The Bank of Uganda's role in
environment on which economic
socio-economic transformation
By Michael Atingi-Ego
T
Deputy Governor
he Bank of Uganda (BoU)
recently updated its mission
statement during the
formulation of its new strategic
plan for 2022 to 2027 to read "To
Promote Price Stability and a Sound
Financial System in Support of
Socio-economic Transformation in
Uganda". The mission aligns with the
national Vision 2040, i.e., "A
Transformed Ugandan Society from a
Peasant to a Modern and Prosperous
Country within 30 years".
Achieving sustainable
socio-economic transformation
requires the consistent participation of
all stakeholders in a multi-sectoral
national endeavour. Accordingly, our
mission statement emphasises the
BoU's strategy, in partnership with the
supervised financial institutions, for an
impactful contribution to national
socio-economic transformation
mindful of environmental
sustainability.
The mission statement signals the
central bank's goal of contributing to
the transition from subsistence to the
market economy. The Statistical
Abstract for 2021 by the Uganda
Bureau of Statistics reported an
increase in the proportion of working
persons engaged in purely
subsistence agriculture from 39% in
2016/17 to about 48% in 2019/20.
In the same report, subsistence
farmland in 2017 was 104,838 (sq. km)
or 98% out of 106,662 (sq. km) of
agricultural farmland. Commercial
farmland was a mere 1,824 (sq. km) or
2% of the farmland. Shifting the
peasant population out of the
unsophisticated subsistence
economy would increase output per
acre, yield surplus production for sale
in markets, and boost incomes from
agriculture.
In pursuing its mission, the BoU will
undertake strategic initiatives towards
enhancing price stability, financial
system soundness and resilience,
financial system development, and
institutionalising environmental, social
and governance (ESG) sustainability in
the financial sector.
Enhancing price stability
The commercialisation of agriculture
requires significant investment and
credit for agro-industrial
development, boosting small-scale
farmers' productivity and incomes,
and creating off-farm employment in
the agricultural supply and value
chains where small and
medium-sized enterprises (SMEs) play
a crucial role. Sustainable investment
requires a predictable supportive
environment of stable prices,
including the exchange rate.
Price stability enables long-term
planning, thereby helping to lower the
risk of borrowers failing to pay back
loans, especially in high-risk ventures
such as rainfed agriculture. Further, an
environment of stable prices
Michael Atingi-Ego
Deputy Governor
Bank of Uganda
The financial sector
enhances price
stability by
transmitting
monetary policy
decisions and
actions through
credit extension to
the real economy
and households.
preserves the value of financial
savings in the formal financial
sector, which offers interest
rates above the level of inflation.
This motivates an increase in
the savings rate, thereby
availing more funds for
affordable lending to
commercial projects.
The BoU is modernising its
analytical and forecasting tools
to improve the assessment of
monetary policy interactions
with oil prices and incomes,
climate change, and other
environmental shocks that
affect agriculture. Refining the
BoU's policy toolkit will foster
price stability in a rapidly
changing environment, thereby
optimising the impact of central
bank actions.
Enhancing financial
system soundness and
resilience
The financial sector enhances
price stability by transmitting
monetary policy decisions and
actions through credit
extension to the real economy
and households. However, this
transmission role is only
possible if the financial sector is
safe, sound, and resilient. These
are critical requirements for
attracting the financially
excluded poor and vulnerable
segments at the bottom of the
economic pyramid.
The BoU is enhancing financial
system soundness and resilience by
strengthening its tools for risk-based
supervision, including updating the
capital requirements of financial
institutions, integrating advanced
technological solutions in the
supervisory reporting and analytics
regime, and developing regulatory
guidelines for emerging issues such
as climate change risk
management, cloud computing, and
cyber security. In addition, BoU is
administering government credit
facilities for value-addition in
agriculture and SMEs to extend
access to affordable credit.
Enhancing financial system
development
Financial development contributes
to economic growth and reduces
poverty and inequality through the
financial inclusion of the poor and
vulnerable groups. Moreover,
financial inclusion helps in risk
management and broadens the
options available for investment. In
addition, providing financial services
to SMEs offers a potent vehicle for
transitioning from the subsistence
economy into the market economy
because they are typically
labour-intensive and more widely
spread across the country.
Accordingly, the BoU pursues
financial system development by
promoting financial inclusion and
advancing payment systems. The
central bank aims to push financial
services to the "last mile" by
supporting technology-driven
financial services and innovation by
financial technology companies
(FinTechs) through mobile money
and agency banking. In addition, the
BoU is leading the development of a
National Payments Switch for
interoperability and lower cost of
payment services, supervising
payment systems service providers
and operators, as well as promoting
consumer protection.
