Developments in Uganda's banking system: Analytical issues and some lessons for financial sector liberalisation policy (original) (raw)
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Banks and non-bank financial institutions have been set up by local privatesector investors in several African countries. The local banks can provide benefits to the domestic economies but they also present risks, with many having suffered financial distress and bank failure as a result of non-performing loans. The severity of bad debt problems was attributable to moral hazard on bank owners and the adverse selection of bank borrowers, with many banks pursuing imprudent lending strategies, in some cases involving insider lending. Low levels of capitalization, the political connections of bank owners, and access to public-sector deposits contributed to moral hazard. Regulatory policy should aim to strengthen prudential supervision of local banks, particularly of credit policies, to enforce banking regulations and improve the incentives on bank owners to pursue prudent management. 2 Banks are defined as financially distressed when they are technically insolvent and/or illiquid. This paper analyses the causes of financial distress in the local banks in Kenya, Nigeria, Uganda and Zambia, and suggests regulatory policy reforms to reduce the incidence of distress, especially by tackling the problems of moral hazard. It is organized as follows. Chapter I provides some relevant background data on the growth of local banks and the reasons behind this growth. Chapter II provides a brief outline of why moral hazard and adverse selection affect financial fragility. The causes of financial distress among the local banks are examined in chapter III. Chapter IV discusses the potential benefits which local banks offer for the economy, while chapter V discusses the implications for regulatory policy.
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