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How COVID-19 Liquidity Shock Threatens Uganda’s Financial System

Bank Financial Risk Managers in the past 12 years have been the busiest bunch recovering from the aftermath of the financial crisis of 2007-2008. These particular effects have brought about the adoption of more robust and prudent credit risk models such as the prominent International Financial Reporting Standards 9 (IFRS9) that was fully adopted in Uganda in 2018. However, these models are not cover enough when the economy is threatened to collapse in the shortest time possible.

Download the Whitepaper on How COVID-19 liquidity shock could collapse the local financial system

While this lockdown has not restricted banks from carrying out their activities, there has been a significant decline in a number of transactions and business carried out at these intermediaries with most people looking to fast-move on most of the high-risk banks. But this only applies to rational clients who can tell what high risk and low risk is.

Nevertheless, most of the high-risk banks have rational clients and these clients are there to leverage from the extra reward given to them for taking this risk. However, when the risk goes beyond a certain level of tolerance, we will soon be clattered with a host of bailout applications.

Like Bernanke stated during the aftermath of the financial crisis of 2008 before the Financial Crisis Inquiry Commission on 2nd September 2010, “Should the safety of their investments come into question, it is easier and safer to withdraw funds than to invest time and resources to evaluate in detail whether their investment is, in fact, safe”, earmarking the run on banks.

For our case we are going to assess Centenary bank, a commercial bank with a high loan to deposit ratio and one whose impact has not been globally diversified. CERUDEB has for many years been the dominant local bank.

Inside

  1. How the bank has performed over the past years.
  2. The Financial Tempest that is COVID-19
  3. How they can retaliate to these shocks
    1. It’s time the banks accessed their capital reserves from the Central Bank
    2. Bank of Uganda repurchase agreements should also include a cushion to protect current assets
    3. In case of bail out, the Central Bank should issue a Wealth Fund in form of convertible debt
    4. Bank of Uganda should increase the interest rates on treasuries to attract more liquidity to the financial markets
    5. Institutional M&A should be encouraged for banks on life support
    6. Issuing Fixed Income Securities at a cost though that can be recovered.
    7. Need to reduce on dependence on brick and motor mechanisms

Download the Whitepaper on How COVID-19 liquidity shock could collapse the local financial system

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