Why banks are faced with rising inactive accounts

Do you have a dormant bank account? Sometimes, people open bank accounts, deposit money for a while, then forget about them.
Or, they let the account go to a very low or zero balance instead of closing the account. If you do not formally close the account, fees may continue which you will be responsible for paying to your bank.

At that point, bankers declares such accounts dormant. A dormant account is an account which has had no activity for a long period of time, other than posting interest.
From time to time, banks in Uganda like in other places, publish dormant account lists in the newspapers for owners to act on them.
Most banks classify savings, current accounts and other types of deposit accounts as dormant where those accounts have no activity other than transactions initiated by the bank (such as interest and charges) after a specified period of time. In Uganda, it is two years.

Lately, there has been an increase in the number of dormant accounts being published by the commercial banks in the newspapers.
Explaining the cause for growing dormant accounts in commercial banks, Ms Charity Mugumya, the director of communication, Bank of Uganda, said this is due to the fact that banks must comply with the law governing dormant accounts.
Ms Mugumya said dormant account balances after a certain period of dormancy (which is 10 years) have to be transferred to the Bank of Uganda in accordance Section 119 of the Financial Institutions Act, 2004.

“In addition, currently we have 24 banks and a good number that were licensed some 10 years ago are making their maiden publication in the print media now,” she said.
Ms Mugumya said this is explained by the lapse of time; in that when a current or savings account, for example, has not been operated for a period of two years or a time deposit account has not been operated for a period of two years after the date of maturity of the deposit, no withdrawals are allowed from the account and such accounts attain the ‘unclaimed balances’ status. Thereafter, such accounts are supposed to be transferred to a separate register.

“When the dormant account remains on this register after a period of another three years, the commercial bank is required to advertise in the print media stating that the account has been on the register for three years. Such unclaimed balances after a period of five years from the date of advertisement are then transferred to the Central Bank,” she said.

She further explained that the principle behind this is to instil confidence in the banking sector that even if a depositor does not operate their account, their money would still be safe at the central bank. The regulator is required by law to refund such balances when a valid request is presented to it from a customer of a commercial bank.
“Further, there is a rebuttable presumption that a commercial bank may be closed while the Central Bank will be there perpetually and the claimants or those who will have succeeded them can always go to the Central Bank and claim their deposits,” she said.

Causes
On what causes the dormant accounts in banks, Ms Mugumya stated that the causes may be as varied as individual account holders but these are the general reasons that may force an account to attain a dormant state: Death of an account holder and their next of kin do not follow up to collect the money.
Disappearance, relocation, migration or immigration to another country, Economic down turns and cycles leading to the closure of business and business owners leaving some residual balances on the accounts.

The other causes she pointed are employees losing jobs, leaving some residual account balances on their salary accounts. Some accounts belong to loan defaulters who sever relationships with the bank. They could be as a result of family wrangles and protracted legal battles over the death of the estate of the account holder(s).
Ms Mugumya said the dormant account balances are transferred from a Commercial Bank to Bank of Uganda for custody, adding that when the dormant account holder finally shows up at their bank, the bank then applies to the BoU for the amount that was transferred initially when the account became dormant to be refunded.

Ms Mugumya said commercial banks are required to transfer unclaimed balances without exception or regard to the amount but the amounts like the normal customer account details cannot be disclosed due to confidentiality concerns.
“Nonetheless, the amount transferred from each bank is well-maintained and accounted for in a separate register with full details of the dormant account owners, date when the account became dormant and branch. Similarly, when banks are publishing the list in the newspapers, they do not disclose the amounts but only to state the names of the dormant account holders,” she said.

The chief finance officer at Stanbic Bank Uganda, Mr Samuel Fredrick Mwogeza, told Prosper Magazine last week that there are multiple factors why there are dormant accounts in Ugandan banks which among others, are caused by the closure of government-funded projects.
“When there is slow economic activity, there is always a problem of low cash flow which makes people’s accounts to become dormant,” he stated.
Financial institutions are required by state laws to transfer resources held at dormant accounts to the state’s treasury after the accounts have been dormant for a certain period of time.

In Uganda, Mr Mwogeza said an account becomes dormant account after two years, when it reaches three years it is published in the newspapers as dormant. After five years when the owners of these dormant accounts don’t respond, these dormant accounts are transferred to the Central Bank with details of the account owners. Some of these people later show up and it’s in the central bank that they get paid,” he said.

Fraud
One of the most worrying kinds of fraud that financial institutions face today worldwide is related to dormant accounts.
This is because the dormant accounts are almost unreachable by outside hackers Fraud in dormant accounts normally involves someone inside the financial institutions, and often a large sum of money. Experts say this kind of insider fraud is particularly disturbing.
Financial institutions are wary of holding dormant accounts for a number of reasons. While the costs of servicing these accounts can be less given the lack of account activity, there can be higher costs for holding accounts with lower balances.

Bank profitability is associated with assets under management, so maintaining a large number of accounts with few resources is not an attractive business proposition.
Makerere University lecturer and economist Dr Fred Muhumuza, believes the financial sector is a reflection of the state of the economy.
“Money is, as taught in class, a medium of exchange that facilitates transactions in the rest of the economy. Thus, if the economy is not doing well, the accounts are bound to dry up and close,” he shares.
Dr Muhumuza blames the poor state of the economy as partly responsible for dormant accounts. He adds: “You might have people who lost jobs or their businesses collapsed, or were running more than one account and decided to consolidate. It is also possible that others have preferred mobile money.”
Others could be people who simply opened an account to do a one-off transaction like receiving NSSF payment or other pension.

Impact
Analysing the impact this has on the economy, the banking industry’s growth and financial inclusion in Uganda, Dr Muhumuza said, “It will affect the sector as functioning accounts are needed to enable banks to mobilise resources for lending.”
To the extent that the situation is related to economic weaknesses, the accounts should be a worry for banks as they reflect possibility of Non-Performing Assets (NPAs).
“We should not just seek to have people open accounts but go beyond to use those accounts for business and other aspects of economic life. We cannot sustain financial inclusion without economic inclusion,” Dr Muhumuza concluded.

When an account is declared dormant
An account becomes dormant account after two years, when it reaches three years it is published in the newspapers as dormant. After five years when the owners of these dormant accounts don’t respond, these dormant accounts are transferred to the Central Bank with details of the account owners.

Impact on performance
To the extent that the situation is related to economic weaknesses, the accounts should be a worry for banks as they reflect possibility of Non-Performing Assets (NPAs).

Trouble identifying fraud
Experts also warn that leaving your bank account idle attracts frauds, yet identifying a fraud in an unused account is not easy.
Therefore, if you don’t intend to use more than one or two accounts, close them and invest the funds in other investment avenues, which give better returns.”