Kenyan banks face tough new capital rules for their Ugandan subsidiaries
A Bank of Uganda information office in Kampala. The banking industry regulator is pushing for higher capital adequacy ratios. Photo/Morgan Mbabazi
What you need to know:
Uganda joins Kenya and South Sudan in demanding for additional capital from lenders in a move that is likely to put a strain on Kenyan banks with regional operations.
International Monetary Fund had warned Kenyan banks expanding into the region that the common market risks in the different countries could put pressure on the parent companies as they diverted resources to sustain the subsidiaries.
Kenyan banks operating in Uganda could be required to inject more capital into their underperforming subsidiaries as the Bank of Uganda pushes for higher capital adequacy ratios.
Uganda joins Kenya and South Sudan in demanding for additional capital from lenders in a move that is likely to put a strain on Kenyan banks with regional operations.
“Focus has been placed on the need to raise minimum capital requirements to cater for evolving risk profiles of these institutions. This process will continue in 2014 and consultations with regional central banks and other stakeholders shall be made,” said the Bank of Uganda in its annual report.
Currently, banks operating in Uganda are required to maintain a core capital of not less than eight per cent and a total capital of not less than 12 per cent of the total risk assets.
Kenya has been observing the same ratios but the central bank will require banks to exceed the benchmarks by at least 2.5 per cent from next year.
This demand has seen banks raise new capital, including through rights and bonus issues.
Kenyan banks operating in South Sudan will also have to increase the paid up capital for their subsidiaries to $25 million (Sh2.15 billion), despite the violence that has rocked the young nation since last year.
The Bank of South Sudan will require international banks to increase their paid up capital to the new level by December this year and further to $30 million (Sh2.58 billion) a year later.
The International Monetary Fund (IMF) had warned Kenyan banks expanding into the region that the common market risks in the different countries could put pressure on the parent companies as they diverted resources to sustain the subsidiaries.
Bad loans shot up in Uganda last year forcing the regulator to consider the changing risk profile. The country’s stock of bad loans rose by 41.5 per cent to Sh466 billion leading to a drop in the industry’s total profit as banks made provisions for the non-performing loans.
The Ugandan banks recorded a 25 per cent drop in earnings, which was attributed to the deterioration of asset quality.
Four of the nine Kenyan banks operating in Uganda reported losses. The banks that found the going tough include NIC, Commercial Bank of Africa (CBA), Bank of Africa (BOA) and Imperial. Other Kenyan banks operating in Uganda are KCB, Equity, DTB, ABC and Guaranty Bank, formerly Fina Bank.
Non-performing loans have also been rising in Kenya. In the three months to March, the bad loans grew by Sh13.2 billion to Sh95.1 billion. The bad loans are expected to continue growing following the dismal performance of agricultural and tourism sector.
