services, capital and labour within the eac ; hence it has profound implications for financial services. in principle the common market should eventually allow banks headquartered in any one partner state the “ right of establishment ” in each of the other partner states and allow citizens of each partner state to purchase financial services from banks in the other partner states. precisely how the “ right of establishment ” will operate with respect to banking has yet to be decided. for the banking industry, a key question is whether all banks, including those headquartered within the eac, should only be allowed to take deposits in any individual partner state if they operate as a fully capitalised subsidiary in that state, rather than merely as a branch. i think that the recent experience in the european single market should caution us against permitting bank branching across borders. the creation of a common market should lead to more efficient financial services. i mentioned earlier that i believe that some consolidation in the ugandan banking sector will be necessary and beneficial. in particular larger banks will be better placed to take advantage of the expansion in the size of the market created by the common market and to reap economies of scale which can bring down the very high operating costs as a percentage of assets which afflict banks in uganda. lower operating costs will in turn help to reduce intermediation spreads which will benefit bank customers in the real sectors of the economy. to create an efficient common market in banking services it will be necessary to harmonise many aspects of bank regulations across all five partner states. this is necessary to create a level playing field for banks and to prevent regulatory arbitrage whereby banks aim to operate from the jurisdiction within the eac with the weakest regulations. i mentioned earlier that the bank of uganda will advise the minister of finance to raise the minimum paid up capital requirement for banks. the increase in part is motivated by the need to align our capital requirements with those of our partners in the eac. kenya will raise its minimum capital requirement to ksh 1 billion, which is nearly $ 13 million, by 2012. other aspects of bank regulations will also need to be harmonised, including permissible activities, restrictions on loan concentrations and liquidity requirements. conclusion i have covered a lot of ground in this talk so i shall refrain from detaining you for much longer. i would like to finish with the following conclusions. i am convinced that the banking industry faces exciting challenges in the years ahead. the prospects of sustained economic growth coupled with east african economic integration will offer banks

requirement which relates a regulatory definition of capital to risk weighted assets. at the global level, concerns have focussed on loopholes in the capital adequacy requirements : banks in western countries were able to “ game the system ” to reduce the amount of capital that they were required to hold, thereby driving up their leverage. we have not faced similar problems in uganda and i don ’ t think that radical changes in capital adequacy requirements are needed yet. we already impose a higher capital adequacy requirement – 12 percent of risk weighted assets – than the minimum of 8 percent stipulated in the basel accord and most banks in uganda currently operate with much more capital than the statutory minimum. we do, however, need to make two revisions to the capital adequacy requirements to cover risks which were not previously considered pertinent but which have become more so. first, we will shortly introduce a capital charge for market risk, which is necessary for full compliance with the basel i accord. secondly, we will eventually introduce a capital charge for operational risk, based on one of the methodologies in the basel ii accord. we require more a radical change to the minimum paid capital requirement for banks. the current statutory minimum of shs 4 billion, which was set six years ago, is far too low. it does not ensure that new entrants to the banking industry have sufficient capital to support their operations before they reach a scale where they can begin to generate profits. it has also fallen way below the minimum statutory levels imposed by our neighbours in east africa and elsewhere in africa. although the banking system as a whole in uganda is currently well capitalised, the evolution of the banking system over the long term is likely to intensify the risks to which banks are exposed. hence i believe that the changes i have just described will help to ensure that banks are better able to withstand shocks to their balance sheets. i think that the higher minimum paid up capital requirement will also stimulate a degree of consolidation in the banking industry in uganda, with fewer but larger commercial banks. i will return to this issue when i discuss the implications of the east african common market. the scope of allowable banking activities the question of whether commercial banks should be allowed to engage in “ non bank ” activities, and if so, what specific activities should be permitted, poses acute dilemmas for regulatory policy. in developing countries, the objective of promoting a diversification of what are often very narrow financial markets with very few non