BoU’s capital proposal aimed at strengthening the sector – Kaboyo
Customers in a bank. BoU has proposed to raise commercial banks’ paid-up capital from Shs25b to Shs150b. PHOTO/FILE
What you need to know:
Last week, Bank of Uganda proposed to increase the commercial banks’ paid-up capital to Shs150b up from Shs25b. The move, according to some experts, could make it harder for locals to start banks and lead to consolidation among the small existing financial institutions. Prosper Magazine’s Ismail Musa Ladu, spoke to Mr Stephen Kaboyo, the managing director of Alpha Capital about the proposal.
What is paid-up capital in simple terms?
Minimum paid-up capital is the amount of funds required as capital by the industry regulator, in this case, the Bank of Uganda, which should be relative to the risk that one takes in the business of banking.
This is good for the customers because it ensures that their funds are secure. This is because once a bank is well capitalized, there will be no defaults or there will be minimum excesses which then ensures that depositors’ money is safe.
Is the move by the Bank of Uganda to raise minimum paid-up capital for commercial banks by about 500 per cent necessary?
After the global financial crisis in 2008, most financial sector regulators became a little bit more cautious and the Bank of Uganda is no exception. Because of the experience of the global financial crisis, regulators are now taking a keen look at capital backup for the financial institutions they are supervising.
You might also want to know that most economies, including that of Uganda, are struggling with pandemic-induced shocks. So to respond to those shocks by way of ensuring the proper financial stability of all the industry players and by extension the entire financial sector, these developments are necessary.
Why is this development being fronted now when most economic sectors, including banking is battling with the COVID-19 induced shocks?
When you look at minimum paid-up capital levels in Uganda’s financial system, they are quite low. Even when you compare with other smaller economies or our peers in the region you will notice that the Shs25 billion is really on the low side. So with this sort of capital levels simply means we are standing on a shaky ground. When you look at the numbers you will realise a few things. For at least more than 10 banks are undercapitalized at the moment.
It is also important to know that this kind of review was last done more than 10 years ago. So as far as I am concerned the timing is right. Although others argue that this shouldn’t have been done now because of the Covid-19 crisis, I believe it is for this reason that this review should be undertaken.
The effect of the pandemic which we continue to absorb can be dangerous to an institution that has no buffer. So the revision of the minimum paid-up capital will result in solid institutions, going forward. And it is important to understand that well-capitalized institutions respond much better to shocks.
Certainly, this development by the Central Bank must have two sides to it. It cannot be all good news?
I agree. For example, there is a school of thought that suggests that when you increase capital, market players, given their tendencies, will pass the extra costs to the customers. And that has the potential to impair the competitiveness of the sector. But there is so much to factor in beyond just cost and that is the problem with that kind of argument.
So I still think the action of the regulator has more positives to it than negatives.
What is the implications of this move by the Central Bank?
Our market is skewed towards the bigger players. About five to six banks command about 57 per cent of the market.
We also know that already several industry players are posting losses. The effects of the pandemic will likely make it more difficult to operate profitably, going forward. So true, this revision will put a lot of pressure on small players to either merge or exit the marketplace. And this is not unique to Uganda.
