda, the Capital Markets Authority (CMA), the Uganda Retirements
Benefits Regulatory Authority (URBRA), the Insurance Regulatory Authority (IRA), Deposit Protection
Fund (DPF), Uganda Microfinance Regulatory Authority (UMRA), the Financial Intelligence Authority
(FIA) and the Ministry of Finance Planning and Economic Development (MoFPED), under a
memorandum of understanding (MoU).

During the period leading up to June 2022, progress was made on two FSSF initiatives.

a) The forum admitted the Financial Intelligence Authority (FIA) as a full member. This is expected to
enhance the implementation and compliance with anti-money laundering/countering financing of
terrorism (AML/CFT) requirements in the financial system.

b) As highlighted in the last FSR of June 2021, the FSSF has been working on developing a Financial
Sector Crisis Management Plan (FSCMP) with support from the Toronto Centre. The FSCM has
been completed and is expected to be approved by the FSSF at its next meeting scheduled for
November 2022. The next step is to conduct a crisis simulation exercise to validate and enhance
preparedness and response plans and procedures as indicated in the FSCMP. The Plan aims to

44 FINANCIAL STABILITY REPORT – JUNE 2022

strengthen the ability and preparedness to deal with systemic crises. It details the minimum crisis
management components that each financial sector regulator must have to ensure coordinated
enforcement action during a financial crisis.

FINANCIAL STABILITY REPORT – JUNE 2022 45

 4. Regulatory and Supervisory Developments

4.1. Strategic Priorities under the BOU SP 2022/27

As part of our work to protect and promote financial stability, we continue to improve the regulatory
structures of the Ugandan banking system by prioritizing work on major micro and macroprudential
policy and regulatory reforms and other key initiatives linked to our assessment of vulnerabilities. These
initiatives aim to ensure that BOU remains alert to stakeholder concerns and responsive to emerging
issues. This section provides updates on these initiatives.

Bank of Uganda adopted a five-year Strategic Plan for 2022-2027, launched on July 15, 2022, by the
Deputy Governor and aimed at strengthening capacity to deliver its mandate to ‘“To Promote Price
Stability and a Sound Financial System in Support of Socio-economic Transformation in Uganda”. The
Bank’s strategic objective regarding the financial system is to ‘enhance financial system soundness and
resilience’ under which the desired outcomes are sound and resilient regulated financial service
providers (RFSPs) and a financial system resilient to systemic shocks.

To achieve the above outcomes, BOU embarked on a review of several frameworks and introduction
of new reforms and initiatives targeted at addressing emerging risks in the financial system, such as
cybersecurity, technology change, climate change and environmental sustainability standards, and

46 FINANCIAL STABILITY REPORT – JUNE 2022

adoption of technology in supervision and regulation (SupTech and RegTech).

The priorities include:

a) Fast-track the development of the Financial Sector Crisis Management Framework.

b) Review and increase minimum capital requirements for all categories of RFSPs.
c) Implement a SupTech solution for automated regulatory reporting and analytics.
d) Review and update the BoU’s Macroprudential Policy Framework and tools.
e) Review and update regulatory frameworks for the financial sector, including a regulatory
framework to supervise large SACCOs and regulatory guidelines for emerging issues such as
climate change risk management, cloud computing, cyber security, oil revenue impact, and
operational resilience.
f) Develop a framework to enhance resilience and risk mitigation of RFSPs to emerging
technologies and sector developments, including ensuring good corporate governance within the
SFIs.
g) Implement risk-based AML supervision, institutional risk profiling, and address FATF/ICRG
concerns.

The public will be informed about the progress of the above initiatives in subsequent Reports.

4.2. Update on Review of Liquidity Regulations for Financial Institutions

In the June 2021 Report, the Bank of Uganda announced that it was undertaking a comprehensive
review of the Financial Institutions (Liquidity) Regulations, 2005.

The purpose was to strengthen liquidity risk management and ensure that the regulations promote
financial stability by lowering the risk of liquidity problems affecting deposit takers.

The review is timely, given the significant changes in banks' liquidity risk profile and operating
environment since 2005, such as money market developments, new products, and technology.

These amendments will also ensure compliance with the EAC Monetary Affairs Committee’s decisions
on harmonising supervisory practices towards the East African Monetary Union. In addition, they will
facilitate the implementation of the Basel III regulatory framework for liquidity risk and introduce new
liquid assets.

By June 2022, the revision of the liquidity regulations was on course. Bank of Uganda has completed
industry consultations, and the regulations were forwarded to the First Parliamentary Counsel for
legislative drafting and subsequent gazetting.

4.3. Emergency Liquidity Assistance Framework

FINANCIAL STABILITY REPORT – JUNE 2022 47

 █ Overview

Effective June 01, 2022, the Bank of Uganda introduced an Emergency Liquidity Assistance (ELA)
facility as the Lender of Last Resort (LoLR) window for banks under liquidity stress.

As a background, following the 2007–09 Global Financial Crisis, it became evident that central banks
needed to reform their LoLR facilities to enhance their capacity to stabilize the financial system and
support the flow of credit to the real economy during periods of stress.

In Uganda, the Lombard Window had long served as the LoLR facility, but with time, its effectiveness
was reduced due to several factors. First, the Lombard Window served a dual purpose, that is, as a
monetary policy instrument and LOLR (financial stability), making it difficult to distinguish between the
two operationally. Secondly, the structure of Lombard Window made it difficult to provide system-wide
liquidity relief because it could only be accessed by commercial banks. In addition, access to liquidity
by banks was automatic up to 25 percent of the cash reserve requirement, and it did not meet
international best practices for liquidity assistance due to the limited scope for supervisory monitoring
of borrowing banks.

To address the issues above, enhance the effectiveness of the LoLR function, strengthen financial
stability and monetary policy implementation, and align with best practices, the BOU reformed the
Lombard Window in 2020 by splitting it into two separate facilities, that is, the Standing Lending Facility
(SLF) for short-term liquidity (monetary policy instrument), which was operationalized in July 2020, and
the Emergency Liquidity Assistance (ELA) facility for the LoLR function (financial stability), which took
effect on June 01, 2022. By definition, ELA refers to the provision of liquidity to solvent institutions that
are faced with extraordinary and temporary liquidity shortages caused by market-wide or firm-specific
stress. ELA is to be provided at the central bank’s discretion, at a penalty rate< and will trigger enhanced
regulatory oversight. BOU’s powers to provide ELA are underpinned by Section 29 of the BOU Act
(2000) covering credit and other operations, specifically Section 29(1)(e), Section 29(1)(f) and Section
29(5). The provision of ELA is, however, not intended to be a form of support for SFIs that are not viable,
as resolution or liquidation of such SFIs would be more appropriate.

█ Eligibility and Modes of ELA

Access to ELA will be to all solvent Tier I and Tier II institutions supervised by BOU (SFIs). These
institutions play an important role in financing the real economy through maturity transformation by
accepting short-term deposits, borrowing from short-term wholesale markets, and making long-term
loans. This role exposes them to liquidity risk due to institution-specific causes or market-wide stress
and disruption of wholesale funding markets, with financial and macroeconomic stability implications.
They are also key intermediaries in the payment systems.

BOU’s ELA facility has two modes:

48 FINANCIAL STABILITY REPORT – JUNE 2022

 • Bilateral ELA: This relates to loans extended to an individual financial institution facing
institution-specific liquidity stress e.g., a liquidity run on a solvent systemically important bank.

• System-wide ELA: BOU shall determine and trigger this option in response to or anticipation
of a market-wide shock. This may occur during a system-wide crisis where SFIs pull back from
lending to each other due to heightened counterpart risk or may be exacerbated by hoarding
liquidity to increase precautionary buffers. This could result in freezing funding markets and/or
disrupting the payment within the financial system. It may take the form of one or several
liquidity facilities open to all SFIs or specified groups of SFIs as long as they have the eligible
collateral with standardised terms of access, thereby supporting market confidence.

