Mergers and degradations predicted as Uganda lenders move to comply with higher capital thresholds

February 7, 2024 in Business, Companies, Finance, Financial Services, Policy by Editor

Uganda could witness a spate of consolidation and degradations across the banking industry, as lender move to meet new capital adequacy regulations, that will come into force starting July 1, 2024.

Citing the recent acquisition of Finance Trust Bank by Nigeria based Access Holdings and the Bank of Uganda’s liquidation of EFC Uganda last month, industry watchers say the market should expect a “number of announcements” as the deadline for recapitalization draws closer.

“There is no deliberate policy to force industry consolidation as such, but in many instances, policy signals force you to think. When capital levels are raised, it is those with the muscle that can stay in the game. If you cannot, you either team-up with stronger players, move to a tier where you fit better, or get out of the market,” says Wilbrod Owor, the executive director at the Uganda Bankers Association.

“There are going to be some announcements soon because the deadline is June,” he added.

EFC Uganda Limited was closed by the Bank of Uganda January 19, citing failure to adhere to minimum capital requirements and governance shortfalls. The banker of last resort said it had placed the microfinance deposit-taking institution under liquidation and revoked its licence.

“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 before setting into motion a rapid refund of deposits through the Deposit Protection Fund.

“What happened to EFC is unfortunate in that you had capital adequacy and governance issues. But the action was probably taken because it was too small to be attractive to any of the other players,” Owor suggested.

The Bank of Uganda raised capital thresholds in 2022, 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.

Industry sources say it was in response to these requirements last year that Nigeria’s Access Bank courted Finance Trust Bank, a long-established lender with sizeable deposits and branch network that goes beyond the capital, Kampala. The merger got the regulators nod last December. It was a marriage that came at an opportune moment for a suitor who was flush with surplus capital looking for growth opportunities beyond West Africa, and a solid but smaller player threatened by the new regulatory requirements.

Earlier, in December 2019, NC Bank Uganda and Commercial Bank of Africa Uganda also got approval to merge operations. They completed the process in March 2020 and nor trade as NCBA Bank.