How increase in paid-up capital has dealt blow to banking sector

In a July 6, 2023 circular, Bank of Uganda indicated that the revision had been necessitated by the need to “enhance financial system’s resilience to shocks, promote financial stability, and advance the capacity of the financial institutions to meet the growing needs of a dynamic economy”. 

The central bank indicated further that as of June 30, 2023, the majority of banks and credit institutions had compiled with the revised capital requirements, while those that had not had “put in place credible capital restoration plans whose implementation was significantly advanced, and on course to achieve complete compliance within agreed timelines”. 

From the outside, everything looked perfect, but what many didn’t know, a number of financial institutions were struggling and searching in all corners to mobilise capital or face the music. 

In fact, the voluntary exit of Afriland First Bank in May 2022 could have been the first signal of the silent struggle in one of the most sensitive sectors of the economy. 

Afriland had just been in Uganda for slightly over two years but why it would quickly decide to liquidate its interests based on “an outcome of a strategic business review by its shareholders - Afriland Group”, told of a business that had not done enough homework when it made a decision to enter Uganda or was only taking the easy way out.

Bank of Uganda had first signaled its intention to increase minimum capital in August 2021, when, in a circular to all chief executive officers of commercial banks, credit institutions, and micro-deposit-taking institutions, indicated that it was undertaking consultations with all stakeholders on the proposed structure of the increment.    

Thus, Afriland could have measured its capacity and left early.    

From the onset, the revision was always going to be a tough balancing act, a shift that would require mobilisation of massive capital, which would present a serious challenge, especially to small banks.

Indeed, in December 2023, Bank of Uganda indicated that whereas the majority of supervised financial institutions had met the new capital requirements, four had not, just six months before the June 30, 2024 deadline. 

Bank of Uganda executive director of supervision Tumubweine Twinemanzi, said then “largely, three to four banks have submitted their capital resolution plans to meet the deadline, but all banks remain well capitalised”. 

No details were provided then, but the difficult balancing act would soon be revealed in a letter of intent contained in the March 18 Fifth Review Under the Extended Credit Facility Arrangement, co-authored by Finance Minister Matia Kasaija and Bank of Uganda Deputy Governor Michael Atingi-Ego, in which government informed the International Monetary Fund that as of September 30, 2023, 18 out of 25 commercial banks had complied with the new paid-up capital requirement, while seven, which represented at least 5.1 percent of the banking sector assets, had either applied to downgrade or were still in the process of searching for capital injections. 

“Three [commercial banks] applied to downgrade to tier II [credit institution] license, three are in the process of onboarding a new shareholder, and one is still pursuing its shareholders for recapitalisation,” the letter said then, before Bank of Uganda on March 27, 2024, named the banks that had applied to downgrade as ABC Capital, Opportunity and Guaranty Trust Bank. 

The three had applied following anticipated failure to fulfill the phased capital requirement buffers. 

Before that, some banks, in details contained in their annual reports published between March and April, had indicated they were in negotiations with their parent companies, many of them based in Kenya, to advance a capital boost to enable them meet the new paid-up requirements.

In the same measure, on January 17, Finance Trust Bank announced “a definitive agreement” in which Nigeria’s Access Holdings had acquired an 80 percent stake in a transaction that would see Access Bank - the subsidiary - inject funds into Finance Trust to boost its capital base.

The announcement was timely, coming just two days, before Bank of Uganda would place EFC Uganda, a credit institution, under liquidation, revoked its license, and ordered for the winding up of its affairs on January 19, 2024. 

The decision to closure it, Dr Michael Atingi-Ego told a press briefing then, had been reached after the central bank had determined that the continuation of its activities was detrimental to the interests of its depositors resulting from its failure to resolve a significant undercapitalisation position and poor corporate governance.

The closure had come just months before the June 30, 2024 deadline, and by the time of its closure, EFC had been operating for about 12 years, having started as Entrepreneurs Financial Centre in a single branch in Ndeeba, Kampala, before expanding into six branches to become a micro-deposit-taking institution and adopting EFC Uganda as the new name in June 2012.

The shift, we could safely say has been a costly affair, impacting the entire financial sector in which one financial institution voluntarily exited, three downgraded operations and two have been forced to close including Mercantile Credit Bank - the latest victim of a massive increase in paid-up capital -  whose tier II license was revoked on June 24, after 30 years of operation, having been incorporated in Uganda on December 1981. 

The credit institution has since been placed under liquidation and ordered to wind up its affairs. 

We could not readily get a comment from Bank of Uganda on whether all 23 commercial banks and five credit institutions have now fulfilled the new requirement since we are now almost a week past the June 30 deadline. 

Government had also proposed a revision of paid-up capital for microfinance institutions from Shs500m to Shs10b but in July last year, Speaker of Parliament Anita Among blocked the increment, noting that it had been established that the Parliamentary Committee on Finance chaired by Mr Amos Kankunda had not consulted some of the major players within the micro-deposit-taking institutions sector as required in the processes of making such legislation. 

Closed accounts and lost jobs 

In undertaking the voluntary exit of Afriland First Bank, and the closure of EFC and Mercantile Credit Bank, the cost has been impactful. 

Details by the Deposit Protection Fund, which is responsible for paying depositors holding deposits of Shs10m and below, indicate that at least 5,250 accounts due to EFC and Mercantile have been closed. 

Details further indicate that more than 200 jobs have been lost, while at the same time, many financial institutions have taken on large sums of equity or loans, especially from their parent companies, which will impact their long-term strategic plans. 

Data from the Uganda Bankers Association indicate that at the time of its closure, EFC had a workforce of 119 employees, of which 59 were male, while 60 were female.

On the other hand, Mercantile, which was closed at the end of last month, had 30 employees -  17 male and 14 female. 

In an April 05, 2024 alert risk, PwC had indicated that whereas the new requirement presented challenges, “the actions of the various institutions suggest a clear appreciation of Bank of Uganda’s unwavering commitment of ensuring that supervised institutions are adequately protected against macroeconomic shocks and liquidity challenges”.

Liquidity challenges had manifested during the Covid-19 period, forcing Bank of Uganda to put in place an emergency window, from which banks facing liquidate stress would borrow to mitigate shocks that would present challenges to the entire banking sector.  

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