█ Terms and principles of BOU ELA

ELA has strong terms and conditions to ensure risk management, protect public funds and exposure of
the BOU balance sheet, and adhere to international best practices. The terms and principles, explained
in a Guideline available on the BOU website, are summarised below.

• Assessment of solvency and viability before access to ELA: BOU shall assess an
institution’s solvency before extending liquidity assistance in line with the provisions of the FIA
(2004) and MDI Act 2003.

• Lending only to viable SFIs: ELA will also incorporate an examination of the SFI’s viability and
will be provided to SFIs that BOU assesses to be viable to provide confidence that the recipient
will be able to repay the LoLR facility.

• Tenor: The duration of ELA will kick in at the upper limit of the SLF (7 days) with a possibility of
rollover up to a maximum of 12 months, subject to BOU approval. ELA should be short enough
to allow continued pressure on SFIs receiving ELA to expeditiously restore their liquidity position
and reduce reliance on ELA.

• Price: ELA shall be priced at the Bank Rate in line with the BOU Act 2000. During periods of
systemic liquidity stress, BOU could extend ELA at a rate lower than the market or the Bank Rate
under Section 29(1)(f) through Board approval, with the SLF rate as the floor. The latter action
would be aimed at stabilizing markets and facilitating market functioning.

• Enhanced supervisory oversight: ELA provision shall be accompanied by enhanced ongoing

supervisory oversight. The SFI must provide a liquidity restoration plan within seven working days
after receipt of ELA.

• Reporting: BOU will disclose ELA provision with a lag until financial stability would no longer be
endangered. Institutions that access ELA should have confidence that BOU will maintain
confidentiality until the stress has passed.

FINANCIAL STABILITY REPORT – JUNE 2022 49

 • Collateral: Banks can use a wider set of eligible collateral under ELA relative to the Lombard
facility, but these are subject to haircuts in line with their risk profile. Banks may also pre-position
collateral. BOU shall have the right to take collateral of its preference.

4.4. Bottom-Up Stress Testing for Commercial Banks

█ Background

In 2019, the Bank of Uganda embarked on developing an Integrated Stress Testing Framework (ISTF)
comprised of micro, macro, and bottom-up stress tests. Thus far, BOU has established micro and macro
stress tests conducted at quarterly and annual frequencies, respectively, and the results are reported
in Section 5.2 of this Report. To complete the ISTF, BOU launched the implementation of bottom-up
stress testing (BUST) in October 2021, with technical assistance from the International Monetary Fund
(IMF), and this Section presents the initial outcomes and lessons.

Several key objectives underpin the exercise. First, is to strengthen monitoring of current and emerging
systemic risks and calibrating macroprudential policies for Uganda’s banking sector. Second, is to
improve the BOU’s internal capacity and models for assessing the resilience to plausible adverse
scenarios under Basel II. Thirdly, given the ever-changing environment within which banks operate, it
is imperative to continuously enhance the robustness of stress testing methodologies to enable banks
to proactively implement measures to increase their resilience against sudden adverse market
developments.

█ Implementation

Initially, only the domestic systemically important banks (DSIBs) were required to participate in the
BUST exercise, given their risk implications for the sector and possession of the requisite minimum
technical capacity to conduct the required stress tests. The participating banks were required to use
their own models to run common baseline and adverse scenarios, developed by BOU, and submit the
stress test results to BOU for review and consolidation. These tests were based on data for the year
ending in 2021 and covered a two-year forecast horizon to December 31, 2023. BUST will be rolled out
to all commercial banks in due course.

The inaugural exercise covered credit and market risks only. The activities of the BUST exercise were
carried out in phases that included a review of the DSIBs’ stress testing frameworks, the design,
approval and issuance of baseline and adverse stress test scenarios, the DSIBs’ and BOU’s execution
of the stress tests with a forecast period of two years, the validation of the stress test results from
participating banks by May 2022, and final engagements with the participating banks.

█ Findings from the inaugural BUST exercise and the way forward

The review of the findings from the initial exercise revealed several lessons for the participating banks

50 FINANCIAL STABILITY REPORT – JUNE 2022

and the Bank of Uganda, which will be considered to improve the next BUST exercise. Among these
were some weaknesses in the DSIBs’ stress testing frameworks, which undermined the quality,
reliability, and aim of the exercise. In some cases, banks used models developed by the parent/group
company, which did not address the Ugandan risk profile. This highlighted the need for participating
banks to enhance their staff’s modelling skills and capacity further. It was also observed that the
scenarios and the data templates shared with banks needed to be simplified with reduced variables.
The exercise was also affected by data quality and collection challenges.

Given these lessons, BOU and the IMF team engaged participating banks to conduct training and
improve the scenario and processes. All DSIBs have taken steps and continue implementing initiatives
in conjunction with BOU to address the said challenges. The BUST exercise is scheduled every two
years, and the next exercise will be conducted in 2023, based on the banks’ 2022 financial data, for
further enhancement before rolling out to the rest of the sector in 2024.

4.5. Calibration of the Countercyclical Capital Buffer

█ Overview

Bank of Uganda implemented the Basel III countercyclical capital buffer (CCyB) for all commercial
banks and credit institutions, effective January 2022. The CCyB was set zero (0) percent of risk-
weighted assets (RWA) until adjusted by the central bank, in line with the evolution of macroeconomic
conditions. The calibration methodology and disclosure requirements are detailed in the CCyB
Framework, which is available on the BOU website and key aspects are highlighted below.

The implementation of the CCyB was introduced in fulfilment of sub-regulation 7(5) of the Financial
Institutions (Capital Buffers and Leverage Ratio) Regulations, 2020. It is a macroprudential policy tool
whose implementation aims to mitigate the risks from the procyclicality of credit growth and thus
dampens the risks from rapid credit growth, in line with the risk-based supervision approach. This will
ensure that banking sector capital requirements consider the macro-financial environment in which
banks operate and support growth by:

• Moderating the flow of credit to the economy when credit and asset trends point to a rise in systemic
risk and ensuring that banks build capital buffers ahead of times of distress; and,

• Releasing the CCyB to support the flow of credit during macroeconomic shocks, enabling banks to
continue lending to the real economy instead of restricting credit supply.

█ Determining appropriate timing for adjusting the CCyB

The implementation of the CCyB is closely linked to identifying periods of excessive credit growth, which
would then guide the triggering of the buffer. As with most macroprudential tools, this requires

FINANCIAL STABILITY REPORT – JUNE 2022 51

 appropriate indicators for assessing whether the rate of credit growth is excessive. The BOU framework
employs the following indicators to signal a change in excessive credit growth risk.

• Long-term trend of the credit-to-GDP ratio: In line with the recommendations of the Basel
Committee for Banking Supervision (BCBS), decisions to adjust the CCyB buffer shall consider the
deviation of the ratio of credit-to-GDP from its long-term trend, which is referred to as the ‘credit-to-
GDP gap’ (BCBS 2010). This approach is similar to that employed by most countries. In line with
this approach, Uganda's credit growth will be deemed excessive if it significantly exceeds its long-
run trend. The Hodrick-Prescott filter (HP filter) is used to capture the long-term trend in the credit-
to-GDP ratio, and after that, the ‘credit-to-GDP gap’ is computed by estimating the deviations of the
observed ratio from its trend.

• Complementary indicators of rapid credit growth: In addition to the ‘credit-to-GDP gap’

indicator, BOU will rely on and monitor additional complementary indicators to form a view on
whether credit growth is excessive and signal or guide regulatory action. One is an objective range
for the credit growth indicator, which considers the level of annual credit growth that is a function of
projected annual output, the core inflation target, and includes an adjuster for financial deepening.
This indicator includes a threshold above which the economy is experiencing excessive credit
growth. Additionally, following the approach by the Bank of Canada and the South African Reserve
Bank, the assessment of rapid credit growth will also rely on monitoring a dashboard of
macroprudential indicators in three categories: sources of credit, quality of credit, and composite
indicators of economic activity.

