Alternative Approaches to Regulating Financial Institutions
"Proposals on different approaches to regulating the financial sector "
traditional model of regulating the financial sector primarily concerned with rules
and regulations has not and will not work for the region. This approach has
been slow in fostering economic advancement and has excluded a large portion of
the population from participating in the economy. This is evidenced by the
sluggish economy, low levels of access to banking services and facilities among
At the same
time, across the region and in most of sub Saharan Africa, regulators are trying
to catch up with the changes in the sector. In a short time period, we have
witnessed the emergence of new regulations and strategies that are geared towards
keeping the regulator relevant in this sector. In Uganda for example, a suite
of new regulations has been drafted to include Islamic banking and agency
banking. In Kenya, there was a decision by the Central Bank to cap interests’ rates
which move was highly criticized. With regulators doing their best to regulate
the financial sector, the regulations do not seem to address wholesome issues
within the sector.
and regulations serve an important role especially in developing societies that
are agrarian. Even in these countries
one has to be mindful of over regulation, because it tends to create resultant
alternatives such as mobile money which had until the recent imposition of a
percentage tax on any transaction, lowered the number of transactions done in
regulations are usually inadequate in defining what constitutes a financial
institution. With the emergence of new technologies, the business functions undertaken
by any company can potentially qualify it as a financial institution irrespective
of whether it is regulated or licensed under the Financial Institutions Act or
similar regulation. An example would be telecom companies, would they qualify
as money lenders or banks by virtue of the fact that they accept deposits and
extend credit through their mobile money platforms? Does a function automatically
make an entity a financial institution?
to a regulation based approach would be a principles based approach which is
fluid in nature. In this approach, the regulator sets guidelines that point to
a certain desired outcome with minimal oversight and reporting requirements. However
with low levels of financial literacy, this approach presents a number of risks.
The choice between the two approaches is not an obvious one. For Uganda’s case,
despite the robust financial laws post 2004, we have witnessed a closing of
many banks since 2004. On another limb, more financial institutions have opened
businesses since 2004, which could be credited in part to the rules and regulations
that have created an enabling environment.
which approach is best, we must inquire what the rationale for regulation is. Financial
regulation serves numerous purposes, but most notably protection of consumers
of financial services. Financial regulation is also intended to steer the
economy in whichever direction the government desires. It can be used to
control forex in the economy and to monitor liquidity. It can be used to
enhance trade and to boost specific sectors in the economy. It may also be used
for political ends.
approach is used, the regulator still has to grapple with the basis or the
model of regulation. Regulating the sector could be based on the legal status
of the institution. This means that an organization’s legal status determines the regulator
which is tasked to oversee its activities. For example if the status is that of
a bank, the regulator would be the Central Bank, if it is not a bank, another
regulator would be appointed even if the services are akin to the workings of a
the sector institutionally offers convenience and a sense of control which is
advantageous to the regulator only. As alluded to earlier, the similarity in function of
institutions could mean that an institution could have the identity of one or
more institutions. It can be firmly suggested that an institution which offers
insurance and banking or quasi – banking services should obtain a license from the
Central Bank and from the insurance regulator, or a telecom which accepts
deposits and extends credit should be regulated by the Central Bank in addition
to the regulator for telecoms. The pandemonium that could result from this is
quite obvious and businesses would resist this.
regulation based on the legal status is not practical, then the business
function could be the basis of regulation. Supervisory oversight should be determined by the
business activities/functions that are being transacted without regard to the
legal status. Therefore each type of business in an institution could have its
own regulator. However this still presents a number of problems.
An integrated approach would be the preferred option.
Under this approach, a single regulator offers oversight and business
regulation for all sectors of financial services. This approach is efficient in
a small market but maybe rendered useless in a rapidly growing economy. From a
number of experts however, a unified regulator has been mooted as ideal to
bring about consistency and uniformity. Uniformity however cannot be achieved
when there are a number of local conditions to be taken into account,
flexibility is required in order to accommodate all players.
no one size fits all approach, due care must be taken to accommodate different local
conditions. Regulation is useful and in making this regulation, a case by case
study looking into the actual need/changes of the financial sector as well as
the rationale for regulating the sector will be useful in enabling a functional
Author, Henry Owen
at Shonubi Musoke & Co.