Remarks by
Prof. Emmanuel Tumusiime-Mutebile
Governor, Bank of Uganda
International Association of Deposit Insurers -
Africa Regional Committee Conference
Serena Lake Victoria Hotel & Spa, Kigo
September 16 - 19, 2019
Hon. Minister of Finance, Planning and Economic
Development
The Board Chairman and Members of the Board of the
Deposit Protection Fund of Uganda
The Secretary General of the International Association of
Deposit Insurers
The Auditor General
Board Members and Chief Executive Officers of Deposit
Insurance Agencies
Board Members and Chief Executive Officers of
Financial Institutions
Chief Executive Officers of Financial Sector Safety
Players
Distinguished delegates
Ladies and gentlemen
Good morning to you all.
I wish you all a very warm welcome; especially to the
participants who have travelled from abroad to Uganda,
and to this splendid resort at Kigo right next to Lake
Victoria. Thank you all for honouring our invitation to
the first conference by the Africa Regional Committee of
the International Association of Deposit Insurers,
hosted in Uganda.
I must say that the theme of this conference, 'Why
Deposit Insurance', was very well chosen as it points
attention to a key component of the financial system
safety net that is meant to promote financial stability.
Fundamentally, deposit insurance exists to protect the
banking system against the risk of bank "runs", that is,
unrestrained demand for cash by savers, which can
cripple the financial intermediation process, disrupt the
payments system, and constrain the performance of the
Financial Sector.
In the normal course of events, healthy banks are
encouraged to lend the deposits that are entrusted to
them in a process called financial intermediation, where
banks make savings available for investment and
economic development. However, when banks face
difficulties and become unable to service their
obligations as they fall due, their creditors, including
depositors, risk suffering ruinous losses.
By relying on customer deposits that can be withdrawn
at little or no notice, banks are exposed to the risk of a
run on deposits as panic-stricken customers take out
their funds quickly before the Bank becomes insolvent.
In order to mitigate the risk of bank runs as well as to
protect the interests of depositors, deposit insurance
systems are established to guarantee the nominal value
and liquidity of deposits up to a certain size, funded
with premiums paid by the institutions whose deposits
are insured. Deposit insurance protects depositors, gives
them comfort that their funds are not too much at risk,
and ensures the viability of banking system.
In Uganda, the need for effective deposit insurance was
exposed during the resolution of several local banks that
failed during the late 1990s and early 2000s. Indeed, the
Bank of Uganda (BoU) has recently been the subject of a
Parliamentary probe seeking final closure of the
numerous issues and contested claims that arose out of
the associated receivership and liquidation processes.
Notably, the depositors of those failed banks were fully
compensated, for the most part, using taxpayers' funds
as the Government sought to preserve public confidence
in the banking system.
Needless to say that such implicit deposit insurance by
the Government imposed an unanticipated financial
burden on the limited fiscal space.
Seeking to foster financial sector soundness, several
reforms were undertaken in the banking system. These
reforms included but were not limited to:

tightening banking laws and regulations designed to
constrain undue bank risk-taking and inappropriate
insider dealings;

upgrading bank supervision and examination
systems;

providing liquidity through the central bank to
prevent bank illiquidity problems from turning into
insolvencies; and

intervening to resolve failing banks.
Of specific relevance was the introduction of a deposit
insurance scheme that was initially operated within the
BoU. An effective deposit insurance system is expected
to yield faster, smoother, and more predictable
resolutions of failing banks, not least because it follows
predetermined "rules of the game," rather than being
discretionary and ad hoc.
And it stands to reason to say that a more rules-based
deposit insurance scheme operates best when it is
autonomous. Therefore, in 2016 the Financial
Institutions Act 2004 was amended to provide for the
establishment of an autonomous Deposit Protection
Fund of Uganda, among other reforms.
Another vital reform, worth highlighting here, is the
recent increase of the deposit insurance threshold to USh
10 million from only USh 3 million previously.
The higher threshold is likely to enhance public
confidence and encourage greater customer deposits,
thereby expanding the funds available for financial
intermediation by the banking sector. Larger pools of
deposits would reduce the cost of loanable funds for
banks, spur credit expansion, and ultimately support
faster economic growth.
At this point, it is necessary to address any concerns
about the safety of the deposits that exceed the insurance
threshold of USh 10 million.
The protection of large uninsured depositors of failing
banks, will continue to take place through various forms
including: a purchase and assumption transaction, in which
all of the deposits (insured and uninsured alike) of the
failing bank are transferred to another bank; a financially
assisted merger of the failing bank with another bank; or
the provision of financial assistance to the failing bank to
avert its failure as happens during statutory takeover by
the regulator.
Mindful of the risk that deposit insurance would stoke
moral hazard through encouraging banks to take greater
risks, I want to assure you that the BoU is committed to
effective supervision of bank risk-taking, with particular
attention to the quality and types of assets that banks
acquire as well as the amount of capital that banks hold
relative to the risks they take.
In addition to the risk-based micro-prudential
supervision, the BoU also undertakes macroprudential
regulation and supervision to ensure the stability of the
entire system, including stress testing to ensure that the
sector is resilient to various shocks.
Effective deposit insurance can contribute to financial
stability, only with strong bank regulation and
supervision in place. Deposit insurance is no substitute
for effective regulation and supervision of banks.
Through a risk-based supervision framework, the BoU is
committed to spotting problems well before insolvency
occurs and compelling banks to take prompt and
preemptive corrective action.
As I come to the end of my remarks, I must stress the
need for the nascent Deposit Protection Fund (DPF) of
Uganda as an autonomous institution to prove its
credibility and fitness for purpose before it gets tested in
a period of difficulty.
The DPF must be well funded, capably staffed, and
should maintain the support of the central bank as well
as that of the Government as partners in ensuring the
stability of the financial system.
The DPF must also maintain strong links with regional
and international peers so as to learn from the diversity
of experiences and to maintain best practices.
I look forward to working with the DFP as it plays its
role within the Africa Regional Committee of the
International Association of Deposit Insurers by
contributing to the stability of financial systems through
international cooperation and maintaining such a
virtuous network as has gathered here for this
conference.
It is now my distinct privilege to invite the Honourable
Minister of Finance to address this audience.
I thank you all for listening to me.