Finance minister Matia Kasaija has set timelines within which all licensed players in the financial sector should meet new capital requirement thresholds by the Bank of Uganda (BoU).   

Bank minimum capital requirements were last revived in 2010. At the centre of the new thresholds is the idea that higher capital levels make the financial sector more resilient and reduce the probability of any financial crises.

Under the Financial Institutions (Revision of Minimum Capital Requirements) Instrument 2022, financial entities have approximately a one-year to boost their capital positions.  

“A person proposing to transact financial institution business in the capacity of a bank shall have a minimum paid-up cash capital of not less than seven million five hundred thousand currency points (equivalent to sh150b), by June 30, 2024, invested initially in such liquid assets in Uganda as the Central Bank may approve,” Kasaija noted in a legal instrument made on November 16 seen by New Vision.

“The minimum capital funds unimpaired by losses shall, at all times, not be less than seven million five hundred thousand currency points,” he added. The new instrument will be gazetted by end of December 2022.

The new capital thresholds will make it a lot more expensive for relatively smaller commercial banks to operate and compete in the market. The increase in capital is likely to create a window for mergers and acquisitions according to analysts.

Currently, at least 14 commercial banks’ core capital position falls below the new threshold of sh150b as at end of December 2021 industry reports – the latest document that can tell their core capital position.

According to the data, only nine commercial banks have core capital positions above sh150b.

But officials at the Bank of Uganda are confident that all “indicators show that most banks are compliant with the proposed timeline for raising capital.”

How much more will they pay?

The new rules, which were first proposed in 2021, mean that commercial banks will require six times their existing capital to meet the new threshold of sh150b.

Currently, to run a commercial banking business, a person had to maintain sh25b as minimum paid-up capital at all times with the regulator.

Non-bank financial institutions will be required to maintain a minimum paid-up capital of “not less than one million two hundred and fifty-thousand-shilling currency points.” This is an equivalent of sh25b.

Non-bank financial entities include firms such as the forex bureau, money remitters, and Microfinance Deposit-taking Institutions (MDIs).

The minimum paid-up capital for credit institutions currently is sh1b whereas that of MDIs is 500m. The capital revisions require about 20 to 25 times more capital to be mobilised.

On December 14, BoU Deputy Governor Michael Atingi-Ego said the sector regulator is revising the minimum paid-up capital requirements to incentivise shareholder commitment, increase resilience to shocks, enhance capacity to field extensive credit facilities in tandem with the expanding economy, and converge with regional peers.

“The BoU will continue monitoring the banking sector closely to ensure that banks are well-capitalised, with sufficient buffers to withstand any adverse shocks, such as the recent COVID pandemic and escalation of geopolitical risks.

“In addition, we shall regularly conduct stress tests on the banking sector to pick up the early warning signal of potential distress so as to administer prompt corrective measures.

“The pandemic reinforced the need to challenge our assumptions continuously and shore up the capital buffers to enable supervised institutions to absorb shocks while maintaining financial soundness.”

As a result of the pandemic and a slow economy in 2021, some small banks found their core capital stretching below the minimum paid up capital of sh25b. These have since had to shore up their capital positions during the course of the year 2022.

Last year, Uganda Bankers Association executive director Wilbrod Owor said that since the last revision of the capital requirement in 2010, the economy has expanded in size significantly which creates a need for the well capitalised financial sector to support growth and national development priorities.

“Globally, there have been developments in financial sector benchmarks and requirements by way of Basel III, International Financial Reporting Standard (IFRS9) and others that require us to scale up capacity.

“There have also been increasing risks and the overall need to build capacity to absorb shocks. Some of these risks include cyber risks, non-performing loans and the demands by non–traditional players now in the financial ecosystem,” Owor said.