The Bank of Uganda has ordered banks to strengthen their balance sheets to improve their capacity to face up to any upheavals in the industry.
The move, while it has been three years in the making, comes at a time when across the border three Kenyan banks have folded under the weight of unregulated insider lending and general economic stress.
The collapse of several banks at the end of the last century, mostly due to an accumulation of bad debt, prompted the Bank of Uganda to raise minimum capital requirements to sh4b in 2005 from the previous one billion shillings for foreign banks and sh500m for local banks. This was further raised to sh25b in 2010.
The banks that folded included International Credit Bank (ICB), Greenland Bank, Cooperative Bank and Trust Bank. More recently the National Bank of Commerce and Global Trust Bank closed shop.
By raising minimum capital requirements allows the banks to absorb higher losses were the bank was to be distressed.
In the latest move the Bank of Uganda has ordered a minimum capital requirement of 10.5 percent of risk weighted assets – cash, loans and government securities from the previous eight percent. In addition banks will be required to provide for an additional 2.5 percentage points as a capital conservation buffer, bringing capital requirements to 13 percent of risk weighted assets.
"And for the big three banks which are judged to have huge systemic risks – what happens to them affects the whole industry, an additional 1 to 3.5 percent of risk weighted assets will be required depending on the central bank's discretion...
This counter cyclical buffer will apply to Stanbic, Standard Chartered and Crane Bank.
“The Banks are already informed and they should comply by the end of the financial year we expect,“ Deputy Governor Dr Louis Kasekende told Business Vision.
“Think of these actions as a longer term effort to strengthen our banking sector not triggered by anything happening here or abroad.”
Due to their unique financing structure, funded mostly by client deposits it is imperative that a bank’s capital keeps step with is growing operations. Bad debts can mean a bank failing to honour savings withdrawals and lead to its closure a bigger capital base means they can absorb more losses and keep the bank afloat.
According to the central bank documents deposits in the industry grew to sh13.2 trillion by the end of 2014 compared to sh1.04trillion in 1999. Industry assets also grew to sh19.6trillion from sh1.35trillion during the same period.
The Kenyan banking industry is reeling from the closure of Chase Bank last week, the third bank to collapse in the last six months. Imperial Bank was taken over by the regulators while Dubai Bank Kenya Ltd run out of money.
The banks have been plagued by bad debts but also improper lending to its shareholders and managers, which forced the lenders’ insolvency.
"The central bank’s regular adjustment of capital requirements and continued improvements in bank supervision has spared the industry much of the turmoil of the global financial crisis that started in 2008 and distressed many foreign banks....
Except for a spike in bad loans to about 5.6 percent in 2013 the industry has managed to contain the bad loans to under five percent, with the n umber coming in at 4.1 percent in 2014.
Industry sources said the changes have been a long time in coming.
“In 2015 bad debts have been rising, this is the central bank’s way of saying “Don’t take as much risk!” a senior banker said on condition of anonymity.
He said the increase in bad loan provisioning in 2015 suggests that banks continued to lend aggressively in a slowing economy and their clients are failing to honour their obligations.
The bigger banks have had it good for a while, accumulating billions in reserves and these new requirements shouldn’t cause much trouble, he said.
“The smaller banks may struggle especially if their head offices are under stress,” he said in reference with the goings on in Kenya.
The banks see the move as positive for the industry but also will be good for their clients.
“From the clients perspective the banks will be more resilient to external shocks so they will have additional comfort about the safety of their savings,” Stanchart’s finance director Kevin Musana told Business Vision.
For the bigger clients, he said, the bank will be able to lend them even more as the limits, currently not more than 25 percent of capital lent to a single client, will rise.
He agreed that it would be much easier to manage raising capital this way rather than fresh capital from the banks’ owners. However shareholders may have to take a cut on their annual dividends this year.
The local banks listed on the Uganda Securities Exchange include Stanbic, dfcu and Bank of Baroda, whose shareholders may be affected.
Banks are currently reporting annual results an exercise whose deadline is the end of April when a more clearer picture of how the industry did last year will emerge.
Seen against the historical issues of the sector the latest move by the central bank should be seen as an extension of previous moves aimed at strengthening the sector and hopefully making ot more competitive.