Why BoU closed Mercantile Credit Bank
![Why BoU closed Mercantile Credit Bank](../admin/images/153120210620241.jpg)
HAPPIER TIMES: Deposit Protection Fund CEO Julia Clare Olima Oyet hands over a hamper to Mercantile Credit Bank MD Paul Senyomo during a courtesy visit at the bank's head offices in Kampala in November 2022.
The banking industry is reeling with shock following the decision by the Bank of Uganda, the regulator of the financial services industry, to close down Mercantile Credit Bank Limited, after over three decades of operation.
A press statement signed by the Deputy Governor Michael Atingi-Ego suggested that the regulator had placed Mercantile Credit Bank Limited under liquidation, revoked its license, and made an order for the winding up of its affairs, which he said was necessary to protect the interests of the bank’s depositors.
“This action is necessary because the Bank of Uganda has determined that the continuation of Mercantile Credit Bank Limited’s activities is detrimental to the interests of its depositors due to the institution’s failure to resolve its significant undercapitalization, poor corporate governance, and insolvency," the statement said.
- Mercantile Credit Bank commenced operations in 1986, starting out mainly as a lender to importers and exporters. Later, it entered into a long-term institutional funding arrangement with the Eastern and Southern African Trade and Development Bank (PTA Bank).
According to the Deposit Protection Fund, Mercantile Credit Bank deposited UGX174 million with the Fund in 2023, which implies that its total customer deposits currently stand at slightly more than UGX17.4 billion.
According to Bank of Uganda, the Deposit Protection Fund of Uganda (DPF) will shortly inform all depositors of the arrangements that are being put in place to enable them to access the insured portion of their deposits of up to UGX10 million per customer. The rest would be paid by Bank of Uganda in due course.
- Mercantile Credit Bank is one of the few institutions in the class of credit taking institutions, which also include BRAC, GT Bank, Opportunity Bank, ABC Capital Bank and Yako Bank.
Two years ago, BOU increased the minimum paid-up capital requirements, with the minimum paid-up capital requirement for financial institutions (Tier I financial institutions) being raised from UGX25 billion to UGX120 billion effective December 31, December 2023 and UGX150 billion effective June 30, 2024.
Additionally, BOU raised the minimum cash reserve requirement for all banks from 8% to 10% of total deposits. The regulator argued that the reforms aimed at fortifying the stability of the financial system and mitigating systemic risk.
However, analysts say that the stringent measures also carry the risk of reducing competition in the industry as some institutions are forced to downgrade their licenses or to completely exit the market.
Barely five months ago, the Central Bank also closed down EFC Uganda, Ltd citing the institution’s failure to resolve its significant under-capitalization and poor corporate governance.
- In recent years, the BoU has also closed down several banks including Global Trust Bank Uganda, National Bank of Commerce, and Crane Bank Limited over failure to comply with the regulatory requirements of their licences, a move that a Parliamentary investigation later described as high-handed.