Kampala — Uganda's largest lender, Stanbic Bank Uganda, is finalising plans to become a Bank Holding Company (BHC), a step that would enable it access funding more easily but also tighten capital requirements and regulatory oversight.
BHC is a business banking model where a bank also owns subsidiaries that are involved in non-banking activities such as insurance, asset management and securities.
Patrick Mweheire, the lenders Chief Executive told The Independent that they have already submitted application to the industry regulatory, Bank of Uganda, for all requisite regulatory and corporate approvals, including the approvals of SBU's shareholders following the Annual General Meeting slated for May.
"The creation of a holding company ('HoldCo') that will house the bank and other non-bank subsidiaries will enable the organisation to provide both banking and non-banking services to our customers and ensure a sustainable long-term business model for our future success," he said.
He said the new business model will ensure that the bank sustain its market leadership position and attain business growth.
He, however, declined to disclose to the type of non-banking business that bank plans to venture into once granted approval to become a BHC.
"Until further announcements regarding the proposed reorganisation are made, Stanbic Bank Uganda's shareholders and other investors are advised to exercise caution when dealing in Stanbic Bank Uganda shares," Mweheire said, adding that the proposed re-organisation will have no adverse impact on bank's shareholders, customers and employees.
Yiga Masajja, an executive at BoU told The Independent the SBU's new step is already provided for under the Financial Institutions Act 2016.
"This reorganization means that the current bank is going to become a subsidiary of a holding company in Uganda," he said. "Hitherto, it has been a subsidiary of a foreign holding company- Standard Bank based in South Africa."
This new move follows the bank's Board of Directors decision on Feb 14 to recommend to the shareholders that SBU undertakes a corporate reorganization to establish a Holding Company group structure to enhance customer value proposition while increasing the returns to its shareholders.
This comes barely three months since the Insurance Regulatory Authority of Uganda granted it an operating licence to venture sale insurance in partnership with insurance companies.
This development also comes at the time when the country's banking industry projects to register subdued profits for 2017 owed to low private sector credit uptake amidst a reduction in the Central Bank Rate and the subsequent decline in interest rates. Banks start announcing their annual performance this month.
It is on this basis that the Stanbic Bank directors appears to be looking for new alternatives to enlarge their scope of the financial services through diversification of business lines to control the enterprise-wide risk, making the entity maintain the profitable growth trend.
Last year, Stanbic Bank recorded a 27% growth in net profit to Shs191.15 billion, up from Shs150.76 billion in 2015 and Shs135.08 billion in 2014 driven mainly by non-interest revenues.
The bank's net interest income was Shs376 billion in 2016 compared to Shs311billion in 2015 and Shs280 billion in 2014 while net non-interest income was Shs267 billion, Shs211 billion, and Shs214 billion during the same period under review.
This banking model, however, is not new. Across the globe, deregulation and financial consolidation have given way to the development of Financial Holding Companies or Bank Holding Companies--allowing commercial banking, insurance, investment banking, and other financial activities to be conducted under the same corporate umbrella.
In the European Union and the US, for instance, financial conglomerates are organised through a holding company model. Australia, based on recommendations of its Wallis Commission, allowed the holding company model as part of liberalisation of the range of activities that can be carried out within a conglomerate group containing banks.
In Korea, it was the Asian crisis which triggered the move towards the holding company model in the financial sector.
Back in East Africa, Equity Bank and KCB group became holding companies with their subsidiaries in Uganda, Rwanda, South Sudan, Rwanda and Burundi in 2014. This followed the mid-sized lender I&M Bank, wholly owned subsidiary of I&M Holdings Ltd that become a holding company earlier.
Vighneswara Swamy's study published in 2013 dubbed 'Financial Holding Company Structure in India' says banks all over the world are now transforming into a BHC because it makes it easier to raise capital than as a traditional bank.
"The holding company can assume debt of shareholders on a tax-free basis, borrow money, acquire other banks and non-bank entities more easily, and issue stock with greater regulatory ease," he says, adding that the model also has a greater legal authority to conduct share repurchases of its own stock.