Bank of Uganda pulls the plug on Mercantile Credit Bank

June 18, 2024 in Business, Companies, Finance, Financial Services, Trade & Industry by Editor

Banking regulator Bank of Uganda has pulled the shutters on Mercantile Credit Bank MCBL, a small bouquet lender that has operated in the country for the better part of three decades. Operating out of an unassuming building, the Old Port Bell Road based bank, is the second lender to be shut down by the regulator this year.

Citing its powers under the Financial Institutions Act 2004, BoU said it had placed MCBL under “liquidation revoked its license and made an order for the winding up of its affairs.”

The regulator said its action had become necessary after an assessment indicated that continuation of MCBL’s activities was detrimental “to the interests of its depositors due to the institutions failure to resolve its significant undercapitalization, poor corporate governance and insolvency.”

The statement is a mirror-image of a similar statement the lender of last resort issued on January 19, as it announced the closure of EFC-Uganda.

“This action has been taken because Bank of Uganda has determined that the continuation of EFC Uganda Limited’s activities is detrimental to the interests of its depositors due to the institution’s failures to resolve its significant undercapitalisation and poor corporate governance,” the central bank said back then, setting in motion a rapid refund of deposits through the Deposit Protection Fund.

Depositors with MCBL were advised to wait for communication from the Deposit Protection Fund while deposits above the insurance threshold would be handled as stipulated under Section 105 of the Financial Institutions Act 2004.

Creditors are supposed to file their claims with the Director for Financial Stability at the central bank within 30 days; while borrowers will continue to service their loans by making payments at the Bank of Uganda branches.

The Bank of Uganda in 2022 revised capital thresholds upwards, requiring tier-1 financial institutions to shore up their paid-up capital from UGX120bn to 150bn. Lenders were given a grace period that expires on June 30 to comply.

Tier-2, credit institutions such as the liquidated EFC, were required to maintain a minimum paid-up capital of UGX25bn. Meanwhile, micro deposit-taking institutions saw the minimum threshold raised from UGX500mn to UGX 5 billion. Forex bureaus are required to increase theirs from UGX50 million to UGX200 million.

According to analysts, the new capital adequacy requirements left the smaller lenders vulnerable. Their only option was to sell, merge or go under. The failure of MCBL is most likely because it was too small to attract a buyer and yet the shareholders were not liquid enough to cough up more capital to keep them in business even at a lower tier.

Although it has been around for the better part of three decades, MCBL was not a mass lender, and few Ugandans knew about it. The lender operated quietly and seemed immune as bigger competitors were mired in scandal after scandal.