INTRODUCTION

In 1992, the government of Uganda embarked on an ambitious program of financial system liberalization as a means of consolidating the gains achieved during the economic recovery program (ERP) it had initiated in 1987. The reforms had two main objectives: to facilitate macroeconomic stability and to promote GDP growth by enhancing the efficiency of the financial system. The liberalization process involved policy and institutional reforms aimed at reducing the role of the government in the financial sector and allowing the market to play a greater role in the allocation of resources. The measures introduced centered around the removal of interest rate controls, restructuring financial institutions to enhance competition and efficiency, and improving the legal and regulatory framework for the financial sector.

The first eight years of Uganda's far reaching and relatively successful liberalization can throw light on the question posed by the title of this volume. We evaluate this experience at both macro- and microlevels. At the macrolevel, we look at trends in interest rates, resource mobilization, investment, and growth. At the microlevel, we test whether the rationale behind financial liberalization – improving competition and hence efficiency in allocation of resources – has been realized under the imperfect, heavily segmented market conditions that characterize the Ugandan financial system. We describe the segmentation in banking and document the contrasting performance of different groups of banks: state owned, excolonial, prudent, and aggressive. We also allude to the political economy of financial liberalization by assessing who are the winners and losers in the process.