Government tightens grip on banks

Wednesday March 23 2011

By Yasiin Mugerwa

Banks and other financial institutions with a shaky financial base could be out of business soon after the government yesterday announced new regulations—increasing the minimum capital requirement from Shs4 billion to Shs25 billion.

The new regulations titled: The Financial Institutions (Revision of Minimum Capital Requirements) Instrument, 2010, tabled in Parliament by State Minister for Finance Fred Omach, require financial institutions to raise

their capital to Shs10 billion by March 2011, and thereafter be obliged to boost it to Shs25 billion by March 2013. However, MPs led by the Public Accounts Committee chairperson, Mr Nandala Mafabi, expressed concerns that the new regulations could put commercial banks and other small financial institutions out of business and scare away potential investors in the financial sector—abating the economy in the process.

“Under the new regulations, any new banks intending to operate in Uganda would have to fork out Shs25 billion, in order to obtain a licence from Bank of Uganda,” Mr Mafabi said. “Small banks are going to collapse because of this new regulation. The government must explain why they want to scare away investors in the financial sector?”

‘Cushion from shocks’
While Mr Omach did not have ready answers and kept referring to the Bank of Uganda and Finance Minister Syda Bbumba, BoU has defended the new regulations as intended to cushion the country’s financial sector from shocks.

“We want to make sure that the financial institutions are strong enough to withstand shocks,” Mr Eriot Mweya, the new BoU’s communications director said. “No bank is going to collapse; financial markets are integrated regionally to protect customers’ deposits. We are trying to manage risks and these regulations will apply to all financial institutions.”

The minimum capital funds unimpaired by loses of a bank shall at any time not be less than Shs25 billion. Uganda has over 25 financial institutions, which emerged following the lifting of the moratorium against licensing new banks in 2005.

No cause for alarm
Uganda’s minimum capital requirements for commercial banks were the lowest in the region at only Shs4 billion compared to Kenya and Tanzania which are at Shs10 billion. However, starting next year Kenyan banks will be required to have a capital of Shs25.7 billion, while in Tanzania banks will be required to have a capital of Shs24 billion.
“There should be no cause for alarm; we have discussed all these matters regionally. We want to have a healthy financial sector,” Mr Mweya said.

Speaker of Parliament Edward Ssekandi has forwarded the new regulations to the Finance Committee for further scrutiny before the matter returns to the floor of Parliament for endorsement. Committee chairperson Frank Tumwebaze said stakeholders will be invited to discuss the new regulations.