Dr Fred Muhumuza (left), an economist; and Dr Kenneth Egesa, the Director of Communications at BoU, during a dialogue on bank closures organised by Kigo Thinkers in Kampala on Thursday. PHOTO | MICHAEL AGABA
Bank of Uganda has since the start of this year closed two financial institutions classified as credit or tier II institutions over capitalisation-related issues.
The latest is Mercantile Credit Bank Limited, which was on June 18 placed under liquidation, its licence revoked and an order given for the winding up of its affairs. The other is EFC Uganda Limited, which was also closed by the Bank of Uganda in June for failing to meet minimum capital requirements.
These join others such as Greenland Bank, Teefe Bank, International Credit Bank, National Bank of Commerce, Global Trust Bank and Crane Bank, which have been closed in the last 15 years.
These closures have left many customers and other people worried about the safety of their funds and whether they should continue keeping their money in banks.
Dr Fred Muhumuza, an economist, agreed that such closures are not healthy for any economy.
"Financial systems are important in the economy and have closely intertwined institutions both within and outside of the sector. Bank closures can send ripples that can hit the economy," he said.
However, he said the closure of any bank is not the end of the world for the depositors.
“A bank closure does not necessarily mean that clients lose access to their banking services or that depositors and other creditors will lose their investments,” Dr Muhumuza said.
The government established the Deposit Protection Fund of Uganda (DPF) following enacting the Financial Institutions (Amendment) Act, 2016, to ensure that depositors are paid their protected deposits in the unlikely event of failure/closure of a Contributing Institution.
DPF pays them up to UGX 10 million to customers in the unlikely event that their bank fails/closes. But what happens to those who have more than the UGX 10 million at the time of liquidation?
“If you have up to UGX 2 billion in a bank and it closes, while the Deposit Protection Fund (DPF) covers only up to UGX 10 million, you might question whether this is fair. However, the DPF has clearly stated its coverage limit, so you could argue that the terms are fair. It is your responsibility to be aware that if a bank fails, you are only covered up to UGX 10 million,” Dr Muhumuza explained.
“Is the Shs10 million deposit protection too low? Should BoU revisit the minimum to reflect the times we are living in to ensure that depositors’ money is protected?” he added.
According to Dr Kenneth Egesa, the Director of Communications at BoU, those who have more than Shs10m after the closure of the bank are paid after selling its assets.
“We had two bank closures in the recent months and all the depositors of EFC have received their funds. The most recent one is Mercantile and the depositors who had 10 and below have been paid off; If the DPF guarantees up to UGX 10 million when a bank closes, anything beyond UGX 10 million depends on how much can be recovered from the bank,” Dr Egesa explained.
The two officials made the remarks in Kampala on Thursday during a dialogue on bank closures organised by Kigo Thinkers, a network of academicians and practitioners of wide-ranging disciplines.
The BoU Director of Communication defended the closure of the banks.
“The Bank of Uganda does not close a financial institution without following the proper process and being certain that it is the only viable solution. Recently, the banks that have been closed faced issues such as poor governance, not following directives, and high concentrations of either deposits or loans that increased the institution's risk status. Additionally, the owners abdicated their responsibility to ensure the institutions continued to run smoothly,” Dr Egesa said.
“The banking sector thrives on trust. It's not just about accepting deposits and issuing loans. When you deposit your money in a bank, you choose that bank because you trust that you will be able to access your funds when needed. This is why there are strict regulations governing entry and exit in the banking sector,” Dr Egesa added.
Dr Muhumuza also supported Bank of Uganda for its strict monitoring of the banks, saying while closure has negative effects, it is in the best interest of the economy.
“Why close a bank? When the regulator determines that, contrary to normal insolvency procedures, closure is the best option for protecting financial stability, safeguarding depositors, and minimizing the need for public intervention,” he said.
