Nairobi — There is a revolution taking place in Uganda's financial sector.

The payment system is being computerised. Automated teller machines (ATMs) have been introduced, and there is talk of banks subscribing to a common switch so their ATM clients can use any commercial bank terminal to access their funds.

Fixed and mobile telephone banking is in place, and electronic money transfer services such as Money Link, Western Union and Moneygram can now be used for domestic and international remittances. Debit and credit cards are becoming a common feature and the payment system is being upgraded to offer real time clearing/settlement.

The payment system is an architecture, the core facets of which are the central bank, financial institutions (banking and non-banking), the legal regime, the capital markets, the macroeconomic policy framework, public utilities and the accounting, auditing and economic infrastructure that facilitates payments. It is in this payment system that one needs to look to discover the loopholes that should be plugged.

This is because this rapid change in the nature of financial services increases risk involved in conducting business, commerce and financial services. If we want to remove the bottlenecks in Uganda's payment system, it is imperative that the missing links in the law be urgently addressed. As the revolution in the financial system intensifies, are the various components of the financial sector backed up by enabling laws?

For example, financial service providers are struggling without adequate regulation and supervision to package and deliver products such as hire purchase, leasing, investment banking, factoring and money lending. What we need to ask is: Are the statutes underlying these services risk-management friendly or do they constrain payment system efficiency?

As financial institutions offer electronic cards and automated funds transfer services, what changes are needed in Uganda's Evidence Act to resolve conflicts, misrepresentations, misunderstandings, fraud, forgeries, and other illegalities that may arise in conducting such transactions? How does the present legal regime answer the challenges posed by telephone and online banking and electronic commerce and business?

There are signals of increased money laundering activities in Kampala. When an economy suddenly registers an upsurge in the leisure industry - activities such as hotels, casinos, lotteries and real estate growth - without commensurate growth in the economy, the authorities need to be on the alert.

Activities that are not justified by underlying business growth need to be investigated. Operations that smell of pyramid schemes need to be curtailed. If you have an environment of shell companies operating in town the danger of a risk of the of money laundering policymakers and politicians nexus becomes real. The partnership between politicians and money laundering can flourish in the absence of an anti-money laundering framework. The environment described above cannot be relied upon to deliver an efficient privation programme either as illicit transactions find ready avenues in which to grow.

ARE UGANDANS not at risk of the e-mail hacking and Internet fraud that have led to huge losses bank accounts in other countries? Internet fraud can far when the town is full of Internet cafes patronised by unemployed, underemployed, underpaid energetic young people?

In an under-regulated market with unregulated niches like Uganda's, layering and integrating bad money - the proceeds of corruption, drug trafficking and other forms of economic crime - into good money is quite easy as is concealing sources and end use of such money. So, where is the anti-money laundering regulatory and supervisory framework for Internet transactions?

We need to harmonise Uganda's contract laws with secure, convenient and efficient electronic commerce banking. We need a financial sector curator to manage financial institution failures, restructurings, mergers and takeovers; sales and liquidations? We need a legal framework for managing and turning round of sick business units and sick borrowers. Even insurance laws may need to be amended to take care of the emerging risks new! Where is the anti-trust regulatory framework? What of the badly needed usury laws? Who has cared to harmonise the provisions of the Bills of Exchange Act with this revolution in the financial sector?

We cannot however rely on the Bank of Uganda, the overseer of the financial system, to instigate debate and take remedial action all by itself. The central bank has previously had difficulties in amending or initiating enactment of commercial laws. Such laws as the Foreign Exchange Act 2004, the Micro Deposit Taking Financial Institutions Act 2003; the Financial Institutions Act 2004, which are under the supervision of the Bank of Uganda, need to be upgraded to remove the many fundamental flaws embedded therein. So far, there is no appropriate regulatory and supervisory regime for non-deposit taking microfinance institutions and development banks in Uganda.

The lack of regulation and supervision of some products introduces discrimination in the market where the financial institutions not offering them subsidise those selling those products, since both types of financial institutions are subject to same prudential requirements and performance benchmarks by the Central Bank.

Any regulatory and supervisory authority that practises discrimination in the financial system, as is the case in Uganda, ceases to facilitate optimisation of risk management and becomes a constraint to market efficiency. In essence, it removes the basis of the public safety net, the rationale of its very existence.

IT IS be incumbent upon the Ministry of Finance, Planning and Economic Development to play the lead agency role to upgrade Uganda's legal framework to forestall the build-up of a colossal risk profile in the financial system and the business world.

The Bank of Uganda should surrender some of its financial resources to the Ministry of Finance to set up, oversee and implement the system to review and update the commercial law framework. This has been done in some developing countries where the central bank lacked the capacity to design, direct, control and own processes that address the changing demands of the financial system and the needs of its clientele.

Jackson Byaruhanga works with Total Quality Consultants in Kampala