While sudden bank closures are not new to Uganda, the recent swift shutdown of EFC and Mercantile banks still sent shockwaves through the sector, leaving depositors uncertain about the safety of their savings.
On August 1, Kigo Thinkers, a network of academicians and practitioners dedicated to fostering intellectual discourse in Uganda, convened a forum to discuss the underlying causes of these bank closures.
The event drew significant public interest, with many attendees urging the Bank of Uganda to provide more regular updates on the financial health of all banks in order to protect depositors' interests.
During the forum, Ronnie Mutebi, an auditor, highlighted the challenges faced by depositors in retrieving their funds after a bank closure. He emphasized that it is unfair for depositors to endure prolonged periods of uncertainty before accessing the money they had entrusted to these institutions.
The recent bank closures have been attributed primarily to insufficient capital reserves, meaning that the banks had depleted the funds they were supposed to safeguard on behalf of their customers. Recovering these funds typically involves a lengthy process of loan recovery, asset liquidation, and other measures, further exacerbating the financial strain on affected depositors.
According to the Deposit Protection Fund (DPF), only a maximum of Shs 10 million is guaranteed to be reimbursed to each depositor in the event of a bank closure. This threshold has sparked criticism from the public, with many arguing that it is insufficient, particularly for large depositors.
Fred Muhumuza, director of the Economic Forum at Makerere University Business School (MUBS), questioned why the DPF has not raised the insured amount above the Shs 10 million threshold.
However, Kenneth Egesa, director of communications at the Bank of Uganda, was noncommittal about increasing the insured threshold or issuing frequent public alerts on the financial status of banks. He explained that while the Bank of Uganda only licenses institutions that meet stringent regulatory requirements, disclosing a bank's financial difficulties could lead to a rush of withdrawals, potentially destabilizing the sector further.
"If we went ahead and told you that a specific bank was running out of money, there would be a dash to the tellers, to withdraw money, which can cause more problems to the sector," Egesa cautioned.
