increase this threshold further, a move which is expected to put smaller banks out of business.
The apex bank, based in Kampala, is proposing to increase the paid up capital of commercial banks from Shs25 billion to Shs150 billion, although only about two fifths of the country’s commercial banks would have the capacity to meet this requirement. The BoU proposal did not spare credit institutions either, as the threshold for these organisations will also rise to Shs25 billion, from the current requirement of Shs1 billion. On the other hand, capitalisation requirement for Micro finance deposit taking institutions (MDIs) will also shoot from Shs500 million to Shs10 billion.
The proposal has prompted concerns among industry experts who claim that it will push smaller players in the financial sector into either mergers or sales in order to raise capital, while the new threshold could also bar local investors from venturing into the country’s lucrative banking industry. Over the past two decades, the BoU shut down a number of banks, including the National Bank of Commerce, Crane Bank and Global Trust Bank, owing to capitalisation issues.
However, Paul Omara, a member of parliament and a former banking executive, took a positive outlook regarding potential mergers. “That in essence will mean that there will be fewer banks in the country. It would also mean that a lot of capital would be tied down. It’s good for financial sector stability and would allow banks to do much bigger deals on their balance sheet because of the huge capital buffers,” he said.
Moreover, the BoU insists an increase in paid-up capital is necessary owing to several reasons. “[…] the increase in paid-up capital is long overdue and is intended to match the dynamism in the economy, incentivise shareholder commitment, and enable institutions to withstand shocks and to converge with regional peers among whom Uganda effectively has the lowest paid-up capital,” the central bank’s director of supervision, Tumubweine Twinemanzi, said.
