Bank of Uganda must pay all Mercantile Bank depositors

By Charles Muhirwe

Kampala, (UG):- Joseph Magezi, 45, has been working as a butcher in Meat Packers (Lufula) along the Old Port Bell since his arrival in Kampala two decades ago. A few years ago, he was encouraged to join a Sacco of fellow butchers. The advantages were enormous. He could save his little profit while accessing credit easily at low interest rates.

That way he was able to supply a few butcheries on the outskirts of Kampala and be able to send his kids to school. Today, Magezi is looking at a bleak future. All his savings are held up in the now-closed Mercantile Bank. He can’t access credit to operate his business because his money is also held up in the same bank.

Recently, the Bank of Uganda, the regulator of the banking industry in Uganda, announced that it had closed Mercantile Credit Bank, one of the country’s largest microfinance institutions.

Mercantile Bank becomes yet another indigenously owned bank to fall to the Bank of Uganda Governor’s knife, following the same path of Crane Bank, Greenland Bank, Teefe, Cooperative Bank and the National Bank of Commerce among others.

“The closure of yet another regulated bank owned by Ugandans means that the country is conceding the financial sector to foreign banks whose major objective is profit, which they repatriate back to their home countries. With the closure of local banks, there is no way interest rates will come down,” says Charles Bbosa, an economist as quoted in a local newspaper.

Two weeks after the forced closure of Mercantile Bank, Bank of Uganda released Uganda’s Economic Checkup: Positive Outlook Despite Existing Near-Term Challenges report.

The report listed what it called “Near-term Challenges” describing them as “rising interest rates, subdued private sector credit, a persistent fiscal deficit and an under-financed current account deficit that is not fully financed by the financial account,” it said.

“The slowing growth of private sector credit from the banking sector is also a cause for concern, as this could be linked to a potential crowding out of the private sector,” the report added.

Bbosa however argues that “Bank of Uganda is leading the crowding out of the private sector by closing banks. It should, therefore, first look at itself when it is diagnosing the challenges the economy is facing.”

The closure of Mercantile Bank means that depositors like the Lufula Sacco who did save with Mercantile Bank because Bank of Uganda assured them that the bank was regulated and therefore infallible have lost a lot of money as they are only entitled to Shs10m through the Depositors Protection Fund.

Many people including unit trusts had billions of shillings saved in Mercantile Bank, a supposedly regulated bank by the Bank of Uganda.

In fact, shortly before its closure, with Bank of Uganda’s nod, Mercantile had adverts to attract depositors which at the end said the bank was regulated by Bank of Uganda. “Bank of Uganda never objected to this which makes its liable to pay depositors of Mercantile all of their money, not just the Shs10m mentioned by the Depositors Protection Fund,” says Ibrahim Magunda, a Kampala businessman.

What happens to the depositors’ money? Since the closure of Mercantile, the central bank has remained muted on where those who had more than Shs10m will get their money so they can continue to operate their businesses.

Previous closures of Crane Bank and National Bank of Commerce were handled differently and swiftly. Customers quickly went to DFCU Bank to get their money back as Bank of Uganda advised. Today, there is no clear process how depositors can access their savings.

The private sector is collapsing due to billions of shillings now being in the custody of the Bank of Uganda and inaccessible by these businesses and individuals. The Lufula Sacco, for example, had billions saved with Mercantile. The money may be in billions but the owners are the butchers like Magezi operating at Meat Parkers opposite the headquarters of Mercantile Bank along the Old Port Bell Road.

The individual owners of these savings are small businesses which means that they are all about to pack to go back to the village as they don’t have access to credit anymore. Many had less than Shs10m in the Sacco. Other businesses like UAP Old Mutual are rumoured to have had people’s savings there too.

“The closure of the Mercantile Bank is leading to rising interest rates and subdued private sector credit that Bank of Uganda is talking about in its reports. And therefore, Bank of Uganda should not be absolved for its lack of regulation to protect depositors’ money,” Magunda argues.

If Bank of Uganda can’t guarantee the safety of depositor’s money, it means that Ugandans will go back to their old habits of keeping money in their pillows or gumboots for the Lufula butchers. The near-term challenges Bank of Uganda is happy to circulate are going to become long-term challenges.

The Bank of Uganda governor should rethink his policy and let Mercantile Credit Bank customers access their money like he did for Crane Bank and National Bank of Commerce. That way, people will have confidence in the financial sector again but most importantly free up capital so businesses don’t have to close and lead to unemployment and weakening of the entire economy.