PROCEDURE FOR SETTING UP A COMMERCIAL BANK (UGANDA)- TIER 1

By Andrew Kakaire LLB (MUK) Dip. LP (LDC)

This paper examines the legal process for one to set up a commercial bank in the
Ugandan legal regime, it does not go without saying that the practical aspect of
the procedure may have few changes but these in effect will have to conform to
the set legal procedure.
INTRODUCTION
The financial sector in Uganda is comprised of four major series that are
categorised as Tiers and these include1;
Tier 1 – Commercial Banks
The Financial Institutions (Revision of Minimum Capital Requirements)
Instrument No. 43 of 2010 in accordance with section 26(5) of the Financial
Institutions Act 2004, revised the Minimum Capital requirements of Banks to One
million, two hundred and fifty thousand currency points (25,000,000,000/=)
Tier 2- Credit Institutions
The Minimum Capital requirement for Tier2 Institutions is 50,000 currency points
(1,000,000,000/=) as per section 26(3) of the Financial Institutions Act 2004.
Tier 3- Micro Finance Deposit Taking Institutions (MDI’s)
The minimum capital requirements for Tier3 institutions is 25,000 currency
points (500,000,000/=) as per Section 15(1) of the Micro Finance Deposit Taking
Institutions Act 2003 and Regulation 6 of the Micro Finance Deposit Taking
Institutions (Capital Adequacy) Regulations 2004.
Tier 4- Micro Finance Institutions
These according to the Tier 4 Microfinance Institutions & Money Lenders Act,
2016, s; 4 include
a) SACCOs2
b) Non deposit taking microfinance institutions
c) Self-help groups
d) Community based microfinance institutions
NB. One Currency point = 20,000/=

1
https://www.bou.or.ug/bou/media/from_the_bank/Minimum_Capital_Requirements_FIs_Supervised_by
_BoU.html accesed on the 30th December 2017
2
Under s;5 Savings and Credit Cooperative or a registered society licenced under s;40 of the
Tier 4 Microfinance Institutions & Money Lenders Act, 2016

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COMMERCIAL BANKS (TIER 1)
The main legislation in regard to this aspect is the The Financial Institutions
Act No.2 of 2004 (as amended by the Tier 4 Microfinance Institutions and Money
Lenders Act, 2016) Part I, II, IV, Part V: sections: 34, 37-39, Part VII: Sections: 52-
57, Part VI: Sections 60(1), 61, 62, 63, 64, Part VII: Sections: 77 & 78, Part XIV:
Sections 129-131. Schedules: 1st Schedule, 2nd Schedule, 3rd Schedule, however for
further clarification one may have to refer to the aforementioned legislations;
a) The Financial Institutions (Amendment Act), 2016 Please note
amendments especially to 2st & 2nd Schedules which introduced
Islamic Banks and Islamic Non-Bank Institutions)
b) The Foreign Exchange Act, 2004 Sections 8 & 17
c) The Tier 4 Microfinance Institutions and Money Lenders Act, 2016
Parts I, II, III, IV, V, Section 14. 1ST & 3rd Schedules.
d) The Micro Finance Deposit-Taking Institutions Act No. 5 of 2003, (as
amended by the Tier 4 Microfinance Institutions and Money
Lenders Act, 2016)Parts I, II, III (Sections: 18 & 19), Part IV
(Sections: 21-23, 46, 55, 85, 88, 90) 1st Schedule, 2nd Schedule
e) The Anti Money-Money Laundering Act, 2013
f) The Cooperative Societies Act, Cap. 112
g) The Companies Act No 1 of 2012
h) The Contracts Act, 2010
PROCEDURE
1. Start by setting up a company3.
Section 3 of the Financial Institutions Act, 2004 (herein after refferef to as the
F.I.A) defines a company as one incorporated or registered under the Companies
Act4 and includes the Uganda Development Bank established by the Uganda
Development Bank Act5, a building society duly incorporated under the Building
Societies Act6 and any institution classified as a financial institution under the
F.I.A.
A company is defined under Section 4 of the Companies Act, 2012.
According to Section 10(1) of the F.I.A, a company proposing to transact or carry

