Author: Alinda Ronnie Kyamureku

Introduction

Banks, like any other business, face challenges which may eventually lead to failure in some cases. However, because banks play a vital role in the economy, safeguards are put in place to ensure that bank closures do not cause extreme shocks to individuals, businesses, and the economy. This article will guide you through what happens when a bank in Uganda is closed, how your money is safeguarded, and what steps you can take to claim your funds.

What Leads to a Bank Being Closed?

Since the 1990s, commercial banks in Uganda have been closed mainly due to insolvency. A bank is deemed insolvent when it does not hold enough assets to cover its liabilities, and/or when it cannot generate sufficient cash flows to meet its short-term obligations. Insolvency in banks may arise due to a range of factors such as poor management and governance practices, inadequate business models that cannot keep up with the market competition, and weak risk management processes that expose the bank to losses.

Who is Responsible for Closing Banks?

The Bank of Uganda Act, in Section 4 that defines the functions of the Central Bank, gives the Bank of Uganda (BOU) powers to supervise and regulate banks, credit institutions, building societies, and any institution classified as a financial institution by the Bank. Through the Bank Supervision Directorate, the BOU closely monitors the health of banks in terms of their financial performance, their ability to meet short-term obligations, the capacity of their capital to absorb losses, and the strength of their management and governance practices.

If a bank shows weaknesses in any of these aspects, the BOU takes remedial actions like issuing fines, change of management, providing emergency liquidity assistance, and requiring recapitalization to restore the institution. If it is determined that the bank is inevitably headed for insolvency, the Financial Institutions Act (FIA) 2004 outlines further actions that BOU may take to protect depositors, such as restructuring the bank, temporarily taking over its management, facilitating a merger with a healthier institution, or closing and liquidating[1] the bank.

Banking institutions closed by the Bank of Uganda

Are My Deposits Safe?

Section 110 of the FIA 2004 provides for the protection of deposits[2] in the financial institutions regulated by the BOU, through the establishment of the Deposit Protection Fund. The Fund was managed and controlled by the BOU until 2016, when the Deposit Protection Fund of Uganda (DPF) was established as a separate legal entity by the Government of Uganda, following the enactment of the Financial Institutions (Amended) Act, 2016. The DPF protects depositors by guaranteeing the return of their funds up to a statutory limit in case of a bank closure, in line with the Section 18(1) of the Deposit Protection Fund Regulations 2019. The current statutory limit set by the Minister of Finance, Planning and Economic Development for the DPF is Ushs. 10 million per depositor per bank. This means that if you have Ushs. 10 million or less in your account, your money is fully protected.

What Happens to My Money If My Bank Closes?

The fate of customer deposits depends on which course of action the BOU takes to manage a bank in distress. Where the BOU identifies a suitable financial institution to take up some of the closed bank’s assets and liabilities, that institution may take over the depositors of the closed bank, and as such, the customer accounts transferred to the institutions. This allows customers to seamlessly transact with the new bank without disrupting access to their money. However, if there is no bank takeover, customer deposits will be paid directly by the DPF up to the eligible amount.

For customers with deposit balances above Ushs. 10 million with a closed bank, the repayment of the amount more than the insured limit depends on the outcome from the liquidation process. The process involves the BOU appointing a liquidator, in line with Section 99(3) of the FIA 2004, to assess the value of the closed bank’s assets and liabilities, correctly dispose of the assets, and use the proceeds from the sale to reimburse the depositors and other creditors. Section 105(1) of the FIA 2004 guides on the hierarchy of payment of claims and places payment of deposits more than the insured amount after repayment to the DPF, liquidator expenses, employee wages and salaries, and secured creditors. The liquidation process may take several months to be completed, so it is essential to remain patient as it unfolds.

Will I Be Notified If My Bank Closes?

The BOU, in collaboration with the DPF, ensures that communications about bank closures are made through public announcements in the media, official websites, and direct communication from the closed bank. It is important to stay informed by keeping your contact information up to date with your bank and regularly checking for updates from the BOU, DPF, and other media outlets.

How do I Claim My Money If My Bank Closes?

Section 19 of the DPF Regulations 2019 stipulates that customers whose deposits are to be reimbursed by the DPF are required to file a claim with the DPF, which must be accompanied with proof of identity and account ownership. Customers may submit claims within 10 years from the date of the bank’s closure. The DPF aims to process claims and reimburse depositors within 90 days (about 3 months) of closure of the bank.

For deposits above the insured limit that must await the completion of the liquidation process, the BOU or its appointed liquidator shall publish a notice for all the closed bank’s depositors and creditors to submit their claims. Claims must be submitted to the BOU or liquidator within 30 days of the publication of the notice, or else they will not be eligible for payment under liquidation but shall be treated as ordinary debt due from the bank.

What Happens to My Loans If My Bank is Closed?

If you have an outstanding loan with the bank that has been closed, you are still required to repay it. The liquidation process does not absolve borrowers of their debt obligations. The liquidator will take over the management of the bank’s loan portfolio and may transfer your loan to another financial institution. You will be notified of any changes to your loan terms or payment schedule and new instructions on how to make payments.

It is crucial to continue making loan payments on time to avoid penalties, accrued interest, and a negative credit reference report.

Conclusion

Despite the rare occurrence of bank closures, your money is safe if your financial institution is regulated and contributes to a deposit protection scheme. If your bank has been closed, or you are concerned about the stability of your current bank, consider taking proactive steps to safeguard your funds:

1. Diversify your accounts: It is always wise to diversify your accounts and not put all your money in one bank. Spreading your funds across multiple institutions reduces the risk of losing access to all your money if one bank encounters problems. Visit Simply Mint’s bank comparison tables to find the best fit for your needs.
2. Check your eligibility for DPF coverage: Ensure that your deposits are within the statutory limit for full protection.

By staying informed and taking these precautions, you can protect your money and maintain confidence in Uganda’s financial system. Remember, the closure of a bank does not mean the loss of your money—thanks to the safeguards in place, your deposits are secure.

[1] Liquidation is the process of dissolving a business by selling off its assets and using the proceeds to pay off the creditors and shareholders.
[2] Section 18 (4) of the DPF Regulations 2019 defines a protected deposit as the aggregate credit balance of any accounts maintained by a customer at a financial institution less any liability of the customer to the financial institution.