Commercial banks will be forced to acquire non-banking institutions trading in government securities if the competition for the country’s most profitable market intensifies, a top regional central bank advisor has said.

Francis Odubekun, a United States advisor of East Africa’s central banks, says that Bank of Uganda’s latest plan to allow non-bank financial institutions to trade directly in the lucrative government securities – an activity that is currently exclusive to only six commercial banks – will lead to mergers and acquisitions within the market.

“If the non-bank institutions become aggressive in the secondary market, commercial banks might want to buy them,” he said.

“We shall see consolidation between the banks and the brokerage companies. We have seen that in other markets and it will happen here too. But that is much farther down the road.”

Odubekun made his remarks during the annual Bonds, Equities, and Related Instruments Forum organized by the Uganda Securities Exchange at Serena Hotel recently. He explained that banks will likely find it costly to pay high salaries to staff engaged in the treasury market, besides funding the research on this market too.

He said that instead of engaging in these costs, banks might simply want to buy a non-bank institution that is well established in this securities market and incorporate it within the bank’s structure.

Emma Mugisha, the Head of Treasury at Barclays Bank Uganda, said there is need to increase the supply of government securities, which include Treasury Bills, Treasury Bonds, and Repurchase Notes, in order to meet the growing demand.

Much of the government securities that government auctions are oversubscribed. “Maybe if government was issuing these securities for debt, it would meet the demand,” she said.

Currently, Bank of Uganda issues government securities to control the amount of money supply in the economy as a means of maintaining stable prices of goods and services.

But Odubekun said the time will come when the Central Bank will issue these instruments for the purposes of sourcing debt, citing the huge need to solve the infrastructure challenges that Uganda faces.

While non-bank institutions include insurance corporations and microfinance companies, it is the brokerage and investment firms that are expected to eye this securities market as it fits their business model of buying and selling, and not holding.

Odubekun’s prediction of the likely mergers and acquisitions in the future represents the weight of the policy shift that the Central Bank is about to undertake, and is bound to arouse interest among non-bank institutions to put their books in order in preparation for trading in the government securities.  
Only six banks, also known as Primary Dealers, – Stanbic Bank, Standard Chartered Bank, dfcu Bank, Barclays Bank, Bank of Baroda, and Centenary Bank – have the privilege of directly trading in government securities.

Trading in government securities is almost risk free as government can print money to pay off its debts. The government securities are listed on the Uganda Securities Exchange.

Now, Bank of Uganda feels that by inviting non-bank institutions to trade in government securities, it will deal with some of its pressing challenges.

Some of these challenges include the little money that the current primary dealers invest in securities during tough financial times, the volatility in the interbank rates which creates a situation of uncertainty over interest rates on loans, just to mention a few.

However, non-bank institutions eying the government securities market have their work cut out. For an institution to trade in these instruments, it must have Shs 12 billion in minimum capital as part of the requirements.

It is not clear whether the Central Bank will adjust this amount downwards to make it easier for non-bank financial institutions to trade in the securities.

Secondly, commercial banks have an edge over non-bank institutions in terms of getting cheaper credit to invest in government securities.

Besides the customer deposits that they receive, banks also have the opportunity to borrow from the central bank or from another bank at a much cheaper rate than the market rate that non-bank institutions pay for.

Simon Rutega, the Chief Executive Officer of Uganda Securities Exchange, notes that they are discussing with the Central Bank to allow brokerage firms sign on to the Real Time Gross Settlement system to deal with any delays in transactions.

It is not clear what BoU’s entire policy shift of attracting non-bank institutions in the securities market means for the corporate bond market on the Uganda Securities Exchange. There was some excitement during the last two quarters of 2009 in the corporate bond market, with Stanbic Bank, PTA Bank, and Housing Finance all offering bonds to the market.

It had been expected that this momentum would build up into 2010. But with the more lucrative government securities market being pushed to more players, the corporate bond market is bound to face a number of challenges to attract investors.

Odubekun, however, points out that once there is increased interest in the Treasury bond market, then that will also rub off the corporate bond market, making this some sort of a win-win situation.
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