The closure of Mercantile Credit Bank Ltd: How secure are your Deposits in the Bank?

Last week, the Central Bank in exercise of its powers under Sections 99 and 17 (b) & (f) of the Financial Institutions Act, as amended placed Mercantile Credit Bank Limited (MCBL) under liquidation, revoked its license, and made an order for the winding up of its affairs with effect from June 18, 2024. As steps are being taken to implement this decision, the bank’s customers are counting loses. They cited under capitalization as the main reason for closure.

The most affected persons are the traders whose chances of recovering their money is only limited to 10 million. If there is luck, customers with less than 10 million may walk away with all their deposits while those whose bank accounts held more than 10 Million shillings may also be lucky to walk home with more than 10 million subject to very stringent terms and conditions.

As BOU continues to close down other banks, I have come to believe many of our people will continue to suffer largely because of ignorance. Bank of Uganda has maintained a disclaimer to bank customers that their deposits are protected by the Deposit Protection Fund of Uganda (DPF) to the tune of 10 million. This means that any deposits in banks beyond 10 million is kept at owner’s risk in case the bank became bankrupt or is closed.

Surely with this disclaimer, no Ugandan should have lost money after the Crane Bank incident had there been proper sensitization. No wonder a former vice president once said that our people take a very short time to understand after a long explanation. After the closure of 6 commercial banks and now Mercantile bank,  our people should have become wiser and avoided some banks that could have been established to fleece Ugandans?

We should not forget that the DPF is a government agency that was created to provide deposit insurance to customers of deposit-taking institutions licensed by Bank of Uganda. The DPF was established as a separate legal entity from Bank of Uganda following the enactment of the Financial Institutions but most importantly, they are supervised by Bank of Uganda.

In other words, the DPF was created to provide a mere safe guard of up to 10 Million shillings of the deposits beyond which customers are deemed to be on their own. This essentially means that any money kept in the bank beyond 10 Million is not the responsibility of DPF or bank of Uganda. The disclaimer is therefore a warning to depositors to be aware of looming danger.

What a pity to live in a country where it is risky to keep your money at home yet depositing the same in the bank beyond 10 million is at owner’s risk. I now understand fully why many Ugandans have resorted to keeping their money overseas and in property. It is apparent that Bank of Uganda does not aim at preventing closure but intervenes only to liquidate banks.

I have been left wondering why Bank of Uganda always wait until the targeted bank runs out of depositors’ money and then intervene to close the institution. This leaves the customers with only one option, the DPF whose existence makes me question whether it is an Insurance company or a branch of Bank of Uganda only created to avoid a conflict of interest.

In the past, there was a rumour that was doing rounds of how a certain political leader and other well connected persons were alerted of a pending closure of a certain bank, they swiftly moved in and withdrew and or transferred their money leaving the ordinary Ugandan at the mercy of the Deposits protection Fund. Those who were not in the know are still in tears to date.

Does DPF have the capacity to pay off affected persons whenever a bank is closed? Don’t they simply transfer the burden to the tax payer to meet costs of their negligent acts like court rightly stated in the Crane Bank closure? Whereas I do not oppose the closure of any bank for good reasons, I wonder where Bank of Uganda was when Mercantile Credit Bank found itself undercapitalized. I believe the under capitalization did not happen in one day but has been an ongoing process for some time under the watchful eye of Bank of Uganda.

Looking back at Mercantile Credit Bank’s slogan, I ponder. I hear “at Mercantile Credit Bank, we understand that banking can be stressful. You are not alone. Our team of experts is always on standby to answer your questions” what could have gone wrong for a bank that was strategically located to serve cattle traders to collapse under its own weight? Infact there was I think a 24 hour Mercantile Credit Bank branch along Port Bell road and inside meat packers.

Even with meat packers and the Kampala City abattoir customers alone, Mercantile Credit Bank could have survived the financial storm to stand out as a people centered bank. Given its size, I personally had no idea they were closed effective June 18, 2024 until one of their big customers called seeking guidance on how he could recover his over 30 million. I honestly advised him to keep his high hopes under check. 