3
https://www.academia.edu/35522438/PAPER_ON_COMPANY_LAW_IN_UGANDA accessed on the 28th
December, 2017.
4
Companies Act No. 1 of 2012
5
The Uganda Development Bank Act Cap 56
6
The Building Societies Act Cap 108

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on business as a financial institution shall apply in writing to the Central Bank
for a license under the Act.
The application shall be in the form in the 1st Schedule of the Licensing
Regulations7 according to Regulation 11(1).
Section 4(1) of the F.I.A provides that a person shall not transact any deposit-
taking or other financial institution business in Uganda without a valid license
granted for that purpose under the Act.
Section 4(2) F.I.A emphasizes the fact that a license shall not be granted to a
person to transact business as a financial institution unless it is a company.
The amendment of the F.I.A, Section 4(2a) provides for agency in the financial
institutions business and that the Central Bank shall make regulations in
respect of agents and agent banking.
The Central Bank in this case is the Bank of Uganda established under the Bank
of Uganda Act, Cap. 51.
The application for a licence shall contain the requirements of Section
10(2), (6) and (7) of the F.I.A. (Regulation 12)

2. Application for a licence

(1) A company proposing to transact or carry on business as a financial
institution shall apply, in writing, to the Central Bank for a licence under this
Act.
According to S; 10(2) of the Financial Institutions Act, 2004 an application for a
licence under this section shall contain the
following information—
(a) the name and address of—
(i) the proposed financial institution;
(ii) the directors;
(iii) the shareholders;
(b) the nationality of directors;
(c) the nationality and shareholding of each shareholder;
(d) the proposed location where the financial institution is going to operate from;
(e) the estimated number of persons to be employed;
(f) the qualifications, experience, nationality and other relevant particulars of
the proposed management and staff;

7
Financial Institutions (Licensing) Regulations, statutory instrument No. 41 of 2005.

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(g) the capital structure and earning prospects of the financial institution;
(h) the applicant’s business, financial plans and earnings forecasts
namely,balance sheet, income statement and cash flow, for at least three years
and sufficient detail to describe the operating plan, demand for financial
products and services and existing competition in theproposed market;
(i) a summary of the applicant’s board risk management policies and management
operating procedures and systems that will ensure the integrity of its financial
controls;
(j) a description of the applicant’s proposed organisational and management
structure, reporting lines and responsibilities of its Board;
(k) any other information relating to the viability of the financial institution or
other matters as the applicant considers relevant to its application.
S;11 of the Financial Institutions Act 2004 provides factors to be considered in
making a decision to grant a licence
The Central Bank shall, in considering an application for a licence under section
10 of this Act, require to be satisfied as to—
(a) the financial condition and history of the applicant;
(b) the nature of the business of the applicant including the range of services
and products proposed;
(c) the competence and integrity of the proposed management;
(d) the adequacy of the applicant's capital structure, earning prospects, business
plans, financial plans;
(e) the convenience and needs of the community to be served;
(f) geographical locations and branch distribution network of the proposed
business;
(g) whether the directors and officers of the applicant are fit and proper
persons for the purpose of transacting business as a financial institution,
according to the criteria set out in the Third Schedule to this Act and such other
criteria as the Central Bank may determine;
(h) the structure and shareholding of the group of companies of which the
applicant forms a part or intends to form a part;
(i) whether the applicant is or will be able to apply or maintain adequate,
effective and proper internal control systems when conducting financial
institution business under the licence;
(j) whether public or economic interest will be served by the granting of the
licence;
(k) whether the promoters, controllers, and substantial shareholders are fit and

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proper persons;
(l) whether the institution's business is or is required to be directed by atleast
two individuals;
(m) the existence of a moratorium in force against the licensing of new financial
institutions;
(n) any other matter which the Central Bank may regard as relevant to the
application or to the applicant.