█ Methodology for setting the CCyB capital requirement

Whenever assessment indicates the need to adjust the CCyB capital requirement within the range of
0-2.5 percent/RWA, the following will guide the decision on the capital add-on requirement.

• CCyB capital calibrated to the credit-to-GDP gap: The CCyB add-on will be linear to the
computed credit-to-GDP gap, as recommended by the BCBS. The size of the buffer add-on is
designed to increase as the gap increases until the buffer reaches its maximum level of 2.5
percent of RWA, and it is to be released in a similar way.

• CCyB for Ugandan SFIs with operations in other jurisdictions: Where a Ugandan bank has
subsidiaries or branches in other jurisdictions, the CCyB requirement shall be determined by the
weighted average of the prevailing CCyB requirements applied in the jurisdictions where the
financial institution has credit exposures.

• Expert judgment: In setting the CCyB requirement, BOU will also rely on expert judgment
regarding the prevailing macroeconomic conditions, the build-up of systemic risk, and the overall
monetary policy and macroprudential policy objectives and stance.

52 FINANCIAL STABILITY REPORT – JUNE 2022

 Figure 37: Calibration of the CCyB add-on

2.50 2.50 2.50

2.5 2.19
1.88
CCyB capital (%)

2.0
1.56
1.5 1.25
0.94
1.0 0.63
(Min 0%) 0.31 (Max 2.5%)
0.5
0.00 0.00 0.00
0.0
0 1 2 3 4 5 6 7 8 9 10 11 12
PSC/GDP Gap (%)

Source: BOU

█ Implementation and reporting requirements of the CCyB

Financial Institutions will be required to ensure that their CCyB requirement is publicly disclosed with
the same frequency as their minimum capital requirements. The CCyB will also form part of the quarterly
assessment of commercial banks and credit institutions' capital adequacy as an add-on to the ongoing
capital requirements.

Where a financial institution fails to maintain the required CCyB buffer or the combined buffer
requirements, the SFI shall be subjected to corrective actions or administrative sanctions as prescribed
under the Financial Institutions Act 2004 and the Financial Institutions (Capital Buffers and Leverage
Ratio) Regulations 2020.

4.6. Update on Revision of Minimum Paid-Up Capital Requirements

In 2021, the Bank of Uganda informed all supervised financial institutions (SFIs) of the planned revision
of minimum paid-up capital requirements under Section 26(5) of the Financial Institutions Act 2004 and
Section 15(3) of the Microfinance Deposit-Taking Institutions Act 2003. Table 10 outlines the proposed
minimum paid-up capital requirements.

Table 10: Proposed increase in paid-up capital requirements

Current Proposed
Commercial banks UGX.25 billion UGX.150 billion
Credit institutions UGX.1.0 billion UGX.25 billion
MDIs UGX.0.5 billion UGX.10 billion
Source: BOU

The current paid-up capital for commercial banks stands at UGX 25 billion, last revised in 2010; UGX
1.0 billion for credit institutions; and UGX 500 million for MDIs, last revised in 2004 and 2003,
respectively. Consequently, the increase in paid-up capital is long overdue, is intended to match the
growth and dynamism in the economy since the last revision, address risks from the complexity of new

FINANCIAL STABILITY REPORT – JUNE 2022 53

 products and risk exposures, incentivize shareholder commitment to the Ugandan market, enable
institutions to withstand shocks whose magnitude and impact is bigger, and to converge with regional
peers among whom Uganda effectively and relatively has the lowest paid-up capital.

The process of revising the minimum paid-up capital requirements is in advanced stages. Bank of
Uganda conducted consultative meetings with chief executive officers of SFIs and other industry
stakeholders in August 2021. The Minister of Finance Planning and Economic Development gave a No-
Objection to the revision, and implementation awaits the Minister’s sign-off of the requisite Instrument.
In the meantime, the Bank of Uganda has engaged all SFIs to ensure that they proactively prepare for
compliance with the new paid-up capital requirements.

4.7. Compliance with Anti-Money Laundering and Countering the Financing

of Terrorism Requirements

In January 2020, Uganda's AML/CFT rating was downgraded and moved to the “Grey List” by the
Financial Action Task Force (FATF). This rating implies that jurisdictions have strategic AML/CFT
deficiencies. For Uganda, the deficiencies identified by FATF cut across all the eleven immediate
outcomes, which are used to assess countries’ compliance with the AML/CFT regime. This classification
has the potential to negatively affect foreign investor sentiment and increase funding costs for firms and
financial institutions looking to source funds from foreign financiers.

Following the downgrade, Uganda resolved to fast-track actions for the deficiencies identified by the
FATF. Under this approach, the Bank of Uganda has taken steps to enhance supervision, monitoring
and regulation of SFIs for compliance with AML/CFT requirements commensurate with the institutions’
risk.

▪ SFIs will be required to apply AML/CFT preventive measures commensurate with their risks.
▪ SFIs are required to report suspicious transactions and to upgrade their systems to facilitate
this process.
▪ BOU set up a dedicated AML/CFT supervision team, developed an AML/CFT Supervision
Manual that includes AML/CFT risk-based on-site inspections, and successfully completed five
commercial bank inspections by end-June 2022.
▪ Training of all financial institutions and payment system providers will be conducted to enhance
the capacity for AML/CFT surveillance.
▪ BOU will continue to cooperate with other government agencies to conclude compliance with
the FATF requirements and remove Uganda from the Grey List.

54 FINANCIAL STABILITY REPORT – JUNE 2022

5. Outlook of Systemic Risks to the Banking Sector

5.1. Overview of systemic risks and resilience of the banking sector

█ Systemic risks to the banking sector

Bank of Uganda’s systemic risk index, a composite tool for assessing key risks to the banking system,
shows that overall systemic risk increased by 3.9 percent during the year to June 2022, following a
reduction in the year to June 2021 of 1.8 percent. The upper and lower limits of the changes in the index
are set at one standard deviation away from the historical mean of 0.6 percent. Between June 2021
and June 2022, the change in the risk indicator was 3.3 percentage points above the historical mean.
Still, it remained below its upper limit of 10.3 percent, beyond which the level of systemic risk to the
banking system would be deemed significant.

Figure 38: BOU systemic risk dashboard

Annual
Summary Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 change (%):
Overall risk 3.9
Macro risk -0.1
Credit risk 38.7
Credit growth 28.5
Credit concentration 81.7
Credit quality 28.4
Liquidity risk 22.1
Market liquidity 48.9
Funding liquidity 1.2
Market risk -14.0
Foreign exchange risk -6.3
Interest rate risk -18.0
Asset price risk -12.0
Profitability & solvency -27.0
Profitability -13.4
Solvency -39.6
Structural risk 16.0
Risk key:
Severity High Moderate Low
Source: BOU staff calculations

The main drivers and direction of the trends in systemic risk are outlined in the Systemic Risk Dashboard
(Figure 38). The dashboard shows that the rise in systemic risk in the period under review was
underpinned by macro-financial disruptions, namely, the dimming global economic outlook, global and
domestic inflationary pressures, increased volatility in the domestic financial markets, and tighter
financing conditions towards June 2022. This will likely slow the economic recovery following the
complete removal of the pandemic movement restrictions in January 2022. While indicators of acute

FINANCIAL STABILITY REPORT – JUNE 2022 55

 household and business stress are few so far, a prolonged period of monetary tightening, with higher
lending rates, could adversely affect the financial health of borrowers and banks' liquidity, exacerbating
credit and liquidity risks.

