Bank of Uganda (BoU) has cautioned against “bureaucratic” resolution of troubled banks, saying failure to take a “proactive” action could see financial institutions fall prey to “predatory behaviour” of their managers and shareholders.
Deputy Governor Louis Kasekende said “speed is of the essence to preserve the residual assets of any failing bank so as to fully cover the deposit liabilities.”
Kasekende’s remarks come high on the heels of intense criticism of the central bank’s delay in resolving financial institutions after being taken over or sold.
A Parliament committee investigating the collapse of banks recently recommended that BoU’s board and the finance ministry should issue guidelines on resolution of financial institutions in distress.
The lawmakers further called for amendments in the Financial Institutions Act (FIA) “to make specific provision for the timelines of undertaking all the activities related to and connected with resolution of financial institutions.”
But speaking at the Bank of Uganda Town Hall Meeting in Jinja Town on Wednesday, Kasekende warned against putting in place rigid guidelines in resolution of banks.
“I wish to urge some level of caution to those advocating for bureaucratic and static procedural guidelines in the resolution of financial institutions,” said Kasekende.
“While there is some merit in the proposal, such procedural guidelines should recognise the dynamic nature of banking crises; allow flexibility and the need to not curtail the ability of the regulator to proactively respond to an evolving state of a failing institution and the predatory behaviour of a bank’s managers and shareholders,” he added.
Kasekende warned that any delay in intervention and resolution, “is an opportunity to shareholders and management of these commercial banks that have caused their collapse in the first place, to further strip these institutions of the remaining residual assets and value; thereby shifting the burden of paying the depositors funds to the tax payers.”
The seven banks closed from 1993 to 2016 are: Teefe Trust Bank, International Credit Bank, Cooperative Bank, Greenland Bank, Global Trust Bank Uganda, National Bank of Commerce and Crane Bank Limited.
Overall, said Kasekende, the current supervision and resolution framework may not be perfect but it has served this country well, especially in the period after the enactment of the Financial Institutions Act, 2004.
“The primary objective of bank regulation is to protect depositor’s funds and no depositor has lost any money in the resolution of any commercial bank since 2004,” he emphasised.
The town hall meeting is part of the public outreach activities instituted as an avenue for BoU to explain its mandate and account to the public for its policies and actions.
Officials say the meetings serve as an avenue to strengthen the linkage between BoU and the local area leadership, and the general population for both sensitization purposes and seeking feedback from stakeholders.
Meanwhile, Kasekende justified BoU’s intervention in troubled banks, saying they only take action basing on solid evidence of impropriety.
“Bank of Uganda only intervenes in a financial institution when it has reasonable belief and evidence that continued operations of that institution pose serious risk of loss to depositors’ funds,” he observed.
The deputy governor further said the dire condition of any institution that is the subject of a Central bank intervention is a result of “failure of the management, shareholders and Board of directors to execute their responsibilities as per the set laws, ethical and corporate governance procedures.”
He added: “For instance, nearly all the banks closed or sold in Uganda since the turn of the century failed because of outright fraud by shareholders, excessive lending of funds to insiders – managers and shareholders, collusion to cover up irregularities between board of directors and the management, and misreporting of the true state of the bank’s financial position, among many factors.”
Forensic auditors recently said in a report that Crane Bank, which was taken over by BoU in 2016, was insolvent as a result of fraud, insider lending, money laundering, corruption, nepotism and failure to adhere to basic good practices of banking.
The event was graced by National Planning Authority (NPA) boss, Dr Joseph Muvawala, Jinja District officials and leaders from other districts of Busoga region.