Commercial banks, will effective end of December, be required to hold more capital, the Bank of Uganda (BoU) governor, Mr Emmanuel Tumusiime-Mutebile, has revealed. The new regulation is expected to come into force as commercial banks report their financial results at the end of 2016.
The proposal to raise the capital requirements has been in the works for more than a year and is meant to strengthen the banking sector. “In line with the Basel III reforms and the agreements reached between the central banks of the East African Community, we are raising the minimum statutory capital adequacy ratios at the end of December 2016, to lock in most of the higher capital that banks currently hold,” Mr Mutebile said while delivering a keynote address at the Annual Bankers Dinner in Kampala last week.
Capital requirements are often placed by banking regulators in order to ensure that a financial institution is able to sustain withdrawal of deposits and operating losses without risking the money of depositors.
“The minimum core capital requirement will be raised to 10 per cent of risk-weighted assets and banks will also be required to hold a capital conservation buffer of 2.5 per cent of their risk-weighted assets,” Mr Mutebile added.
Currently, commercial banks are required to hold a core capital requirement of 8 per cent of risk-weighted assets. A bank that follows below this is considered undercapitalised. For instance, when Crane Bank was taken over by BoU in October, the revelation was that the core capital had fallen to below 4 per cent of risk-weighted assets.
Risk Weighted Assets is where instead of the regulator having a static requirement for capital “buffers,” it bases the risk factor on the assets a bank holds. The collapse of banks often affects depositors who could end up losing their money. With better cash buffers, the risk to customers is reduced.
Mr Mutebile pointed out that most commercial banks in the country are already operating above the new buffer requirements. “Most of the banks in Uganda already hold sufficient capital to meet the new capital requirements, so they will not have to mobilise additional capital,” he said.
He added: “However, the new capital requirements raise the floor on the amount of capital which banks must hold and will help to ensure that banks continue to hold very strong capital buffers.
Strong capital buffers are the foundation of sound banking and hence I believe that the revisions to the capital adequacy ratios will enhance public confidence in our banking system.”
According to Mr Wilbrod Owor, the executive director Uganda Bankers Association (UBA), since banks have been operating above the new regulatory requirement, “it will not negatively impact the performance of commercial banks.”
There are banks in the economy that are considered to be large, namely Stanbic Bank, Standard Chartered Bank and Crane Bank. Their capital buffers are expected to be higher than the new minimum requirement for the rest of banking sector, as it has previously been.