█ Banking sector resilience

On a positive note, banking sector resilience, as defined by banks’ asset quality, loss absorption
capacity, and balance sheet composition and diversity, remained strong in the year to June 2022. The
Resilience Index, a weighted composite indicator that monitors risks endogenous to the domestic
banking sector, decreased marginally by 0.6 percent during the period under review, slower than the
decline of 0.3 percent in the year to June 2021. Like the systemic risk index, the upper and lower limits
of the changes in the index are set at one standard deviation away from the historical mean.

Figure 39: Systemic risk cobweb Figure 40: Changes in composite systemic risk
indicator (Percent)
Jun-20 Jun-21 Jun-22
20

Overall risk 15
0.8
Structural 0.6 10
Macro risk
risk
0.4
5
0.2
0.0 0
Profitability Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22
Credit risk
& solvency
-5

Liquidity -10
Market risk Annual change
risk Threshold
-15 Upper bound
Lower bound
-20

Figure 41: Annualized banking sector resilience index Figure 42: Annual changes in banking sector
with annual changes in sub-indices resilience index (Percent)

Asset performance Loss absorption 2.0

Annual change
BS Composition Diversity Threshold
RIDX (RHS) 1.5
0.610 Upper bound
% Lower bound
1.0
20 0.605
0.5
10 0.600
0.0
0 0.595
-0.5

-10 0.590 -1.0

-20 0.585 -1.5

Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22
Source: BOU

56 FINANCIAL STABILITY REPORT – JUNE 2022

Despite the trend of the Resilience Index, the banking system is well positioned to manage risks from
rising interest rates, both on the balance sheets and for the economy. Bank liquidity has been boosted
by increased holdings of treasury securities, which are liquid assets, given the aversion to heightened
credit risk and tightened lending standards, especially towards sectors such as education services that
continue to struggle with the effects of the pandemic. Bank capital levels will be boosted by the
introduction of the Basel III capital buffers and the increase in minimum paid-up capital requirements,
whose implementation is expected to start by the end of 2022.

5.2. Solvency Stress Test Results

BOU carried out stress tests to assess banks' resilience to a significant worsening of the economic
outlook under several severe scenarios. This Report presents the results of two macro scenarios,
covering further rise in inflation and tightening of monetary policy by increasing the central bank rate
(CBR) over a forecast period of one year from June 2022 to June 2023.

▪ In both scenarios, stress testing shows that the banking sector is in a strong position to weather a
severe downturn in economic conditions, even without accounting for mitigating actions.

▪ In the first scenario, it is assumed that, in line with BOU macroeconomic projections, inflation will
rise and peak at 10.3 percent by March 2023 before declining slightly to 10.2 percent in June 2023.
In response, the CBR is assumed to rise by 1 percentage point in each quarter to March 2023,
where it peaks at 9.8 percent and holds there in June 2023.

With the materialization of this scenario, the aggregate banking sector NPL ratio would change
marginally from 5.3 percent to 5.4 percent by June 2023. As a result, all but two banks would be
able to withstand the impact of this scenario.

Figure 43: Post-shock NPL ratio (Percent) Figure 44: Post-shock core capital adequacy ratio
(Percent)
7
30

6 25

20
5

15
Scenario 1 Scenario 2 Scenario 1 Scenario 2
4
10

3 5
Jun-21 Dec-21 Jun-22 Dec-22 Jun-23 Jun-21 Dec-21 Jun-22 Dec-22 Jun-23
Source: BOU

FINANCIAL STABILITY REPORT – JUNE 2022 57

 ▪ The second scenario was more severe and prolonged, based on the adverse macroeconomic
events in 2011-2012, when inflation reached an all-time high of 31 percent. This resulted in the
CBR being adjusted by 10 percentage points from 13 percent to 23 percent between July and
December 2011. Therefore, the scenario assumes the CBR will rise by 10 percentage points from
7.5 percent at end-June 2022 to 17.5 percent as of end-December 2022, before dropping by 1
percentage point in March 2023 and June 2023.

The impact on banks’ credit conditions would be a rise in the NPL ratio to 6.5 percent, and the
aggregate core CAR would decline to 19.7 percent by June 2023. All but six banks would withstand
this stress scenario without entering their prudential capital buffers.

5.3. Outlook for Financial Stability

The outlook for systemic risks in Uganda’s financial system remains highly uncertain. Near-term
aggregate risks to financial stability are likely to remain elevated, with risks to growth and inflation tilted
to the downside.

Banking sector resilience is likely to be tested if macro-financial conditions deteriorate further as the
effects of higher inflation and lending rates pass through to asset prices, affect the financial health of
households and businesses, and translate into higher credit risk and liquidity risk. Some banks may
also continue to be affected by burgeoning credit losses arising from facilities that were permanently
impaired during the pandemic period. The increasing threats of cyber and technology risks, especially
in the payment systems, require strengthening of the operational management safeguards by banks.
Nevertheless, indicators show that the banking sector can withstand adverse macro-financial events
and support the economy.

BOU remains mindful of the evolution of the adverse effects of the pandemic and stands ready to review
the macroprudential policy measures highlighted in this Report and to take other appropriate measures
as the pandemic evolves to safeguard the financial system's stability.

58 FINANCIAL STABILITY REPORT – JUNE 2022

6. Special Topic: Effects of An Operational Disruption on
the Payments System

By Irene Patience Nabwire Jingo, Joseph Nyanzi Ssentamu, and Robert Mbabazize 14

This section reports the outcome of a study on network analysis and simulation of operational disruption
in the Uganda National Interbank Settlement System (UNISS) payment system. The study investigated
the system's resilience, defined as the network of its participants, and the appropriateness of liquidity
levels under tightened liquidity conditions.

6.1. Introduction

Since the global financial crisis of 2008, central banks have become increasingly concerned with the
extent to which operational disruptions in large-value payment systems (LVPs) can endanger financial
stability. LVPs are subject to several key risks, including liquidity, operational, and counterparty risks.

In particular, operational disruptions can be sources of systemic risk if the failure or delay of a participant
to meet its obligations, or a disruption in the system itself, causes other participants or financial
institutions to fail to meet their obligations as they fall due.

Such an operational disruption of a major participant can interrupt the liquidity cycle mechanism,
resulting in a build-up of a ‘liquidity sink’ in an adverse scenario. This effect can be exacerbated by the
network of interdependencies, which can propagate the spread of the systemic effects to other
connected systems. This adverse effect on the functioning, safety, and efficiency of payment systems
may lead to knock-on effects on the smooth functioning of modern economies and the stability of
financial markets and systems.

To address the above-mentioned risks, CPSS-IOSCO Principles of Financial Market Infrastructure

(PFMIs) recommend conducting regular assessments to ensure that the resilience of systemically
important payment systems (SIPs) to operational disruptions is not compromised.

Against this background, this Section presents key highlights of a study that was conducted to assess
the systemic risks, interlinkages, liquidity effects and resilience of an operational disruption of UNISS

14 All staff of Bank of Uganda. The Working Paper is available on the Bank of Uganda website.

FINANCIAL STABILITY REPORT – JUNE 2022 59

 through network analysis and a stress test. This was done as a simulated operational disruption using
the 15Bank of Finland Simulator (BoF-PSS3 v1.0).

6.2. Objectives of the Study

The major objectives of this study were ;

(i) Establish the counterparty and liquidity risks posed by a disruption of UNISS for the institutions
that use the system;
(ii) Identify the critical participants and interlinkages and their implications, especially in periods of
market stress; and,
(iii) Assess the channels through which shocks in one institution can be propagated across UNISS.
(iv) This study also contributes to BOU’s efforts to make the system fully observant of the Principles
for Financial Market Infrastructures (PFMIs) issued by the Committee on Payment and
Settlement Systems (CPSS) and the International Organization of Securities Commissions
(IOSCO).
(v) In addition, the study would enable BOU to enhance and safeguard the financial sector's
stability by identifying and implementing policy measures to address systemic risks that may
arise from liquidity and operational disruptions in the UNISS, a systemically important payment
system. Moreover, identifying critical participants and the interlinkages will facilitate a better
understanding of the transmission channels of systemic risks in large value payment systems
that can result in structural vulnerabilities.

