Whereas many banks are dealing in the secondary market, it is only Standard Chartered Bank that holds a Dealers’ license, a key requirement for agents in the secondary market. Photo / Isaac Kasamani
A government's push for a more transparent and liquid bond market is getting caught in red tape, turning it into a playground for the big fish while leaving small investors on the sidelines.
Uganda’s bond market is a two-lane highway: the public debt market, where both government and private players borrow from the public, and the private debt market, where private entities handle their borrowing.
But within the public debt market, there’s a VIP section - the sovereign market - where only the government gets to play.
This is the primary market, akin to an initial public offering (IPO) for government securities.
Once the dust settles, these securities start exchanging hands in the secondary market, much like stocks do after an IPO.
Here is where things get murky. Bank of Uganda (BoU) oversees the primary market, while the Capital Markets Authority (CMA) keeps an eye on the secondary market.
In 2016, CMA introduced a ‘Dealer’ license category to boost liquidity by allowing firms to trade government securities independently or on behalf of clients.
The problem? Since its introduction, not a single bank has been licensed to deal in the secondary market.
Only three non-banking firms - Crested Capital, BIK Capital, and Dyer and Blair - currently hold official ‘Dealer’ licenses.
Among the big banks, only Standard Chartered has secured one, even though all eight major banks act as primary dealers with the central bank.
According to Dickson Sembuya, the CMA director of research and market development, several banks have applied, but their applications are still under review.
Separately, CMA says that the absence of primary dealers with ‘dealer licenses’ from the regulator has long led to opaque transactions, where banks negotiate under the table bond deals before presenting final terms to buyers.
The challenge this brings is that it distorts price discovery, allowing banks to manipulate yields and coupon rates through syndication.
Essentially, they decide where the market goes, unchecked.
Without a savvy investment advisor, an investor becomes a pawn in the bank's game of 'let's make a deal,' says financial markets consultant Alex Kakande, who has previously encountered such episodes.
Investors interviewed for this article echo frustrations, with many reporting attempts by banks to change agreed terms.
The detail is in the numbers
While secondary market trading is growing, it’s hardly the kind of surge that gets regulators, industry players, or the government excited enough to bank on domestic capital markets for project financing.
Data from CMA shows that government bonds had a busy fourth quarter in 2024, with trading on the secondary market growing by 3.1 percent to Shs15.8 trillion, up from Shs15.3 trillion the previous quarter.
Monthly trading rose slightly to Shs5.3 trillion, but bonds were less active, with their share of total turnover falling to 38.6 percent from 42.1 percent.
Market reforms have kept things lively, but looking at the bigger picture, annual turnover took a 24.2 percent nosedive from Shs20.9 trillion in late 2023.
So, while the market had a short-term glow-up, year-on-year numbers tell a different story. Growth has been lukewarm for years, thanks to a mix of factors - limited retail and institutional investors, and, of course, the very issue at the heart of this article –under-the-table bond sales by banks.
Last September, CMA finally woke up and told banks, “enough is enough,” informing them that by March 31, 2025, they must apply for ‘Dealer’ licenses or risk consequences.
Officially, it was not a request, but law.
On Monday, CMA issued a public notice, noting that no person should act as a Dealer unless they have been approved by the Authority.
But for now, it is still a game of moral persuasion, with letters sent and meetings held. But the question remains: Will the banks comply, or will the bond market’s liquidity remain locked behind closed doors and jargon?
A fix or a fight?
Right now, Uganda’s secondary bond market operates like a backroom poker game - opaque, exclusive, and dominated by a handful of banks calling the shots.
Transactions happen over the counter, meaning if you want to buy a government bond, you don’t see a public order book. Instead, you ask your bank, which then could call another bank to check what is available.
If they do, a closed-door negotiation happens, the price is set behind the curtain, and you get your bond, often at a cost skewed in favour of the banks.
Price manipulation
Since banks control the market, they can inflate yields and coupon rates, making bonds more expensive than they should be. Why? Because they profit off the spread - buying cheap, selling high.
And that is where the CMA license comes in to introduce transparency by moving transactions onto a regulated trading platform.
“Under this system, all buy and sell orders would be visible, ensuring fair pricing and eliminating backroom deals. No more arm-twisting, no more secret negotiations—just a fair, open market,” Denis Kizito, director of market supervision at CMA, says.
Right now, liquidity is artificially constrained - only a few licensed dealers operate in the secondary market, limiting the number of trades.
The expectation is that if the banks finally join in, liquidity would skyrocket.
More players, more trades, better price discovery, and a bond market that works for investors, not just the banks.
But will the banks comply? Or will they fight to keep the current system, where they quietly milk the market behind closed doors?
