banking although the number of deposit accounts held in commercial banks in uganda has grown rapidly, tripling since 2005, commercial banks only serve 20 percent of the adult population, according the 2013 finscope survey. the provision of banking services involves substantial fixed costs, which is an obstacle to expanding services to the unbanked, especially in rural areas. as such, an expansion of banking services requires new business models which can deliver services at much lower costs. one such model is agent banking. agents are normally people with small businesses, who are contracted by the banks to undertake transactions on their behalf, such as collecting deposits, facilitating customer withdrawals and making payments, for a fee. the advantage for the bank is that it can avoid the heavy expenses involved in setting up a bank branch. agent banking is restricted under the existing banking laws, hence we are currently in the process of amending the financial institutions act to permit the use of authorised agents by banks, with safeguards for bank customers. savings and credit cooperatives there are currently approximately 2, 000 savings and credit cooperatives in uganda. these are mutual associations whose members make deposits in, and can access loans from, their sacco. although there are a handful of quite large saccos, whose members comprise employees of large organisations, the vast majority are very small. saccos undoubtedly play an important role in extending financial services to the unbanked. the 2013 finscope survey revealed that 622, 000 adults, about four percent of the adult population, held accounts in saccos in 2013, a fivefold increase since 2009. although saccos are registered with a public agency – the registrar of cooperatives – they are not subject to any prudential regulation, and hence there are no safeguards for members ’ savings. bis central bankers ’ speeches the dilemma for regulatory policy is that effective prudential regulation of a very large number of small, informal financial institutions, such as the saccos, is not feasible. it is far too costly for any regulator to supervise effectively any more than a tiny fraction of the existing saccos. consequently the approach we have adopted at the bou is to try and encourage some of the larger saccos, which have hundreds or even thousands of members, to graduate to the status of microfinance deposit taking institutions ( mdis ), and thus become subject to the mdi act. to facilitate this, the mdi act is being amended to make it more compatible with the organisational structure of saccos, for

emmanuel tumusiime - mutebile : the effect of regulation on financial inclusion remarks by mr emmanuel tumusiime - mutebile, governor of the bank of uganda, at the national microfinance conference 2015 “ financial inclusion in a regulated environment in the east african community ”, kampala, 29 january 2015. * * * good morning, ladies and gentlemen, my intention this morning is to outline the regulatory approach which we have adopted in uganda with regard to the promotion of financial inclusion and then to discuss the results of that approach. i will start by expounding the principles which guide the regulatory approach. the key principle which guides our regulatory approach to the promotion of financial inclusion is that financial regulations cannot force financial institutions to provide customers with financial services when this is not profitable for them to do so. the main cause of financial exclusion is the difficulty in serving the financially excluded in a commercially viable manner. these difficulties arise because the costs of serving the financially excluded are high, especially in rural areas, whereas the income which can be generated from the poor is low. consequently financial exclusion can only be reduced through innovations which can lower the cost of providing financial services or which can create new financial services which are both wanted by and affordable to the poor. in a market economy, the institutions best placed to generate these innovations are in the private sector ; institutions which have the incentives and expertise to do so. the rapid growth of mobile banking in east africa is a phenomenon which has been driven by private sector initiatives. private sector banks and telecommunications companies, driven by the profit motive, have utilised new technologies to create new markets and have thus brought financial services to millions of people who previously had no access to these services. in these circumstances, what is the appropriate role of financial regulation? the primary objective of financial regulation is prudential ; it is to protect the savings of ordinary citizens from reckless or abusive management of financial institutions, and to preserve the stability of the financial system. to the extent that ordinary citizens have greater confidence in the safety of their deposits in financial institutions, prudential regulation can contribute to the deepening of the financial system. inevitably, however, there are often tradeoffs to be considered when innovations are proposed by the private sector which have the potential to promote financial inclusion. the approach which we have adopted in uganda is to avoid placing regulatory restrictions on innovations in the financial sector provided that these innovations do not conflict with the primary objectives of prudential regulation. in some cases,