6.3. Brief Overview of the Uganda National Interbank and Settlement System

As stated earlier in this Report, UNISS is Uganda’s Real Time Gross Settlement System (RTGS) and
started operation in February 2005. The system plays a pivotal role in the Ugandan financial market, as
it processes all large value and time-critical payment transactions between banks and different financial
institutions. It is linked to and settles payments for almost all other payment systems, including money
market transactions, clearing house positions, interbank transfers, and government securities.

As such, its safe and efficient functioning is critical for implementing monetary policy and financial sector
stability in Uganda. Specifically, the main features of UNISS are that;

(i) The system is operated by BOU such that transactions are settled on banks’ accounts at BOU;
(ii) BOU designates it as a Systemically Important Payment System (SIP);
(iii) All transactions should pass through UNISS in real-time with finality, and,
(iv) Banks that fail to settle can access an Intraday Liquidity Facility (ILF) provided by BOU subject
to the availability of collateral or borrow from the Lombard Window.

15 https://www.suomenpankki.fi/en/financial-stability/bof-pss-simulator/

60 FINANCIAL STABILITY REPORT – JUNE 2022

A BOU self-assessment against the PFMIs that was conducted in 2019 indicated that the main risks to
the efficient use of UNISS were operational.

6.4. Conceptual Approach to Disruptions in Payment Systems

Leinonen, H. (2020) and Bank for International Settlements (2008) point out that payment system
disruptions directly and indirectly affect participants, typically resulting in credit risk/counterparty risk
and liquidity risk. In a direct effect, other participants will not receive payments from and may cancel
payments to the disrupted participant after a certain period. In an indirect effect (systemic effect),
second-round effects may arise from other participants being unable to settle their payments due to
liquidity shortages caused by the liquidity sink stemming from the failing participant. Given the network
of interdependencies, these systemic disruptions can spread to other connected systems and thus
trigger a network of failures throughout the financial system, thus contagion. These interdependencies
are identified using network analysis.

In line with Clarke and Hancock (2012), the study assumed that in the event of an operational disruption,
the disrupted bank receives less payments until operational failure becomes evident. Temporarily
disrupted banks may often receive less payment values, implying that non-disrupted banks react to a
temporary disruption by significantly altering their behaviour towards the affected participant. This
behaviour may take the form of a deliberate decision to delay payments to the affected bank due to
uncertainty about counterparty exposure or could be due to a lack of incoming funds from other
participants.

6.5. Methodology

█ Network analysis

The study employed network analysis, which involved representing UNISS transactions as a system in
which a set of elements are related by their connections or links. The elements (also known as vertexes
or nodes) are the financial institutions, and their connections (also known as edges) are the financial
transactions. The linkages correspond to volumes or values that are transacted by the banks. Thus,
each node represents one of the 25 banks in UNISS that are linked to each other by the payment flows
(arrows).

█ Bank of Finland Payment and Settlement System Simulator

To simulate an operational disruption, the study utilised the Bank of Finland Payment and Settlement
System Simulator (BoF-PSS3 v1.0). This tool is considered one of the best tools and has been
employed by many central banks to stress test and simulate disruption in payment systems (BOF,

FINANCIAL STABILITY REPORT – JUNE 2022 61

 2020). The simulator allows for evaluating the performance of SIPs such as UNISS under severe but
plausible scenarios to assist the system operators in mitigating settlement, operational, and other risks.

These simulations, which utilise data from December 2020 and June 2021, broadly follow Glaser and
Haene (2008) in their assessment of operational disruption in the Swiss interbank clearing system.
Thus, the operational disruption16 to UNISS, as simulated in this study, follows these assumptions.

Figure 45: Assumptions of simulated UNISS operational disruption

6.6. Presentation and Discussion of Results

█ Results of the network analysis of UNISS

The visualisation of the network of transactions in UNISS during the study period of June 2022 is shown
in Figure 47. The analysis reveals that the network is dense, showing a large volume of transactions
with close network linkages. The implication of the dense network is that regardless of where contagion
starts, it could reach nearly all banks. Nevertheless, depending on banks’ capital levels, the impact of
the shock would be quickly absorbed. An analysis of the network topology shows a two-tier network
structure in UNISS with core and periphery layers, whereby three banks form the network's core and
serve a liquidity intermediary role in the banking sector. Consequently, based on the network analysis

16 The operational shock to UNISS may be caused by liquidity shock from participants (not an exogenous shock) or technical
faults such as intermittent internet or complete internet shutdown, extensive cyberattack or IT failure, power failure and
insufficient funds among others. In addition, there are no other shocks over 10 days, which are the liquidity maintenance period
for the Cash Reserve Requirements (CRR).

62 FINANCIAL STABILITY REPORT – JUNE 2022

results, the simulation of the operational disruption in this study focused on the three banks (22, 2, and
23) that formed the core of the UNISS payment for the period under review.

Figure 46: UNISS payments network for June 2022 Figure 47: Topology of the UNISS network for
June 2022

Source: BOU

█ Simulation results of an operational disruption to UNISS

a) Findings on the timing of transactions

Analysis of the daily transactions processed through UNISS indicated that most transactions occur after
midday, as shown by the scatter plot in Figure 48. Although the RTGS is open from 8 am, most
transactions occur between 12 pm and 1 pm, possibly indicating process inefficiencies in the UNISS
system. While there may be other plausible explanations for this behaviour, based on the experiences
of other central banks (ECB, 2017), it is also suggestive of a high degree of receipt-reactive behaviour
in which some banks delay their payments as they wait to receive payments from other banks.

b) Findings of the operational disruption

The study results show the simulated disruption of the three banks at the core of the UNISS network as
follows.

▪ In the first scenario, bank 2217 has an operational disruption. As a result, two banks, that is
bank 1 and bank 11 fail to meet their obligations. Note that these two banks have no direct
connection to bank 22 and are linked to it through bank 25 and bank 2, respectively, (Figure 47).
Thus, their failure to meet their payment obligations is possibly due to the transmission of the

17 Account 22 received about 23.9 percent of the overall payments in the system.

FINANCIAL STABILITY REPORT – JUNE 2022 63

 resultant contagion effects. However, on a positive note, 22 out of the 25 participating banks
would still be able to make all their payments as scheduled regardless of the failure of bank 22.
▪ In the second scenario, Bank 2 undergoes a similar disruption. The operational disruption to
UNISS arising from this event results in counterparty and liquidity risks for bank 1 and bank 14.
Despite no direct connection to bank 2, these banks fail to meet their payment obligations due to
contagion effects that are easily transmitted within the network. Also, these banks may not have
sufficient liquidity to absorb shocks and thus fail to settle their payment obligations.
▪ The third iteration involves the operational disruption of bank 23, which results in mild
counterparty and liquidity risks as only bank 1 fails to meet its obligations, leading to some
unsettled transactions.

Figure 48: Liquidity usage for June 2022

Source: BOU

Figure 49: Settled and unsettled values following the failure of bank 22

160 600
Average SettledValue
Average UnsettledValue(RHS) 500
UGX billion

120
UGX million

400
80 300
200
40
100
0 0
Bank10
Bank11
Bank12
Bank13
Bank14
Bank15
Bank16
Bank17
Bank18
Bank19

Bank20
Bank21
Bank23
Bank24
Bank25
Bank1

Bank2

Bank3
Bank4
Bank5
Bank6
Bank7
Bank8
Bank9

Source: BOU data

It is important to note that the analysis in this report does not consider the alternative avenues for
participants to obtain additional liquidity under their respective liquidity contingency plans, such as
borrowing from the central bank or other market sources. Nevertheless, the results indicate that while
overall the system remains liquid, operational disruptions to the banks at the network's core can result
in moderate liquidity effects.

