emmanuel tumusiime - mutebile : regulatory challenges in the use of icts to promote financial inclusion remarks by mr emmanuel tumusiime - mutebile, governor of the bank of uganda, at the digital impact awards africa, kampala, 21 august 2014. * * * management and staff of cyberplc and hipipo ( u ) ltd. invited guests in your respective capacities ladies and gentlemen it gives me great pleasure to address you today on the topic of “ regulatory challenges in the use of icts to promote financial inclusion ”. at the outset, let me express my gratitude to cyberplc and hipipo ( u ) limited for organizing the digital impact awards event. the african development bank defines financial inclusion as the “ provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance to poor and low - income households and their micro - enterprises ”. beginning in 2006, three finscope surveys have been undertaken in uganda to establish the extent of financial inclusion in the country. the latest survey, conducted in 2013, found that : the percentage of the adult population with access to formal financial institutions has risen from 28 percent in 2009 to 54 percent in 2013. this large increase in access to the formal financial sector was almost entirely attributable to the spread of mobile banking. mobile banking has had a transformative effect on access to financial services since it was first introduced in uganda in 2009. there are now 17. 6 million registered subscribers to the six mobile money providers in uganda. these customers are served by 64, 000 mobile money agents. to date, however, the scope of financial services available through mobile banking has been rather limited, in most cases to basic payment services, such as transferring money from one customer to another or paying bills. customers can also use mobile banking to save money, as an alternative to holding cash. money held in the form of electronic funds on a mobile phone has analogies with a demand deposit in a bank ; it is non interest bearing but accessible on demand. however, there are undoubtedly opportunities for product innovation within mobile banking, in particular to extend the type of services available beyond basic payments to include savings products and possibly even loans. in discussing the regulatory challenges which arise from growth of mobile banking, it is useful to begin by clarifying why financial services require regulation. the main rationale for financial regulation is prudential and involves two objectives. first, financial regulation aims to protect the systemic stability

deposits. this is the essence of the prudential regulation of banks ; the objectives of which are the avoidance of banking crises and the protection of depositors. these objectives are both clear and, other than in the most exceptional of circumstances, achievable. what is problematic is to expect central banks to use their regulatory tools to achieve other objectives besides those of prudential regulation ; for example attempting to direct the credit allocations of banks. as with monetary policy, this will create conflicts of interest which are likely to bis central bankers ’ speeches undermine prudential regulation and make it harder to evaluate the performance of the central bank and hold it to account. 3. the operational independence of the central bank in common with many other central banks around the world, the bou has operational independence. in uganda this independence is guaranteed by the constitution which explicitly states that : “ in performing its functions the bank of uganda shall conform to this constitution but shall not be subject to the direction or control of any person or authority ”. what does operational independence actually mean in the context of the central bank and why is it important? in essence operational independence pertains to the independence of the central bank to set its monetary policy instruments, such as the policy interest rate, free of any interference from other persons or authorities, such as ministries of finance. it does not mean that the central bank is free to set its own policy priorities or objectives. whether or not the central bank should prioritise the control of inflation or some other objective is an inherently political question which must be determined by a political organ. often this will be determined by the legislature, with the policy objectives set out in legislation, as is the case in uganda where the bank of uganda act specifies the functions of the bou and places emphasis on “ achieving and maintaining economic stability ”. within the specific framework of politically determined policy objectives, a central bank with operational independence is free to set its policy instruments to best achieve those objectives. operational independence is regarded as being of fundamental importance in the institutional governance of central banks because of the notion of the “ time inconsistency ” of economic policy making. this refers to the incentives that policymakers with short time horizons have to take decisions which may generate short term gains but at the expense of long term costs, and the recognition that rational private sector agents will understand the incentives facing these policymakers and take actions which will circumscribe any short term gains without necessarily mitigating the long term