Uganda reduces bank depositors’ exposure

Saturday April 20 2024

Black man in red long sleeve shirt holding Ugandan shilling notes with opened palms. PHOTO | SHUTTERSTOCK


Uganda’s Deposit Protection Fund (DPF) has agreed on rules to stem systemic risks and maximise asset recovery in the event of bank failures as part of a five-year crisis management plan seeking to bolster depositor confidence and open up the banking sector to more investments.

The rules contained in the liquidation policy and procedures manual provide guidance on orderly and efficient closure of failed banks, minimise systemic risks and maximise asset recovery.

Systemic risk is the risk of an entire financial sector collapsing as a result of the failure of an individual bank, leading to a severe economic downturn.

DPF’s crisis management plan (2022-2027) aims to ensure fast and decisive actions in case of bank closure through coordinated approach bringing together key stakeholders, including the DPF, the Bank of Uganda and Ministry of Finance.

Read: Institutional investors exit Uganda bourse

During 2022-2027, the fund also aims to attain a payout readiness of between seven and 30 days after the bank failure, expand its mandate to include risk minimisation and resolution of problem banks, grow its size to at least Ush2 trillion ($522.9 million) from Ush1.36 trillion ($355.57 million) as at end of June 2023 to protect at least 3.5 percent of total deposits in the sector and ensure its board members and staff acquire the requisite skills and competencies, and knowledge in deposit insurance.


Uganda’s depositors of failed banks are currently compensated up to Ush10 million ($2,614.53) of their savings, while those with savings in excess of Ush10 million are paid from proceeds of bank liquidation through the sale of assets.

Initially, DPF compensated depositors up to Ush3 million ($784.359).

Uganda is working to enhance resilience of its banking sector against financial distress and ensure that the sector houses strong institutions that effectively contributes towards financing the country’s mega infrastructure projects.

The Ministry of Finance has set stringent new capital requirements for commercial banks, opening up the sector for mergers and acquisitions, with some lenders opting to downgrade and become tier-2 financial institutions.

Commercial banks are required to maintain a minimum paid-up capital of Ush120 billion ($31.37 million), and credit institutions of Ush20 billion ($5.22 million) by December 31, 2022.

Read: Deposit Protection Fund assets hit $280m

These capital thresholds are to be further raised to Ush150 billion ($39.21 million) for commercial banks and Ush25 billion ($6.53 million) for credit institutions by June 30, 2024.

The higher minimum paid-up capital requirements are intended to enhance the financial system’s resilience to shocks, promote financial stability, and advance capacity to meet the growing needs of a dynamic economy.

BoU reclassified Guaranty Trust Bank (GTBank), ABC Capital Bank (U) Ltd and Opportunity Bank Ltd from Tier I commercial banks to Tier II credit institutions

The three institutions applied for the change of status following their anticipated failures to meet the new capital buffer requirements.

Uganda’s DPF has disclosed through its latest report (2022/2023) that it aims to attain an enhanced mandate in deposit insurance by 2027 as part of its five-year strategic plan.

“To enhance its operations further, DPF will work closely with Bank of Uganda to propose amendments to the Financial Institutions Act, 2004,” says Julia Clare Olima Oyet, chief executive, DPF.

Compared to other East African countries Tanzania’s Deposit Insurance Board increased the amount of protected deposits from Tsh500,000 ($193,626) to Tsh1.5 million ($580,878), Kenya increased it from Ksh100,000 ($764.081) to Ksh500,000 ($3,820.4) and the Deposit Guarantee Fund of Rwanda protects eligible deposits up to Rwf500,000($383.048) per depositor.

Globally, the average deposit insurance coverage limit is $59,500, with the lowest value reported at $ 1,000 and the highest at $250,000, with total deposits covered averaging 40 percent according to the International Association of Deposit Insurers (IADI).

DPF protects a large percentage of retail depositors, small, unsophisticated customers of regulated deposit taking institutions from losing their deposits in case of bank failure.

“This provides confidence in the financial sector by ensuring that depositors are paid in time if a Contributing Institution is closed through outright liquidation,” says DPF.

According to DPF 98.05 percent of deposit accounts in Uganda’s banking industry are fully protected while 19.64 percent of deposit balance are covered.

Total deposits within the banking sector grew by 6.1 percent to Ush 35 trillion as at June 30, 2023 from Ush 33 trillion as at June 30, 2022.

Out of these, 19.7 percent (Ush6.9 trillion, $1.8 billion) of the total deposits, were protected largely above the 10 percent benchmark put in place by the East African Monetary Affairs Committee.

With a fund size of Ush1.36 trillion as at June 30, 2023, the DPF could pay 19.7 percent of total protected deposits which was slightly below the 20 percent benchmark recommended by the East African Monetary Affairs Committee.

On the other hand, the Fund could pay up to 3.9 percent of total deposits which is slightly higher than the three (3 percent) benchmark set by the East African Monetary Affairs Committee.

“In FY2023/24, the Fund will place emphasis on a number of mission critical activities. To ensure that the recently rolled out payout system works as desired, simulation tests will be conducted. The Fund will embark on the automation of systems to support its financial and human capital management,” says DPF.

DPF is a statutory body that was established by the Financial Institutions Act, 2004 as amended with a mandate to pay depositors their protected deposits in case a of a bank failure.

“In addition to ensuring improved financial performance, the Fund continued to focus on building systems to support the fast reimbursement of depositors and manage liquidation of banks. To this end, a Crisis Management Plan was put in place to guide the Fund’s actions in the event of a payout,” the fund says in its latest annual report (2022/2023).