64 FINANCIAL STABILITY REPORT – JUNE 2022

6.7. Conclusion and Policy Implications

The network analysis and simulation results indicate that UNISS is largely resilient to an operational
disruption/stress scenario. The simulated disruption results in moderate counterparty and liquidity risks,
but most participating banks would be able to settle their transactions. This partly reflects the
maintenance of sufficient liquid assets by SFIs. The liquidity levels appear appropriate to absorb shocks,
supported by the liquidity management features of UNISS.

Nevertheless, several results have implications for systemic risk, including the presence of a high
degree of clustering, which may affect access to liquidity and propagate contagion in the system, and
evidence of receipt-reactive behaviour in which some banks delay their payments as they wait to receive
payments from other banks, which affects efficiency. The results also confirmed the systemic
importance of a few banks forming the UNISS network's core.

These results, therefore, give rise to several policy recommendations to enhance UNISS's resilience.

First, there is a need to enhance collateral rules for intraday credit and ensure that banks that fail to
settle consistently should be required to provide collateral for the Intraday Liquidity Facility to improve
liquidity levels on a case-by-case basis.

There is also a need for measures to reduce receipt-reactive behaviour, which affects the efficient
transmission of liquidity in the system. To address clustering risks, there is a need to enhance access
to UNISS for all Tier II and Tier III banks that process a required percentage of the transactions therein,
benchmarking at other jurisdictions such as the UK, where the threshold is 1.5 percent.

In addition, the results highlight the significance of the banks at the network's core and, hence, the need
for continued enhanced regulatory oversight over these systemically important banks that are central
to the functioning of the payments system.

Finally, there is a need for further analysis of the contagion channels to identify and address contagion
that could arise through the propagation of risks in the network channels.

6.8. References

Bank of Finland (2020). Payments and Settlements Simulator. Accessed March 5, 2021, from
https://www.suomenpankki.fi/en/financial-stability/bof-pss2-simulator/

Bank for International Settlements. (2008). The Interdependencies of Payment and Settlement
Systems. Accessed March 5, 2021 from https://www.bis.org/cpmi/publ/d84.pdf

Bank of Uganda. (2017). Uganda National Inter-Bank Settlement System (UNISS) Rules and
Procedures. Accessed March 2, 2021, from
https://archive.bou.or.ug/archive/opencms/bou/bou-downloads/payment_systems/UNISS-
Rules-and-Procedures.pdf

FINANCIAL STABILITY REPORT – JUNE 2022 65

 Clarke, A., & Hancock, J. (2012). Payment System Design and Participant Operational Disruptions.
Accessed March 9, 2021, from https://www.rba.gov.au/publications/rdp/2012/pdf/rdp2012-
05.pdf Reserve Bank of Australia.

Danmarks National bank. (2019). Liquidity Stress Test shows that Kronos is Resilient. Accessed March
6, 2021, from https://www.nationalbanken.dk/en/publications/Pages/2019/05/Liquidity-stress-
test-shows-that-Kronos-is-resilient.aspx. Issue No.9

European Central Bank. (2017). Stress-Testing of liquidity risk in TARGET2. Group on TARGET2
Stress Testing of the Market Infrastructure Board, Market Infrastructure and Payments
Committee. Accessed March 6, 2021 from
https://www.ecb.europa.eu/pub/pdf/scpops/ecbop183.en.pdf. Occasional Paper Series No.
183

Glaser, M & Haene, P. (2008). Simulation of participant-level operational disruption in Swiss Interbank
Clearing. The 5th Payment and Settlement Simulations Seminar and Workshop, 28 August
2007, Bank of Finland.

Leinonen, H. (2020). Liquidity, risks and speed in payment and settlement systems: A Simulation
approach. European Journal of Educational Research, 9(2). doi:10.12973/eu-jer.9.2.753. Bank
of Finland.

66 FINANCIAL STABILITY REPORT – JUNE 2022

FINANCIAL STABILITY REPORT – JUNE 2022 67
 7. APPENDICES

Appendix 1: Summary status of BOU macroprudential policy measures for financial stability

Type of risk Intermediate Tools/Instruments Effective Date Status

objective
Ended on
COVID-19 Credit Relief Measures April 2020
30th September 2021
Resilience against
Targeted COVID-19 Credit Relief
COVID-19 shock Ended on
Measures for Education and October 2021
30th September 2022
Hospitality Sectors
Capital Conservation Buffer. (2.5
percent of RWA) Applicable to
December 2021
Commercial Banks and Credit
Institutions
Countercyclical Capital Buffer.
(0.0 percent of RWA)
December 2021
Resilience against Applicable to Commercial Banks
credit and other and Credit Institutions Ongoing
Time-varying
risks Leverage Ratio: 6%/Total Assets.
risk
Applicable to Commercial Banks December 2021
and Credit Institutions
Loan to Value Ratio Limit: 85
percent.
May 2020
Applicable to Commercial Banks,
Credit Institutions and MDIs.
Liquidity Coverage Ratio: 100.0
percent
January 2014
Applicable to Commercial Banks
Funding/ liquidity and Credit Institutions
Ongoing
risk Emergency Liquidity Assistance
(ELA)
1st June 2022
Eligible for Commercial Banks and
Credit Institutions
• Enhanced disclosure
requirements for DSIBs
• Framework for Regulation of
Resilience of Domestic Systemically
December 2021 Ongoing
market structure Important Banks.
• Systemic Risk Capital Buffer
Cross-sectional
for DSIBS of 0.0–3.5 percent of
risk
RWA
Crisis Management Plan (updating
June 2012
Enhance capacity of the plan is underway).
to manage a Recovery Plans for DSIBs. June 2019 On-going
financial crisis Resolvability Assessment of
DSIBs
Source: Bank of Uganda

68 FINANCIAL STABILITY REPORT – JUNE 2022

 Appendix 2: Selected financial soundness indicators for commercial banks (Percent)

Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22

Capital adequacy
Regulatory capital to risk-
22.7 22.5 22.2 23.8 23.5 24.1 23.7 25.6 22.8
weighted assets
Regulatory tier 1 capital
21.1 20.9 20.6 22.2 22.1 22.6 22.2 24.2 21.4
to risk-weighted assets
Leverage ratio 11.6 11.3 11.0 12.0 11.5 11.6 12.1 12.9 11.7
Asset quality
NPLs to total gross loans 6.0 5.2 5.3 5.4 4.8 5.4 5.3 5.8 5.3
NPLs to total deposits 3.7 3.1 3.2 3.3 2.9 3.3 3.3 3.5 3.2
Large exposures to total
107.5 107.3 110.7 105.2 97.0 93.5 86.8 80.6 93.7
capital
Earnings and
profitability (YoY)
Return on assets 2.6 2.6 2.4 2.5 2.7 2.6 2.7 2.7 2.7
Return on equity 15.2 15.1 14.3 14.7 15.5 14.9 15.6 15.4 15.5
Net interest margin 10.9 10.5 10.2 10.4 10.2 10.1 10.4 10.3 10.2
Cost of deposits 2.5 2.5 2.4 2.4 2.4 2.4 2.3 2.2 2.1
Cost to income 74.3 74.3 75.1 73.5 71.7 72.6 71.8 72.2 72.1
Overhead to income 51.0 50.8 50.9 49.5 49.1 48.7 47.6 47.9 48.1
Liquidity
Liquid assets to total
49.1 48.8 50.7 47.6 51.6 49.2 48.0 49.6 46.5
deposits
Total loans to total
60.9 60.4 60.8 61.2 59.9 60.8 61.9 60.5 59.8
deposits
Liquidity Coverage Ratio
279.6 285.5 229.6 266.9 240.3 232.9 297.2 301.7 184.5
(LCR)
Market sensitivity
Forex exposure to
-6.9 -7.5 -6.0 5.5 -6.6 -7.6 5.8 -5.0 -8.3
regulatory tier 1 capital
Forex loans to forex
62.7 62.2 62.2 62.3 59.2 59.8 60.4 58.1 62.3
deposits
Forex assets to forex
98.2 95.7 99.5 94.3 93.6 86.4 98.9 92.6 95.3
liabilities
Source: Bank of Uganda

