The 1998‐99 banking crisis in Uganda: What was the role of the new capital requirements?
| DOI | https://doi.org/10.1108/13581980210810229 |
| Date | 01 September 2002 |
| Published date | 01 September 2002 |
| Pages | 224-242 |
| Author | Paul Mpuga |
| Subject Matter | Accounting & finance |
The 1998–99 banking crisis in Uganda:
What was the role of the new
capital requirements?
Paul Mpuga
Received (in revised form): 18th March, 2002
Johannes Kepler University, Institute of Economics, Linz, Austria;
tel: +43 732 2457 720; fax: +43 732 2457 39; e-mail: pmpuga@hotmail.com
Paul Mpuga is a lecturer at Makerere Uni-
versity, Kampala, and is currently working
on a PhD research project, ‘Estimation of
demand for rural financial services in
Uganda’ at Johannes Kepler University,
Linz, Austria.
He obtained his Bachelor of Science
(Honours) and Master of Arts degrees in
Economics at Makerere University, Kam-
pala, in 1992 and 1996 respectively. He
has experience as a researcher in eco-
nomics and economics-related fields and
has worked for the Central Bank of
Uganda, as a researcher and the Bank of
Baroda (U) Limited, as a banking officer.
His area of specialisation is develop-
ment economics and he has a particular
interest in banking, demand analysis, rural
development and rural finance — the
working and implications of microfinance
institutions.
ABSTRACT
Up to the early 1990s, Uganda’s financial
structure was characterised by government con-
trols and instability, leading to financial repres-
sion and lack of development in the sector. The
sector was, as a consequence, dominated by
commercial banks, which are mainly concen-
trated in urban areas. Financial intermediation
was restricted to the mobilisation of short-term
savings and advancing credit to low-risk busi-
nesses with quick returns.
In 1993, The Bank of Uganda Statute and
The Financial Institutions Statute were passed
by Parliament, requiring, among other things,
commercial banks operating in Uganda to have
a minimum paid up capital of Uganda shillings
(Ushs) 500,000 (for the locally-owned banks)
and Ushs 1bn (for the foreign-owned banks).
The new capital requirements were made effec-
tive from the end of December, 1996. Between
1998 and 1999, however, four commercial
banks (three of them locally owned), were
closed because of insolvency originating from a
number of causes. It is not clear whether the
new capital requirements played a part in set-
ting off or precipitating the crisis.
The results of this study show that whereas
there was impressive improvement for the bank-
ing system as a whole, it seems that these new
guidelines had a different impact on foreign-
owned and locally-owned commercial banks.
Performance of the foreign banks remained quite
steady or even rapidly improved while the local
banks suffered massive declines in their profit-
ability and accumulated more non-performing
loans.
INTRODUCTION
Up to the early 1990s, Uganda’s financial
structure was characterised by government
Journal of Financial Regulation and Compliance Volume 10 Number 3
Page 224
Journal of Financial Regulation
and Compliance, Vol. 10, No. 3,
2002, pp. 224–242
#Henry Stewart Publications,
1358–1988
controls and instability, leading to financial
repression and lack of development in the
sector. The sector was therefore dominated
by commercial banks, which are mainly
concentrated in urban areas. Financial
intermediation was restricted to mobilisa-
tion of short-term savings and advancing
credit to low-risk businesses (mainly in the
import-export trade) with quick returns.
Over the years, however, the sector has
evolved from the era of total control by
government to a more liberal one.
Whereas between the 1970s and 1980s,
successive governments made sure that the
central bank was under the full control of
government, with virtually no regulatory
powers over the money supply in the
economy, today the central bank has full
autonomy over the formulation and imple-
mentation of monetary policy. In that
period, excessive government fiscal deficits
were met by government borrowing from
the central bank, resulting in chronic infla-
tion. The financial sector also faced distres-
sing government controls, which greatly
compromised its development. To date,
government has eased most of the controls
over the financial sector, only retaining
those necessary for prudential purposes.
Nonetheless, Uganda’s financial sector is
still one of the smallest and least developed
in sub-Saharan Africa.
1
The sector is very
small in terms of both value and volume of
transactions. It is equally narrow in terms
of type of transactions, there are only a
few monetary instruments — cash, and to
a limited extent, cheques and bank drafts
are used. As measured by the ratio of
financial savings to money supply (M2),
financial deepening in Uganda is still low
at an average of about 29.3 per cent.
Furthermore, the ratio of financial savings
to gross domestic product (GDP) is very
low at about 2.9 per cent (Table 1). This
compares very poorly with the average for
neighbouring Kenya of about 13 per cent
and that for the low-income countries
(excluding China and India) of about 20
per cent.
2
The growth of these ratios is
equally very low. As a consequence of the
low domestic savings rate, the country
relies heavily on foreign resources and
investors for capital accumulation.
This situation can in part be explained
by the continuing decline of the formal
financial sector in the country over the
years.
4
Whereas the number of commercial
bank branches in Uganda was 270 in 1970,
the total branch network in 2002 is less
than 155 branches and 45 agencies, despite
Table 1 Ratios of financial savings to M2 and financial savings to GDP in Uganda 1991/92–1998/99
3
Period Financial savings/M2 Financial savings/GDP
Percent Change Percent Change
1991/92 18.9 – 1.6 –
1992/93 29.5 10.6 2.4 0.8
1993/94 27.3 –2.2 2.7 0.3
1994/95 25.5 –1.8 2.6 –0.1
1995/96 29.2 3.7 3.1 0.5
1996/97 21.1 –8.1 3.7 0.6
1997/98 32.7 11.6 3.2 –0.5
1998/99 34.3 1.6 4.1 0.9
Average for the
period 29.3 2.9
Page 225
Mpuga
To continue reading
Request your trial