Section 10(3) F.I.A specifies the classes of licences given by the Central Bank for
the financial institution business. For the bank business, the applicant shall be
issued with Classes 1, 2, 3, 4 or 9 considering their financial plans and ability.
Therefore, sub-section 4 is to the effect that the Central Bank shall not be
precluded from issuing other classes of licenses which by reason of the other
financial services fall within the scope of the F.I.A.
The applicant is therefore required to state the class of license it seeks in its
application. Regulation 11(2)
The applicant shall pay a non-refundable fee of 1,000,000/=(Uganda Shillings One
Million) for the application. (Regulation 11(3))
The Central Bank shall investigate and prepare a report in respect of the
application within 6 months of receiving all the required information. (Reg. 14)
It is at this stage that the requirements in Sections 11 and the 3rd Schedule of
the F.I.A are examined by the Central Bank.

The Central Bank shall then consider the application and report within fourteen
days from the six months and either grant the license if satisfied with the
application, grant a conditional license, grant a limited licence to the extent it
is satisfied that the applicant meets the requirements or refuse to grant the
licence completely. (Reg. 14)
The Central Bank shall within seven days from the end of the fourteen day
period communicate its decision to the applicant in writing.
The licence shall specify the financial business and services the company is
licensed to conduct.
3. Minimum Capital Requirements
The Financial Institutions (Revision of Minimum Capital Requirements)
Instrument No. 43 of 2010 in accordance with section 26(5) of the Financial
Institutions Act 2004, revised the Minimum Capital requirements of Banks to One
million, two hundred and fifty thousand currency points (25,000,000,000/=)
The successful applicant shall further be required to provide the Central Bank

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with;
Complete operating manuals covering policies and procedures on loans,
investments, deposits, foreign exchange and other major operations of the
financial institution;
Information regarding risk management policies and procedures covering
credit, liquidity, interest rate, foreign exchange and operational risks;
Information regarding management systems, description of sample forms,
reports and schedules;
Other documents or information, which the Central Bank may require. (Reg.
15(5)(a-d))

Upon being granted a license, Section 13 F.I.A provides that a company

granted the licence shall pay a fee prescribed by the Central Bank within
14 days of receipt of the notice of the decision (Reg. 15 (5) (e) and Reg. 17)
and thereafter an annual fee prescribed by the Central Bank on or before
the 31st day of January of each year.
Failure by the licensee to pay shall attract a late payment penalty at a
rate of 50% of the licence fee which shall otherwise be a debt to the
Central Bank of the financial institution.
The licensee must begin operations within twelve months from the date of
issue of the license or it shall be revoked by the Central Bank. (Section 16
of the F.I.A)

CONCLUSION
The industry has evolved over time but still grapples with challenges. High
cost of credit continues to loom, biting into the pockets of Ugandans. The
average bank lending rate for Shilling dominated loans in April 2017 was
20.5 per cent. Lending rates have remained high because banks incur
substantial costs in doing business.8
According to its Uganda Economic Outlook report 2017 however ,Price
waterhouse Coopers (PwC) says that the banking sector as a whole is
adequately capitalized to withstand any shocks.9

PREPARED BY:
Andrew Kakaire LLB (MUK) Dip. LP (LDC)

8
http://www.monitor.co.ug/Business/Prosper/Growth-banking-sector/688616-4131946-
88v0bd/index.html Accessed on the 2nd January 2018.
9
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=7&cad=rja&uact=8&ved=0ahUKEwi
7q4S72rjYAhUBHxQKHRr3AskQFghMMAY&url=https%3A%2F%2Fwww.pwc.com%2Fug%2Fen%2Fassets%2
Fpdf%2Feconomic-outlook-2017-first-edition.pdf&usg=AOvVaw1RpwbLr34PJqwNvTll3QfK Accessed
on the 2nd January 2018.

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 kakandreau@gmail.com
+256-702713748
KM Advocates & Associates
Equatorial Mall, Level 3 Suite 356
P.O.Box 73316
Kampala, Uganda.

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