Uganda: Listed banks hold onto billions in dividend pay outs

Listed commercial banks in Uganda are set to hold back billions in dividend payments for the period ended December 2021, following a directive by the Bank of Uganda. The directive requires financial institutions to continue withholding discretionary dividend and bonus payments. Edgar Isingoma, a Partner at KPMG Uganda, discussed the impact of this directive with CNBC Africa. Isingoma explained that the central bank's decision aims to preserve capital during times of uncertainty and vulnerability, such as the ongoing Russia-Ukraine conflict and the lingering effects of the COVID-19 pandemic. By suspending dividend payments, the Bank of Uganda seeks to ensure the financial stability of the banking sector. The move also aligns with efforts to increase the capital adequacy ratio (CAR) in Uganda, which is currently proposed to rise from 25 billion to 150 billion Uganda shillings, or approximately $40 million. Despite the Ugandan economy's recovery from the pandemic, with a growth rate of around 6% last year, the central bank continues to prioritize capital preservation for banks facing external economic shocks. Isingoma addressed concerns about a potential liquidity problem in Uganda, stating that while banks have adequate capital, the government's excessive borrowing drives interest rates up, posing a challenge for liquidity. He emphasized that the suspension of dividend payments is not a sign of poor bank performance but rather a precautionary measure against unpredictable external factors. The impact of this decision on commercial banks varies, as they balance short, medium, and long-term perspectives. Institutional investors may choose to reallocate their funds if dividend payments remain suspended for an extended period, potentially affecting shareholder returns. Isingoma highlighted that the central bank assesses dividend payment suspensions on a case-by-case basis, allowing banks with strong portfolios to resume dividend payments when deemed appropriate. Comparing Uganda's approach to dividend payment suspension with other East African countries like Kenya, Tanzania, and Rwanda, Isingoma noted that each economy faces unique challenges and considerations. While some countries in the region have allowed banks to pay dividends, the selective approach ensures that financial institutions maintain adequate capital reserves amidst global uncertainties. Isingoma concluded that the central bank's decision aligns with safeguarding the financial stability of Uganda's banking sector, emphasizing the importance of capital preservation and risk management in the current economic environment.