We all know the mandate of the Central Bank and the DPF; they are accomplices in all they do and we cannot rule out a syndicate. BOU responsible for regulating & supervising financial institutions but how well have they done this? But they have miserably failed on this as they only become active when they determine to close a given bank before identifying a liquidator to prepare a post mortem report before burying the bank with their customer’s money.

Infact Bank of Uganda has closed more banks than all the Central Banks in the East African Community which makes me think Uganda is the worst country in managing its banking sector. In the past they have closed about seven banks including Green Land Bank, National Bank of Commerce, Teefe Trust Bank, Global Trust Bank, International Credit Bank, Cooperative Bank, Crane Bank and now Mercantile Credit Bank, there is no guarantee they won’t close others soon.

Many of the foregoing closures were faulted on inside lending, under recapitalization and poor corporate governance of the financial institution. To Bank of Uganda, closure is intended to protect depositors’ savings, an excuse that I find wanting in form and in substance. The doctrine of collective responsibility should also fall on Bank of Uganda for failing to carry out their statutory obligations. They should not be allowed to push the entire blame on closed banks. 

In the past instances including when the courts of law found in favour of Sudir Ruparelia over the illegal sale of Crane Bank, shareholders sought the intervention of parliament which ordered the Auditor General to undertake a special audit on the closure of banks. When the report eventually came out, it faulted Bank of Uganda Officials for having flouted guidelines and processes established to close any bank. Uganda being what is it, you cannot rule out corruption.

Otherwise, how could Bank of Uganda sell rented buildings belonging to Meera Group to DFCU bank without verifying and carrying out a due diligence? Was this negligence, stupidity or carelessness on the part of the persons who signed off the sale of Crane Bank and its assets?  Are these not traits of persons who had swallowed a bribe. Guess who is going to pay the bill of the Meera’s properties dispute, it is you, me, our children and the future generations

Some banks in the past have been closed because the shareholders are suspected of harboring Presidential ambitions while others have been closed on suspicions of funding subversive activities or funding the opposition. Others have been closed due to malice or ill will from haters and competitors. For instance a report by the Auditor General revealed that the closure of Crane Bank, National Bank of Commerce and Global Trust Bank were irregular since the shareholders were ready, able and willing to recapitalize.

In a past incidence again, the former Bank of Uganda Governor Mutebile confessed that former Deputy Bank of Uganda Governor Louis Kasekende, former Executive Director of Bank Supervision Justine Bagyenda and Director of Banking Ben Sekabira closed and sold  some of the banks without his knowledge, consent and approval akin a typical mafia cartel.

Now that there is no substantive Governor, somebody may say a mistake was made at closure of Mercantile Credit Bank because there was no governor to guide them. By then it was only understandable that Mutebile was more of a shadow than a Governor of Bank of Uganda. So long as the supervisor- Bank of Uganda is left with the responsibility of being a judge and auctioneer in matters of defunct banks, history is bound to repeat itself.

Matter are made worse that Section 101 of the Financial Institutions Act blocks any aggrieved entity from seeking court redress to the extent that a court shall not entertain any application for stay of proceedings in relation to the liquidation or winding up of a financial institution under the Act. So the BOU has the lee way to do as they please since they are shielded by law.

When a bank is closed, all its assets and liabilities are taken up by Bank of Uganda for “better management” when this happens; there is no chance that such a bank can be allowed to operate again. In this case of Mercantile, Deputy Governor Michael Atingi-Ego said Bank of Uganda and the DPF will inform all depositors of the arrangements that will be put in place to enable them to access the insured portion of their deposits.

That means customers with fat accounts will be subjected to Section 105 of the Financial Institutions Act where the bargaining power of the Creditor is limited and left at the mercy of third parties who often don’t approve such payments for free. Matters are made worse that there is a thirty days limitation period after the announcement closing the bank. I am short of making sounding warning drums, the government needs to come up with a better shield, our money in commercial banks are not well shielded. 

Whereas there is a cap on the maximum that can be claimed from DPF subject to conditions upon closure, the same does not apply to those who had taken loans of less or more than 10 million. Infact Bank of Uganda has advised borrowers of Mercantile Credit Bank to continue servicing their loans by making payments at the various Bank of Uganda offices.

Wadada Rogers is a commentator on political, legal and social issues. Wadroger @yahoo.ca