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COSASE Proposes BoU Reforms as Critics Slam Report’s Shallowness, Bias

A cross section of Ugandans has dismissed a report into the closure of banks by Parliament’s Committee on Commissions, Statutory Authorities and State Enterprises (COSASE) as a ‘cover-up’ of the misdeeds of failed financial institutions such as Crane Bank and Greenland Bank.

Key among its findings, the report which was presented by Hon. Abdu Katuntu, the COSASE chairperson and Bugweri county legislator, faulted Bank of Uganda (BOU) for breach of national financial laws in the closure of the said banks.

Katuntu noted that at the time of Teefe Trust Bank Limited closure in February 1993, BOU did not provide the attorney general with an inventory report detailing assets sold and other liabilities to help shareholders and other clients make financial forecasts regarding this transaction.

This, he says, was not in tandem with Section 32 (3) of the Financial Institutions Act of 1993 upon taking over.

Summarily, Section 32 (3) states that upon a financial institution becoming insolvent, the central bank in line with its duties should assume all recorded deposit liabilities of the insolvent financial institution, or proceed with liquidation of the insolvent financial institution.

Additionally the report also questioned circumstances under which in which the national bank of commerce was closed and sold upon being declared insolvent in September 27th 2012.

According to the report, the NBC was taken of and sold subsequently on the same day without providing the insolvent institution with a winding up order and subsequently publishing related information in the press.

Collectively, the report observed that under unclear circumstances, Bank of Uganda failed to value the assets and liabilities of Global Trust Bank, National Bank of Commerce and Crane Bank Limited leaving shareholders about the performance of non-performing assets, assets at closure and selling price among other fundamentals.

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Shallow Report

But prominent lawyer, Silver Kayondo says Parliament gave COSASE powers to carry out any procedure that may be necessary in the circumstances including studying circumstances under which the banks collapsed.

“BoU was not a lone player in this. The report is more of a fault-finding mission against BoU than an objective inquiry into circumstances surrounding the seven failed banks,” said Kayondo.

Shawn Mubiru, a good governance activist wondered why COSASE ever had “to take this long, spend all this money to be able to create this cover up in form of recommendations?”

He added: “This is the greatest overhyped committee inquiry our country has faced since Independence…”

Victoria Nyeko, a Communication Specialist Interested in Economic Development, said on NBS today that “the end of COSASE, its report and recommendations were pre-determined four months ago,” adding, “There were interested parties who had a discussion about what they wanted to come out of COSASE and decided what the public should know.”

Government spokesperson Ofwono Opondo said he expected “earth-shaking” recommendations which he didn’t see in the report.

“I don’t want to believe that this was a mistake, I think it was deliberate, and it explains why they’ve not mentioned people in the closure of banks, which they should do,’ said Opondo.

“The testimony that went on in parliament today was hair raising, the public has been expecting earth shaking recommendations, I am disappointed.”

The COSASE report appeared to favour businessman Sudhir Ruparelia who had asked for compensation for the loss of Crane Bank.

“The committee finds that BoU’s failure to observe principles of financial prudence and in the course breaching their statutory duties provided under the FIA thereby financially disadvantaging Crane Bank Limited (CBL), it should make good the loss occasioned to the commercially fair extent of the value of the Bad Book,” reads part of the report.

Yet, auditors had spelt out how Sudhir was involved in insider lending, money laundering and fraud, leading to capital and liquidity inadequacy leading to the bank’s takeover by the central bank.

Lawyer Kayondo said the COSASE report is “silent on how BoU should deal with criminal banking malpractice responsible for causing bank failures.”

He added: “I think BoU should have full powers to prosecute such statutory crimes such as fraud without relying entirely on the Director of Public Prosecution (DPP).”

Kayondo further said “a lot more could have been addressed to deal with market conduct enforcement, volcker rule and offshore ownership.”

Katuntu recalled BoU’s statement that when they took Crane Bank into statutory management, it was found to be grossly insolvent.

“It is not possible to revive a bank with this level of insolvency and restore it to full compliance with capital adequacy and other requirements,” said Katuntu.

BoU reforms

Nevertheless, the report wonders how Nile River Acquisition Limited the company that took over ICB, Greenland and Co-operative bank roundly bought the three bank’s net loan portfolio which was valued at 135 billion at a 93 percent discount. The MPs said this was contrary to the net value ratio principles as 35 billion of these loans were securable in equitable mortgage.

The committee report also noted that  winding up process of all the defunct banks has taken an unjustifiably long time something that has made financial litigation cumbersome.

Katuntu noted that in the case of Teefe, majority of its shareholders have since passed on since it was closed 26 years with only one remaining.

Going Forward

Going forward, the report recommended that the individual officers who handled these transactions be held personally liable.

Interestingly, Section 28(7) of the BoU Act, 2000 states that no employee of Bank of Uganda shall be liable for any loss or damage suffered by BoU unless that loss or damage was caused by his or her own default or wilful act.

The same law provides that no employee of BoU will be subjected to any legal proceedings for anything which is done in good faith.

Nevertheless, the report stipulates that BOU Board, in consultation with the Minister of Finance, planning and Economic Development through Statutory Instruments should issue procedures and guidelines under the Financial Institutions Act on the resolution of financial institutions in distress in not more than six months.

The committee has also tasked government to separate the supervisory and liquidation functions of bank of Uganda so as to avoid the issue of conflict of interest which he says might be a risk to the financial sector.

Lawyer Kayondo said one major loophole of COSASE report was that “it does not suggest a solution on which department should handle failed bank resolutions. It is not enough to divest the Bank of Uganda Supervision Department of that role without suggesting an alternative.”

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