The insurance and banking sectors could witness mergers and acquisitions in the near future as companies are unable to make meaningful profit margins to ensure business sustainability, a market expert has warned.
The Principal Makerere University Business School, Prof Wasswa Balunywa, said Uganda’s economy is small and unable to profitably accommodate many players.
Mr Balunywa, who was speaking at the insurance industry’s chief executive officers meeting in Kampala yesterday, added that a few financially strong companies are likely to swallow up small ones through mergers and acquisitions so as to make meaningful profits which are now shared among many players.
“There will be about three big insurance companies and about six marginal insurance firms in future not because the rest have failed but because they are unable to compete in a highly competitive environment,” he said.
Currently, there are 22 insurance firms, 26 insurance brokers and 17 loss assessors/adjusters.
It had been predicted that the revision of the insurance and banking industries’ minimum capital requirements would result into mergers and acquisitions.
However, with the exception of the National Bank of Commerce that was closed in September 2012, all Ugandan banks are said to have complied with the Shs25 billion minimum capital requirements, although it is said that most foreign banks have been depending on recapitalisation from their parent companies, even though some countries have banned capital outflow, a move that could force mergers and acquisitions.
The insurance industry also revised the minimum capital requirement for life insurers, non-life insurers and reinsurance firms was increased to Shs4 billion, Shs3 billion, Shs1 billion and Shs10 billion, respectively, and all players must comply by October this year.
The Insurance Regulatory Authority chief executive officer, Mr Ibrahim Kaddunabbi Lubega said about 50 per cent of insurance companies have complied.
Prof Balunywa urged regulatory authorities to relax on some rules and regulations so as not to stifle businesses.
“Although there is need for regulating the industry, laws should not suffocate businesses and restrict them from expanding. We need to be more pragmatic and put in place laws which businesses can comply with. We shouldn’t legislate against entrepreneurship,” he said.
Mr Kaddunabbi, however, said regulations are crucial especially in developing countries where most players don’t want to do what ought to be done if there are no laws in place to compel them to.