In August the Bank of Uganda (BOU) announced that it would be raising the capital requirements of the financial institutions under its supervision, kicking up a lot of noise from the usual suspects.
BOU has tabled a six-fold increase in paid up capital for
commercial banks to sh150b from the current sh25b, while microfinance, deposit
taking institutions (MDI) will see their requirements jumping to sh10b from
sh500m.
The central bank argues that these changes are long overdue,
would strengthen the financial sector, allowing it to be more innovative and be
able to finance more of our own development agenda.
The critics pointed out that these requirements would
effectively shut out local businessmen from entering the sector, banging in the
last nail in the coffin for foreign dominance of the sector. Their argument
seems to be that foreign banks are not sensitive to local business and the
repatriation of their massive profits is helping fund their home countries to
the detriment of Uganda.
They are right to some extent, foreign banks by their
definition have their owners abroad, which investors want to see a return on
their investment and understandably prefer to be paid where they are – at home.
And true, it is very possible local businessmen will be shut out of the industry, not because they cannot raise the required sh150b but because they cannot work together to raise these amounts and run the banks properly...
Their concerns that foreign banks may not be sensitive to the
local environment is debatable. What is true though is that targets for the
management of these banks are set abroad and local managers will do everything
in their power to meet their targets to win the juicy Christmas bonuses. That
may very well mean sidestepping all risky projects and loading up on the less
risky government paper. This argument also seems to suggest, wrongly I think,
that local owners would be more willing to take risks on local businessmen at
the expense of their bottom line. If this is true maybe that is why our banks
cannot stand the test of time?
And on the issue of loading up on treasury bills and bonds
the scope for this is increasingly narrowing. In the last treasury bond auction
held in August government offered to sh200b and sh300b in three year and
15-year treasury bonds respectively. These were oversubscribed more than twice
in each case, meaning that while the investors – many of whom are banks, had
money to invest the BOU could only take about half of what they offered.
So while everybody with half a brain should be in bonds,
with their double digit returns, that lucrative investment avenue is narrowing by
the day. Which means bank managers will have to either report lower profits and
kiss goodbye their huge Christmas bonuses or be more innovative in the products
they offer their clients.
"An increase in capital requirements means banks will see the government paper as less of an option to show an adequate return on equity for their shareholders here or abroad...
Related to that, existing requirements that banks can not
lend more than a quarter of their capital to one individual puts a cap on how
much our banks can support local projects. At the current sh25b paid up capital
the most a business man can borrow from such a bank would be under sh7b – not
enough to build a mall, leave alone a mega factory that would create jobs.
Interestingly, it is worth noting that such products like
salary loans only came into play at the end of the 1990s when the government
raised bank paid up capital from sh30m to sh1b and then sh4b.
Banks make money by lending and the more money they have in
capital the more they need to shovel out the door. It follows therefore that
apart from thinking up new products to sell to the product they may very well
be forced to lower lending rates, what everybody has been dying to see.
Logically the only people who would have a problem with this new arrangement would be the bank owners who don’t want to invest more in Uganda (they were reaping a lot more than they sowed and would like to keep that going without more risk to themselves) and the bank managers who would have to earn their keep – be more efficient and think harder, in order to keep looking brilliant at their local bar....
For the owners who don’t want to inject more they have the
option of merging operations with other banks or selling off their golden goose
altogether. Not a bad thing, especially if some of our local businessmen can
pony up the money to buy them out.
Beyond the possibility of better service and lower lending
rates, there is a real possibility that some of the owners may finally be
resigned to sourcing their money on the stock exchange, essentially sell shares
to the rest of us to raise the required amounts, allowing us in on this
business that seems to make money effortlessly 24/7.
On the issue of the cementing foreign domination, that has been on for a while and now and may very well continue. If we have surrendered our industry to foreigners, we have only ourselves to blame. Would you rather maintain a weak banking industry, which cannot support local production because you are jealously guarding it from foreigners or invite foreign capital in and get better service?
"Jealously guarding the industry from foreign money will only benefit the few local businessmen who will be able to raise the small capital requirements, shut out other competitors because of their connections in high places and reap massively from charging extortionate lending rates...
They say that nationalism is the last resort of the
scoundrel. Do we for instance believe that our businessmen will charge us less
to borrow and pay us more on our savings? Recent evidence of local banks does
not suggest that and I don’t see what would change now.
But if we got our richest 100 Ugandans together, would they
fail to raise the sh150b new requirement and the additional working capital to
start a bank? If that is true, then BOU is in danger of building such huge
banks here as not to find business.
But it is also not true that we do not have local industry
players. Post Bank has a nationwide network and sh76b in capital; Housing
Finance Bank has sh61b in paid up capital. If you merged these two government
institutions and slapped on Pride Microfinance Ltd – paid up capital of sh25b,
we would have an institution big enough to not only meet the new requirements
but compete favourably in the industry.
