Fifty thousand shilling notes go through a money counting machine in a bank. PHOTO/ Edgar R. Batte
Large depositors in the failed Mercantile Credit Bank Limited could lose 50 to 60 percent of uninsured funds amid serious loan recovery challenges encountered in its liquidation process.
This scenario raises hard policy questions within Uganda’s financial sector and has also triggered pleas for a government bailout for the affected customers, The EastAfrican has learnt.
Around 1,000 depositors who hold 70 percent of Mercantile Credit Bank Ltd’s total deposits are likely to be affected by this conundrum, industry sources say. The failed lender had accumulated roughly 3,000 customers before its closure last year.
The tier-2 credit institution was shut down by the Bank of Uganda (BOU) in June 2024 on account of insufficient liquidity levels and failure to comply with new, minimum capital requirements.
Capital requirements for tier-2 credit institutions were raised from Ush10 billion ($2.7 million) to Ush25 billion ($6.8 million) effective June 30, 2024 alongside increases applied to existing minimum capital requirements for both commercial banks and Micro Deposit Taking Institutions (MDIs).
Customer deposits held by commercial banks, tier-2 credit institutions and MDIs are insured up to Ush10 million ($2,702) by the Deposit Protection Fund of Uganda.
Any deposit above Ush10 million ($2,702) that is held by a closed financial institution is paid off through disposal of assets belonging to the affected institution based on their market value, according to Ugandan laws.
But loan recovery efforts pursued by BOU against former Mercantile Credit Bank borrowers have been reportedly hampered by huge loans disbursed by the failed lender to sister companies in the past.
The latter include Victoria Motors Ltd, a prominent supplier of brand-new vehicles, Victoria Engineering Ltd, and Victoria Pumps. For instance, previous loans extended to Victoria Motors were utilised for the importation of various motor vehicles but efforts to dispose of its vehicle stock for purposes of loan recovery have been bogged down by sluggish car sales in a local market dominated by used car imports.
So far, BOU has cleared 28 percent of the total value of uninsured deposits held by Mercantile Credit Bank clients, according to a public notice issued earlier this month.
The failed lender possessed total assets estimated at Ush300 billion ($81 million)-Ush400 billion ($108 million) before its closure, while total deposits were estimated at Ush150 billion ($40.5 million)-Ush200 billion ($54 million), according to previous financial statements.
“Some depositors of the defunct bank might be forced to accept a haircut of about 50-60 percent of their deposits. The affected customers are large depositors that account for about 70 percent of its total deposits and are about 1,000. This situation has been brought about by serious difficulties encountered during loan recovery targeted against different borrowers. For example, that institution lent money to its sister companies like Victoria Motors, which is a car dealership, but the process of liquidating some of its assets is very problematic because some of the cars were supplied on leases, a portion of the vehicle stock is hard to sell off while others are still in transit. There have been some meetings held between BOU and the affected depositors and the idea of government financial intervention has been considered. But those depositors are bound to receive less than what they are entitled to because of limited resources available in the national coffers,” explained a banking industry source.
Dr Kenneth Egesa, BOU’s communications director, said that most of the financial institutions that were closed were insolvent and their shareholders did not have enough money to recapitalise them.
“Under those circumstances, their assets are less than liabilities, and recovery of money from all existing assets might not be enough to settle all depositors’ claims. Some difficult borrowers in Mercantile Credit Bank had not serviced their loans for a long time but we are still trying to recover from them. We are going to sell all the cars and other assets that belong to the financial institution to recover money and clear depositors’ claims. It is too early to draw lessons from the resolution of failed financial institutions but it would be up to the Ministry of Finance to decide on the use of public funds for purposes of compensating affected depositors,” he said.
“BOU is obliged to dispose of Mercantile Credit Bank’s assets and pay off depositors’ claims. The fact that BOU committed itself to clear depositors’ claims during the liquidation of EFC Limited means it must find all the money it needs for the dissolution of that financial institution to protect its reputation. Any loss of deposits might cause deposit flight from small financial institutions to large ones for fear of potential loss of money in a little, collapsing financial institution,” noted William Sekabembe, a former executive director at DFCU Bank.
“Liquidating a financial institution takes a long time. Converting assets into cash is not easy. For example, if the financial institution owns the land, it must be valued and that takes time. Thereafter, the land must be put on auction to select the right buyer. The liquidator must balance the interests of the depositors, shareholders, and creditors during the liquidation process. A ‘fire sale’ of available assets would not serve anyone’s interests. But the average cost of liquidating a financial institution in Uganda is not clear,” observed Phillip Karugaba, a Kampala-based lawyer.
