CHAPTER ONE 1.0 Introduction This chapter will show the background, problem statement, purpose, objectives, research questions, hypothesis, and significance of the study. 1.1 Background of the study Following a deep banking crisis in 1998, 1999, Uganda's banking sector has experienced recovery and the regulatory environment has focused on creating security, and confidence and maintaining strong capitalization rates. The sector has experienced higher supervision from the bank of Uganda and higher capital requirements wi1h the passing of the financial institutions Act in 2004 and the financial institution regulations in 2005. This facilitated a quick recovery of the sector following the closing of several domestic banks in 1998 and 1999. As of may 2009 there are twenty-three licensed banks operating in the country, twenty two of which are operational. Commercial banks hold approximately us $3 .5 billion in total assets made up of approximately five million accounts. This is equivalent to 16% commercial bank penetration rate given the CU!Tent population. Most banks are foreign owned including major international institutions such as Stanbic (South Africa) city Banlc) (USA) Barclays Bank (United Kingdom) and standard chaited (United Kingdom). However a nU111ber of locally based baiiks have been established including development finance company of Uganda (DFCU) Bank, Nile Banlc, and CERUDEB (Centenary Rural Development Bank). The central bank of Uganda is responsible for suspending the activities of each licensed commercial bank operating in the country. According to international monetary fond, Uganda has one of the developed financial systems among low-income --oil-importing nations which has substantially increased in importance in the last three years. The financial sector foffi1S 29.6% of the se1vice contribution to GDP which is approximately US$ 2.13 or 13.5 of total GDP. The latest IMF data, reports that deposits money Bank assets formed 15.7% of GDP in 2007. Uganda has classified the banking sectors into four groups so as to facilitate the granting of licenses for commercial operations there are four tiers of financial institutions two development banks, four investment banks , ten Forex Bureau and twenty insurance companies. Commercial banks are classified as tier institutions and are authorized to hold checking savings and time deposit accounts for individuals and institutions in local as well as internatioual Clllrencies. They are also authorized to buy a11d sell foreign exchaJlge issue letters of credit and make loaJ1S to depositions and non-deposits.