Bank of Uganda closes Mercantile Credit Bank

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In exercise of its powers under Sections 99 and 17 (b) & (f) of the Financial Institutions Act, 2004, as amended, the Bank of Uganda has effective today, June 18, 2024, placed Mercantile Credit Bank Limited under liquidation, revoked its license, and made an order for the winding up of its affairs.

The Central Bank announced that this action is necessary because it determined that the continuation of Mercantile Credit Bank Limited’s activities is detrimental to the interests of its depositors due to the institution’s failure to resolve its significant undercapitalization, poor corporate governance, and insolvency.

“The Bank of Uganda and the Deposit Protection Fund of Uganda (DPF) will shortly inform all depositors of the arrangements that will be put in place to enable them to access the insured portion of their deposit(s). The uninsured portion of the deposits will be handled in accordance with Section 105 of the Financial Institutions Act 2004, as Amended,” Deputy Governor, Michael Atingi-Ego announced in a statement on Tuesday.

He added that all creditors are requested to submit their claims to the Office of the Director, Financial Stability, Bank of Uganda, within 30 days from June 18.

The closure of Mercantile Credit Bank Limited comes just six months after Bank of Uganda closed EFC Uganda Limited and placed it under liquidation.

The liquidation of Mercantile Credit Bank and EFC Uganda Limited by the Bank of Uganda has cast a spotlight on the fragility and health of the country’s banking sector.

These decisive actions underscore significant regulatory concerns and highlight potential systemic issues within the financial system.

The revocation of licenses and the cessation of operations for these banks indicate severe financial distress, potentially stemming from issues such as poor asset quality, inadequate capitalization, or failures in risk management and governance.

COLLAPSE OF OTHER BANKS

The closure of EFC Uganda Limited and Mercantile Credit Bank by the Bank of Uganda is not the only issue affecting Uganda’s banking sector.

In March this year, at least three commercial banks—ABC Capital Bank (U) Limited, Guaranty Trust Bank (U) Limited, and Opportunity Bank Limited—applied for and received approval from the Bank of Uganda to downgrade from commercial banks to credit institutions.

These banks were given a transition period from April 1, 2024, to June 30, 2024, to phase out products and processes requiring a Tier I License. This transition period was intended to ensure a smooth service transition for their customers and mitigate any disruption to financial sector stability.

Commercial banks offer a wide range of services, including savings and checking accounts, loans, mortgages, investment services, underwriting securities, and advisory services. In contrast, credit institutions primarily focus on providing loans and credit to individuals and businesses, with some basic banking services.

A bank may choose to downgrade from a commercial bank to a credit institution if it cannot meet the higher capital requirements for commercial banks due to financial difficulties, profitability challenges, or strategic shifts. This restructuring allows the bank to align its capital needs with the lower requirements for credit institutions.

The three banks’ transition suggests they could not meet the higher capital requirements set by the Ministry of Finance last year.

FAILURE TO MEET MINIMUM CAPITAL REQUIREMENTS

On July 6, 2023, the Minister of Finance, Matia Kasaija, issued the Financial Institutions (Revision of Minimum Capital Requirements) Instrument, 2022, raising the minimum capital for commercial banks from Shs. 120 billion to Shs. 150 billion and for credit institutions from Shs. 20 billion to Shs. 25 billion by June 30, 2024.

These increased capital requirements aimed to enhance the financial system’s resilience, promote stability, and ensure institutions can meet the growing needs of a dynamic economy. While most financial institutions complied with the revised requirements, some needed credible capital restoration plans to achieve full compliance.

The downgrade of the three commercial banks to credit institutions indicates their failure to meet the raised capital requirements, leading their boards to strategically shift and reposition to better serve their core customer base.

The Bank of Uganda’s interventions aim to prevent further erosion of confidence in the banking sector, but they also reveal underlying vulnerabilities that could pose risks to the overall financial system.

The repeated need for liquidation suggests that some institutions may have struggled to meet regulatory requirements, manage liquidity, or maintain solvency.

IMPLICATIONS

The implications extend beyond immediate regulatory measures.

The liquidation of these banks could lead to consolidation within the sector, as weaker institutions are phased out or acquired by more stable entities. This consolidation could enhance overall sector stability but may also reduce competition, potentially impacting consumer choice and access to banking services.

However, strengthening regulatory frameworks, fostering financial resilience among institutions, and maintaining depositor confidence are crucial for the sector’s long-term stability and growth.

The Bank of Uganda’s actions, while challenging, are necessary steps towards a more robust and trustworthy banking environment.

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