The Relationship between anti money laundering compliance and financial sector development in Uganda (2012 – 2023)

Abstract

This research paper examines the relationship between Anti-Money Laundering (AML) compliance and financial sector development in Uganda between 2012 and 2023. While Uganda has committed to adhering to the Financial Action Task Force (FATF) standards to combat money laundering and terrorist financing, the impact of these measures on financial sector development remains unclear. This study investigates whether compliance with FATF standards has contributed to strengthening Uganda's financial sector. The paper uses domestic credit to the private sector (DCPS) as a percentage of GDP as a proxy for financial sector development and the FATF compliance index as a measure of AML compliance. The study also considers the influence of control variables such as inflation, borrowing rates, and unemployment. Employing a quantitative approach with an explanatory research design, the study analyses data from reputable sources, including the World Bank World Development Indicators and the Basel AML Index. Regression analysis is used to determine the relationship between AML compliance and financial sector development. The results indicate that AML compliance has a negative but statistically insignificant impact on financial sector development in Uganda. Similarly, inflation and borrowing rates exhibit statistically insignificant relationships with financial sector development. Unemployment also shows an insignificant association with financial sector development. The findings suggest that while AML compliance enhances financial stability and reduces financial crime risks, the associated costs may hinder the ability of financial institutions, especially smaller banks, to grow and innovate. The study concludes that policymakers need to strike a balance between stringent AML enforcement and fostering a conducive environment for financial sector growth. This can be achieved through targeted policy reforms, support for financial institutions, and promoting financial literacy. The paper also highlights areas for further research, including sector specific analysis, the role of technology in AML compliance, and the impact of AML regulations on the informal sector.