East African countries are working to strengthen the financial muscle of banks in an attempt to create stronger institutions, protect depositors’ savings and contain cross-border contagion effects of bank failures.
This comes after a dramatic collapse of some regional banks in quick succession between 2015 and 2016 — Crane Bank (Uganda), Dubai Bank, Imperial Bank and Chase Bank (Kenya) and Twiga Bancorp (Tanzania).
In Rwanda, the full enforcement of new capital regulations dubbed Basel III is expected to start this year. It requires banks to have sufficient cash to address short-term outflows as well as long term obligations.
“Systemic risks related to the ‘too big to fail’ financial institutions are among key areas monitored by the Bank of Rwanda,” said the central bank.
In Tanzania undercapitalised banks were directed to come up with plans to restore capital levels by December 2017.
In January this year five community banks which failed to raise Tsh2 billion ($878,360) were shut down — Covenant Bank For Women Ltd, Efatha Bank Ltd, Njombe Community Bank Ltd, Kagera Farmers’ Co-operative Bank Ltd and Meru Community Bank Ltd.
Some eight banks holding about 0.4 per cent of the total banking sector assets are undercapitalised.
Minimum core capital
In 2013, the Bank of Tanzania (BoT) directed commercial banks and community banks to increased their core capital to Tsh15 billion ($6.58 million) and Tsh2 billion from Tsh5 billion ($2.19 million) and Tsh250 million ($109,795) respectively.
In the same year, Bank of Uganda increased the minimum core capital for its banks to Ush25 billion ($6.74 million) from Ush10 billion ($2.69 million).
In 2007, Kenya raised the minimum core capital for banks to Ksh1 billion ($10 million) from Ksh250 million ($2.5 million), setting December 31, 2012 as the deadline for compliance.
But an attempt by Cabinet Secretary for the National Treasury Henry Rotich to increase the core capital to Ksh5 billion ($50 million) was rejected by parliament and Central Bank on the grounds that the policy would lead to the closure of nascent banks and hurried consolidations, stifle competition, and empower big banks.
If successful Kenya’s commercial banks would have had to increase their core capital to Ksh2 billion ($20 million) by December 2017, Ksh3.5 billion ($35 million) by December 2018, and Ksh5 billion ($50 million) by December 2019.
In several sub-Saharan countries banking sector vulnerabilities have increased partly due to a rise in non-performing loans and reduction in profitability as well as capital buffers.