Bank Why government must support the banking sector t o keep credit flowing to stimulate economic growth COMMENT | SIMON MUTUNGI | Following the 2008 Global Financial Crisis, many banks collapsed worldwide while others had to plow 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 Shs25 billion in capital. This was done with the passing of the Financial Institutions (Revision of Minimum Capital Requirements) Instrument No. 43 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 percent (up from 8 percent) of the risk-weighted assets of the bank on top of holding a capital conservation buffer of 2.5 percent of their risk weighted assets. An additional capital surcharge of 1-3.5 percent was charged on the big banks considered as Domestically Systemic Important Banks which currently include Stanbic, Standard Chartered and DFCU.
Strong capital buffers ensure 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. Simply put, now that Ugandan banks built up reserves in peace time, they should use the same to save the private sector in war time.
According to the latest BoU monetary policy, the COVID-19 pandemic has led to a severe contraction in economic activity due to a combination of global supply chain disruptions, travel restrictions, measures to limit contact between persons, and the sudden decline in demand. 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 the country’s […]