FINANCIAL STABILITY REPORT – JUNE 2022 69

 Appendix 3: Commercial banks’ balance sheet (UGX billion)

Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22

ASSETS
Cash and Cash Assets 1,240.3 1,355.6 1,623.2 1,481.1 1,309.0 1,376.3 1,553.2 1,485.7 1,492.0
Balances with BOU 3,948.8 3,606.2 3,596.6 4,136.2 4,502.5 4,154.9 3,952.1 3,655.4 4,269.1
Loans due from banks in
563.1 791.9 887.7 959.9 827.9 736.5 956.7 788.3 992.7
Uganda
Due from banks abroad 3,266.8 3,099.6 3,192.2 2,638.0 2,725.3 2,262.4 3,663.5 3,407.5 3,326.2
Government Securities 7,705.3 8,180.8 10,070.4 9,965.3 10,241.8 10,722.9 10,823.0 11,519.8 12,137.2
Other Securities & Equity
11.7 11.2 10.5 10.4 10.0 10.0 8.5 8.5 7.6
Investments
Bank of Uganda Securities 1,134.2 1,996.0 406.4 358.2 1,148.5 1,186.8 315.2 1,038.9 329.0
Loans & Overdrafts
14,562.4 14,460.2 15,051.8 15,181.9 15,447.9 15,628.2 16,520.9 16,676.6 17,461.7
(Gross)
Less: Provisions -433.7 -423.0 -465.2 -498.7 -452.7 -517.0 -510.6 -580.5 -579.7
Loans & Overdrafts (Net) 14,128.7 14,037.2 14,586.6 14,683.2 14,995.3 15,111.2 16,010.2 16,096.1 16,882.0
Administered Advances 941.4 1,227.0 1,229.4 1,238.6 1,123.6 1,164.0 1,185.8 1,191.5 1,123.4
Fixed Assets (Net) 1,187.9 1,123.7 1,134.8 1,144.7 1,108.1 1,094.8 1,143.7 1,115.3 1,120.0
Other Assets 1,697.3 1,430.1 1,562.1 1,723.2 1,778.9 1,964.5 1,959.9 2,157.8 2,926.6
Total Assets (Net) 35,825.4 36,859.2 38,299.8 38,338.8 39,770.8 39,784.2 41,571.8 42,464.7 44,605.6
LIABILITIES
Due to financial institutions
476.0 638.7 572.8 784.2 717.0 533.5 739.0 720.5 752.7
in Uganda
Borrowings from BOU 0.0 50.7 369.1 0.0 0.0 67.0 0.0 0.0 0.0
Deposits 25,471.3 25,957.6 26,774.4 26,832.2 27,685.7 27,602.6 28,604.5 29,526.9 31,078.9
Due to financial institutions
249.7 380.3 276.9 296.5 274.9 435.7 399.1 399.0 496.4
Abroad
Administered Funds 1,017.7 1,204.3 1,150.5 1,149.4 1,056.3 995.7 1,020.5 962.6 870.4
Bills Payable 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other Liabilities 2,558.1 2,398.6 2,896.7 2,716.6 3,131.0 2,946.1 3,311.2 3,099.4 3,721.7
Total Liabilities 29,772.7 30,630.2 32,040.3 31,778.9 32,865.0 32,580.7 34,074.2 34,708.4 36,920.1
CAPITAL
Paid-up-Capital 1,425.4 1,425.4 1,445.2 1,538.1 1,563.6 1,599.8 1,775.5 1,780.5 1,837.1
Share Premium 1,177.7 1,763.0 1,763.0 1,847.6 1,847.6 1,847.6 1,847.6 1,847.6 1,847.6
Retained Reserves 2,692.2 2,040.6 1,929.5 2,582.8 2,488.0 2,480.6 2,457.6 3,469.4 3,072.2
Other
Reserves/Subordinated 322.5 313.2 266.9 311.8 412.1 460.6 373.7 350.9 283.4
Debt
Profit – Loss (current year) 435.0 686.8 855.0 279.7 594.5 815.0 1,043.3 308.0 645.3
Total Shareholders’
6,052.7 6,229.0 6,259.6 6,559.9 6,905.8 7,203.4 7,497.6 7,756.3 7,685.5
Funds
OFF BALANCE SHEET
ITEMS
Letters of Credit 525.9 651.9 596.3 628.7 722.4 712.8 692.9 675.5 778.0
Guarantees and
3,504.0 3,738.5 3,545.9 3,644.6 3,936.3 3,847.4 3,785.3 3,771.5 4,437.6
Performance Bonds
Unused Loans/Overdrafts
3,443.2 3,966.2 3,915.7 3,845.2 3,839.8 3,805.1 3,812.7 4,291.6 4,531.0
commitment
Other off balance sheet
521.9 445.3 420.4 429.8 785.6 1,383.5 624.3 1,001.5 669.7
items
Total Off-Balance Sheet
7,994.9 8,801.9 8,478.2 8,548.2 9,284.1 9,748.8 8,915.2 9,740.0 10,416.4
Items
Source: Bank of Uganda

70 FINANCIAL STABILITY REPORT – JUNE 2022

 Appendix 4: Commercial banks’ quarterly income statement, year-on-year figures (UGX billion)

Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22

INCOME
Interest Income – Advances 2,258.2 2,249.5 2,235.2 2,253.3 2,273.8 2,341.2 2,412.8 2,457.9 2,523.2
Interest Income – Govt
769.9 805.0 856.3 895.8 958.8 1,025.6 1,065.3 1,099.3 1,116.4
Securities
Interest Income – Deposits
60.2 53.9 44.0 40.9 38.1 30.7 28.3 21.2 21.5
Abroad
Interest Income - Others 140.4 152.2 152.6 150.2 147.7 138.9 130.7 127.3 124.9
Charges, Fees, and
590.1 592.7 598.5 588.3 624.5 637.9 658.7 694.8 743.1
Commissions
Foreign Exchange Income 266.3 270.0 302.8 347.7 344.4 364.5 355.5 333.0 372.1
Income – Off Balance Sheet 69.6 68.4 64.9 65.4 69.5 68.3 68.4 68.7 70.0
Other Income 281.8 307.0 286.3 323.0 394.3 388.1 398.7 414.8 361.7
Total Income 4,436.3 4,498.7 4,540.6 4,664.5 4,851.0 4,995.2 5,118.3 5,216.9 5,332.8
EXPENSES
Interest Expense – Deposits -570.4 -587.0 -602.1 -611.6 -625.1 -631.4 -631.6 -629.0 -627.2
Other Interest Expenses -160.9 -155.7 -157.9 -154.3 -155.4 -156.8 -154.2 -164.0 -169.6
Provisions for Bad Debts -300.1 -313.6 -339.1 -356.7 -318.7 -405.4 -451.9 -478.2 -486.0
Salaries, Wages, staff costs -931.1 -929.9 -930.2 -923.6 -938.7 -956.0 -973.9 -1,015.1 -1,053.2
Premises, Depreciation,
-390.7 -399.1 -412.2 -415.6 -422.3 -420.6 -420.9 -421.8 -431.1
Transport
Other Expenses -941.3 -955.4 -967.8 -967.7 -1,020.0 -1,056.0 -1,043.3 -1,059.7 -1,079.7
Total Expenses -3,294.6 -3,340.6 -3,409.2 -3,429.3 -3,480.2 -3,626.2 -3,675.7 -3,767.8 -3,846.8
EXTRAORDINARY
0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.3 0.2
Credits/Charges
Net Profit Before Tax 1,141.7 1,158.1 1,131.4 1,235.2 1,370.9 1,369.0 1,442.6 1,449.4 1,486.3
Corporation Tax -288.0 -283.8 -285.2 -326.7 -368.0 -365.5 -368.7 -347.2 -357.3
Net Profit After Tax 853.8 874.3 846.2 908.5 1,002.9 1,003.5 1,073.9 1,102.2 1,129.0
Source: Bank of Uganda

