Uganda’s central bank plans to raise minimum capital ratios for all banks by 2.5 per cent at the beginning of 2015, while those deemed weak, yet important for industry stability, will be obliged to hold an extra one per cent above the official requirement to cushion them against shocks.

Under the new rules, tier one capital requirements will be raised from eight per cent to 10. 5 per cent while the total regulatory capital ratio will be raised from 12 per cent to 14.5 per cent for all commercial banks, according to the latest Financial Stability Report issued by the Bank of Uganda.

A special category of banks to be classified as Systemically Important Banks (SIBs) will be required to maintain tier one capital of 11.5 per cent and a total regulatory capital ratio of 15.5 per cent respectively.

This move reflect efforts by the BoU to address concerns raised by the International Monetary Fund over the ability of local banks to withstand future shocks after overcoming the global financial crisis of 2008 and also to ensure full compliance with Basel III financial standards.

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The Fund believes higher capital requirements will enable the industry to counter new shocks without affecting profitability in the medium term, according to a report issued in February this year.

While minimum capital amounts were raised to Ush25 billion ($9.9 million) in March this year — a requirement that all banks fulfilled — BoU’s decision to alter specific capital ratios highlights a shift of focus towards underlying risk challenges faced by the industry, observers said.

Implementation of these rules is expected to eliminate the risk of collapse within large banks and also boost the industry’s capacity to execute big corporate deals. Tighter capital requirements are considered vital in maintaining sufficient liquidity among large banks while restricting appetite for high-risk activities, analysts say.

Backed by stronger capital requirements, industry players feel more banks will be empowered to provide bigger loans to single borrowers and also participate in syndicated loan transactions that have previously been dominated by big lenders.

“Higher minimum capital ratios directly increase a bank’s capacity to finance a single deal using its balance sheet and those of its sister institutions. As a result, more banks will be in a position to take on big corporate finance deals of more than $50 million instead of letting two big banks dominate this space,” said Michael Monari, Ecobank Uganda’s managing director.

A $190 million syndicated loan deal signed this month between Umeme, Standard Chartered Bank Uganda, Stanbic Bank Uganda and the International Finance Corporation stands out as the biggest corporate finance transaction witnessed in the banking industry this year.

Whereas a legal instrument signed by Minister of Finance Maria Kiwanuka in May this year ratified the proposal to gazette systemically important banks, guidelines for selection of these banks are yet to be finalised. Development of a framework for classifying such banks is to commence next month.

Some bankers feel deposit levels plus loans and advances held by banks should top the criteria for determining systemically important banks instead of relying solely on asset size.

While deposits appear more evenly spread across the industry due to rapid branch expansion experienced between 2007 and 2010, total assets seem concentrated among the top five banks with assets lying in the range of Ush900 billion ($356 million)-Ush2.7 trillion ($1.1 billion) — a scenario that offers a narrow view of underlying risks prevailing in the market.

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The top five lenders by asset size are Stanbic Bank Uganda, Standard Chartered Bank Uganda, Barclays Bank Uganda, DFCU Bank and Crane Bank Ltd, while slightly smaller players like Centenary Bank, which has grown its service network to 57 branches, also possess substantial deposits. Therefore, sudden shocks in the operations of the latter could affect several customers with deposit accounts, despite their relatively thin asset base.

The regulator appears optimistic about the industry’s ability to fulfil new capital requirements despite a relatively short compliance period.

“The current tier one capital adequacy ratios of banks indicate that they are well placed to meet the new regulatory requirements. This level of capital should provide banks with the scope to absorb a significant decline in asset quality without threatening the solvency of the banking system,” the report says.

Banking executives who spoke to The EastAfrican sounded optimistic about the industry’s ability to respond to the new capital rules but downplayed the risk of foreign spillover risks.

“Our exposure to foreign spillover risks remains small because of the modest portion of assets contributed by African subsidiaries to parent institution’s balance sheets. For example, African operations outside South Africa currently account for roughly 20 per cent of Standard Group’s total assets,” argued Patrick Mweheire, Stanbic Bank Uganda’s executive director.