A steep entry
CMA wants transparency and improved liquidity, but there are quite a few hiccups to take note of.
The primary dealers in Uganda’s bond market play in the big leagues - not without some serious financial muscle.
To qualify, you must have at least Shs6m in liquidity parked in the securities market at any given time.
That is a steep entry price, making it nearly impossible for smaller dealers to compete on the same scale. Thus, primary dealerships are inadvertently dominated by banks.
But here is where it gets even trickier: dealers who try to grow their books are penalised because their exposure to a single asset (like government securities) is legally capped at a percentage of their paid-up capital - meaning that if their business expands too much, they must keep injecting more money just to stay compliant.
Which begs the question: Why does this rule exist?
“If the goal is investor protection, it doesn’t protect investors. The capital requirement doesn’t contribute to an investor protection fund or provide any meaningful safeguard against risk. Instead, it just makes it harder for dealers to scale, keeping the playing field tilted in favour of the big banks,” says Abraham Banaddawa, a financial markets consultant, who is also the founder and chief executive officer of Uilis Ventures, a Fintech using decentralised financial principles.
And here’s the loophole: if someone wanted to game the system, they could pay the maximum required capital, build a massive book, and then disappear - because, technically, they have met the legal benchmarks.
Meanwhile, legitimate players are stuck in regulatory quicksand, forced to navigate complex net capital calculations that even auditors struggle to grasp.
The banks, however, have no such struggles. They enjoy first bids on the market, with different placement fees for primary market buyers, which vary from bank to bank.
This means advisors for investors must explain a confusing fee structure to clients, while banks maintain an opaque advantage in bond sales.
“At its core, the system seems built to favour incumbents, locking out smaller firms and stifling competition under the guise of regulation. If true transparency and liquidity are the goals, the market may need more than just new dealer licenses - it might need a fundamental rethink of the rules,” Banaddawa notes.
The lack of a market-making policy has created a closed-off trading environment, where only a select group of well-resourced players - those who meet high entry requirements - can participate. And without designated firms actively buying and selling to ensure liquidity and fair pricing, there is no real competition in the market.
Instead, it functions like an exclusive club, shutting out smaller investors and limiting broader participation, something that stifles growth and efficiency in the trading ecosystem.
Financial market consultants interviewed for this article note that policies roll out without clear execution plans, leading to uncertainty.
“If true liquidity, price transparency, and fair competition are the goals, then maybe it’s time to rethink the entire system, not just who gets to participate,” one suggested, preferring anonymity.
The transparency illusion
On paper, market transparency sounds great. In reality? It’s an ‘illusion’ - at least until everyone sees the same prices at the same time. Right now, only a handful of insiders know the real numbers.
Take Standard Chartered. It’s the most expensive bond dealer in Uganda, but unless you’re moving big money or working within the system, you won’t know that. Meanwhile, Absa might be cheaper, but not for everyone.
Prices depend on who you are, who you know, and what you can negotiate.
The lack of a real-time, centralised pricing system means dealers can charge whatever they want, and most retail investors are left guessing or overpaying.
BoU collects pricing data, but it’s not real-time - it’s often published days later.
By then, you can only look back, but without any remedy.
A centralized market system like Bloomberg could fix this - if not for the $50,000-a-year price tag.
Some in the domestic capital markets have tried building solutions, but the costs are too high - up to $2.5m for infrastructure needed to track, correlate, and broadcast real-time bond prices.
One knowledgeable source says that the incentives regime is also skewed.
“Dealers on treasury desks aren’t rewarded for fairness – they are paid to maximise margins. If they can overcharge 100 customers, they hit bonus targets. There is nothing technically illegal about it. It’s just how the system is built,” he says.
“Without a real-time, publicly accessible pricing platform, the bond market remains a closed-door club, where only a few truly know what is going on, and everyone else is just paying the price,” he adds.
Complex pricing
Right now, bond pricing in Uganda is hard for ordinary people to understand because it’s quoted in yields instead of actual cash prices. This technical jargon makes it feel like a secret code.
Banks and big institutional investors are used to it and know how to play the game, but for everyday retail investors, it’s confusing and keeps them on the sidelines.
“This is one of the reasons why price transparency is a myth in the market. Even if you had access to pricing data, you need to do the math yourself. And most retail investors don’t have the expertise - or the tools - to calculate what they are paying,” Banaddawa says.
“For real transparency, bond prices should be displayed in shillings, not just abstract yields. That’s the problem we’ve been working on solving: a system that translates all this financial jargon into simple, clear numbers,” he adds.
Until the rules change, investors are stuck watching the big fish swim in circles.
