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Uganda’s banking sector stable – BOU Deputy Governor

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The Deputy Governor, Bank of Uganda Dr. Louis Kasekende has said the local banking industry is not close to suffering a systemic crisis.

“Bank failures have been few in number and that, when banks have failed; prompt regulatory intervention has protected their deposits from losses,” he said Wednesday at the Seventh Annual International Leadership Conference organized by Makerere University Business School at Entebbe.

According to Kasekende, the Ugandan banking industry has debt liabilities, mainly deposits, which are almost five times larger than its equity and reserves. “This means that if a bank fails, the consequences in terms of losses to its creditors are likely to be much greater than would be the case if a non-financial business were to fail,” he said.

He said the local banking industry is by far the most important component of the financial markets in Uganda, with commercial banks accounting for around 80 percent of the total assets of the financial system.

Uganda’s financial system includes commercial banks and other deposit taking financial institutions, insurance companies, the capital markets and the pension sector.

According to Dr. Kasekende, to protect depositors, banks operating in Uganda must hold total capital which is at least 12 percent of their risk weighted assets.

“The purpose of these capital adequacy requirements is to ensure that banks hold a buffer which can absorb losses and thus protect their deposits,” he said, adding that if a bank suffers losses for example, bad loans, these losses are first absorbed by the bank’s capital.

“It is only if the losses exceed the bank’s capital that the bank’s depositors or other creditors will incur losses,” he added.

According to Dr. Kasekende, sound economic reasons exist for subjecting the financial sector to greater regulation than other sectors of the economy.

“But I would argue that there is no compelling evidence to suggest that the banking sector is overregulated in Uganda,” he noted.

 

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