New capital requirements for banks

Proposal is good for the industry but a headache to investors, small players

| THE INDEPENDENT | The central bank’s proposal to raise capital requirements for commercial banks is commendable but could threaten survival of small players, according to industry players and experts.

Wilbrod Owor, the executive director at the Uganda Bankers Association told The Independent in an interview that it is because of the likely risks to the industry that they have consultations.

He said, there are already suggestions to the Bank of Uganda on how to move on including; giving timelines for banks to raise the required capital by staggering it in years; creating tiers for banks basing on their capital base and other indicators like cash and retained earnings.

Stephen Kaboyo, the ex-Bank of Uganda executive and now the managing director at Alpha Capital Partners, a financial advisory firm, said he supports the new move but predicts danger for small players.

He told a local daily newspaper that it is likely that the proposed capital levels will put pressure on small banks to merge or exit the market as regulation is always costlier to small players than the big ones.

The Bank of Uganda circular dated Aug.20, directed to all chief executives of commercial banks, credit institutions and micro deposit taking institutions, said the central bank proposes to raise paid up capital requirement of commercial banks from the current Shs25bn to Shs150bn, credit institutions from Shs1bn to Shs25bn and MDIs from Shs500milion to Shs10bn.

The capital requirement for commercial banks, credit institutions and MDIs were last revised in 2010, 2004 and 2003 respectively.

The circular stated that the increase in paid up capital is long overdue and is intended to match the dynamism in the economy, incentivize shareholder commitment, and enable institutions to withstand shocks and to converge with regional peers among whom Uganda effectively has the lowest paid-up capital.

However, 15 of the country’s 25 commercial banks have capital that fall far below the proposed new capital requirements, according to their financial statements for the year ended December 2020.

For instance, Bank of Africa had its capital standing at Shs95bn, Orient bank Shs25bn, Ecobank Shs36bn, KCB Shs67bn, UBA Bank Shs66bn, Bank of India Shs43bn, Finance Trust Shs46bn, Tropical Bank Shs29bn, Cairo Shs41bn, ABC Capital Shs28bn among others.

Those operating above the proposed new threshold are, Stanbic Bank with capital worth Shs917bn, Centenary Bank Shs684bn, Stanchart Shs570bn, Absa Shs435bn, dfcu Shs482bn, Baroda Shs409bn, Diamond Trust Bank Shs228bn, Housing Finance Shs211bn and Citi Bank Shs213bn.

This means that in the event that the proposal is implemented, then, those that will be unable to raise the required capital to meet the rule will be forced to either merge or exit the market.

Centenary Bank Managing Director, Fabian Kasi, said though he supports the proposal, the banks need to be given ample time to meet the capital requirements subject to the fact that they are not a threat to the financial sector.

“Banks need to have enough financial muscle to safeguard peoples’ deposits and ensure they access it when they need it,” Kasi said.

He said, the timing of the proposal owed to the covid-19 pandemic makes the whole initiative debatable.

Kasi, however, said his team is ready to ‘shop’ any player that fails BoU’s capital requirement test.

“Mergers and acquisitions are part of business,” he said, “As a bank that is looking at expanding its footprint across all parts of the country, if there is an opportunity for acquiring one [bank], we will consider,” he told The Independent on Aug.26, on the sidelines of another event in Naguru, a city suburb.

Anne Juuko, the chief executive, Stanbic Bank Uganda said the lender is ready to meet the new requirement in the event that the proposal is passed.

“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,” She said.

“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 on many fronts.”

A central bank executive told The Independent that conversations in relation to the proposed capital requirement have been ongoing informally with banks anchored on the country’s expected growth linked to oil and gas sector.

“…many banks have been urged to up their capital in preparation for financing the oil and gas sector,” the executive said.

For the banks that are way below the proposed capital requirement, the executive said BoU ‘shall consult them and get their plans.’

Regional comparison

Looking at the comparison with other countries in the region and beyond, Uganda appears to be behind. For instance, Zambia caps its capital at US$100m (Shs350bn) for foreign banks and US$50m (Shs175bn) for local banks and Ghana’s is US$100m (Shs350bn).

Rwanda and South Sudan have capped their capital requirement at US$35m (Shs123bn) and US$30m (Shs105bn) respectively.

Zambia has its capital cap for local banks lower than foreign banks, mainly to boost capacity of local banks to lend more and expand and ensure that profits made remain at home.

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