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BoU Opens Up Govt Securities Dealership to All Banks

A primary dealer is a well-capitalised financial institution that has an undertaking with the Central Bank to facilitate Open Market Operations as well as be the conduit for market making. There have been six Primary Dealer banks namely Stanbic Bank, Standard Chartered Bank, dfcu Bank, Barclays Bank, Bank of Baroda and Centenary Bank which are the first contact with BoU.
04 Apr 2017 17:33

Audio 4

The Bank of Uganda (BoU) has opened up primary dealership in the lucrative and risk-free government securities to all licensed commercial banks in the country.

The government borrows from the domestic market by issuing securities like treasury bonds and treasury bills which are bought by bidders.

Treasury bills are short-term securities structured in three maturities of 91, 182 and 364 days.

Treasury bonds are long-term securities structured in maturities of two, three, five, 10 and 15 years.

The way the market operates is such that all bids, competitive and non-competitive, are submitted through a commercial bank who appoints a Primary Dealer bank.

A primary dealer is a well-capitalised financial institution that has an undertaking with the Central Bank to facilitate Open Market Operations as well as be the conduit for market making.

There have been six Primary Dealer banks namely Stanbic Bank, Standard Chartered Bank, dfcu Bank, Barclays Bank, Bank of Baroda and Centenary Bank which are the first contact with BoU.

All other banks have been operating in the secondary market, meaning they play second fiddle to the primary dealers.

Now BoU Governor Emmanuel Tumusiime-Mutebile says all commercial banks will operate as primary dealers and can open central securities depositories for their clients and themselves with the central bank.

Mutebile says the demand for government securities is strong and sufficient to accommodate the needs of government for domestic finance, adding that primary dealers have enhanced liquidity in the secondary market.

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Despite these successes, Governor Mutebile says some challenges have been experienced in distribution mechanism of government securities.

Accordingly, Mutebile says they would now want to see more vibrancy in the secondary market by introducing changes in the way the primary dealership system works.

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Mutebile says initially the securities were for monetary policy purposes but since 2012 they have become a fiscal operation of financing the budget.

BoU's Director of Financial Markets, Stephen Mulema, says opening up the primary dealership to all licensed commercial banks is to ease access to the government papers for many players.

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On fears that the opening may worsen government's appetite for borrowing and further crowd out the private sector leading to skyrocketing of interest rates, Mulema says the amount of securities on offer will be that approved by parliament.

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Investors in government securities include commercial banks, insurance companies, individual companies, government agencies, pension funds, individuals aged 18 years and above, and offshore investors among others.

Some of the advantages of investing in government securities include competitive rates of return, being risk-free instruments, being a way of long-term saving mechanism, being liquid meaning the holder can easily sell it off in the secondary market, and they can be pledged as collateral for borrowing.

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