What next for Uganda’s undercapitalised banks?  As of 31st December 2022, out of the 25 banks, 10 banks didn’t meet the thresholds on share capital while another 10 did not meet the thresholds on core capital. Seven (7) banks did not meet both. They have until the end of June 2023 to beat the deadline for the first phase of recapitalisation. They have 4 options⏤comply, downgrade their license, find a buyer or exit the market.

On the 16th of November 2022, the Financial Institutions (Revision of Minimum Capital Requirements) Instrument 2022 was signed into law by Uganda’s Minister of Finance, Planning and Economic Development (MFPED), Hon. Matia Kasaija. The instrument increased the minimum capital requirements for banks by  6 times or 500% from UGX25 billion (USD 6.7 million)  to UGX150 billion (approx USD 40.2 million).

The increment would however be tiered, starting with a minimum capital buffer of UGX120 billion (USD32.2 million) by the 31st of December 2022 and then UGX150 billion by the 30th of June 2024. 

Commercial banks are also required to have minimum capital funds unimpaired by losses (core capital) of UGX 120 billion by 31 December 2022, and UGX150 billion by 30 June 2024.

Under the same statutory instrument, minimum capital requirements for credit institutions were also increased by 25 times or 1900% from UGX1 billion (USD268,000) to UGX25 billion (USD6.7 million) by 30th June 2024. Similarly, the increments are tiered, starting with a minimum capital buffer of at least UGX20 billion (USD5.4 million) by the end of December 2022. 

Micro-Deposit-taking Institutions were also required to increase their minimum capital to at least UGX8 billion by 31st December 2022 and UGX10 billion by June 2024. 

Minimum capital buffers were last revised in 2010 under Financial Institutions (Revision of  Minimum Capital Requirements Instrument), 2010.

The Central Bank says the revised buffers are long overdue and “intended to match the dynamism of the economy, incentivise shareholder commitment, enable institutions to withstand shocks and to converge with regional peers among whom Uganda effectively has the lowest paid-up capital”. 

However, by December 2022, out of the 25 banks, according to the industry’s published financial results,  at least 10 banks didn’t meet the thresholds on share capital while another 10 did not meet the thresholds on core capital. Seven(7) banks did not meet both.

However, all Domestically Systemic Important Banks (DSIBS)- Stanbic Bank, Centenary Bank, Absa Bank, Standard Chartered Bank, dfcu Bank and Equity Bank, which according to the Central Bank, jointly accounted for 64.6 per cent of total banking sector assets as at end December 2022, were compliant on both their share capital and core capital requirements. 

Eight other non-DSIB banks also met the capital threshold first phase deadline.

CEO East Africa Magazine has not immediately established how many Credit Institutions and MDIs are compliant/non-compliant. 

The Central Bank, accordingly has directed the banks that did not meet the first phase of the capital increase to submit capital restoration plans within forty-five (45) days and to meet the required capital by June 30, 2023, in line with the regulatory framework.  

While the non-compliant commercial banks have up until the end of June 2023 to meet to raise their share capital and core capital to UGX120 billion, a further closer review of the non-compliant banks shows that while a number of banks, especially those with stronger regional parent groups were closer to and or had indicated stronger commitments to comply, it is also very evident that some banks won’t be able to meet even the extended deadline. 

Tough times for the non-compliant banks

We asked the Bank of Uganda’s Executive Director in Charge of Bank Supervision, Dr. Tumubweinee Twinemanzi on what was likely to happen to the non-compliant banks, but he simply referred us back to the law.

“Please refer to Section 86 of the FIA 2004 with respect to what banks not meeting the minimum paid-up capital have to do,” he said in an emailed response to CEO East Africa Magazine. 

Section 86  of the FIA 2002 mandates that non-compliant financial institutions have to submit to the Central Bank, within forty-five days, a capital restoration plan to restore the financial institution to capital adequacy within the next 180 days. 

During these 180 days, the Central Bank may prohibit the financial institution from awarding any bonuses, or increments in the salary, emoluments and other benefits of all directors and officers of the financial institution. It may also appoint a person, suitably qualified and competent in the opinion of the Central Bank, to advise and assist the financial institution in designing and implementing the capital restoration plan, and the person appointed shall regularly report to the Central Bank on the progress of the capital restoration plan.

Where a financial institution has been ordered by the Central Bank to submit a capital restoration plan or to add more capital, and the financial institution fails, refuses or neglects to comply with the order or to implement the capital restoration plan, the Central Bank can among other regulator measures, prohibit the financial institution from opening new branches and or impose restrictions on the growth of assets or liabilities of the financial institution as it shall deem fit. The Central Bank may also restrict the rate of interest on savings and time deposits payable by the financial institution to such rates as the Central Bank shall determine. The Central Bank also has the discretion to remove officers of the financial institution responsible for the financial institution’s noncompliance. It may also order the financial institution to do any or such other things that the Central Bank may deem necessary to rectify the capital deficiency of the financial institution.

