The Bank of Uganda (BoU) will start investigating banks on how they are measuring their liquidity risks internally, as part of its offsite surveillance to boost financial stability and prevent bank failures.

The regulator says this policy shift will help evaluate the ability of banks to meet their financial obligations as and when they fall due, and at a reasonable cost. The central bank says this policy is meant to support the stability and resilience of the financial system.“Going forward, offsite surveillance will include the supervisory review of the Internal Liquidity Adequacy Assessment Process (Ilaap), to evaluate the ability of banks to meet their financial obligations as and when they fall due and at a reasonable cost,” the regulator revealed through its latest integrated annual report.“This will promote more intentional balance sheet management and assessment of funding requirements of each bank.”Usually, banks measure their liquidity risks through the Ilaap, a framework used by the lenders to identify, measure, manage, and monitor their liquidity risks.

The central bank says the process serves as an early warning mechanism, enabling it to detect emerging risks through continuous monitoring and analysis of financial and operational indicators.“Insights from this process inform timely and proportionate supervisory interventions, thereby supporting the stability and resilience of the financial system,” the bank says.

Offsite bank surveillance involves analysing data submitted by banks, such as regulatory reports and financial statements, to identify early warning signs of financial deterioration, ensure compliance with prudential standards, and assess risks.

Uganda has faced several bank failures, including the major collapses of four banks in 1998-1999 and more recent closures of the National Bank of Commerce (2012), Global Trust Bank (2014), Crane Bank (2016), and Mercantile Credit Bank (2024).

The key causes of the bank failures have included poor governance, insider lending, fraud, lack of transparency, and undercapitalisation.

As a result, the BoU has taken cautionary measures to prevent further bank failures, including the introduction of a new requirement calling for increased core capital for the lenders.

In November 2022, BoU announced a sixfold increase in the minimum paid-up capital requirements for major financial institutions operating in Uganda to enhance financial sector stability and provide greater room for loan growth. All financial institutions were given a deadline of June 30, 2024 to comply.

The minimum paid-up capital requirement for commercial banks (Tier I financial institutions) was increased from Ush25 billion ($7.16 million) to Ush120 billion ($34.38 million) by December 31, 2023 and Ush150 billion ($42.98 million) by June 30, 2024.

The majority of Uganda’s 25 commercial banks achieved compliance, with only three small banks—Guaranty Trust Bank (GTBank), ABC Capital Bank, and Opportunity Bank— opting to downgrade to Tier 2 licence, which has a much lower requirement of Ush25 billion.

According to global rating agency Fitch, the increased minimum paid-up capital requirement for the Ugandan banks has boosted capitalisation among the country’s smaller banks, leading to a modest improvement in overall sector capitalisation.

Compared with international standards such as Basel III, which are recommendations on banking regulations issued by the Basel Committee on Banking Supervision in response to the financial crisis of 2007–2008, BoU’s move is seen to be a step in the right direction.

Basel III sets international standards for banks’ capital adequacy, leverage, and liquidity requirements and recommends lenders to maintain common equity of at least 4.5 percent of their risk-weighted assets and a leverage ratio of at least three percent.

Hence, increasing paid-up capital requirements for the Ugandan banks is a step in improving capital adequacy and leverage for banks to meet recommended global standards.“Looking ahead, the Bank anticipates an increasingly complex risk environment driven by digital advancement, climate change and geopolitical tensions, all contributing to economic volatility,” BoU says.“The Bank is steadfast in enhancing its risk resilience through risk management within its processes, strengthening its crisis management capabilities as well as fostering a risk awareness culture among the staff. Supervisors will also proactively engage banks to address emerging risk escalations before they materialise into systemic concerns, thereby safeguarding financial system stability.”

SLF is a monetary policy tool used by central banks to provide overnight liquidity to eligible financial institutions, typically by allowing banks to borrow funds against collateral.

BoU responded flexibly to liquidity pressures in the bank sector through the Standing Lending Facility (SLF) by injecting Ush86 trillion ($24.64 billion) during tight episodes, while excess liquidity was sterilised through repurchase agreements (repos) worth Ush16.5 trillion ($4.73 billion).

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