Bank of Uganda's mid-month announcement of an increase of the minimum capital requirement for commercial banks signals the first steps to reforming a sector that has become deeper and more sophisticated, according to sector analysts who spoke to The Independent.
The BoU announced that the minimum capital requirement would jump from Shs 4 to 25 billion in two years.
Indication that the minimum capital requirement would be raised was first signaled by the Deputy Governor of the BoU, Louis Kasekende, when he told a bankers meeting at the Serena Kampala Hotel in May that the central bank would "require a radical change to the minimum paid capital requirements for banks".
A minimum capital requirement for commercial banks provides a basis for BoU to ensure that their capital is adequate and acts as a buffer to protect depositors and creditors.
According to BoU the new requirement starts at Shs10 billion next year and is expected to have reached 25 by 2012.
Uganda's Shs4 billion capital requirement, which was set in 2004, is the lowest in the region and is deemed insufficient to ensure that sector players have sufficient capital.Kenya, has a minimum capital requirement of KShs1 billion (Approx. Shs28 billion) and Tanzania earlier this year tripled hers from Shs 5bn to Shs15 billion (Ushs.23.6bn.)
The central bank has also embarked on the review of other capital adequacy requirements which banks are required to comply with during operation, including permissible activities by banks, loan risk cover, and liquidity.
The bank believes the changes, coming on the back of the recent global financial sector crisis, will help to ensure that banks are in a better position to withstand shocks on their financial positions.
The new regulations are in line with the Basel Accord arrangement, which is an international bank regulation framework, which among other things sets the minimum liquidity requirement for each country, and the Financial Institutions Act (FIA) 2004.
Most of the Basel recommendations are designed to ensure short-term financial sector resilience for at least 30 days and long-term reduction in the liquidity mismatches.
Thechanges are part of the proposals approved on September by the internal Basel Committee on Banking Supervision to strengthen the resilience of, especially the internationally active banks.
Uganda has 22 commercial banks, most are foreign and a few are new. Only two banks, the National bank of Commerce (NBC) and Crane Bank are locally owned.
In the latestBoU-issuedFinancial Stability Report of June 2010, the Governor of BoU, Emmanuel Mutebile, notes that although, "overall, in the short-term at least, there are no major threats to the systemic stability of the Uganda banking system", there is need to "remain vigilant".
A recent report on Uganda's banking sector by African Alliance, notes that majority of the country's 22 banks already maintain capital in the range of Shs12-30 billion which is far above the requirement.
But the new requirement comes at a time when newcomer banks are still struggling to breakeven. In the first quarter of 2010 only half of the 22 banks survived making losses. The rest including the local banks made losses according to Bank of Uganda's Financial Stability Report June 2010.
It is for this reason that BOU's move has resurrected the buzz of speculation about mergers and takeovers. These are the obvious short-term options for raising the required minimum capital.
Kalanzi Evans Frank, a Business Banker with Stanbic says that the new requirement could herald intense competition between banks and lead to takeovers of some banks.
"(But) this is good because it will lead to strong consolidated banks that will instill confidence in clients."
If this happens, Mutebile will most likely be a happy man. The governor has always been against local ownership of banks saying that local owners fail to meet standard requirements of formidable banks. Tumusiime says increasing minimum capital requirement aims at "securing banking from future domestic or external financial crises."
Insiders in the banking sector say that Barclays was in talks to take over DFCU but the talks hit a dead end. Standard Chartered bank also had interests in DFCU.
In October last year, the Abu Dhabi Group injected $10m (about sh20b) into NBC.Amos Nzeyi, the bank's outgoing chairman, explained that the new investment would not affect their shareholding in the bank. However, Ahmed Dagher the Abu Dhabi group's representative became chairman of the bank and said that the investment would prepare the bank for a planned expansion.
Nzeyi said he stepped aside for Dagher's chairmanship in line with the central bank's Financial Institutions Act (FIA) 2004, which prohibits shareholders from chairing banks. However, even with that provision in force, he had been chairman for many years. So what was changing?
Since then, there has been talk that the bank might be in the process to secede ownership to foreigners but this has remained unconfirmed talk.
Kalanzi says generally the new capital requirement is good for the banking industry. "This requirement will force banks into micro-lending currently done by micro-finances," he said, "and this will increase their capital base and capacity of branches to lend more money to the people."