“Capital restoration plans when submitted are reviewed and if there are deficiencies therein, fixed; and then implemented as agreed,” Dr. Twinemanzi adds. 

Are mergers and acquisitions on the horizon?

Stephen Kaboyo, the Managing Director of Alpha Capital Partners, an indigenous Ugandan firm focusing on sovereign asset management, foreign exchange trading strategies and financial markets advisory says the capital thresholds changes were long overdue and are likely to drive mergers and acquisitions. 

“Looking at Uganda’s banking sector, the current regulatory level with regard to the minimum capital requirement has been below the optimal level for quite some time considering the dynamic and changing banking landscape. It, therefore, came as no surprise when the Bank of Uganda prescribed higher levels. The rationale behind BOU’s move is that increased capital requirement limits risk-taking and default risk and with more shareholders equity, it lowers debt funding costs and encourages commercial banks to monitor and manage the business of lending more effectively,” Kaboyo told CEO East Africa Magazine in a mailed response. 

“In terms of the size of balance sheets, commercial banks in Uganda fall into three categories i.e., large, medium and small. In that case, some medium and small-sized banks will struggle to be able to meet the new minimum capital requirements. The likely outcome of this regulatory change is that we could easily see mergers and acquisitions in the banking sector. Mergers and acquisitions are a means by which banks are able to capitalise, increase market share, and scale up efficiencies in a competitive marketplace,” Kaboyo adds.

“While we could see domestic takeovers, also cross-border mergers and acquisitions are also likely, creating opportunities for regional banks that are in search of new markets. Overall the banks that will be able to meet the new requirements will be solid with sufficient buffers to withstand any kind of shock in the industry,” he reiterates.

Prof. John Ddumba-Ssentamu, the Executive Chairman of Centenary Group, the parent company for Centenary Bank, Uganda’s second-largest bank, and Centenary Technology Services Limited (Cente-Tech) says his Group is open to exploring opportunities presented by the changes in regulatory capital buffers.

“We are always exploring opportunities to expand our reach and better serve our customers. In this context, we are open to considering potential acquisitions of banks that align with our values and mission,” he told this reporter in an emailed interview.

“We believe that collaboration is key to achieving our goals, and we are particularly interested in partnering with institutions that share our commitment to promoting inclusion and integral ecology. By working together, we can create greater value for our stakeholders and contribute to the well-being of our communities,” he further says.

He however says, Centenary Group is deeply aware of the potential risks that come with such acquisitions. 

“We are mindful of the challenges and risks involved in any acquisition, and we will approach such opportunities with the utmost care and diligence. Our focus will always be on creating sustainable growth and delivering exceptional value to our customers while maintaining the highest standards of ethical conduct and corporate responsibility,” he concludes.

Putting good money after bad money?

Another senior banking executive with a rich merger and acquisitions experience in the East African region who spoke to this reporter on condition of anonymity says that while mergers and acquisitions may not be ruled out, the downgrading of licenses to Tier II level may be a more viable option since most of the affected banks are ‘squeezed banks’ with little compelling reasons for recapitalisation and acquisition. 

“The first thing to appreciate is the Return on Equity of the Ugandan banking sector⏤I believe it’s about 15% across the board. So it’s not a super attractive sector from a macro perspective and indeed quite fragmented with the top 5 banks controlling about 80% of market share,” says the executive.

“The banks you refer to are the squeezed banks with no market share to speak of and no deep-pocketed shareholders. But even deep-pocketed shareholders are looking for a return both in absolute terms and in ROE. They will not put good money after bad, especially given all the other opportunities elsewhere. This leaves these banks limited options and the most likely will be to downgrade the license,” he adds.

“There might however be that outlier that convinces a new investor to come in. Mergers or consolidation is also unlikely as adding two low ROE banks seldom makes a healthy bank especially since their customer bases are generally niche-oriented. Such mergers may not create value or cost synergies. In some cases, an exit makes more sense⏤preserve your capital and exit unattractive markets like Uganda,” they conclude. 

According to the Bank of Uganda’s Quarterly Financial Stability Review for December 2022, overall, “systemic risks to the banking sector remain elevated, reflecting the continued pass-through of global and domestic macro shocks, including inflationary pressures and tight financial conditions that started in early 2022”. 

“Credit risk remains a concern in the near term due to rising lending interest rates amidst slow economic recovery. There are signs that global and domestic macroeconomic conditions have started to improve, however, the implications of tightening monetary policy on financial institutions are yet to fully emerge. On aggregate, Uganda’s supervised financial institutions (SFIs) held strong liquidity and capital buffers to withstand ongoing shocks during the quarter ended December 20221,” the Central Bank noted.

The Central Bank further said it was banking on the recently capital-increasing regulatory moves as well as the introduction of a capital charge for operational risk under the Basel II framework and the increase in the regulatory minimum paid-up requirements – to “enhance resilience to potential risks”.