Institutionalisation of ESG
sustainability
ESG sustainability is vital for
sustainable finance and involves
taking environmental, social, and
governance considerations into
account when investing in the
financial sector. The environmental
considerations include climate
change mitigation and adaptation,
the preservation of biodiversity,
pollution prevention, and the circular
economy that optimises resource
usage and recycling. Social
considerations account for
inequality, inclusiveness, labour
relations, investment in human
capital and communities, and
human rights issues. Similarly, the
governance concerns include
effective management structures
and employee relations, together
with ensuring the inclusion of social
and environmental considerations in
the decision-making process.
Sustainable finance channels private
investment into the transition to a
climate-neutral, climate-resilient,
resource-efficient, and fair economy,
thereby complementing public
money. Ignoring climate change and
environmental threats stokes severe
physical risks (from extreme weather
events like floods, fires, mudslides,
and drought), as well as transition
risks (from policy changes, litigation,
technological substitution in support
of less carbon-intensive products,
changing consumer behaviour
affecting markets, and reputational
jeopardy arising from the
stigmatisation of carbon-intensive
sectors). These risks threaten the
soundness of individual financial
institutions through increased credit
and market risks and imperil the
entire financial industry.
Further, environmental crises exert
economic stability, growth,
inequality, and employment
challenges through the destruction
of assets or interruption of
production. Also, climate change
disproportionately hurts the people
living in poverty, particularly those
dependent on agricultural and
pastoral livelihoods, especially the
peasants in Uganda and the
marginalised communities, women,
and girls. Finally, sustainable finance
also aids social inclusion by
providing financial services,
including appropriate loans, to the
vulnerable, underserved population.
To institutionalise ESG sustainability
in the financial sector, the BoU has
so far focused on creating
awareness among financial
institutions and formulating a
climate risk policy. We are also
developing guidelines for
institutionalising ESG sustainability
in the operations of supervised
financial institutions without
compromising their stability. The
guidelines will mainly aim to
a. re-orient financial flows towards
investment for sustainable and
inclusive growth that creates
value for the communities they
operate in,
b. manage financial risks stemming
from climate change, natural
disasters, environmental
degradation, and social issues
such as securing the livelihoods
of the vulnerable population in
agrarian peasantry, and
c. foster transparency and a
long-term perspective in financial
and economic activity.
Implementation of the guidelines
will encourage financial institutions
to align their business models to
address socio-economic challenges
by creating value for the
communities they serve. It will be
necessary to redefine what business
success means at a corporate level
and set standards towards
transforming institutions into
essential players in economic
development. In addition, financial
institutions will need to strengthen
the link between a healthy natural
activity depends and the balance
sheets of their institutions by
holistically embedding environmental
sustainability in their core business
strategies.
Further, financial institutions will be
motivated to leverage emerging
technologies in channelling capital
towards creating decent jobs and
sustainable economic opportunities,
particularly for the underserved and
vulnerable population, while
improving operational efficiency. In
addition, they will be encouraged to
collaborate with FinTechs to increase
financial outreach and inclusion
efficiently.
Financial institutions will also enhance
their governance mechanisms
through increased accuracy and
transparency in reporting activities
that create value for their host
communities. A new approach of
integrated reporting focusing on value
creation for communities will go
beyond regular financial reporting
aimed at shareholder value creation. It
is expected that the compliant
financial institutions will have easier
access to reasonably priced
sustainable, responsible and impact
(SRI) assets that are now globally
available to fund bankable projects for
social, environmental, and economic
sustainability.
Enhancing other existing
initiatives
The BoU will appropriately enhance its
participation in promoting
development financing through its
administration of the Agricultural
Credit Facility (ACF) and Small
Business Recovery Fund (SBRF). The
ACF and SBRF are government
partnerships with commercial banks
and other financial institutions.
The ACF provides affordable
medium-to-long-term loans to
projects engaged in agricultural value
addition, such as agro-processing and
commercialisation. And the block
allocation innovation under the ACF
offers loans to borrowers with
non-traditional collateral, such as the
borrowers' character and movable
property, thereby serving women,
youths and those who lack land titles
or inherited property.
In addition, the BoU is administering
the SBRF, which was set up in 2021 to
support micro, small and
medium-scale enterprises negatively
affected by the Covid-19 pandemic.
The SBRF disburses loans to eligible
borrowers through participating
financial institutions, broadly following
the ACF model.
The BoU will leverage its institutional
strengths to crowd-in financial
resources and support, including from
the Government, development
partners, and impact investors keen on
the strict deployment of resources tied
to virtuous purposes, including the
creation of fruitful jobs and sustainable
new economic opportunities.
Conclusion
The successful pursuit of the BoU's
sustainability agenda will yield a
stronger and more resilient financial
sector that significantly contributes to
the actualisation of the national Vision
2040 and the United Nations
Sustainable Development Goals
(SDGs).