- East Africa
Undercapitalised commercial banks in South Sudan now risk closure due to the ongoing scrutiny by the Bank of South Sudan to strengthen the banking sector, a report from the International Monetary Fund (IMF) has revealed.
The IMF report No. 23/108, dated March 1, 2023, noted that the said banks account for about “six percent of system assets and 12 percent of deposits”.
“Over the coming months, the BoSS will lay out plans to address the undercapitalization of the domestic banking sector (MEFP). Several licenced commercial banks, accounting for six percent of system assets and 12 percent of deposits, appear to be undercapitalised,” the report read.
The lender warned that “undercapitalization is unhealthy for financial development and affects the capacity of the banking sector to absorb shocks in economic growth and development.”
It added that the bank had already taken the necessary measures by revoking the licences of “two inactive domestic banks” that were yet to start operations.
“It is also reviewing the licences of inactive banks that are critically undercapitalised and have ceased operations,” the report elaborated.
It stressed that the BoSS Board would begin publishing audited financial statements after the strategy for addressing undercapitalization is approved in June 2023.
“By June 2023, the BoSS Board will approve a time-bound strategy for addressing banking sector undercapitalization as one of the SBs of the PMB,” the IMF noted in the report.
“The BoSS will proceed to enforce the publication of audited financial statements by all commercial banks operating in South Sudan, and, to enhance transparency, it has also commenced the regular publication of quarterly Financial Soundness Indicators (FSI) for South Sudan’s banking sector on its website.”
But a news report published by The East African on June 3, 2023, stated that BoSS would phase out low-denomination banknotes, reduce cash payments, and prioritise payments through bank accounts.
“Juba is also seeking to reduce the cost of cash transactions by phasing out low denomination banknotes and reduce the cash reliance of the economy through supportive policies, including paying civil servants through bank accounts,” wrote The East African.
“The Bank of South Sudan (BoSS) has disclosed in the International Monetary Fund (IMF) Country Report No. 23/108 dated March 2023 that plans are underway to implement an insurance plan for bank depositors as part of a wider East African integration agenda, seeking to protect account holders and boost confidence in the regional banking sector.”
But a reliable source from the Bank of South Sudan who spoke anonymously said such reports were not true as the governor of the Bank of South Sudan (BoSS) had not said anything like that.
“I am not sure about this. I don’t know their source of information because the source of information is the governor; if the governor had said this, this could be true,” denied the anonymous source.
Importance of capitalisation
In June 2023, Dr. Moyi Harry Ruben, the acting managing director of Ivory Trading and Investment Company, issued similar sentiments that banks that lack capital are economic baggage.
“Bank capital risk should not be treated lightly because it may affect the whole economy. In other words, excess credit, interest risk, and operational risk could result in a bank’s having insufficient capital to meet losses resulting from loan losses. It may even run short of cash in some cases,” Moyi said.
He stressed that the Central Bank imposed the policy of adequate capital so that it could defend the economy.
“The important reason why the Central Bank imposes capital adequacy is simply to safeguard the economy and the customer’s deposits, prevent panic withdrawals that may cause a lack of confidence in the banking industry in the country, and influence the functions of a discount window where banks can borrow money from and safeguard confidence in the banking system,” he added.
“Banks need to have several reserves for prudential purposes. If a bank fails to meet its minimum desired level of reserve assets, it may have to turn away customers, loan seekers, and other obligations that fall due.”
In January 2023, the Bank of South Sudan (BoSS) issued an order for the closure of the bank accounts of public institutions like ministries and commissions as well as state governments in commercial banks, asking for the list of exempted banks to be submitted by January 27, 2023.
“In light of the above, the BoSS is hereby directing all commercial banks to close all bank accounts of central government institutions (ministries and commissions) and state governments except donor-funded project accounts of these institutions,” the BoSS said, demanding that the names of these exempted banks be submitted no later than Friday, January 27, 2023. By , The City Review