FINANCIAL STABILITY REPORT – JUNE 2022 71

 Appendix 5: Selected financial soundness indicators for credit Institutions (Percent)

Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22

CAPITAL ADEQUACY
Regulatory tier 1 capital to risk-
22.3 20.3 15.6 16.9 15.8 15.3 14.7 13.7 12.4
weighted assets
Regulatory capital to risk-weighted
23.5 21.5 16.8 18.1 17.0 16.5 15.4 14.6 13.3
assets
ASSET QUALITY
NPLs to total gross loans 7.6 5.3 8.2 6.2 8.0 8.7 8.5 7.5 6.1
Specific Provisions to NPLs 31.2 46.1 46.6 58.1 45.6 48.8 55.7 52.7 51.6
Large Exposures to Total Capital 27.8 39.5 48.5 42.0 42.2 41.0 126.8 141.0 153.1
EARNINGS & PROFITABILITY
(annualized)
Return on Assets -0.3 -3.0 -3.7 1.8 -1.0 0.3 0.7 -0.8 -1.3
Return on Equity -1.7 -16.4 -22.5 11.9 -6.5 2.3 4.3 -4.7 -8.9
Net-Interest Margin 13.3 12.2 12.0 17.3 16.0 16.9 12.6 22.2 21.9
Cost of Deposits 4.1 3.9 4.3 4.0 4.2 4.5 3.5 7.0 6.9
Cost to Income 101.0 115.2 130.2 87.0 103.9 103.9 97.0 102.3 104.9
Overhead to income 78.2 91.7 102.0 68.8 83.0 83.7 73.4 80.2 82.6
LIQUIDITY
Liquid Assets to Total Deposits 56.7 56.7 59.1 62.4 53.7 47.5 52.0 54.3 54.9
Total Loans to Total Deposits 96.7 101.3 96.3 88.8 92.4 95.8 104.2 105.6 98.5
Source: Bank of Uganda

72 FINANCIAL STABILITY REPORT – JUNE 2022

 Appendix 6: Selected financial soundness indicators for microfinance deposit-taking institutions
(Percent)

Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22

CAPITAL ADEQUACY
Regulatory tier 1 capital to risk-
36.6 35.9 35.4 38.5 38.2 36.4 38.6 39.3 38.6
weighted assets
Regulatory capital to risk-
39.4 38.6 38.1 41.3 41.0 39.2 41.1 41.8 41.3
weighted assets
ASSET QUALITY
NPLs to total gross loans 10.8 9.0 6.3 9.8 12.0 17.4 10.1 8.0 6.8
Specific Provisions to NPLs 67.9 46.8 66.3 58.1 70.9 73.6 75.6 69.0 64.9
EARNINGS & PROFITABILITY
(annualized)
Return on Assets -1.4 2.6 2.7 -0.7 -2.3 -4.0 -0.7 4.5 3.8
Return on Equity -4.7 9.3 10.0 -2.6 -7.9 -13.6 -2.3 15.1 13.1
Net Interest Margin 13.1 18.8 24.4 5.5 10.9 15.0 20.3 5.6 11.4
Cost to Income 103.2 88.1 87.1 100.4 108.0 114.0 101.2 80.1 82.5
Overhead to Income 60.9 59.8 59.2 61.1 61.3 60.5 60.6 56.7 58.6
LIQUIDITY
Liquid Assets to Total Deposits 70.9 67.1 68.8 76.1 73.9 72.8 68.9 65.7 65.2
Total Loans to Total Deposits 79.6 76.8 74.9 72.7 72.7 71.3 73.3 67.4 69.1
Source: Bank of Uganda

FINANCIAL STABILITY REPORT – JUNE 2022 73

 Appendix 7: Selected financial soundness indicators for East African Community Partner States
(Percent)

Partner
Indicator Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22
State
Uganda 22.7 22.5 22.2 23.8 23.5 24.1 23.7 25.6 22.8
Regulatory
capital to Kenya 18.5 15.6 16.7 16.5 16.5 18.8 19.6 18.9 18.8
risk- Tanzania 17.9 18.3 18.1 18.9 18.9 19.8 20.2 21.6 20.2
weighted Rwanda 23.6 22.6 21.5 22.3 22.5 22.2 21.5 23.9 23.1
assets
Burundi 26.2 30.6 30.1 29.0 29.0 2.6 3.3 0.8 1.6
Uganda 6.0 5.1 5.3 5.4 4.8 5.4 5.3 5.8 5.3

NPLS to Kenya 13.1 13.4 14.1 14.6 12.3 13.6 13.1 14.0 14.7
total gross Tanzania 10.8 10.4 9.4 9.3 9.3 9.3 8.8 8.5 8.1
loans Rwanda 5.4 5.2 4.5 6.6 5.7 5.1 4.6 4.7 4.3
Burundi 6.2 6.8 5.4 4.8 4.1 4.1 3.5 3.0 2.6
Uganda 2.6 2.6 2.4 2.5 2.7 2.6 2.7 2.7 2.7
Kenya 0.7 1.7 1.6 2.6 3.4 1.4 1.8 2.8 2.6
Return on
Tanzania 2.2 2.2 2.0 2.4 2.4 2.7 2.8 4.3 4.1
assets
Rwanda 1.8 1.9 2.0 2.4 2.5 3.6 3.7 4.4 4.0
Burundi 2.1 3.4 3.9 1.0 1.7 2.6 3.3 0.8 1.6
Uganda 15.2 15.1 14.2 14.7 15.5 14.9 15.6 15.4 15.5
Kenya 15.6 14.8 13.8 22.0 23.4 22.0 21.6 25.1 26.8
Return on
Tanzania 9.9 9.4 7.8 10.0 10.2 11.4 11.5 19.0 18.5
equity
Rwanda 9.9 11.0 11.8 14.5 14.4 14.8 15.0 18.4 16.5
Burundi 19.8 33.1 39.0 8.0 22.6 28.1 0.9 1.6
Foreign Uganda -6.9 -7.5 -6.0 5.5 -6.6 -7.6 5.8 -5.0 -8.3
currency
Kenya 1.7 1.2 1.4 1.8 2.8 1.4 1.8 2.8 2.6
exposure
to Tanzania 7.3 6.2 9.0 5.0 4.9 6.9 7.8 5.5 4.9
regulatory Rwanda -6.6 -7.3 -4.4 -3.2 -4.7 -5.1 -4.2 2.0 -4.3
tier 1
capital Burundi 0.7 7.0 17.0 11.6 4.5 -0.4 2.8 1.7 -1.0
Uganda 49.1 48.8 50.7 47.6 51.5 50.6 48.8 50.6 47.4
Liquid Kenya 55.6 55.8 57.1 57.3 57.3 53.6 56.2 55.0 52.5
assets to
Tanzania 39.0 38.2 37.0 35.6 35.6 31.0 29.4 29.8 28.1
total
deposits Rwanda 36.4 36.0 39.5 35.9 38.1 101.6 133.1 145.1 129.4
Burundi 16.8 14.2 15.5 11.6 11.6 14.5 10.8 14.8 15.5
Source: EAC Partner States Central Banks

74 FINANCIAL STABILITY REPORT – JUNE 2022