Uganda has finally begun implementing tighter rules on capital injection for financial institutions, seeking to cushion firms from unforeseen global shocks. But those rules may, on their own, become a suppression tool for investors who feel the new requirements are too stiff.

The Ministry of Finance this month began rolling out the regulations, requiring, for instance, that commercial banks have at least Ush150 billion ($40.7 million) in capital, up from Ush25 billion ($6.8 million).

The government says the rules are a result of consultations that began in 2021, at the height of Covid-19 pandemic. And regulators say higher capital requirements are critical to building resilience among financial players in harsh economic conditions affecting economies after the onset of the Russia-Ukraine war.

Yet many investors feel hard-pressed mobilising substantial amounts of money from capital markets due to widespread pessimism among lenders and wealthy individuals, financial analysts say.

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Uganda has reported single-digit growth rates registered by several sectors in the economy during 2022, which seem to highlight severe spillover effects of geopolitical events.

Industry consolidation

As a result, some banks have downgraded operations. Guaranty Trust Bank Uganda Ltd, a subsidiary of Nigeria’s Guaranty Trust Bank, lowered its status from a commercial bank to a credit institution.

Guaranty issued a public notice last month, just as the rules were setting in. The fate of other smaller banks remains unclear in the aftermath of a new capital adequacy compliance regime.

But capital requirements in Uganda’s financial sector have been lower than among its peers.

Patrick Mweheire, CEO of Stanbic East Africa, said that raising capital requirements leads to industry consolidation, which benefits the industry over time.

“Through consolidation, Ugandan banks will eventually minimise problems of low revenue margins by allowing small banks to scale up their operations. This is much better than making Ush500 million ($135,514) in profits per year or posting losses of $3 billion ($813,084) after 12 months of hard work,” he said.

The decision by Guaranty seems to be part of recent trends where some West African banks that have suffered domestic financial challenges are being forced to pursue a delicate balancing act of protecting their parent operations and those of small subsidiaries scattered across Africa, he told The EastAfrican.

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Under the new rules, commercial banks are required to raise their new minimum capital levels to Ush120 billion ($32.5 million) by the close of December 2023. The banks minimum capital levels are scheduled to increase to Ush150 billion ($40.7 million) by end of December 2024, according to a memo issued by Bank of Uganda (BoU).

The new minimum capital requirements for credit institutions, also known as tier-2 financial institutions, will rise from Ush1 billion ($271,028) to Ush25 billion ($6.8 million).

“That’s a lot of money!” said Stephen Mwanje, a major shareholder in Bridge Credit Finance, a tier-2 credit institution.

“I’m still looking for new business partners willing to inject the extra capital that is required to comply with new minimum capital requirements. In case I fail, I might be forced to shut it down.”

The minimum capital requirements for microfinance deposit-taking institutions (MDIs) increased from Ush500 million ($135,514) introduced in 2003 to Ush10 billion ($2.7 million), due to the amendments.

Lobby groups

Forex bureaus will need to increase theirs from Ush50 million ($13,551) to Ush200 million ($54,206) following amendments in the Foreign Exchange Act of 2004 that were endorsed by parliament in June.

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“That amount is too much for most of us under current economic conditions. Our association is working on a policy response brief that will be submitted to Parliament soon. There is a forex bureau association quarterly meeting scheduled for this month that will help us finalise our submissions,” noted Fauz Kaliisa, who runs a forex bureau.

Richard Mulema, a shareholder in Finbold Microfinance Ltd, said the increase in minimum capital requirements for banks, credit institutions, and MDIs might push some weaker players higher up down into their space, depleting revenue margins for his kind of lenders.

“Someone holding Ush50 billion ($13.6 million) in capital within our business segment might be in a position to lend money at one percent per week, which is far below the average weekly interest rate charged by non-deposit-taking microfinance institutions,” Mr Mulema told The EastAfrican.

“The implementation of higher minimum capital requirements for different financial players has also created worries about bigger capital requirements being introduced in our business segment in the near future.”