BOU issues tough rules for bankers

BoU has proposed to raise commercial banks’ paid-up capital from Shs25b to Shs150b. The paid-up capital for ‘credit institutions’ will jump 25 times from the current Shs1b to Shs25b while the paid-up capital for micro-finance deposit-taking institutions (MDIs) will jump from Shs500m to Shs10b. 

Credit institutions are credit and finance companies which may accept customer deposits, open savings accounts, and issue loans backed with or without collateral to savings and non-savings customers. MDIs are allowed to accept deposits from customers only in the form of savings accounts. They cannot offer checking accounts or trade in foreign currency. 

The threshold for commercial banks was last revised in 2010 while that for credit institutions and MDIs was last revised in 2004 and 2003 respectively, according to BoU. 

In a statement, Tumubweine Twinemanzi, the director of supervision at BoU, said: “…the increase in paid-up capital is long overdue and is intended to match the dynamism in the economy, incentivise shareholder commitment, and enable institutions to withstand shocks and to converge with regional peers among whom Uganda effectively has the lowest paid-up capital.” 

Total assets of the banking sector stood at Shs38.3 trillion at the end of December 2020 with five small commercial banks, ranked by asset size, losing money by the end of that accounting period, according to the Central Bank.

In 2018, Rwanda raised its paid-up capital requirement to 20 billion Rwandan francs (Shs70.3b) from five billion francs (Shs17.5b). An earlier move, in 2016, by Kenya’s Treasury to increase the minimum capital requirement for commercial banks from Ksh1 billion (Shs32.2b) to Ksh5 billion (Shs161.1b) was rejected with lawmakers arguing it would kill competition and make it difficult for small banks to grow. 

Those in support of the increase argue that the measure protects public deposits and investments contribute to investor confidence in the country’s financial sector.

Critics, however, say the move will keep local investors out of the financial sector with the increased capital threshold likely to favour major foreign players with deeper pockets. 

Uganda has at least 24 commercial banks and this will translate into at least Shs3.6 trillion in the combined paid-up capital if the proposal is approved without amendments. At least five credit institutions and four MDIs are licenced in Uganda.

A source privy to the ongoing discussions told Daily Monitor that the top commercial banks in the country are supportive of the proposal but the smaller players have raised issues on their ability to fulfil the new requirement. 

A phased approach, however, has been agreed on with the financial institutions given three years to fulfil their respective requirements. BoU will meet bankers tomorrow to discuss the proposal, with some quick to signal their willingness to comply.

“As a supervised financial institution, we have a reputation for being compliant with all central bank regulations; in the event that this proposal is passed, Stanbic Bank will certainly comply with it. We are also happy that BOU takes a consultative approach with stakeholders in the process of creating new regulations; on this one, we are being engaged and, I believe, others too. Our view is that it is a good proposal as it fortifies financial institutions from shocks such as those caused by the COVID-19 pandemic. The proposal is also a good thing for customers as it would enable  banks to do more,” Anne Juuko, Chief Executive, Stanbic Bank Uganda, told Daily Monitor.

“Our stand is that it is a good proposal as it fortifies financial institutions from liquidity shocks such as those caused by the Covid-19 pandemic. The policy is also a good thing for customers as it is an assurance of their deposits’ safety,” she added. As of December 2020, Stanbic bank’s total assets had increased to Shs8.58 trillion ($2.387 billion).

Wilbrod Owor, head of the Uganda Bankers Association, a lender’s lobby group, has been contacted for response. 

Section 26(5) of the Financial Institutions Act, 2004 (as amended) grants the finance minister powers to revise the minimum capital requirements of financial institutions through a statutory instrument on the advice of BoU. Consequently, the ministerial statutory instrument revising minimum capital requirements of financial institutions will be laid before Parliament. 

Regulators rely on this core capital, among other things, to authorise the financial institutions to receive deposits from the public, savings. It is on the basis of the same, that a financial institution is allowed to make loans to depositors and non-depositors, buy and sell foreign exchange and issue letters of credit. 

It is not clear whether a BoU directive to all supervised financial institutions to “defer dividend and discretionary payments in order to preserve capital for the real economy” was, partly, in anticipation of this move.  

Only five banks, including DFCU, Stanbic, Standard Chartered, Absa, and Centenary are listed by BoU as systemically important to the financial health of Uganda’s economy. 

In April, the five banks accounted for 57 per cent of total banking sector assets, were adequately capitalised, held sufficient liquidity buffers and were profitable according to the Central Bank. Most of these five banks are majority foreign-owned. DFCU and Stanbic are listed on the Uganda Securities Exchange while the Catholic Dioceses of Uganda and the Uganda Catholic Secretariat have major stakes in Centenary Bank. 

Local ownership

Since 2000, several locally owned commercial banks have collapsed as BoU gradually upped the capital requirement, or as they failed on internal weaknesses. Many local banks have folded or been sold over the years. 

Uganda Commercial Bank, once the biggest local bank, and the Co-operative Bank were sold to Standard Bank of South Africa. Greenland Bank was liquidated, International Credit Bank, Teefe Bank and Gold Trust Bank were closed. Crane Bank is also currently under liquidation.

In a 2019 paper titled “Neocolonial Bank of Uganda has Made Sure No Ugandan Can Open a Bank”, former finance minister Dr Ezra Suruma, who has also held various other roles including at Bank of Uganda and Uganda Commercial Bank, criticised the paid-up capital requirement as a hindrance to Ugandans owning commercial banks. Kigezi Bank of Commerce, in which Dr Suruma and other local investors were invested, collapsed because shareholders could not keep up with BoU’s capital requirements. 

“The law governing the supervision of banks was also rewritten in 2004 so as to strengthen the powers of BoU in their supervision, making it impossible for Ugandans to start a bank by increasing the capital needed beyond their means. You need [Shs]25b to start a commercial bank! Even those who had started earlier were made to sell to foreigners as the minimum capital required kept rising,” he writes.

Last year, Tropical Bank was directed to submit a capital restoration plan after the bank’s core capital dipped to Shs21b below the Shs25b which is a minimum requirement. It is not clear whether such banks that were already struggling to maintain the Shs25b threshold will be able to shore up the Shs150b if the proposal is approved.  

Mr Yusuf Nsibambi, the  Mawokota South MP and was company secretary of the defunct Greenland bank.  He said: “The proposal has no logical reason behind it. They are trying to close indigenous people completely out of the sector”.  He added that the paid-up capital requirement is not a fool-proof protection for depositors and called, instead, for BoU to introduce different capital requirements for local and foreign investors as a way of mitigating capital flight and ensuring that Ugandans engage in the financial sector.  For MDIs and Credit institutions, he said BoU should drop the proposal so that local investors are not forced to sell.

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