Regulatory Developments in Payment Systems in Uganda

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BY MACKAY AOMU

After nearly 10 years of indirect regulation, Uganda’s payment systems are now premised on an enabling legal framework, with the Bank of Uganda as the main regulator.

Payment systems refer to, all arrangements including instruments, infrastructure, rules, procedures, laws, and systems used to transfer money and securities for the settlement of payment obligations.

It involves two or more Payment Service Providers (PSPs) like banks and e-money issues, Payment Systems Operators (PSOs) like payment switches, integrators, or aggregators and customers.

Customers may include Government, Business enterprises, utility companies, and individuals. The orderly and efficient functioning of the Payment Systems contributes to;

  • Financial and economic stability.
  • Effective and efficient transmission of monetary policy.
  • Efficient and cost-effective discharge of claims and liabilities arising out of economic transactions, and hence promotes economic growth.

Background of Payment Systems Law in Uganda

Due to the importance of the payment system to the economy, a sound legal and regulatory framework is essential to ensure safety, and efficiency of the National Payment System (NPS).

In this regard, the Bank of Uganda (BoU) worked with the Ministry of Justice and Constitutional Affairs and the Ministry of Finance Planning and Economic Development (MoFPED) to draft the National Payment Systems Bill which became a law in September 2020 and the implementing regulations were gazetted in March 2021.

Regulations & Enabling Laws

The NPS Act, 2020 grants the Bank of Uganda the legal mandate to;

  • License and regulate PSOs and PSPs (including electronic money issuers) and Issuers of Payment Instruments.
  • Provide oversight over payment systems.
  • Prescribe the rules governing the oversight and protection of the payment systems. In addition, the law provides for the promotion of innovations in the payment space through the use of the Regulatory Sandbox Framework.

Regulatory Sandbox Framework

Pursuant to Section 16 of the National Payment Systems Act, 2020 and the National Payment Systems (Sandbox) Regulations, 2021, the Bank of Uganda (BoU) launched a Regulatory Sandbox Framework.

A Regulatory Sandbox is a set of rules and requirements that allows innovative financial solutions, for example, fintech start-ups, to be tested in a live controlled environment for a specified period of time under BoU’s oversight and subject to the necessary safeguards.

So far, M/s Wave Transfer Limited has received approval to test Quick Response (QR) technology under the Sandbox arrangement for six months effective April 12, 2021.

Bank of Uganda invites more firms to develop and test financial innovations under the Regulatory Sandbox.

The framework for the sandbox is available at: www.bou.or.ug and more details can be obtained by sending an e-mail to: fintechoffice@bou.or.ug The Regulatory Sandbox Framework will;

  • Promote financial services innovation.
  • Attract capital and funding for fintech firms.
  • Provide shared learning opportunities for the innovators and regulators.
  • Promote uptake of electronic payments, digital financial services, and financial inclusion in general.

Roles of BoU in the Payment Systems

The main role of BoU in the payment systems space is to; regulate, supervise, and oversee the operations of payment systems in Uganda in order to ensure safety and efficiency.

In the process of executing the above, BoU is required to;

  • Regulate and supervise PSPs & PSOs – license, monitor, assess & induce change.
  • Publish the laws and regulations, ensure disclosures and cooperative oversight.
  • Monitor cross border payments.
  • Provide settlement services.
  • Coordinate payment system activities with relevant stakeholders.
  • Issue directives/guidelines to regulate payment system operations.
  • Approve rules & arrangements for payment systems.
  • Implement the NPS Act.

Issuance of Licences

Following the enactment of the NPS Act, 2020 on September 4, 2020 and the gazetting of the NPS Implementing Regulations on March 5, 2021, BoU commenced licensing of PSPs and PSOs.

Pursuant to Section 9 of the National Payment Systems Act, 2020 and Regulation 3 of the National Payment Systems Regulations, 2021, BoU has so far issued licences to the following entities;

  • MTN Mobile Money Uganda Limited.
  • Airtel Mobile Commerce Uganda Limited.
  • MicroPay Uganda Limited.
  • Mcash Uganda Limited.

Oversight Framework for Payment Systems and Payment Services

BoU has a statutory responsibility for Uganda’s National Payment System. This responsibility is enshrined in the National Payment Systems Act, 2020, which empowers BoU to regulate, supervise and oversee the operations of payment systems to ensure their safety and efficiency.

As indicated above the regulatory ambit extends to PSOs, PSPs, and Issuers of Payment Instruments. To enable effective oversight, the Bank has developed an oversight framework which lays out the Bank’s oversight objectives, methodology and overall approach to the oversight function.

The detailed document is available at the BoU website; www.bou.or.ug. Bank of Uganda’s oversight responsibility is intended to;

  • Promote safety and efficiency of Uganda’s payment systems.
  • Identify potential risks posed by the payment systems or financial market infrastructure, take steps to minimize the risks and where necessary induce change.
  • Emerging trends in the Payment systems.

Emerging trends point to increased emergence of Fintech or Financial Technology Innovators. These are firms that leverage the use of technology in Financial Services to automate, improve, disrupt, or change the way business is done as follows;

  • New systems, processes, products, business models.
  • Compete with and complement traditional financial services.
  • Aim to reduce operational costs and improve efficiency.

With the world currently recovering from a major pandemic, the underlying technology that has driven Fintech, including Blockchain and open banking will continue to drive future innovations. Fintechs can be utilised to close gaps, given their potential for a wider reach at reduced costs as follows;

  • Provide access to Financial Services for the unbanked population e.g. savings, loans, payments.
  • Provide access to Healthcare and Insurance via Tech.
  • Support Financing of Agriculture especially small holder farmers.
  • Offer fairer and competitive pricing of products.

However, with the advancement in technology in the payment systems space, players, especially regulators have to be mindful of the following shortcomings:

  • Increased overlaps due to scope, scale and dynamism.
  • Increased risk around data security, privacy, money laundering, cybercrime, and consumer protection.
  • Need for controls to keep pace with change.

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Uganda’s Payment Systems Outlook

There is no doubt that payment systems hold the promise to deliver financial services to both merchants and customers, more especially in this unprecedented and uncertain times of the Covid-19 pandemic.

The BoU will scale up efforts in four strategic areas to support development of the payments ecosystem;

  • Ensure adequate legal, regulatory and oversight framework.
  • Promote infrastructure development and interoperability of payment systems.
  • Foster innovations, competition, consumer protection and digital financial literacy.
  • Strengthen collaborative arrangements with stakeholders.

The Bank of Uganda will continue to support the development of a vibrant and resilient payments eco-system, by safeguarding the stability and integrity of the financial sector to promote economic growth.

This article was first published in the Annual Bankers’ E-Magazine.

The author is the Director, National Payment Systems Department, Bank of Uganda


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