Bank of Uganda (BoU) Governor Prof Tumusiime-Mutebile has for the first time, spoken extensively about the takeover of Crane Bank in 2016, saying there was “no other option” as the financial institution was “massively insolvent” as a result of “mismanagement and fraud”.
He also said Dfcu was a “suitable” bank which ensured no depositor lost money after the transfer of assets and liabilities from Crane Bank.
Mutebile spoke at the Uganda Bankers’ Association Annual Bankers’ Conference at the Kampala Serena Hotel.
The theme of the conference was Financial Sector Stability: Managing Risk in a Fast Growing and Fast Changing Environment.
Addressing bankers, Mutebile defended BoU against criticism that it took long to realise the situation, saying they were able to ensure customers did not lose their deposits.
“After the BoU had intervened in Crane Bank and taken it over in October 2016, an inventory of its assets and liabilities was commissioned and carried out by a reputable accounting firm,” said Mutebile.
“This inventory found that Crane Bank was massively insolvent, with core capital of negative Shs240 billion, as a result of mismanagement and fraud.”
He said the “notion that this bank could have been rehabilitated by its owners – the same people who were responsible for its failure – if only the BoU had provided more liquidity support and allowed the owners to remain in control, is not tenable,” emphasising, “In reality, the BoU had no other options, if it wished to minimise the losses incurred by the bank and protect the interests of its depositors, other than to take over Crane Bank and resolve it.”
Mutebile told bankers that in spite of their best efforts, “we must be realistic about what prudential regulation and supervision can feasibly deliver in a market oriented financial system. It is not possible for regulators to detect all instances of fraud that may occur in financial institutions, not least because such frauds are often carefully concealed from external auditors as well as regulators.”
At the time of Crane Bank’s collapse, the institution had received several ‘Best Bank’ awards and was among the most profitable financial institutions in Uganda.
Mutebile explained that it was also not possible for regulators to guarantee that no bank will ever fail, because that would require the elimination of risk-taking by banks, which would in turn hinder the very purpose of financial intermediation.
Instead, said the Governor, regulators can ensure that bank failures are the exception rather than the norm; that timely interventions in distressed banks protect depositors’ funds; and that when a systemically important bank fails, it gets resolved without undermining the stability of the financial system.
Mutebile said in order to protect the interests of a distressed bank’s depositors, the regulator has a responsibility to intervene promptly in a bank that is severely undercapitalised or insolvent, and, if necessary, to take over the bank and resolve it.
The Bank’s former directors blamed BoU for not providing the much needed funds as the lender of last resort to manage the liquidity situation or facilitate the owners to obtain financially stable investors.
But Mutebile said BoU has no obligation to bail out a distressed bank by providing it with liquidity support, in the hope that it will somehow be restored to financial health.
“Such an option would be extremely dangerous. It would allow the distressed bank to continue being mismanaged in the same manner that caused it to become distressed, thereby incurring further losses at the taxpayers’ expense. It would also send a signal to all participants in the financial markets that mismanagement carries no consequences for the owners and managers of banks,” he observed.
Nevertheless, the criterion of selling Crane Bank to Dfcu has been criticized by former directors, who claim it was sold for one dollar.
Mutebile told bankers that in resolving a failed bank, the Financial Institutions Act provides for several resolution modalities; for example, the failed bank can be sold as a going concern, it can be merged with another financial institution, it can be subject to a purchase of assets and assumption of liabilities transaction (P&A) or put into liquidation.
“In practise, the options are usually more limited. Most of the banks, which have failed in Uganda during the last 20 years, either had very little franchise value or were too heavily insolvent to be sold on a going concern basis or merged with another bank. Hence in these cases, the feasible options were a P&A or a simple liquidation,” said Mutebile.
A P&A has the advantage of transferring a substantial part of the failed bank’s business, including all or most of its deposits and parts of its loan book, to one or more acquiring banks; thereby minimising the disruption to the failed bank’s customers.
P & A
Mutebile said this is why the BoU has used the P&A modality on several occasions over the last two decades in resolving failed banks, as was the case with the resolution of Crane Bank
Two factors are crucial in determining how a P&A transaction is carried out, and in the selection by the regulator of feasible partners, to acquire the assets and assume the liabilities of a failed bank.
First, an acquiring bank must have the resources – financial, managerial, and infrastructural – to absorb the assets and liabilities of the failed bank quickly and smoothly so as to avoid disruptions to its customers.
Mutebile gave an example, a bank, which has branches only in Kampala, saying it cannot absorb the assets and liabilities, and serve the customers of a failed bank, which had a nationwide branch network.
Second, a P&A must be organised and implemented quickly, so that a failed bank’s customers do not face a long wait to access services or to ensure that the regulator does not have to manage the failed bank on a statutory basis for an extended period.
Chimp Corps report since 2010, the BoU has intervened in five banks; closing three of them, and taking two others into temporary statutory management.
Mutebile said in none of these banks did depositors lose their money, nor was there any danger caused to the stability of the financial system.
“The intervention in Crane Bank, was the most difficult of these interventions and the one which was potentially the most problematic, because it was a large bank of systemic importance, and because of the huge magnitude of the losses it had incurred,” said Mutebile.
“Nevertheless, the BoU was able to resolve Crane Bank smoothly. It remained open under statutory management until most of its assets and liabilities could be transferred through a P&A to a suitable acquiring bank, DFCU Bank, thereby avoiding disruption to its customers. None of its depositors lost the money,” he added.
“Furthermore, despite the size of the bank and its links with other banks through the interbank market, there was no contagion to the rest of the financial system and no loss of public confidence in bank deposits.”
Prime Minister Dr Ruhakana Rugunda, who spoke at the event, said enabling infrastructure has been put in place in 33 major towns to facilitate cyber banking.
“By the time digital banking starts, Government will be ready for it. We must note that it’s projected to be a very big source of revenue to the country,” he said.
“To accelerate economic growth beyond security, the banks are working hand in hand with Ministry of ICT to ensure the country has successful electronic banking because it reduces the banking charges on customers,” he added.