Bank of Uganda (BoU) plans to increase the paid-up capital requirements of financial institutions in the country in a move that could make it harder for locals to start banks and lead to consolidation among the small existing financial institutions.
The Central Bank says the move will transform the sector and align it to regional peers.
BoU has proposed to raise commercial banks’ paid-up capital from Shs25b to Shs150b. The paid-up capital for ‘credit institutions’ will jump 25 times from the current Shs1b to Shs25b while the paid-up capital for micro-finance deposit-taking institutions (MDIs) will jump from Shs500m to Shs10b.
Credit institutions are credit and finance companies which may accept customer deposits, open savings accounts, and issue loans backed with or without collateral to savings and non-savings customers. MDIs are allowed to accept deposits from customers only in the form of savings accounts. They cannot offer checking accounts or trade in foreign currency.
The threshold for commercial banks was last revised in 2010 while that for credit institutions and MDIs was last revised in 2004 and 2003 respectively, according to BoU.
In a statement, Tumubweine Twinemanzi, the director of supervision at BoU, said: "… the increase in paid-up capital is long overdue and is intended to match the dynamism in the economy, incentivise shareholder commitment, and enable institutions to withstand shocks and to converge with regional peers among whom Uganda effectively has the lowest paid-up capital."
Total assets of the banking sector stood at Shs38.3 trillion at the end of December 2020 with five small commercial banks, ranked by asset size, losing money by the end of that accounting period, according to the Central Bank.
In 2018, Rwanda raised its paid-up capital requirement to 20 billion Rwandan francs (Shs70.3b) from five billion francs (Shs17.5b). An earlier move, in 2016, by Kenya’s Treasury to increase the minimum capital requirement for commercial banks from Ksh1 billion (Shs32.2b) to Ksh5 billion (Shs161.1b) was rejected with lawmakers arguing it would kill competition and make it difficult for small banks to grow.
Those in support of the increase argue that the measure protects public deposits and investments contribute to investor confidence in the country’s financial sector.
Critics, however, say the move will keep local investors out of the financial sector with the increased capital threshold likely to favour major foreign players with deeper pockets.
Uganda has at least 24 commercial banks and this will translate into at least Shs3.6 trillion in the combined paid-up […]