Auditor General flags BoU’s rising undercapitalisation

Risky. According to the Auditor General, the continued under capitalisation poses a business risk to the bank and its operations.

What you need to know:

  • Below minimum capital. According to a report highlighted in the 2019 Bank of Uganda annual report, the Auditor General informed Parliament that the Central Bank’s core capital had fallen below the minimum required capital by Shs671.7b.
  • However, a simulated bank run stress test scenarios of a sudden withdrawal of short-term deposits, which indicated that liquidity buffers of two banks would be depleted by day three, and four additional banks by day five, with the rest of the banks able to withstand the shock over a five-day period.

The Central Bank’s core capital has continued getting eroded as it seeks to maintain a stable monetary policy.

According to a report highlighted in the 2019 Bank of Uganda annual report, the Auditor General informed Parliament that the Central Bank’s core capital had fallen below the minimum required capital by at least Shs671.7b.

“As at June 30, 2019, the core capital of the Bank [of Uganda] was below the minimum required capital by Shs671.7b from Shs482b in 2017/18,” Mr John Muwanga, the Auditor General wrote in a report carried in the BoU’s 2019 annual report.

The Central Bank, in accordance with the BoU Act has a minimum capital requirement of Shs20b.
However, owing its Shs651b deficit in core capital, the Central Bank is now undercapitalised by Shs671b.

Business risk
The Auditor General attributed the capital erosion to BoU’s implementation of monetary policy, which cost is fully borne by the bank, warning that inadequate capital poses a business risk to the bank and its operations.

For instance, he said, operating losses of the Central Bank during the year ended June 30, 2019 were mainly attributable to interest expense paid to financial institutions on deposit auctions and vertical repos issued by Bank of Uganda in the management of monetary policy as per the bank’s mandate and currency costs of Shs198b, which is 89 per cent of the interest income.
This is a 10 per cent increase from 2018 when it was about Shs155 billion.

The Bank of Uganda Act declares that government will furnish securities to the bank when its capital is impaired at any particular time.
To that effect, government recapitalized the Central Bank with Shs960b which reduced the core capital deficit to Shs651 as at June 30, 2019.

State of commercial banks

During the year, according to the report, commercial banks were adequately capitalised with total assets of the banking sector increasing by 10.5 per cent from Shs27.4 trillion in June 2018 to Shs30.3 trillion in June 2019.
Asset growth according to BoU was pegged on the rise in total industry gross loans and advances by 11.3 per cent from Shs12.2 trillion in June 2018 to Shs13.6 trillion in June 2019.
Banks also increased holdings of government securities by 14.7 per cent which contributed to an upsurge in total assets.

The improvement in asset quality BoU said, was driven by a reduction in non-performing loans by 5.2 per cent from Shs542.84b in June 2018 to Shs515.1b in June 2019.
Quarterly Stress tests conducted on the banking sector at the end of June 2019 showed that while most banks had sufficient capital and liquidity buffers, the least resilient bank to a credit risk stress test that analysed the deterioration in performing loans indicated that it would be affected when 3.6 per cent of its performing loans become non-performing.

However, a simulated bank run stress test scenarios of a sudden withdrawal of short-term deposits, which indicated that liquidity buffers of two banks would be depleted by day three, and four additional banks by day five, with the rest of the banks able to withstand the shock over a five-day period.

Stress test on banks

Run stress: According to the 2019 Bank of Uganda annual report, a simulated bank run stress test scenarios of a sudden withdrawal of short-term deposits, which indicated that liquidity buffers of two banks would be depleted by day three, and four additional banks by day five, with the rest of the banks able to withstand the shock over a five-day period.