Only about two fifths of 24 commercial banks operating in the country have their core capital above the Shs150b paid up capital threshold proposed by Bank of Uganda, Daily Monitor can reveal.
Already, industry observers have predicted that the smaller banks could be put out of business if the BoU proposal is adopted.
The paid up capital threshold will be key as leaders of financial institutions mull over the new proposals with Bank of Uganda and other stakeholders today. The central bank has proposed that the paid up capital of commercial banks be increased from Shs25b to Shs150b.
Elsewhere, the paid up capital for credit institutions will jump from the current Shs1b to Shs25b. Micro finance deposit taking institutions (MDIs) were also not spared, with their capitalisation requirement shooting from Shs500m to Shs10b.
There are fears that the proposal — if passed as is — will force the smaller players into either mergers or sales to raise international and local capital. There are also concerns that the move could further bar local investors from venturing into Uganda’s lucrative banking sector.
Mr Paul Omara, a former banking executive with bags of experience across Africa, however, believes the proposal will have positive ripple effects.
The current legislator for Otuke Constituency in the 11th Parliament says the increased capitalisation will force small banks to merge.
"That in essence will mean that there will be fewer banks in the country. It would also mean that a lot of capital would be tied down. It’s good for financial sector stability and would allow banks to do much bigger deals on their balance sheet because of the huge capital buffers," he says.
Banks merge depending on how much capital is required. The adoption and approval of BoU’s proposal will compel smaller entities to look at their balance sheet and, crucially, weigh their options.
Industry observers also say it will be a nightmare for the banks that recently turned profitable following the November 2010 directive by BoU. The directive compelled all commercial banks in Uganda to raise their minimum capital to Shs10b by March 2011 and to Shs25 billion by March 2013.
The decision could also negatively impact earnings for investors in smaller banks.Following the 2010 decision, dividend per share (DPS) — which is the sum of declared dividends issued by a company for every ordinary share outstanding — reduced significantly.Banks struggled to reach the BoU requirement irrespective of whether they were making profits. In the […]
