Bank of Uganda should ease capital requirements for banks

Bank of Uganda should ease capital requirements for banks

Credit flow. The lockdown is likely going to force many firms out of business, as well as employees out of work. To help stimulate growth in the economy, the government must support the banking sector since it is a central player in economic growth and a conduit through which finances are distributed. To keep credit flowing to counter the economic havoc caused by the pandemic, I propose the dropping of the minimum capital requirements and compulsory reserve funds for these banks.

Following the 2008 global financial crisis, many banks collapsed worldwide, while others had to plough through public funds in the form of government bailouts in order to survive.

To avert a consequent repeat of this episode, the Bank of International Settlements (BIS), a global standard setting body for central banks, under the auspices of the Basel Committee on Bank Supervision (BCBS), amended its standards with the passing of the Basel III Accords.

These increased the capital and liquidity requirements that banks are mandated to hold as buffers against shocks in times of crisis.

In 2009, Uganda became part of this risk management framework and the Bank of Uganda (BoU) subsequently implemented Basel III by requiring banks to hold a minimum Shs25b in the capital.
This was done with the passing of the Financial Institutions (Revision of Minimum Capital Requirements) Instrument No43 of 2010 in accordance with Section 26(5) of the Financial Institutions Act 2004.
Later on, perhaps to restore public confidence in the banking sector after the Crane Bank debacle, the BoU, in December 2016, would further raise the minimum statutory capital adequacy ratios to 10 per cent (up from eight per cent) of the risk-weighted assets of the bank on top of holding a capital conservation buffer of 2.5 per cent of their risk weighted assets.

An additional capital surcharge of 1 to 3.5 per cent was charged on the big banks considered as Domestically Systemic Important Banks, which currently include Stanbic, Standard Chartered and dfcu, with strong capital buffers ensuring sound banking and indeed the BoU June 2018 Financial Stability Report showed that the banking sector remained well capitalised and that banks had adequate liquid assets.
This stability buffer is, however, not only meant to help banks weather a stormy crisis, but also encourage them to help their struggling customers in tough times such as these caused by the Covid-19 pandemic.

According to the latest BoU monetary policy, the Covid-19 […]

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