JP Kiwanuka
Mercantile Credit Bank Limited (MCBL) underwent significant transformations from facilitating import-export activities as a merchant bank in 1986 to becoming one of only four credit institutions in Uganda. This evolution culminated with MCBL's designation as a Tier II institution under the Financial Institutions Act.
MCBL offered various financial products and services, including lending, financial advisory, operating and finance leases, and commercial banking. Its Super Fixed Deposit Account allowed individuals and groups to maximise their savings by investing for an agreed-upon period. It also offered specialised savings options for group borrowers and non-borrowers working towards a shared financial goal. The financial leasing options covered various brand-new or used assets, from vehicles (cars, buses, trucks) and generators to medical and manufacturing equipment, institutional computers and other assets acceptable to MCBL.
The Bank of Uganda's closure of Mercantile Credit Bank on June 18, 2024, sends a strong message about regulatory oversight. Citing the bank's persistent undercapitalisation, non-compliance with licensing terms, poor corporate governance and possible insolvency, the central bank took decisive action. Perhaps this move underscores the regulator's commitment to protecting depositors and ensuring the stability of the financial system.
Following the closure, the Deposit Protection Fund (DPF) of Uganda effectively compensated depositors of MCBL up to the UGX 10 million legal limit. Even then, a substantial number of account holders (individual, company, joint, trust, minor, SACCO and investment club) have yet to claim all their protected deposits. The large depositors or investors remain partially compensated to-date having received less than 30% of their deposits!
BoU’s decision regarding the closure of MCBL raised several questions as discussed by a Kigo Thinkers Baraza in Kampala on 1 August 2024!
Why wasn't a coordinated sale process, similar to the one used for UK’s Chelsea Football Club (in 2022) or Uganda’s Crane Bank (in 2016) implemented? Such an approach could have preserved the stability provided by MCBL's large depositors. These depositors were crucial, offering a stable funding source that enabled long-term lending and investment, a key strategy of MCBL's operations. Their presence also signalled market confidence in the bank's financial health.
The regulator's rationale for not pursuing a negotiated sale or take-over remains questionable.
While the DPF's commitment to reimbursing 2,850 customers a total of UGX 3.031 billion demonstrates its function, the fact that a significant portion of deposits (UGX 108.7 billion) exceeds the UGX 10 million limit and falls under the Bank of Uganda's purview raises concerns about the adequacy of the current protection scheme. The data reveals many partially protected accounts (84 individual, 54 company, 22 joint, and 34 trust accounts), indicating that many depositors held balances significantly exceeding the insured amount. This, coupled with the requirement for loan deduction from deposit pay-outs, underscores the potential financial vulnerability of depositors in the event of bank failures.
The complexities and potential administrative burdens associated with deposit insurance claims, as highlighted by the differentiation in payment procedures, underscore the urgent need for a thorough review of the deposit insurance framework in Uganda. This review should consider the level of coverage, claims processes and the division of responsibilities between the DPF and the Bank of Uganda.
Kigo Thinkers (KT) raises concerns about the closure of MCBL, questioning its impact on investor confidence in Uganda. While citing poor governance and inadequate capitalisation as official reasons, KT argues that the closure, was not an appropriate problem-solving resolution; and this may deter future investment in the financial sector. Furthermore, there is need for greater public awareness regarding the limitations of the Deposit Protection Fund and its potential impact on depositors' access to their funds.
Kigo thinkers advocate a more supportive regulatory approach to mitigate the negative consequences of bank closures. Finally, Uganda's current deposit protection scheme needs to be improved due to the large number of depositors with balances exceeding the UGX 10 million insured limit. While the Deposit Protection Fund has reimbursed UGX 3.031 billion (2.7% of the value) a significant portion of deposits (UGX 108.7 billion - 97.3 % of the deposit value) falls outside the DPF's purview and under the Bank of Uganda's responsibility. This raises concerns about the overall effectiveness of deposit protection. A comprehensive framework review is needed, focusing on improved coverage levels above the UGX 10 million threshold and clarifying the Bank of Uganda's role in protecting these larger depositors.
Kigo Thinkers is a public policy think tank with a mission to spur thinking spaces in Uganda. The opinion rendered in this article is a collection from its Baraza, “Examining Uganda’s recent bank closures,” held on 01-August 2024.
JP Kiwanuka
A Kigo Thinker
